CBL & Associates Properties CEO Discusses Q2 Results - Earnings Call Transcript

Jul.27.12 | About: CBL & (CBL)

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

Q2 2012 Earnings Call

July 27, 2012 11:00 am ET

Executives

Stephen Lebovitz - President and Chief Executive Officer

Katie Reinsmidt - VP - Corporate Communications & Investor Relations

John Foy - Vice-Chairman, Chief Financial Officer

Analysts

Christy McElroy - UBS

Paul Morgan - Morgan Stanley

Jeffrey Donnelly - Wells Fargo Securities

Todd Thomas - KeyBanc Capital Markets

Nathan Isbee - Stifel Nicolaus

Michael Mueller - JPMorgan

Carol Kemple - Hilliard Lions

Michael Bilerman - Citi

Richard Moore - RBC Capital Markets

Cedrik Lachance - Green Street Advisors

Andrew Rosivach - Goldman Sachs

Operator

Welcome to the CBL & Associates Properties, Inc Second Quarter 2012 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Friday, July 27, 2012.

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

Stephen Lebovitz

Thank you and good morning. We appreciate your participation in the CBL & Associates Properties, Inc. conference call to discuss second quarter 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 a transcript of today's comments and additional supplemental schedules.

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

Stephen Lebovitz

Thank you, Katie. We are pleased to report another strong quarter headlined by very positive operational results at our portfolio of market-dominant properties.

FFO per share increased 6% to $0.53 beating the most recent consensus estimate of $0.49 per share. Same-center NOI grew by 2.7%, occupancy increased to 180-basis point and leasing spreads by 10.2%. As a result, we have raised our guidance for the year for same-center NOI growth to 1% to 2%, and FFO to a range of $2.00 to $2.10 per share.

Our improved performance reflects the more robust retail demand we are experiencing in our portfolio. Sales growth year-to-date has been encouraging as well at 4.3%. This coupled with improved occupancy allows us to generate higher rents and better lease terms in retailer negotiations and improve the productivity of our portfolio going forward.

We spent a lot of time this quarter meeting with our retail partners. The ICSC RECon in Las Vegas this May, was up roughly 10% in attendance, and we experienced a similar increase in a number of meetings at our booth.

Overall, our meetings were positive and we were able to effectively follow-up on pending deals with our own leasing conference in June, which we call connection. Approximately 145 retailers attendant connection here in Chattanooga, which is the best turnout in 16 years that we have held this conference.

We had nearly a dozen new companies represented, including Francesca's, Firebirds Restaurants, Pandora and Godiva to name just a few. Connection is a great opportunity for us to make deals and also to strengthen our retailer relationships with key deal makers that visit us over the three days of the event.

Recently, we welcomed several new stores to the CBL portfolio, opening our first Lego and Microsoft, at Oak Park mall in Kansas City, Kansas, as well as Armani Exchange at Mall del Norte Laredo, Texas. The store has experienced strong openings and we are pursuing discussions for additional locations in CBL Malls. We also celebrated the grand opening of our fifth Apple Store at CoolSprings Galleria in Nashville.

Stabilized mall occupancy improved during the quarter by 180 basis points, increasing to 92.3%. Total portfolio occupancy experienced a similar improvement increasing a 170 basis points to 92.3%. We only have one property The Outlet Shoppes at Oklahoma City in the new mall category at this time and that property is 100% leased.

We are very pleased with the progress in leasing spreads this quarter. We showed strength across both, new and renewal leasing. Overall leases for stabilized malls during the quarter were signed at 10.2% increase over the prior year gross rent per square foot.

Renewal leasing spreads increased 9.5% over the prior gross rents and new leases were signed at a 13.2% increase over prior gross rents. The improvement in renewal spreads is encouraging, and coupled with our occupancy increases demonstrates the strengthening of our properties as demand improves and new supply remains constricted.

During the quarter, we commenced construction on the Outlet Shoppes at Atlanta. With just over a year until the grand opening, the 370,000-square foot project is approximately 72% leased or committed with the first-class line up of retailers, including Saks Fifth Avenue Off 5th, Nike, Levi's, Brooks Brothers, Converse, and Cole Haan. Similar to The Outlet Shoppes at Oklahoma City, this project is being developed in 75:25 joint-venture with the Horizon Group.

We have recently announced several new projects starts during the quarter. We are underway with the development of the second phase of the Outlet Shoppes at Oklahoma City. Phase 2 will encompass approximately 30,000 square feet, with great new stores such as Ann Taylor LOFT, Waterford, Lucky, James and Cole Haan.

The project is scheduled to open ahead of the 2012 holiday season. We just started construction on an expansion at Southaven Towne Center, our open-air center across the state line from Memphis and Southaven, Mississippi. The first phase of the expansion features 15,000 square feet and is fully leased in Men's Warehouse College Station Torrid and rue21. The project is scheduled for completion in late fall.

At Southpark Mall in Colonial Heights near Richmond, Virginia, we announced the first phase of the redevelopment of the existing Dillard's. Dillard's will be closing their store in September, so we can begin construction in October on a new 56,000-square foot Dick's Sporting Goods. This will be a great addition to the center. We will announce more details on the project, including additional retailers when construction commences later this year.

Year-to-date sales at our malls increased 4.3%. During the second quarter sales lagged in April as compared with the prior year, primarily due to earlier Easter holiday. However May and June showed healthy increases.

For the trailing 12 months, our sales have increased 4% to $341 per square foot, compared to $328 in the prior year period. We anticipate sales will continue to improve at a steady pace through the remainder of 2012.

During the second quarter, we closed on the acquisition of Dakota Square Mall in Minot, North Dakota for a total investment of $91.5 million. This is a great addition to our portfolio at a very attractive price. The mall currently generates sales of over $490 per square foot and it continue to increase.

We see a number of opportunities to grow the NOI at the center, since the average occupancy cost is in the high single digits. The Minot economy is growing tremendously, in part because of the booming oil and gas industry in the area. The unemployment rate is one of the lowest in the country at under 4%. We are confident Dakota Square will be a solid long-term contributor to the CBL portfolio.

In July, we sold Massard Crossing, a community center in Fort Smith, Arkansas for $7.8 million. We were pleased to expand our third-party management business in the second quarter with a new contract with Starwood to provide management services for six of the seven malls they recently acquired from Westfield.

The contract is for an initial two-year term and we will provide day-to-day on-site management, accounting, specialty retail and branding, marketing and other services. We are excited to work with Starwood to unlock the potential at each of these properties. It's a strong endorsement of our operating expertise to have Starwood select us to provide these management services.

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

John Foy

Thank you, Stephen. You may recall that in the first quarter, we retired most of our 2012 maturities using our credit facilities. Since that time, we have been actively placing new mortgages on those properties and reducing the corresponding balance on our lines of credit.

Year-to-date, we have closed over $456 million in loans at a weighted average rate of 4.97% and a term of 10 years. These financings generated net cash proceeds of more than $138 million after repayment of the existing loan balances.

We've achieved significant interest rate savings over the previous loans which averaged 6.25%. We anticipate using the excess proceeds to retire $167 million unsecured credit facility that matures in November 2012.

We have one remaining mortgage maturity in 2012, which we expect to refinance when it opens to prepay in October. As a result of our financing activity, our variable rate debt declined to 17% of our shares of total consolidated and unconsolidated debt from 23% in the first quarter.

We finished the quarter with $100 million outstanding on our credit facilities providing ample capacity and ability. Our financial covenant ratios remained very sound with an interest coverage ratio of 2.5 times and fixed charge coverage of 1.97 times. Our debt-to-GAV ratio was 52.5% at quarter end. Today, more than 80% of our debt is non-recourse and property-specific.

Beginning in January of next year, we have the option to call the Westfield preferred units. If we choose not to call the units before July 2013 the rate steps up to 9% and depending upon the circumstances will either return to 6% July 2016 or stay at 9% into perpetuity.

We anticipate addressing this using our combination of capital sources. We have more than enough capacity on our lines of credit to retire the entire principal balance as a short-term solution. However we would anticipate a longer-term takeout to include a combination of asset sales, proceeds excess financing proceeds and other capital sources depending upon market conditions.

Second quarter 2012 FFO grew 6% to $0.53 per share, compared with $0.50 per share in the prior year. FFO was positively impacted by lower interest expense resulting from our recent favorable financing and lower overall debt as compared with the prior year period.

Our cost recovery ratio for the second quarter 2012 was 97.3%, compared with 102.5% in the prior year period. This was primarily the result of lower tenant reimbursements. G&A as a percentage of revenue was 4.7% for the second quarter compared with 4.3% in the prior year period.

G&A as a percentage of revenue will be slightly higher going forward, primarily as a result of lower revenues from the deconsolidation of the TIAA joint venture properties.

Our same-center NOI growth in the mall portfolio was encouraging, increasing 2.9% over the prior year. Same-center NOI growth for the total portfolio was also healthy at 2.7%. Same-center NOI was positively impacted by increases in rent as a result of occupancy gain and positive leasing spreads. We also received $1.5 million bankruptcy settlement related to Wilson's Leather in the quarter that was included in base rent.

Property operating expenses increased by roughly $1.3 million on a same-center basis, primarily as a result of higher payroll costs, bad debt expense and legal fees. Bad debt expense during the second quarter 2012 was $663,000, compared with $111,000 in the prior year period.

Based on our current outlook and expectations, we are updating our guidance for 2012 FFO to the range of $2.00 to $2.10 per share. The guidance incorporates our stronger assumptions for NOI growth and occupancy. We increased our forecast for same-center NOI growth to a range of 1% to 2%, and portfolio occupancy up 50 basis points to 100 basis points for the year.

The guidance includes contributions from the property interest acquired this year as well as the additional third-party fee income from the Starwood contract. While our expectations for the full year results have improved, we would anticipate that the pace of NOI growth to mitigate somewhat in the second half as we head into a period of tougher comps.

We anticipate a negative comp for bad debt expense and a lower tenant recovery ratio compared with the prior year. We are pleased with the progress we have made improving our internal growth and believe that should continue with further occupancy advances and positive leasing spreads.

We have been successful in sourcing attractive external growth opportunities contributing to higher overall portfolio growth. Our balance sheet has also improved through pruning of non-core assets, where we have found attractive pricing. We have generated roughly $40 million in sales year-to-date through the dispositions of three community centers. We have refinanced substantially all of our 2012 maturities and are well positioned to address our future obligations.

We appreciate everyone joining us today and would be happy to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the Christy McElroy with UBS.

Christy McElroy - UBS

Hi, good morning, everyone. John, just with regard to the guidance increase and following up on your comments, how much of the increase was related to the Starwood management contract? Can you sort of walk through the different line items that will be impacted, specifically fees and G&A. Then can you also talk about why leasing wasn’t part of the arrangement?

John Foy

Christy, yes. I think our guidance basically included about $0.01 for the year. It's a $2 million contract per year with our friends from Starwood.

Christy McElroy - UBS

Okay, and then leasing?

John Foy

On the leasing spreads, we don’t really give that number out from the standpoint of how much is in that number.

Christy McElroy - UBS

I'm sorry just with regard to why leasing management wasn't part of the arrangement, wasn't part of leasing fees.

John Foy

Leasing. Steve, you want to address the leasing question that we are not doing the leasing on the Starwood properties.

Stephen Lebovitz

Was that your question, Christy?

Christy McElroy - UBS

Yes. It was.

Stephen Lebovitz

We are just doing the property management and the specialty leasing and branding at the properties, so we are not doing the actual leasing for Starwood. They are hiring people to do that work themselves and so that wasn't part of our contract.

Christy McElroy - UBS

Okay. Then percentage rents have been down sort of year-over-year over the last several quarters with positive sales growth I am just wondering what's driving that. Is it the mix of tenants or you are just doing fewer percentage rent deals?

John Foy

Yes. Percentage rents are actually up if you basically take out the deconsolidation of the Teacher's joint venture, so they are slightly up. That's a difficult thing till we get Teacher's in our numbers for full year the comps are tough for you guys to follow. Actually percentage rents are up and we feel very good about those and has been our principle.

Our leasing guys are on top of those tenants as soon as they get into percentage rent, just try to get them to make that into fixed minimum annual rents, so the trends are looking much, much better and I think we're positive with regard to the outlook even on percentage rents.

Christy McElroy - UBS

Got you. Then just lastly in light of your comments regarding the Westfield, the likely Westfield preferred unit redemption, if I think about non-core dispositions, how actively are your marketing some of your centers and realistically how much would you expect to sell over the next six to 18 months?

Stephen Lebovitz

I think we are going to be very opportunistic with regard to the sale of assets. As we see those opportunities, we'll jump on those and take advantage of those situations, so we don’t have a definite amount set in mind, but as pointed out in our comments, we would anticipate that our lines of credit would provide that take-out for that on a short-term basis but we do have plans, we’re looking at the non-core assets and the market has been very good and very attractive for those coupled with the low interest rates and the markets where we serve, because the occupancies in those have basically held pretty good and now are starting to come back up, so we would anticipate that the salability of these assets should be pretty good.

Operator

Our next question comes from the line of Paul Morgan with Morgan Stanley. Please proceed with your question.

Paul Morgan - Morgan Stanley

Just sticking with Westfield, can you provide a little more color about what you are currently thinking based on sort of market conditions about what you expect to do? You outlined some of the options, but in terms of selling assets or reusing it to recapitalize part of the balance sheet?

John Foy

Well, it's a very favorable preferred interest rate or preferred dividend that we pay on that $400 million plus, so which is a very, very favorable rate, so we don't anticipate paying that before the due date on that.

During that period of time, we are exploring all of the avenues that basically gives the best benefit to our shareholders, and also to lowering our debt ratios and taking all of those things into consideration. There is a plan that we have. We have dual plans in place in case certain things don't occur, but we are very comfortable and confident that we will take care of that situation when that time arises.

Paul Morgan - Morgan Stanley

I mean, is part of the plan sort of a broader desire to reduce leverage over sort of the next year?

John Foy

Yes. Of course, and I think, that's been a focus that we've been on with the Teachers joint venture and the continual approach to looking at all of our assets, paring down those non-core assets, as well as any other assets that we believe would bring the best pricing in the market today considering all the circumstances.

Paul Morgan - Morgan Stanley

Great. Then just my other question is on acquisitions. First, probably on Dakota Square. I mean, how do you try to calibrate incremental capital investments in a kind of such a boom market, given that boom markets also can be bust markets down the road, but there is variable occupancy costs, presumably lots of potential there, how do you think about the risk reward for putting incremental capital, and then seeing other assets of a similar sort of middle market type that are interesting in terms of your acquisition pipeline, and how active is it right now?

Stephen Lebovitz

Sure. As part of Dakota Square, I mean, when you look at the metrics on the center even if they had a more normal rate of growth to be able to buy an asset that's close to 500 a foot over an cap rate with low occupancy cost were in roughly the 9% range.

We see solid upside there, regardless and it’s got all the characteristics that we look for. It's the only mall for hundreds of miles. It's the dominant retail facility in the market. It's not easy to build stuff there in terms of additional retail, so it’s just a great fit with our strategy and we are looking at ways to add value to it, there is our par sold potential in terms of expansion and moving tenants around, so that's our business and that’s what we focus on.

As far as other acquisitions, there's definitely properties out there. We look at everything and we see a good opportunity than we would definitely pursue it. Right now, we don’t have anything that is close to being announced, but we look and we are cognizant of the impact on our leverage and our capital.

If it makes sense, we would work on something with the joint venture partner there's a lot of interest out there from private equity and other institutional sources in doing joint ventures in malls with kind of sales into 350 and up range, so we feel like we are in a good position to take advantage of opportunities if we like them, but we are also not forced to be desperate or to chase anything that don't make sense for us.

Paul Morgan - Morgan Stanley

Do you feel like those cap rates sort of in the, say, mid-7 to 8 or so are achievable for that middle market-type asset these days? Are you seeing any signs of compression?

Stephen Lebovitz

We've definitely seen some signs of compression and we think we got a great deal on Dakota Square, and there's probably been a 100 basis points movement in the market since then.

Operator

Our next question comes from the line of Jeffrey Donnelly with Wells Fargo. Please proceed.

Jeffrey Donnelly - Wells Fargo Securities

Morning. How are you doing this morning? A follow-up on Christie's question just, I was curious about the Starwood transaction and why they didn’t hire you for leasing. Did they give you guys a chance to get that assignment or is that really just a deal from the start when you started working with them?

Stephen Lebovitz

That was the deal from the start. I mean, one of the things Starwood is looking to do is to build a platform for regional malls and this was the first of what hopefully will be other acquisitions for them and leasing is something that they wanted to control, so when they talked to us and other potential management groups it was never about leasing, it was only about management, and we will obviously work with them. The partnership has gotten off to a great start in terms of our cooperation and we will help them with leasing where we can with our relationships, but that was just never part of the discussion.

Jeffrey Donnelly - Wells Fargo Securities

Then just in the quarter how much of your leasing activity was the continuation of those short-term leases converting to long-term leases? Do you have an update on the statistics of what maybe those rent increase are as you convert those?

Stephen Lebovitz

It's come down a little, it's about 45%, three year and less, which is down from about 50% last year this times, so it's slowly working its way down. I think like we said in the last call, our goal is to push it down but it’s not going to happen immediately.

Yeah. There continues to be just retailers where it's in our interest to do shorter term either, because we're continuing to negotiate with them on long-term deal and it's just a way to – the best way to move the negotiation forward or flexibility in moving people around and we're working on some larger users.

For example, we're working with H&M in a number of malls and to create 20,000 square foot boxes that we need, we need the flexibility to move tenants around. So, a lot of it is intentional on our part to give us that flexibility to bring in those better tenants.

Jeffrey Donnelly - Wells Fargo Securities

Do you have a sense though of like what the gap has been like on the leases you did during the quarter between the rents they were paying when they were on the short-term and when you did chose to convert them to the longer term lease?

Stephen Lebovitz

No. I mean, it's really hard to say, because this quarter the renewal leasing and the new leasing was a lot tighter in terms of the percentages than it was last quarter, so it just varies depending on the deals that are happening in that quarter.

Jeffrey Donnelly - Wells Fargo Securities

Then just one last question is, what is your take on the St. Louis market? There's a lot of activity there with outlets and certainly you've a big presence there. Do you think there's enough demand, consumer demand in the market to support that level of growth in retail square footage and how do you think about what the impact would be on you guys?

Stephen Lebovitz

We're announcing our outlets center, because we don't think there is enough. No. I was just kidding.

I mean, we are watching the same way everyone else is watching, and we're focused on Chesterfield Mall, which is our asset that's closest to the outlet centers and we think that the mall has a great future that it's complementary to the outlet centers. We just opened the American Girl Doll store there early in the year and their sales are phenomenal just like off the charts really strong and we can't say exact numbers, but it's something that we are really excited about because it just shows the potential for the mall and for the trade area.

Look I think it's crazy for both those outlet centers to be built, but it seems like that's the path that is going down and they'll fight it out among themselves in the mall. We'll attract the local customer and have its position in the market and we feel like it’s got a strong future, so I don’t know if I can really give you any other color on it.

Jeffrey Donnelly - Wells Fargo Securities

Is that one of the two that you'd rather see, that you had to choose so you get completed or not?

Stephen Lebovitz

I don't think so. They are both Tom is three miles away and Simon's five miles away from the mall, but they are both designed to serve the entire market. The entire St. Louis market, so from our point of view we are indifferent at to which one gets built. It appears from their conference calls and their activity, they are both planning on building, so good luck to them.

Operator

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

Todd Thomas - KeyBanc Capital Markets

Good morning. Thanks. Stephen, you mentioned that we are seeing traffic in discussion with ICSC, and the event you are holding in Chattanooga were both positive, but I was just wondering given some of the macro headwinds and some uncertainty surrounding the fiscal cliff here, are you seeing any retailers talk about delaying their plans to open stores or make commitments at this point?

Stephen Lebovitz

Todd, we haven’t seen any of that effect at this point. We are hoping it doesn't, but the retailers are continuing to make deals. They haven't shown any indications of slowing down and hopefully that will continue to be the case.

Todd Thomas - KeyBanc Capital Markets

Okay. Then just looking over the leasing stats your gross rents were up 10% in the quarter, but average base rents were up less than 1% relative to last year. I was wondering when you think you'll see an inflection in base rents?

Stephen Lebovitz

Are you talking about total base rents, or I think the average base rents, there is just a lag because of the impact of the lease spread. The lease spreads are based on leases signed during the quarter, so those stores are not actually going to open for the one or two quarters or onto the future and so there is just a lag between when the lease spreads come into play with the average rents. So we should see continued growth in the average rents as we go into the next few quarters.

Todd Thomas - KeyBanc Capital Markets

Okay. All right. Great. Just one last question, John just a clarification regarding Westfield warrants. I was just wondering whether you could clarify if Westfield has an actual put option on the preferred and I am asking because I am just wondering whether there is any scenario where you could ultimately endure 9% on the preferreds for three years but then end up with 6% perpetual preferreds.

John Foy

There is no put in the Westfield documentation, and we'll say, a very negotiated transaction with many lawyers involved, so there is definitely no put provision in it and that was one of the things that they wanted, as well as we wanted and so we feel very comfortable with it, and we think that that was the right strategy for both of us when we completed this transaction to start with.

Todd Thomas - KeyBanc Capital Markets

Is that a potential outcome that you're evaluating where you end up paying 9% for 3 years, but then up with a pretty attractive preferred at 6%?

John Foy

Probably not. I think where we are as we would envision that when they come due, all our plans are basically to pay them off or to buy those preferreds back and retire them. I wouldn't envision that, so I think that's where we are. It's a good plan. It's something that we can always fall back on, but it's not our intention to do so at this time.

Operator

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

Nathan Isbee - Stifel Nicolaus

You're replacing the Dillard's, I think, at RiverGate with Dick's, can you just talk in perhaps a little more broader terms what your plan is to try to proactively re-tenant some of your other boxes and anchors in the portfolio?

Stephen Lebovitz

Sure, Nate. Well, at Southpark where we are doing that, and it's a store that we have been talking to Dillard's about for a number of years. It's not that productive. So we have been working with other prospective users and we were able to get Dick's to step up and commit. So we made a deal to buy the store from Dillard's and then they will close this fall and we will redevelop them.

I would say there is a couple of other Dillard's and Belk stores where we are in conversations with them and over time we look to do the same. We replaced Belk with a theater at Foothills mall earlier this year. Carmike just opened and its ongoing.

We have had a pretty steady amount of, let's say, two to three department stores a year that we have redeveloped where we would be the bottom back or they have closed and consolidated with two stores in the mall. We are having conversations with Sears about certain of their locations.

There is no surprise there, either subleasing or taking back stores. Another one, one of our biggest projects is Monroeville Mall in Pittsburg this year where we are replacing a former Boscops and putting in a moving JCPenney into former Boscops replacing the JCPenney and adding a theater in there.

So there is lot of moving pieces and it’s happening at a lot of the malls we've got that kind of activity or discussion underway.

Nathan Isbee - Stifel Nicolaus

Do you see the two to three a year even doing accelerating?

Stephen Lebovitz

If it accelerated it would be to four to five. It’s not like it’s going to go up dramatic. The department store business is very healthy. They have gone through a lot of their rationalization over the past few years. So we don’t see with Dillard's and Belk and Macy's, its slowing in terms of the opportunity with Sears and Penney there is probably more of it looking forward.

Nathan Isbee - Stifel Nicolaus

Then just on the Starwood deal. The $2 million, I think, that’s the gross level, what would flow through to the bottom-line for you guys?

Stephen Lebovitz

There will be about $200,000 in expenses. It depends on how we end up finalizing the setup of everything but as the NOIs grow hopefully the income will grow as well. There is definitely some incentives for us to do that. So one of the benefits, we are decentralized in our management structure we have our regionals in place, and these properties just spread out around the country. So it’s a good way for us to be able to absorb them.

Operator

Our next question comes from the line of Michael Mueller with JPMorgan. Please proceed.

Michael Mueller - JPMorgan

Couple questions, first of all, back on Dakota Square, why was the occupancy cost so low at 9%? Is it a function of sales are growing so fast, because I know they are up around 500, just can’t mark to market? Is it in North Dakota you can’t necessarily push the same level of occupancy cost that you would have at other places, I mean, just any color on that?

Stephen Lebovitz

Well, I think, it’s really just because the sales have increased so much over the past year. So just the catch up in the lag and we can only roll the leases as they turn. There is not a huge amount of small shop GLA. So it just takes time for us to be able to absorb those increases and for them to show up in higher rents, but we are definitely looking to make some improvements.

We have brought in some better tenants. Chico's just signed their lease, it’s under construction, so we will be able to upgrade the tenant mix and definitely see some upside there through that.

Michael Mueller - JPMorgan

John, you talked about low recovery ratios for the second half of the year in third and fourth quarter, what's roughly the magnitude, about how many percent lower?

John Foy

So where we would be, Michael, is at the high 90s on recoveries, by year end for the year. We normally have been running a little over 100%, so we're seeing it coming down a little.

Michael Mueller - JPMorgan

Okay. So, high 90s on a full year basis.

John Foy

That's correct.

Michael Mueller - JPMorgan

Okay. Great. And then last question, the renewal, the cash renewal spread, 6% to 7%, can you just talk about what an expectation for the back half of the year, what you're seeing does it feel like, and obviously that number can bounce around from quarter to quarter, but the trend line has been positive, do you still see that happening in the back half of the year?

John Foy

Yeah. I mean, we've set our goal is to end up high single digits for the year, so we're getting there. I think, it will be pretty similar to what you're seeing in this quarter in terms of the rest of the year.

Operator

Our next question comes from the line of Carol Kemple, Hilliard Lions. . Please proceed.

Carol Kemple - Hilliard Lions

Congrats on a great quarter. Have you had any more discussion with Horizon about either any other outlets that they’ve announced interest in, or any additional outlet development?

Stephen Lebovitz

Yes. We are constantly in communications together. It's been a great partnership for both of us, we think. The results at Oklahoma City and then what's happening in El Paso and ultimately the expansion at Gettysburg is really making a mark in the outlet business for both, Horizon, as well as ourselves.

So there is a lot of new opportunities they're seeing. Atlanta is going to be a great opportunity for us as well. Those relationships they have with those retailers just gives us that ability to see the expansion of the outlet business continue. So, we have had other conversations with them and we think, we would like to see one new outlet mall developed every 12 to 18 months.

So that, we think, is achievable and we think our partners likewise feel that way.

Carol Kemple - Hilliard Lions

Have you all given any thought to retiring the current preferreds and issuing new preferreds? Is there enough of an interest spread where that would make sense at this point?

John Foy

We look at it constantly and the markets are getting favorable. We play our poker pretty close and we basically are waiting to see how low we can get that.

Operator

Our next question comes from the line of Michael Bilerman with Citi. Please proceed.

Michael Bilerman - Citi

I have Quentin Velleley is sitting with me here. He has a question going back to the Starwood management contract. I am just curious as you think about receiving whether its $1 million, $1.25 million, $1.5 million whatever it is in terms of fee income relative to the time that even if your decentralized organization and time that your people are spending in the field on those assets relative to the time they could be spending on your owned assets in driving productivity for shareholders and even management's time in terms of negotiating the contract and dealing with the partnership.

How do you balance that?

Stephen Lebovitz

We actually felt it was a great opportunity for us. It wasn’t something that we had planned for. We have really good relationships with the senior guys at Starwood and that really laid the groundwork for the negotiations. It wasn’t a long, protracted negotiation. From our organization's point of view, they are excited about the opportunity. There are some good malls that they have acquired that we are managing for them.

Yes, there is an opportunity cost and we think about it but we think the benefits far outweigh that.

Michael Bilerman - Citi

What are the benefits? Other than bringing in $1.5 million of income, how is this value enhancing to CBL and their shareholders?

John Foy

I think our systems are in place, Michael. So a lot of it’s basically systems driven, the accounting et cetera. In addition to that, we do the specialty and the branding income. So when our guys are up-selling at our malls it’s not that, it doesn’t cost us anything for them to basically sell branding on these malls as well.

So we looked at it. Spent a lot of time from a standpoint of just analyzing it to make sure that we are going to make money and we think that Starwood is basically in a great position to acquire more assets. Basically that could be additional management fee income for us as well.

I don’t know that we are diverting any attention from our existing portfolio. So we looked at it from the standpoint of dollars and cents and we expect it to grow and we think with the branding and the other opportunities, it makes sense.

Michael Bilerman - Citi

Is there any assets that are in close proximity to each other?

John Foy

Well, they are in closer proximity to our existing properties?

Michael Bilerman - Citi

There are?

John Foy

Yes.

Michael Bilerman - Citi

So does it make sense to sell those assets to Starwood? Is that being explored in terms of the next stage of this partnership?

John Foy

I think all of those things are possibilities and the relationships that we have developed with the folks of Starwood over the years. We have known them for years and years. That's a possibility, as well as the relationships with other parties as well

Stephen Lebovitz

But I think, Starwood, they just closed in the middle of June, and so I think right now they are absorbing and setting up their systems for this pool of properties, and then down the road they will look at growing it.

We have our platform of management services and our organization. So we are really leveraging off that platform and it's very efficient from that point of view. So, I am kind of surprised that you are questioning it like you are.

Michael Bilerman - Citi

No, I am just curious about what it eventually leads to and whether it was just one transaction or a part of a larger go forward relationship that you're going to have with them. Obviously we are speaking a lot in this call about these Westfield preferreds and funding them. Clearly you have a deep pocketed investor that wants to grow in the mall platform. You own a lot of malls that would fit within that category. You own malls that are close to these malls. If I were to draw a line one to the other, it would seem that would be a natural extension of doing a management contract with them?

Stephen Lebovitz

We agree.

Michael Bilerman - Citi

Just in terms of rank ordering of the capital that you are raising. Obviously it was a pretty bitter pill to swallow three summers ago when you had to raise the equity at where you did. The equity today is still trading at a discount relative to asset value but obviously selling common equity to deliver is one way that you could narrow, perhaps, that gap.

I am just curious how you think about your stock today as a source of deleveraging?

Stephen Lebovitz

It is a source. It's something we look at. We weigh all of the alternatives to it. It's something that’s on the table but we never crossed any of our alternatives off but we think our plans in place today are to, as we discussed, get rid of some of the non-core assets and the availabilities under the lines.

We had our joint venture with Teacher's. There is some tremendous amount of other opportunities and common is something that is a possibility in the market today as well as preferreds but it’s a pretty expensive way of doing it and in face of other ways of accomplishing it.

We will accomplish it while at the same time delivering the Company. Management still is a huge owner of the company of 13% and we continue to buy shares. I do, personally. I think we are going to do what we think gets the best return to our shareholders. We are not going to rule anything off the table. I haven’t mentioned nonrecourse debt in this whole conversation but we do love nonrecourse debt and its project specific.

Operator

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

Richard Moore - RBC Capital Markets

A question for you first, John, on the Monroeville mortgage that comes due, I think, in January. Is that an issue or you have to put that on the line given that you are doing an expansion as well?

John Foy

I think where we are on that, what Stephen mentioned earlier on, is that we are redoing the Penney's deal with the theater and its impact upon the restaurants, et cetera. So we are weighing as to where the best place to do that, that refinancing on that. So we are still working on that and looking at all of our alternatives there as well.

So we haven’t come to any direct conclusion on that but we have different alternatives and we are weighing each of those as well.

Richard Moore - RBC Capital Markets

So more broadly with about $700 million that you have coming due next year in terms of different kinds of debt, are you going to do the same strategy you did this year where you put the bulk of that on the line of credit before looking for permanent funding sources?

John Foy

No, I would think we will basically look at that and watch the markets and see what the best alternative is. If we can see that we are adding value to a property and it’s going to take just a few more months or six months or whatever then we would probably put that on the line for a short period of time and then put permanent financing in place on that, but we do as I mentioned just a minute ago got lot of smiles from our team here as we do like non-recourse project specific financing.

Richard Moore - RBC Capital Markets

So you could do some of these mortgages more as they mature as opposed to putting them on the line and waiting for a later date to take care of them?

John Foy

Exactly.

Richard Moore - RBC Capital Markets

Then a question for you guys on traffic at your centers. There is obviously concern out there that the economy is slowing to some extent. What are you guys seeing in terms of traffic, broadly I guess, throughout your portfolio?

Stephen Lebovitz

We have seen good traffic and good sales. Like I have said in the call, April wasn’t the best month for sales because Easter was early but May and June were both strong and in that 4% to 5% range.

We expect things to continue where we are heading. We have got back to school now. We have got tax free shopping in a lot of the states where we operate. We are seeing restaurants, which are a good proxy for traffic and their businesses is strong.

So we haven’t seen it and you get a lot of these macro headlines out there that are in the New York Times or the Wall Street Journal, but in the local markets there's a lot of good things happening with the job growth and economy strengthening and housing starting to come back. So we are seeing some positive signs.

Richard Moore - RBC Capital Markets

Then one last thing, John, did you mention that the bad debt would be higher to the last half of the year?

John Foy

Yes, we did. We think that that should mitigate some of the growth that we have seen or the acceleration because we are coming off such a low comp last year. So that bad debt expense number could impact us somewhat.

Richard Moore - RBC Capital Markets

Okay. So, is it anything in particular that you are looking at or do you just think the generally low level of last year is not sustainable?

John Foy

Yes. I think, its last year's number, it is not sustainable. It's probably more the case. So yes.

Operator

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

Cedrik Lachance - Green Street Advisors

So you talked a little bit about non-core asset sales for repaying the Westfield prefs. Are any malls part of your non-core assets? Or do you really focus on non-mall properties here?

Stephen Lebovitz

Yes. I think that we would look at certain malls as well. It's just not office or community centers or associated centers. It could be certain malls, et cetera.

Cedrik Lachance - Green Street Advisors

Could you give us the general description of those malls maybe for the certain sales productivity or regional breakdown?

Stephen Lebovitz

Yes, I would say that those centers where we see minimal growth before or no growth at all would probably be the ones that we would look and focus on.

Cedrik Lachance - Green Street Advisors

Stephen, you made the comment that cap rates might have compressed 100 basis points since you bought Minot. Do you mean cap rates were similar assets? Or do you mean that the Minot mall couldn’t be sold at a cap rate that’s 100 basis points lower than what you bought it at?

Stephen Lebovitz

The only reason I say that is just from what we have heard about some other malls that are on the market and sales are lower than Minot and they don’t have the upside but cap rates are 50 basis points, probably lower. So there is more art to science in this.

As you know, there is not a lot of transaction activity, but you look at the way the Westfield malls has traded and based on some things we are hearing that was the reason I said that, it might not be 100 basis points, but probably 50 to 100 but there is definitely upside in some compression just because the interest rates have stayed low and the expectation now is that, that’s going to continue versus may be six months ago, people were worried that they would spike back up.

Cedrik Lachance - Green Street Advisors

Then final question I think Moody's had the somewhat negative view on adding malls to CMBS pools recently and has crafted some rules that make it more difficult to add malls to CMBS pools. Whatever you heard from the CMBS or the banks that you deal with in terms of your ability to use CMBS financing going forward to finance the kind of malls that you have been financing in the CMBS world?

Stephen Lebovitz

We have had discussions with the groups as well on that and with a number of CMBS groups that basically lead a lot of those transactions. We are reviewing those and taking all of those into consideration in our refinancing opportunities that are coming in favorable for us next year.

As you know, we only have the one mall left to refinance this year. It's at 8% interest rate. We think that it's a good opportunity to refinance that. But, yes, we are aware of that, and looking at that as far as our planning for next year and those maturities that are coming available next year.

We will figure out a way to satisfy them on those. We have basically done it thus far with where we are. Granted they are raising the standards but we have some good assets that should fit within those portfolios and within those standards as well.

So, there are also additional other people not just the CMBS market that's available to us as well.

Cedrik Lachance - Green Street Advisors

For assets that don't fit the standard, would you be looking at what? Regional banks or alternative source of financing?

Stephen Lebovitz

Yes. There is all of that. The creativity in the financial markets today recognize and realize that just because a center doesn't do $300 a square foot that it's still a good solid asset, that they can basically make good money off of that.

So I have never felt that the financial community in this country is lacking in the creativity to take care of these types of situations.

Operator

Now our next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.

Andrew Rosivach - Goldman Sachs

Hey, sorry. It's Andrew Rosivach, and I apologize for asking the question this late in the call, but there's all this Westfield preferred refinancing conversation, nobody has talked about the potential for up financing. Could you potentially discuss the debt that you have been through 2013 and the potential excess proceeds you can pull out of them given the performance that you have had so far this year?

Stephen Lebovitz

There is that opportunity and as we have done this year, we were very fortunate in pulling out some excess proceeds, and the portfolio basically for '13 and '14 going forward has additional opportunities in it as well. So right, there is that as well as we just don't have to sell assets to a certain extent to cover, but that is part of the plan as well, and I appreciate you pointing that out though. Thank you very much.

Andrew Rosivach - Goldman Sachs

Thanks for that, and also for the rollover that you have through 2013. I have to give credit to Katie for pointing this out as well. Of the malls that you have rolling it's only Monroeville that's under $300 a foot?

Stephen Lebovitz

That's correct, and there we think with the addition of the theater and what we are doing with the Penney's, that that should grow as well. Theaters have an incredible ability to help those restaurants and drive sales within those restaurants. So we think what we are doing in repositioning that Boscov store and putting the Penney’s in there, and the new theater will have just a great opportunity for it.

And again, you're the best pointing that out for us.

Andrew Rosivach - Goldman Sachs

Is Alamance kind of a go by. When you referred that last year, that Louisville preferably was going through a redevelopment and you managed to get a financer that got the point that you couldn’t look just at the trailing 12 months, and there was more value there?

Stephen Lebovitz

Yes. That's correct and we have opened up the expansion of that center with BJ's Wholesale Club, and the Kohl's and the performance is starting to perform better and that market area is coming back as well. The Carolinas were probably impacted fairly significantly with the economy, and now we are starting to see more signs of life and better traffic there.

So, it's an asset that we have our eyes on, and our marketing folks have a special attention on those as well.

Operator

Mr. Lebovitz, there are no further questions at this time. I will turn the call back to you, please proceed with your closing remarks.

Stephen Lebovitz

Sure. We would again like to thank everyone for joining us today. We are really pleased with the improvements that we have shown in our operating results and we are looking forward to continuing that over the rest of this year. Thank you and have a good day.

Operator

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

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