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CBL & Associates Properties Inc. (NYSE:CBL)

Q2 2008 Earnings Call

August 6, 2008 10:00 am ET

Executives

Stephen Lebovitz - President and Secretary

Katie Reinsmidt - Director of Corporate Communications and IR

John Foy - CFO

Analysts

Christine Mcelroy - Banc of America

Paul Morgan - FBR

Jay Habermann - Goldman Sachs

Craig Schmidt - Merrill Lynch

Jeff Donnelly - Wachovia Securities

Nathan Isbee - Stifel Nicolaus

Michael Bilerman - Citigroup

Ben Yang - Green Street Advisors

Mike Mueller - JPMorgan

Christine Kim - Deutsche Bank

Rich Moore - RBC Capital Markets

Dave Fick - Stifel Nicolaus

Operator

Good day and welcome to the CBL & Associates Properties Incorporated Conference Call. Today's call is being recorded and will be available for replay beginning today at 11 AM Central Time and running through August 13th at 11:59 PM Central Time. You can access this by dialing 303-590-3000 or 800-405-2236 and entering passcode 11110989.

At this time for opening remarks I would like to turn the call over to the President, Mr. Stephen Lebovitz. 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, Chief Financial Officer, and Katie Reinsmidt, Director of Corporate Communications and Investor Relations, who will begin by reading our Safe Harbor disclosure.

Katie Reinsmidt

This conference call contains forward-looking statements within the meaning of the federal securities laws. Such statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual events, financial and otherwise, may differ materially from the events and results discussed in the forward-looking statements. We direct you to the company's various filings with the Securities and Exchange Commission, including without limitation the company's Annual Report on Form 10-K and the Management's Discussion and Analysis of Financial Condition and Results of Operations incorporated by reference therein, for a discussion of such risks and uncertainties.

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

This call will also be available for replay on the Internet through a link on our website at cblproperties.com. This conference call is the property of CBL & Associates Properties, Inc. Any redistribution, retransmission, or rebroadcast of this call without the expressed written consent of CBL is strictly prohibited. During this conference call, the company may discuss non-GAAP financial measures as defined by SEC Regulation G. A description of each non-GAAP measure and a reconciliation of each non-GAAP financial measure to the comparable GAAP financial measure will be included in the earnings release that is furnished on Form 8-K.

Stephen Lebovitz

Thank you, Katie. We are pleased to report 9.5% FFO growth per share this quarter, particularly in light of the retail climate. We were disappointed with our same-center NOI growth, which was impacted by the increase in bankruptcy and store closure activity. However, we are still seeing positive leasing progress as retailers focus on quality expansion. Our senior management team has weathered many previous economic downturns, we are confident we will work through this one as well.

Last week we were joined by representatives from the department stores, specialty retailers, area officials, lenders as well as shoppers and other guests for the ribbon cutting for Pearland Town Center. Our new mixed-used centers located 20 miles south of Houston in Pearland, Texas.

The Houston market including the Pearland submarket is experiencing considerable growth and Pearland Town Center is well position to capitalize on this growth. This project represents our first mixed-used development incorporating retail, hotel, office and residential components.

Despite the retail climate, the CBI leasing team did an outstanding job and the center open an impressive 85% lease committed and 70% occupied. We are excited to share the news of this successful opening and invite you all to visit the center and experience the success for yourselves.

In addition to Pearland we currently have four large new projects under construction, plus 1.5 million square feet of additional development expansion and redevelopment projects. These projects combined represent a total net investment of approximately $440 million though 2010.

All the equity has been funded and construction financing for the balance of the cost is in place. While the leasing environment is challenging, we believe that each of these projects will have a strong grand openings, similar to what we were able to accomplish at Pearland.

One of these projects the Promenade in D'Iberville, Mississippi celebrated its ground breaking in June. This 700,000 square foot power center project has commencement from retailers for approximately 405,000 square feet including Best Buy, Dick's Sporting Goods, Marshalls and others it will be announced shortly.

Our development project in Brazil, Plaza Macaé is going extremely well. We anticipate opening in the fall 95% leased and committed. The Brazilian retail market fundamentals are very strong and while we will maintain a controlled international strategy we believe this market will be a great source of growth for us. Our Brazilian joint venture partner Tenco Realty has identified several new opportunities that we are looking into and completing due diligence.

We also announced an expansion to our sustainability initiative in the second quarter. The program will address sustainability opportunities in the three major areas of our business, including the corporate and regional offices, our properties and new developments. We are continuing to look for way to make a positive impact on the markets we serve.

During the second quarter, our leasing activity remained solid. We signed a total of approximately 1.4 million square feet of leases, including approximately 557,000 square feet of development leases and 863,000 square feet of leases in our operating portfolio. The 863, 000 square feet in our operating portfolio was comprised of 412,000 square feet of new leases and 451,000 square feet of renewal leases.

Today we have completed approximately 81% of our 2008 renewals, for stabilized mall leasing year-to-date on a same-space basis, we achieved an average increase of 11.6% over the prior gross rent per square foot. Portfolio occupancy excluding the centers acquired in 2007 was flat, year-over-year at 91.6%. Stabilized mall occupancy excluding centers acquired in 2007, declined 100 basis points to 91.2%.

Following the first quarter call, we experienced a significant increase in bankruptcy activity. We are working to minimize downtime on this space and have made headway in replacing some of the locations. Despite the increase in bankruptcy store closures through the second quarter, have amounted to less than 1% of total revenues.

The largest outstanding bankruptcy exposure is Steve & Barry's. Since there is still uncertainty surrounding the future of this retailer, our guidance does not anticipate any lost income, other than the write-off during the second quarter of accounts receivable of approximately $632,000. We have 21 Steve & Barry's locations in our portfolio, comprising 813,000 square feet and representing $7.3 million of annual gross rents.

In the meantime, we have a team in place exploring strategy to limit the impact, should we receive some of the space back. They are developing a plan for each space, which will include maximizing temporary income as well as options for redevelopment, replacement with another junior anchor, alternative uses or subdividing the space. Most locations are between 25,000 and 35,000 square feet. Average gross rent for the Steve & Barry's stores is approximately $9 per square foot.

Same store sales declined 2.3% to $341 per square foot recording tenants 10,000 square feet or less and stabilized malls for the rolling 12 months ended June 30, 2008. Consumer sentiment continues to way on sales with traffic at the centers declining year-over-year. Same store sales held up best in the Midwest, Texas and the non-costal south east.

Now I will turn the call over to John for our financial review.

John Foy

Thank you, Stephen. We were pleased this quarter to achieve a 9.5% increase in FFO per share to $0.81, compared with $0.74 per share in the prior year period.

Although lease termination fees and outparcel sales were $0.03 higher in the second quarter 2008 than the prior year. This was partially offset by an increase in the non-cash income tax provision. FFO was also reduced by an increase in the write-off for bad debt and an increase in abandoned project cost.

FFO was positively impacted by properties acquired in the prior year and lower interest expense on floating rate debt during the quarter. Same-center NOI declined 80 basis points for the quarter and declined 70 basis points for the six months ended June 30, 2008, compared with the prior year.

Excluding lease termination fees same-center NOI growth declined 1.8% for the quarter and declined 40 basis points for the six months compared with the prior year period. Same-centre NOI was negatively impacted by $2 million increase in the write-off of bad debt for store closures as well as a year-over-year decline in occupancy. If you exclude lease termination fees and bad debt expense from both periods same-centre NOI in the second quarter was flat and year-to-date was up 60 basis points.

Our cost recovery ratio for the quarter ended June 30, 2008 was 96.7% compared with 102.8% in the prior year period. Excluding the bad debt expense and the quarter the cost recovery ratio would have been 100%. Today, we are about 75% converted to fixed CAM. We anticipate the cost recovery ratio for the full year to be close to 100%.

G&A represented approximately 4.1% of total revenue in the second quarter ended June 30, 2008 compared with 4.3% of revenues for the quarter ended June 30, 2007.

Our debt-to-total market capitalization ratio was 68.6% as of the end of the June compared with up 53.2% as of the end of the prior year period. The increase in our debt-to-market cap is primarily a result of the decline in our stock price. All of our bank covenants are based on gross asset value test, and are not influenced by market volatility.

Variable rate debt was 15.1% of the total market capitalization as of the end of June 30, versus 9.6% as of the end of the prior year period. Variable rate debt represented 22% of CBL share of consolidated and unconsolidated debt compared with 18.1% in the prior year period.

Our EBITDA to interest coverage ratio for the quarter ended June 30, 2008 was 2.27 times compared with 2.35 times for the prior year period. Our dividend pay out ratio in the second quarter was 68% of FFO, which we are very comfortable with. We view the safety of our dividend to be very important.

We are maintaining our FFO guidance for 2008 range of $3.46 to $3.56 per share, which represents a 6.1% to 9.2% increase over 2007 FFO per share excluding the prior year impairment charge for marketable securities. The guidance assumes NOI growth of 0 to 2%, excluding the impact of lease termination fees for both periods.

At this time, we believe that the lower end of this NOI range is more probable. The guidance incorporates a write off of outstanding receivables for bankruptcies to date, including $632,000 related to the recent Steve & Barry's bankruptcy filing, but does not anticipate any lost rent and common area maintenance reimbursements resulting from the potential future Steve & Barry's store closures or other future store closures. The guidance also assumed out parcel sales of $0.12 to $0.16 per share. It does not include any unannounced acquisitions or dispositions. Once the full impact of the Steve & Barry's bankruptcy is known, we will incorporate any closures or rental reductions in our quarterly update.

In conjunction with the Starmount transaction on the second quarter, we saw one office build in Westridge Suites located in Greensburg, North Carolina for $1.2 million. Additionally, we have entered into a contract to sell New Garden center, a community center located in Greensburg North Carolina for $19.45 million. We anticipate closing the sale this month.

As we announced on last quarter's call, we completed sale of five community centers located in Greensburg, North Carolina in April for approximately $24.3 million to three separate buyers. All of the proceeds are used to reduce outstanding balances on the Starmount facilities.

As of June 30th, we had retired the $193 million bridge loan and have reduced the term loan balance to $240 million. We are continuing to market the remaining properties and will announce information on any additional sales quarterly.

We are comfortable with our liquidity position and ability to fund our future capital needs excluding loans and facilities that have remaining extension options, we have approximately $340 million of remaining maturities this year. We have term sheets and commitments in place and anticipate completely new loans within the next 60 days. The terms we are receiving on the loans are relatively favorable, and we anticipate just a slight increase in the weighted average interest rate.

The loans on Hanes Mall and Meridian mall are fully non-recourse. Rivergate Mall (Inaudible) Mall may include a portion that would be recourse to the company.

We will provide specific loan information once we have closed. We also have approximately $305 million of loans maturing in 2009 and are presently discussing refinancing options for those. These assets are very high quality with low loan to values. So, we anticipate benefiting from significant excess proceeds.

In these tough economic times, we are all experiencing the importance of strong relationships. Maintaining relationships with retailers as well as our financial partners is crucial. The successful opening of Pearland Town Center is evidence of how strong retailer relationships have benefited us.

In addition to the completion of our new $220 million term loan with our banks, at a spread of $150 to $180 over LIBOR, likewise shows how the relationships with our banks and financial partners have been beneficial to us as well.

There are many other examples that we can tell you, about illustrating how our relationships as well as the confidence in our management team by these industry leaders, enhances the ability of CBL's team to produce not only in good times, but in challenging times as well. Senior management has gone through many other difficult times and we are determined to continue the success, we have enjoyed over the years.

Our ownership position in CBL continues to increase with management currently owning over 21% of the company. We believe that during these times, we will see an increase in number of opportunities to grow our company, in a very sound and secure way.

We understand the vague reason volatility of the market, as well as the need to ensure that our company is running in the sound financial manner. We are operating proactively and believe we are position to weather the economic strains and strengths, and strengthen CBL.

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

Question-and-Answer Session

Operator

Operator: Thank you sir. (Operator Instructions) Our first question is from the line of Christine Mcelroy with Banc of America. Please go ahead.

John Foy

HI, Christy.

Christine Mcelroy - Banc of America

Morning guys, good morning. John did you see that the total amount of bad debt expense in Q2 was $2 million, and if so what are the retailers beside Steve & Barry's stood early 2?

John Foy

It was an increase of $2 million.

Stephen Lebovitz

The retailers other then Steve & Barry's were (Inaudible) and those were the main ones, those three. But then there were some others as well Friedman's, street staff, some of the other bankruptcies (Inaudible) Disney. So they were about 10 different retailers that contributed to that.

Christine Mcelroy - Banc of America

So, what was the total amount, and what should I be thinking about in terms of a normalized run rate in terms of kind of what your guidance include to any additional bad debt expense in the back half for the year.

John Foy

$2.9 million.

Stephen Lebovitz

That was their amount.

John Foy

The run rate should be -- I think we have basically said that we'll get back to you with regard to what ultimately happens with regard to Steve & Barry's. So we are monitoring that on the daily basis, it appears that there is somebody who wants to take over vast amount of those stores, so it's really difficult to basically see where it is and then again we are getting into that time of the year when retailers are doing pretty well coming into the holiday seasons. So, we would anticipate that as we see things occur, we will basically stay on top of those and announce those.

Christine Mcelroy - Banc of America

Okay. And then just looking at your guidance range, kind of what offsetting the higher bad debt expense that you'd keep guidance un-changed is that the lease termination fees?

John Foy

We see interest savings there as well as some other properties and projects that are coming on stream. So, we see that as basically one way of accomplishing that.

Christine Mcelroy - Banc of America

Then what kind of lease termination fees you forecasting in the second half?

John Foy

We are not forecasting any lease termination fees in the second half.

Christine Mcelroy - Banc of America

Okay, and then just lastly, following-up on Hickory Hollow, you’ve got the debt coming due this month. I believe you just had Dillard's closed there; you've got a pretty large Steve & Barry's there. Can you give us a sense for kind of your long-term plan for that mall and what option do you have from a vendor's standpoint on refinancing the mall I know you mentioned a new loan would probably be recourse?

Stephen Lebovitz

Yeah, on a couple of fronts, one is, we're looking at redeveloping that mall. The mall was probably overbuilt from a standpoint of square footage so there, we're out exploring other non-retail uses for that and some new concepts that we're working with some partners, who have been very successful in their endeavors of changing malls around typical of this.

Nashville is a great market area and Hickory Hollow has been impacted somewhat by new model with opened down in [Murphy's Pro] Lifestyle Center and in addition to that, the city that your government of Davidson County, Nashville is really showing a lot of interest in seeing Hickory Hollow basically being revitalized and come back.

We are definitely in the midst of discussions with lenders with regard to that, but we feel that we will accomplish something on the Hickory Hollow refinancing. There will probably be some recourse on that asset, but all of our other re-financings are in great shape and we will be announcing those and closing those just over that next 60-day period. So, we are very, very comfortable and confident with regard to our re-financings and we couldn't be more pleased with the results we are getting from the lenders.

Christine Mcelroy - Banc of America

Thank you

Operator

Thank you. Our next question is from the line of Paul Morgan with FBR. Please go ahead.

Paul Morgan - FBR

Good morning.

Stephen Lebovitz

Hi, Paul.

Paul Morgan - FBR

Hi. Would you like its right that you said the 81% of your '08 renewals have been dealt with already?

John Foy

That's correct.

Paul Morgan - FBR

How would that compare to say the same time last year?

John Foy

That's about the same place we were last year. That's pretty much for this time year, where we typically see it.

Paul Morgan - FBR

Okay, and then what kind of visibility do you have and what's your feeling, I know it’s a little bit early to scale about your holiday seasonal leasing and kind of where is that, what is that program in fact the whole specialty program as a percent of your NOI?

John Foy

I think the specialty in seasonal leasing for this year, is going to end up pretty much flat from last year. I mean, its with mall traffic being down its been impacted somewhat, but we're still seeing good demand for the fourth quarter and we feel like we will able to end up roughly, where we were last year. That's roughly a $100 million program total. So, that's gives you a sense for the amount of revenues we get from that.

Paul Morgan - FBR

What kind of growth have you been seeing over the past few years or year-over-year, I mean it been generally growing I’m assuming faster than core NOI?

John Foy

Yeah. It's been growing roughly 10% a year. It’s been slow down by a couple of factors. One is that some of the retailers have put restrictions that have limited the number of card. So, that has kept us from adding to the supply in some cases, and then just with economy and the traffic. Then the other thing is that the immigration has crackdown on some of our operators. So, that’s we would also see people over that.

Paul Morgan - FBR

Okay. Last question on the held for sale assets, do you have any sort of update on your, what do you expect to see in the second half for those?

Stephen Lebovitz

Paul I think we re having conversations with people on all of the remaining assets that we are going to dispose out in the Starmount portfolio. We look at our own portfolio, as opportunities come along. So, in second half of the year, we have projected no sales or disposition of those assets. So, we like to take a conservative approach to what we put into our numbers. So if they were to occur, it would just be a bonus from the standpoint of additional income to the company.

Paul Morgan - FBR

Okay, but there is nothing in guidance for related to sales.

Stephen Lebovitz

That's correct.

Paul Morgan - FBR

Thanks.

Stephen Lebovitz

Thanks Paul.

Operator

Thank you. Our next question is from the line of Jay Habermann with Goldman Sachs. Please go ahead.

Stephen Lebovitz

Hi, Jay.

Jay Habermann - Goldman Sachs

Hi, good Morning

Stephen Lebovitz

Good Morning

Jay Habermann - Goldman Sachs

John, question for you, I guess you mentioned in your comments on FFO growth that your increase largely year-over-year due to acquisitions and lower interest expense from lower interest rates. But you are currently about debt to asset of about 75%, you got a $1.5 billion on shorter-term financing and your fixed charge is down year-over-year. Can you just update us on thoughts in terms of thoughts on deleveraging the balance sheet a bit in this current environment, especially given the continued turmoil in credit markets?

John Foy

Yeah, I think we are Jay. Yes, I think when we started this company we built a lot of community centers and power centers and so those off to the leverage well at that time, not deleverage, but to provide equity for the company. So, we think that same basic fundamental applies today with the development pipeline that we have going today and the ability to sell those assets. That should generate additional income to us as well.

As we pointed out just a minute ago to Paul, we don’t project any of sales of assets in our FFO numbers, but we are very cognizance of where we are on our debt to market capitalization number, but in turn it really has no relevance to our bank clients of credit. They are all based upon gross asset value test and we have plenty of capacity in there and under our lines of credit in to the second quarter, we ahead about $190 million of availability there.

Then we had construction loans that we have excess financings so we clearly which were pull down on that of approximately $30 million. Granted that doesn't deleverage the company from the debt to market capitalization standpoint, but we think ultimately the markets got to realize the CBL is a best value out there especially, when the dividend is so safe and secure. 11% dividend payment is just really kind of crazy in today's market.

So, we think that ultimately the market will realize that CBL is underpriced, number 1. Number 2 is that we have plans in place that we will learn over the years that we can sell assets and deleverage it anytime. And number three is, that we have a great relationship with their banks and financial institutions. So, we are very, very comfortable with our financial position and we think we are just going through one of those good times in the retail business. It happens and we have been here, its hard to believe that I've been this business for 40 years, but I have been and we have seen many of these opportunities, so.

Jay Habermann - Goldman Sachs

Right, I was just looking at in debt to assets and just again thinking that, would you reconsider sort of taking into a low level going forward.

John Foy

I think we are always focused on the ability to pay down debt and bring those levels down. No question that debt to market capitalization and the lot of people's minds this is an important deal, but I think it doesn't have anything to do with regard to the safety and the soundness of our financial capabilities of this company and we got good coverage ratios as well.

So, I think what we are focused on, is to make to certain we get those coverage ratios in place. We are sorry that the market doesn't view as a tremendous opportunity down at this time and we'll do what we need to do to bring those that levels down.

Jay Habermann - Goldman Sachs

Just turning to NOI growth, can you give a sense of just the disparity of growth say between your top centers maybe your top 25 versus say the remainder?

Stephen Lebovitz

Yeah Jay we don't really breakout the portfolio and look at it that way. I mean there is a lot of disparity. Some of the tourist markets have been impacted more then non-tourist markets. The properties along the border with Mexico have stayed very strong and they perform well. It's not just kind of a top 25 versus the rest.

I think what you are saying is I mean unfortunately this retail environment is not discriminating and you saw in the journal today there is an article on Whole Foods and Starbucks and companies have appealed to the high end have been hit as well as companies in the more moderate range. So I think it's just a weak retail environment and like John said we have seen it before, we'll work through it and some of the most successful retailers like the company like [Baco] has unbelievable sales growth just because they got their merchandise right.

Then some other companies that have been very hard or struggling. So, it's just a function of the retailers working through their issues and getting there products right. The other thing that's going on with the retailers is they have gotten so conservative on the inventory for this year that there is no way, holiday sales on (Inaudible) decrease. So, they are looking very closely and they have got issues with higher cost of goods sold and issues like that that are going to impact us and we are working with them. But that's a big struggle from their point of view.

Jay Habermann - Goldman Sachs

Just one more from me and then Tom has a question as well. Can you mention what was the $1.2 million of abandoned development costs associated with?

John Foy

Yeah. It was associated with two or three projects that we had that we basically couldn't get the returns that we thought we should. We didn't see the pre-leasing that needs to be done and it's consistent with the conservative approach that we have taken and we'll continue to take. So, it was three basic projects that we had that we are going to develop that we have basically written-off them.

Jay Habermann - Goldman Sachs

Hey, guys its Tom here. I apologize if you spoke about this earlier on the call but what's your outlook for stabilized mall occupancy for the balance of the year? Do you think that the increase that might result from temporary leasing is enough to offset the potential for increased store closings and the impact that will have on occupancy?

Stephen Lebovitz

I think we are looking at roughly a 100 basis points down from where we were at the end of last year and the temporary leasing and specialty leasing will help out especially with some of the spaces that between the bankruptcies or the store closings. So, that's going to absorb some of that. But I think at the end of the day we'll still be down year-over-year.

Jay Habermann - Goldman Sachs

Okay. Thanks a lot. One final question on the credit facility that matures in August of this year, I know you guys plan on utilizing the extension option. I'm just curious if there are any changes in the terms of that loan that take effect upon exercise of the extension option?

John Foy

Tom, I'm amazed that you would even ask that question normally that we would have negotiated and a great deal for us. So, it's basically the same that goes throughout. It's got three additional periods of one year each. So, there is plenty of room on that as well as the rest of our lines.

Jay Habermann - Goldman Sachs

Okay. Thanks a lot, guys.

John Foy

Thank you, Tom.

Operator

Thank you. Our next question is from the line of Craig Schmidt with Merrill Lynch. Please go ahead.

Craig Schmidt - Merrill Lynch

Thank you. The operating income of discontinued ops of $3.3 million. What assets does that consist of?

Stephen Lebovitz

That is the Starmount office buildings that we bought Craig, when we bought the Starmount portfolio. So, it was always our game plan to sell those off that's not our business. So we are in the midst of selling those off.

Craig Schmidt - Merrill Lynch

I heard early you don't have that in your guidance though that could be a positive?

Stephen Lebovitz

That's correct.

Craig Schmidt - Merrill Lynch

Okay, and then, I mean, you had one of the bath clubs in Monroe that's one of your more productive centers. I wondered, what about some of the alternatives you thought of replacing the closed bath clubs?

Stephen Lebovitz

Yeah. It's interesting because they just filed a suit. We have already got two emails from retailers that have expressed interest in it. I probably shouldn't name who they are, but we have interest from those two plus possibility of a theatre that we were looking to develop on some land around it that we could redevelop that. We don't own the store. [Boston] owns that they bought it directly from Macy's when Macy's bought the May Company. But I'm sure we'll have conversations with them once they sort out their situation.

Craig Schmidt - Merrill Lynch

Thanks.

Operator

Thank you.

Stephen Lebovitz

Thanks, Craig.

Operator

Our next question is from the line of Jeff Donnelly with Wachovia Securities. Please go ahead.

Jeff Donnelly - Wachovia Securities

Good Morning guys.

Stephen Lebovitz

Hi, Jeff. Good Morning.

Jeff Donnelly - Wachovia Securities

Hey, John. Maybe you touched on this in an answer to Christy's question, but I guess why not get more conservative in your guidance for this year. I guess putting more of a cushion for retailer losses or what does that mean that you expect we are done for the time being on retailer issues as they go through a back-to-school holiday sales period?

John Foy

Well. I don't think we are necessarily done because I think we are in a very fluid economy and I don't know that we are necessarily done from that standpoint. But, as you'll note our range is pretty wide and it does give us a lot of flexibility to that. I think that the biggest issue still outstanding that we got to focus on -- we are focused on it from the stand point of leasing and taking care of the space but Steve & Barry's is the big question mark today.

If two weeks ago, you would basically ask the question, everybody would have said they are going to liquidate their whole company. Then yesterday, there is a stock in horse basically now talking about operating the stores et cetera and it's in the bids to negotiating. So, I think, what we felt is that we had a broad range there and then looking at the numbers and so on we felt fairly comfortable with that other then these unforeseen things that could occur.

Jeff Donnelly - Wachovia Securities

I'm curious on your development and redevelopment pipeline, we saw opening dates in a handful of projects pushed back and yet initial yields they are pretty much across the board, were either flat to up slightly. I'm curious, I mean with the delays generally leasing or construction motivated and what gives you the confidence I guess on initial yields for your projects just given the environment that we are in?

John Foy

I think there is only one delay, which was a Barnes & Noble store and that was just we got behind on approvals, governmental approvals. So, we delayed it from fourth quarter to first quarter. But other then that we haven't delayed any development projects.

Jeff Donnelly - Wachovia Securities

Something, I guess the opening dates also some of your redevelopment projects I guess as well, looks like they had slipped back from what I think they were published within the supplemental in Q1?

John Foy

Right, okay. There were couple of Barnes & Noble Asheville in West County and actually at West County that ones -- the Barnes is opening is just a restaurant. So, they are going to opening in the spring and that was just a matter of getting the leasing done and giving everyone open and it was ambitious schedule. We are pushing really hard on our leasing group originally and it was overly ambitious and so just the reality of what we could accomplish was set in there, but that project has really come together nicely and we'll be announcing a second really strong restaurant very soon and we have got four good restaurants plus Barnes & Noble’s part of that. So, that's really come together well.

The Barnes & Nobel at Nashville just was a few months delayed from where we originally said it was. But we held to the schedules for the most part, the leasing environment for new developments is definitely challenging like I said, but we're confident that we're going to pull those projects off and they're going to get to the leasing levels that we are able to achieve it at our Pearland.

Jeff Donnelly - Wachovia Securities

Just one last question is, I know you John, put this in your guidance, but considering the assets did you hold for sale. I was curious, do you still expect the majority or good number, I should say, of the Starmount office portfolio assets or maybe it will be sold by year-end and how the occupancy holding up in the office side of that business?

John Foy

I think occupancies are holding up pretty well there. There were long-term leases in place on those in today's market took the cost of replacements in those market areas, basically time is the ability of people to come in and compete against that. There is a lot of interest in those market areas. I think one of the reluctances of a lot of people slowed down the process somewhat is we already get financing and we're able to work through that within as well.

Jeff Donnelly - Wachovia Securities

Okay, thanks guys.

Stephen Lebovitz–

Thanks, Jeff

John Foy

Thank you

Operator

Thank you. 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, Nathan.

Nathan Isbee - Stifel Nicolaus

CapEx is down by $10 million in the first half of '08, is that a timing issue or you still comfortably you would be inline with last year's totals?

John Foy

We feel comfortable that we are going to be inline with last year. So, we have been proactive with regard to taking the steps necessary in this market area to handle those types of situations and we feel comfortable with where we are today.

Nathan Isbee - Stifel Nicolaus

Okay, and then one last, how are you doing the '09 lease renewals?

Stephen Lebovitz

We are about 40% of '09 and so we are making good progress there and that's around this time a year typically, where we would be.

Nathan Isbee - Stifel Nicolaus

Okay. Thank you very much.

Stephen Lebovitz

Thanks Nathan.

John Foy

Thanks Nathan

Operator

Thank you. Our next question is from the line of Michael Bilerman with Citigroup. Please go ahead.

Michael Bilerman - Citigroup

Good morning.

Stephen Lebovitz

Hi, Mike

Michael Bilerman - Citigroup

I have Ambika Goel with me as well.

Stephen Lebovitz

Hi, Michael. Hi, Beaker.

Michael Bilerman - Citigroup

John maybe can you just talk a little bit more clarification on the financing, I think you mentioned you had 340 rolling and I guess your two loan subject to extension option is that Lakeview and Milford.

John Foy

Yes.

Michael Bilerman - Citigroup

When did they all have extensions too.

John Foy

I think that they have one or two more years on him.

Michael Bilerman - Citigroup

Okay, and then I guess the balance of 340 is right now at a 64 interest rate and I think you said it will be north of where you are today, so we should expect that this is because 675 or 7% all in type of rate.

John Foy

Yes, it’s about 6.5 today and it should go up about 30 basis points or some like that in the range.

Michael Bilerman - Citigroup

That's all and in terms of all your upfront fees and all the cost to do it?

John Foy

Yes.

Michael Bilerman - Citigroup

Then are you getting excess proceeds out of the 340 that's rolling or it just straight swap?

John Foy

We have been able to negotiate some excellent terms on those loans and we are working to close those loans. The appraisals are coming in. The appraisals are basically inline with what we expected and there are some proceeds.

Michael Bilerman - Citigroup

Magnitude wise, we are talking about $100 million or something less.

John Foy

I am going to slip that question by Michael. Because we are in negotiations on one of these loans we prefer not to answer that at this time.

Michael Bilerman - Citigroup

I guess it's probably not extraordinarily significant.

John Foy

It's not going to be extraordinarily significant. That's it. Thank you.

Michael Bilerman - Citigroup

Then just going back, I think your unsecured facility of your three one-year extensions and the cost stays the same. Is that the same for your secured facility that in most of your rolls early next year or one year extension, is it going to be the same term, same fees?

John Foy

That yes, that's correct.

Michael Bilerman - Citigroup

You don’t have to pay anything to get the extension, right.

John Foy

I think there is some minimal fee.

Michael Bilerman - Citigroup

Mostly to do it, and how far long are you on all these sort of discussions on next year's maturities?

Stephen Lebovitz

The lenders that we have been talking to today about the '08 financings basically, what's really primed there, they’re desire to do these loans with us the ability to do more next year. It seems like these people that we have been dealing with are very excited about it and they relish some of our best properties coming up next year. So, we feel really, pretty good and comfortable about those.

Michael Bilerman - Citigroup

You said, Hickory and Rivergate would both have recourse on them, but Hanes would not. Hanes and Meridian would not.

Stephen Lebovitz

Yeah, that would be partial recourse.

Michael Bilerman - Citigroup

On Hickory and Rivergate?

John Foy

Yes. They are basically, these are two assets that we bought in about nine or ten years ago and they’re cross-collateralized. One will basically come out of the cross-collateralization and the other one will basically have some recourse, that both has some type of recourse on.

Michael Bilerman - Citigroup

Going to the abandoned project expenses, you have almost $3 million year-to-date, which I guess all refers to all development that you haven’t decided to pursue. How much more sort of pursue cost you have on the books related to projects, that you potentially start just to get a sense of how much more it is?

John Foy

There is some other projects that we are still working on. That we are still feeling fairly good with regard to the prospects of those going forward. So, if we thought that we were going to write those off, we probably would have done at this point in time, but I think people feel that where we are on those assets, we still have a lot of time left on the options.

Keep in mind, that we don’t buy any property who already have commenced construction on that. So, it gives us tremendous flexibility and what we are at risk is, engineering costs and option fees. So, we minimize that and then, we also keep in mind is that (Inaudible) legal fees etcetera that are involved. So, we try to minimize our exposure and do a pretty good job of that, that we write-off this time we felt that we just couldn’t achieve the free and clear returns that we felt that we needed to.

Michael Bilerman - Citigroup

Do you have like $25 million and investments right now and developments and future development pipeline, I'm trying to get a sense of…

John Foy

[Multiple Speaker] considerably less than that.

Michael Bilerman - Citigroup

Okay.

John Foy

We are careful even in great economic times about our upfront costs and I think we probably average $1 million to $1.5 million a year and write-off, but given the size of our development program that’s pretty minimal.

Michael Bilerman - Citigroup

Hi, this is Ambika. Just following up on the expense recovery rate you had mentioned that it was lower because of the higher bad debt expense even adjusting for the bad debt expense, it appears that it is trending lower this year? Are there are any other factors on the operating expense side that are trending higher just because of the impact of what's happening in the economy and occupancy down?

Stephen Lebovitz

Ambika, as you transition from pro rata CAM to fixed CAM you'll always go backwards till that time. So, that's what has impacted us as well as we can mention. So, as we finish up and get everybody on fixed CAM then we should see a positive 100% or back to those levels or better.

Michael Bilerman - Citigroup

Okay. So, it's just a matter of I guess, the timing of the recoveries, which is causing the expense recovery rate to turn lower this year?

John Foy

Yes. We did that's correct.

Michael Bilerman - Citigroup

Okay. Then last quarter you went through just kind of talking about each tenant's exposure and how far you are on re-leasing the space. Could you update tenant by tenant, how the re-leasing is going for the space that you have gotten back from either closures or bankruptcies?

Stephen Lebovitz

Well, I think what happened in this quarter was a lot of the store closings were right at in June or that the bankruptcies and we are not even sure, which stores we are getting back in a lot of cases. So, it's just preliminary to do that for this new batch. But we can do that with you at some other point or we can update it probably with the next quarter because then we'll have a lot more clarity as to how this is all going to shakeout in terms of storage, we are going to be having the opportunity to re-lease.

Michael Bilerman - Citigroup

Okay, and then if the closures, I guess just happen in June, if we are thinking about like a rolling from second quarter to third quarter NOI run rate. What's the impact of these closures just to get a sense of how NOI will be impacted just because the second quarter won't really include the impact of all these closures?

John Foy

Well that's why we have reduced the NOI guidance, we didn't reduce them, I'm sorry we guided to the lower end of the NOI guidance of the range that we had projected. So, that reflects this fallout that we are seeing from this batch of retailers that filed.

Michael Bilerman - Citigroup

Okay. So, would it be fair to say, you gave the number of 1% of revenues lost. Is that in the figure of what was I guess, lost right at the end of the second quarter?

Stephen Lebovitz

No, that's the year-to-date revenues.

Michael Bilerman - Citigroup

Okay, great. Thank you.

Stephen Lebovitz

Thank you.

John Foy

Thanks, Ambika.

Operator

Thank you. Our next question is from the line of Ben Yang with Green Street Advisors. Please go ahead.

Ben Yang - Green Street Advisors

Hi, good morning.

John Foy

Hey, Ben, how are you?

Ben Yang - Green Street Advisors

Fine. Stephen just a few questions on Pearland Town Center you said that the property opened up 85% lease, which sounds very good given the tough environment, but the 70% of the space occupied sounds low. All tenants deliberately postponing store openings until the market improves or did you have any trouble of coordinating tenant openings here?

Stephen Lebovitz

Well, we opened 61 stores last Wednesday plus Macy's and that's the 70% and plus Barnes & Noble opened I'm sorry. Dillard's which is the second department store anchor isn't opening until the end of October. So and that was always plan that way that there is no delay, that's been their plan from a couple of years ago. So, most of the difference between the 70 and 85 is just happening over the next couple of months around the time that Dillard's opened. So, we figure right now will be 82% opened by year end.

Again, some of those are deals that just happened last minute and they couldn't get built out before the center opened and things like that. So, we to be over 80% within 3, 4 months of a new mall opening is good. It's pretty normal in good times and given this economy, we think it's extraordinary. We have good interest, as a result of the opening, everyone sales have been great. So, I think it's a real success story for CBL chose what we can do.

Ben Yang - Green Street Advisors

Unlike the delayed opening, is it really baked into the yield that you are expecting for the project?

Stephen Lebovitz

That's correct.

Ben Yang - Green Street Advisors

Then can you give us some update on the residential and the office portion of Pearland, are those opened yet or are they opening I guess, later this summer?

Stephen Lebovitz

The residential we opened 62 of the units, which are what we are going to own that we have a local partner Sueba, who also has the ability to build other apartments and they are handling the management and the leasing of those.

So, those opened with the center in fact that was the first time people could look at them as well. So, we anticipate that those will lease-up over the next few months. The office also was completed and that again we are starting to get some good activity now that the center is opened. We are close to signing our first lease for that. The hotel opens this week and so that also is a real attractive element of the project.

Ben Yang - Green Street Advisors

Okay. Thank you.

Stephen Lebovitz

All right. Thanks, Ben.

Operator

Thank you. Our next question is from the line of Mike Mueller with J.P. Morgan. Please go ahead.

Mike Mueller - JPMorgan

Hi. Just two questions. First of all with respect to the guidance of rental income its okay an income I think it's $0.12 to $0.16 for the year, it looks like so far this year you have booked about $0.06. Can you just talk about the visibility and the comfort level of hitting the balance of that income in the second half for the year?

Stephen Lebovitz

Yeah. I think a lot of this is centered around the new developments and things such as that. So, I think our guys are having a lot of interest in those partials. So, I think we review that with our peripheral property guys before we did our guidance and I think they all feel fairly comfortable that we can achieve those numbers.

Mike Mueller - JPMorgan

Okay. Is there any sense at this point about will it be more Q4 then Q3 or fairly even?

Stephen Lebovitz

It will be probably more Q4 then Q3.

Mike Mueller - JPMorgan

Okay, and then secondly you commented before about I think Stephen, did about the 09' leasing activity. Can you provide any insight in terms of, if we are thinking about how the lease spreads have turned out so far this year versus the activity you are looking at 09', are you seeing those levels holding up still or any diminution in them?

Stephen Lebovitz

Yeah. I think we have been double digits with the lease spreads this year for new leases and renewals are a little bit less. But I think we are looking at comparable for 09' there is no question that retailers are pressuring to try to get as good a deals as possible. But I think we can hold those levels.

Mike Mueller - JPMorgan

Okay. Thank you.

Stephen Lebovitz

Thanks.

Operator

Thank you. Our next question is from the line of Christine Kim with Deutsche Bank. Please go ahead.

Stephen Lebovitz

Hey Christine.

Christine Kim - Deutsche Bank

Hey, good morning. John you mentioned before a couple of projects not meeting your retail requirements. Can you just remind us, where are your yield hurdles are at this point and how much that's changed over the past three or six months?

Stephen Lebovitz

Christine it's in the range of 8% to 10% on an un-leveraged basis after taking out management fees and the development fees, the typical normal way we underwrite. Before this sort of downturn in the economy those probably were little less than that. But that's basically, where we are as 8% to 10%. Then on remodels and expansions, if we take into consideration lost rent for space that you are taking out of that those returns could be a little lower than that, but it just add to the total overall projects value.

Christine Kim - Deutsche Bank

To compare to where you guys, where maybe 3, 6 months ago, those requirements or hurdles have increased 50 basis points or not even something in that magnitude?

John Foy

Actually they’re probably up by 100 basis points.

Christine Kim - Deutsche Bank

Okay, great. Thank you.

John Foy

Thanks.

Operator

Thank you. (Operator Instructions). Our next question is from the line of Rich Moore with RBC Capital Markets. Please go ahead.

Rich Moore - RBC Capital Markets

Hello, good morning guys.

Stephen Lebovitz

Hi, Rich.

Rich Moore - RBC Capital Markets

Question John on the credit facilities and the letters of credit just I don’t know, confused myself here. With all the different facilities and letters of credit now, what is the total capacity that you have and then the total outstanding on the group?

John Foy

Total capacity Rich just the lines of credit, excluding the letters of credits is about $1.490 billion right in that range. What we have outstanding on those today are let me go at a different way, what we have available as at the end of the second quarter was a $190.5 million available on that. What we do is, we basically because our lines of credit interest rates are lower than what our construction loans are. We will use our lines of credit to the extent before we close the construction loan because of pricing.

So, in addition to that, when we close a couple of construction loans that are already committed and we are in the process of documenting. We would have another $31 million of available funds out of that as well.

In addition to that there is a line of credit or letters of credit and that I think probably has availability in the $20 million range or so. Likewise, we are in the process of closing a lot of bond issues on TIF financings and other things it should generate additional revenue source well.

So, those TIF monies that we've basically taking back notes for, as an example on West County I think it's about a $10 million or $12 million TIF financing there, when we close that loan we will get back that $10 million or $12 million and there is a number of those like that. So, we were focused on is the liquidity of the company and make concern that is financial sound and that we have the flexibility to do what we need to do and to make sure that our dividend are safe and secure.

Rich Moore - RBC Capital Markets

Okay. Okay. John. So, then when I look in to supplemental and I see $1.5 billion of balance on the credit facilities. How is that $1.5 billion compared to the $1.49 that is the capacity of the facilities? Is there I’m talking about in the….

Stephen Lebovitz

Rich, this is Steve and this is dangerous, because I’m trading on John's…

Rich Moore - RBC Capital Markets

Yes, that’s right.

Stephen Lebovitz

The total just the credit facilities, the total commitment is 1.455200 billion and the outstanding is 1.264700 billion. So, that's a 190 of availability that John was talking about, and in the supplemental that's schedule are that are you looking at also includes the term loan, then the term loan is when we talk about the credit facilities we are talking about that's a separate item.

John Foy

So, the term loan we close to the $228 million and what we did that, is we paid off some debt and then we paid down our lines of credits by that amount.

Rich Moore - RBC Capital Markets

Okay, I got you. Very good. Thank you for that. I appreciate it. Then, one more finance question if I could John, on the FFO I'm just curious why do we add back that tax item, this time on the sales of the assets?

John Foy

It's a non-cash item and the reason Rich is, because that is income that the management company has basically earned and for GAAP purposes, you've got to pay taxes on it. But we have enough carry-forward losses in the management company to cover that.

Rich Moore - RBC Capital Markets

Okay, good. I got you. And then now, turning to concessions are you guys seeing the environment for concessions with retailers, is that increasing? I mean, they were looking for -- I'm sure they are looking for more but are you having to give more concessions at this point?

Stephen Lebovitz

I think the only areas where we have gotten pressure is some higher tenant allowances on some of the development projects and that's from some of the retailers who have like the women's specialty retailers, where they just really been struggling and had cutback on their expansion and they requested higher allowances to the way to bridge the gap and make the numbers work. But other than that we haven't seen that.

Rich Moore - RBC Capital Markets

Okay, very good. Thanks, Stephen. Then last question I have is, you guys have a lot of community centers and open-air centers in the pipeline, in the development pipeline. I'm curious, would any of those become merchant building type assets or you might just turnaround and sell them?

Stephen Lebovitz

Well, I think what we'll do there is that we would see what the market would want to do with regard to those and we think that there will be opportunities to sell those and we can generate significant profit for those as well. As you know in the past that's what we have done and I think we'll look at that and examine that.

Rich Moore - RBC Capital Markets

Okay, all right. Great, thanks, guys.

Stephen Lebovitz

Thanks Rich.

Operator

Thank you. Our next question is a follow-up question from the line of Paul Morgan with FBR. Please go ahead.

Paul Morgan - FBR

Hi. Just a quick follow-up. Stephen if I heard you right the leased and committed and open numbers for Pearland are including the anchors?

Stephen Lebovitz

No, no. They don't include the anchors. That's just the non-anchor space.

Paul Morgan - FBR

Okay. I thought you were saying where you were talking about that occupancy was getting from 70 to 85 or whatever Dillard's that was doing making up the GAAP.

Stephen Lebovitz

No, what I was saying is that Dillard's isn't opening until October so some of the specialty stores that were in that 15% between 70 and 85 are opening between now and when Dillard's opens in October.

Paul Morgan - FBR

Okay. So, that was done by Dillard's or something?

Stephen Lebovitz

Yeah.

Paul Morgan - FBR

Okay, thanks.

Stephen Lebovitz

Thanks, Paul.

Operator

Thank you. Our next question is a follow-up question from the line of Nathan Isbee with Stifel Nicolaus. Please go ahead.

Dave Fick - Stifel Nicolaus

Hi, it's actually Dave Fick here with Nathan. I know you guys don't like to comment before hand on what your dividend policy is going to be. But given that your track record over the last few years has been sort of 30%, 10% and then last year 8% dividend increases in December. Given where you are in the capital markets and so forth right now and acknowledging that's a Board level decision again. Where do you think you all might be coming out in terms of recommending an increase to the Board?

Stephen Lebovitz

I think, it's early in the process to really see where we are going to be on that David. But we have had a history of increasing the dividend every year since being a public company. But I think what we are really focused on is the safety and security of that dividend where it is today and we feel very comfortable and confident that it's safe and secure for our shareholders.

Then after taking that into consideration as well as the other capital needs I think, the Board will come to a conclusion as to what they want to do on that. I think that as we pointed out the debt to market capitalization number is more of a street driven number versus our banks and financial. So, we will take that into consideration as well as other things in capital needs, but we do have the financial flexibility to do what we need to do, and all of those turn to take into consideration.

Dave Fick - Stifel Nicolaus

Thank you.

John Foy

Thanks David.

Operator

Thank you. Our next question is a follow-up question from the line of Jeff Donnelly with Wachovia Securities. Please go ahead.

Jeff Donnelly - Wachovia

Hey guys, this might just be a presentation issue from Q1 to Q2 in your supplemental, but on two of the community open-air centers I think the Hammock Landing and Pavilion at Orange, that your projected total costs pretty much halved it themselves, but in both quarters they were and still a 50-50 JV is just a presentation difference or did you (Inaudible) scale back of your expectations of costs there or?

Stephen Lebovitz

It just presentation that the project to the same cost in the same size. We just adjusted for the 50-50 JV.

Jeff Donnelly - Wachovia

Okay. Thank you.

Stephen Lebovitz

Okay.

Operator

Thank you. There are no further questions. At this time, I would like to turn the call back over to Mr. Lebovitz for any closing remarks.

Stephen Lebovitz

I would like to thank everyone for joining us this morning, as John said this is a difficultly economy. It's not the first one that we have seen and we are very confident that, with our management team and our experience and our properties that, we are going to get through this and show everyone that CBL stock is very much under valued and we are going to have a solid rest of the year and that our program going forward it's going to really show the investors that CBL is a company that they want to earn to be a part of. Thank you.

Operator

Thank you ladies and gentlemen. This does conclude the CBL & Associates Properties Incorporated conference call. Thank you for your participation. You may now disconnect.

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Source: CBL & Associates Properties Inc. Q2 2008 Earnings Call Transcript
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