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

Q3 2012 Earnings Call

November 07, 2012, 11:00 am ET

Executives

Stephen Lebovitz - President & CEO

Farzana Mitchell - EVP & CFO

Katie Reinsmidt - SVP, IR & Corporate Investments

John Foy - Vice Chairman of Board

Analysts

Todd Thomas - KeyBanc Capital Markets

Mike Mueller - JPMorgan

Ross Nussbaum - UBS

Cedrik Lachance - Green Street Advisors

Quentin Velleley - Citigroup

Craig Schmidt - Bank of America

Carol Kemple - Hilliard Lyons

Ben Yang - Evercore Partners

Rich Moore - RBC Capital Markets

Nathan Isbee - Stifel Nicolaus

Michael Bilerman - Citigroup

Operator

Ladies and gentlemen thank you for standing by and welcome to the CBL & Associates Properties, Inc. Third 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 Wednesday, November 7, 2012.

I would now like to turn the conference over to Stephen Lebovitz, President and Chief Executive Officer. 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 third quarter results. Joining me today is Farzana Mitchell, CBL's recently appointed Chief Financial Officer and Katie Reinsmidt, also recently promoted to Senior Vice President, Investor Relations and Corporate Investments.

Before I hand it over to Katie, I would like to formally welcome Farzana as CFO and as part of our quarterly calls. Most of you have met Farzana at ICSE or other conferences that she has attended during her 12 years with the company and know that she has long been an integral part of the CBL senior management team.

Also in the room with us today is Vice Chairman, John Foy. While this is the first call since our IPO in 1993 that John will not actively participate in, he is listening intently so he can provide a full critique after we are done.

I will now turn it over to Katie who will began by reading our Safe Harbor disclosure.

Katie Reinsmidt

This conference call contains forward-looking statements within the meanings 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 these 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. While the broader economy continues to stage a slow and somewhat uneven recovery, we are seeing solid and steady improvements within the CBL portfolio. Our operational results for the third quarter demonstrated the significant strength of our market dominant mall portfolio. Same center NOI increased 1.2%. Mall occupancy improved 180 basis points year-over-year. Year-to-date mall sales increased 4.1% and FFO per share was $0.54 representing a 12.5% increase over the prior year quarter.

We are also experiencing the benefit of the short term leasing strategy we took during the recession. We are converting many of these leases to long-term at significant rental increases either through executing renewals or bringing in new tenants. This is best evidenced by the year-to-date increase of more than 25% in new leasing spreads, which would directly contribute to our NOI growth rate going forward.

We continue to add new retail names to the CBL portfolio as well as expand our presence with existing retailers that are performing well. This quarter, we signed a number of deals with Clarks, a shoe store which is a new tenant for our malls. We opened the first new Build-A-Bear prototype at our West County Center in St. Louis and have expanded our relationship with [Justice], Maurice’s and H&M.

As a result of these and other new store additions, year-over-year occupancy increased across our entire portfolio with total portfolio occupancy improving a 170 basis points to 93% and stabilized mall occupancy improving a 180 basis points to 93%.

Leasing spreads demonstrated sustained retail demand for space with overall leases for stabilized malls during the quarter signed at a 9.2% increase over the prior gross rent per square foot. For the quarter, renewal rents increased 6.7% and new leases were signed at a 17.1% increase over prior gross rents.

The back-to-school shopping season was healthy, with our mall sales increasing 4.1% year-to-date through September. For the trailing 12 months, our sales have increased 4.2% to $344 per square foot, compared with $330 in the prior year period. As we look towards the fast approaching holiday season, we are encouraged by the recent strong gains in consumer confidence as lower gas prices, recovering housing market and improved jobs reports resonate with the shopper. While some or pleased with the outcome of the election and others are disappointed, we are confident that the economy is headed in the right direction and that our malls will benefit going forward.

I will now turn it over to Katie for a few comments.

Katie Reinsmidt

Thank you, Stephen. Construction continues on Outlet Shoppes at Atlanta, our development in Woodstock, Georgia. Retail demand is strong and we are approximately 81% leased or committed with great retail names including Saks Fifth Avenue Off 5th, Nike, Brooks Brothers, Under Armour, J. Crew and Carter's. The grand opening is scheduled for August 2013.

In October, we started construction on the Crossings at Marshals Creek a 130,000 square feet shopping center development in Saltsburg, Pennsylvania. The 80% leased or committed shopping center will be anchored by Price Chopper supermarket and Rite Aid, and will feature approximately 22,000 square feet of stores and restaurants. The grand opening is scheduled for June, 2013.

Later this week, we will celebrate the opening of the second phase of the Outlet Shoppes at Oklahoma City, opening just in time for the holiday season. Phase II is a 100% leased and will encompass approximately 30,000 square feet with great new stores such as Ann Taylor LOFT, Waterford, Lucky Jeans and Coachman.

Waynesville Commons, our community center project in Waynesville, North Carolina opened at 100% leased for the first week of October. The 127,000 square feet Community Center is anchored by Belk, PetSmart and Michaels along with 11,000 square feet of small shops including Rack Room Shoes.

At Monroeville Mall, J.C. Penney entered their new 110,000 square feet prototype store in October relocating from their existing store in the mall. Their former building is being redeveloped into a new 12 screen Cinemark Theater opening fall 2013.

Moving on to dispositions, subsequent to the end of the third quarter, we completed the sale of two of our non-core properties, Hickory Hollow Mall, in Antioch, Tennessee and Towne Mall in Franklin, Ohio to two separate buyers. We also have the Community Center Willowbrook Plaza in Houston under contract to sell which is still contingent on due diligence.

We determine that it was necessary to take impairment charges and net income in the quarter to reflect the fair value of these properties. As these sales demonstrates, we are executing on our strategy of treating non-core and mature assets from our portfolio. While, we are not comfortable providing a disposition target, we have become more aggressive in this area as the credit markets have improved. Buyers are able to obtained financing to pursue transactions and cap rates have compressed across the quality spectrum.

In late September, we took advantage of favorable market conditions to launch a new preferred offering including the exercise of the full over allotment option, repriced $172.5 million of our new Series E preferred stock bearing a CBL record low coupon at 6.625%. With the redemption of our 7.75% Series E preferred stock that was completed on November 5th we are able to save more than 100 basis points on the face coupon. The offering also provided as with approximately $15 million of excess proceeds to apply towards reducing the balances on our lines of credit.

I will turn the call over to Farzana now to discuss our financial strategies as well as third quarter financial performance.

Farzana Mitchell

Thank you, Katie. Following my appointment to CFO, many of you have inquired if there would be any major changes to CBLs financial strategies. John, have certainly left very large shoes to fill. During his more than 40 years with CBL, he has been responsible for successfully managing CBL’s balance sheet through a variety of economic cycle. His foresight has insured that the company operated in a position of financial strength and could execute unfavorable opportunities. It is my goal to maintain and improve that flexibility, as we look forward to addressing our future capital needs.

With the increasing volatility of the debt markets, our priority is to ensure that we have multiple capital sources available to us. This means that we will continue our focus on reducing overall leverage and explore opportunities to diversify our financing structure. We are working to put our balance sheet in a position to achieve an investment grade rating, providing CBL with access to a broader market of corporate securities. While achieving an investment grade rating is a process and it’s not without risk, we believe it is obtainable over time. Obtaining an investment grade rating will lead to a more diversified and flexible balance sheet and a lower overall cost of capital.

We are pleased with the positive response and support we have received from our banks as we pursue this process. What this will mean for CBL's balance sheet going forward is that we will be taking steps to grow our unencumbered pool of properties, as well as continue our focus on reducing overall leverage. We will also lower our percentage of secured debt overtime as loans mature allowing us to increase our access to unsecured debt.

As a first step yesterday, we announced that we have received fully executed lender commitments to extend and modify our two largest credit facilities. The facilities are being converted from secured to unsecured, and will be expanded by $155 million to an aggregate capacity of $1.2 billion. We are extending the maturities of both facilities by three years with one $600 million facility having an outside maturity date in 2016 and the other $600 million facility having an outside maturity date in 2017. The average spreads on both facilities are being reduced by 60 basis points across the leverage grid. Closing is expected by mid-month.

Converting our facilities to unsecured has several immediate benefits. It eliminates significant administrative costs and provides us with maximum flexibility with our unencumbered property pool. These new facilities are another example of the tremendous strides we have made this year in reducing our average borrowing cost. This has positively impacted our FFO and allows us to fully take advantage of the current favorable interest rate environment.

All of our property level mortgage maturities for 2012 have been successfully addressed. Our $167 million unsecured term loan will be retired later this month. Looking into next year, we are currently in the market to refinance our early 2013 joint venture maturities and will report additional details as they become available.

We ended the quarter with only $256 million outstanding on our lines of credit, providing ample capacity and flexibility. This amount was further reduced subsequent to the quarter end with net proceeds from all preferred offering. Our financial covenants ratios remain very sound with an interest coverage ratio of 2.6 times and fixed charge coverage ratio of two times. Our debt to GAV ratio was 52.5% at quarter end.

As John discussed last quarter, we have a call option for the Westfield preferred unit available to us beginning next year. We anticipate redeeming the units mid-year using a combination of capital sources. We have more than enough capacity on our lines to retire the entire amount as a short term solution. However, we anticipate a longer term solution will include a combination of asset sales, excess refinancing and other capital sources. Third quarter 2012 FFO grew 12.5% to $0.54 per share compared with $0.48 per share in the prior year period.

FFO in the quarter was positively impacted by the lower interest expense, resulting from a recent favorable financing and lower overall debt as compared with prior year period. Our cost recovery ratio for the third quarter 2012 was 97.8% compared with 101.4% in the prior year period as a result of low tenant reimbursement.

G&A as a percentage of revenue was 3.9% for the third quarter compared with 3.8% in the prior year period. G&A as a percentage of revenue would be slightly going forward, due to lower revenues from the deconsolidation of the TIA joint venture properties.

We had discussed last quarter that we anticipated a more difficult comp period for the second half of the year versus the first half. While still very healthy with a 2% increase year-to-date, our same center NOI growth decelerated from second quarter to an increase of 1.2% for the third quarter 2012 over the prior year period. Same center NOI in the mall portfolio was up 30 basis points.

Total N Mall same center NOI were positively impacted by increases in rent as a result of the occupancy gains and positive leasing spreads as well as lower bad debt expense of $193,000 versus $573,000 in the prior year period. Same center NOI in the mall portfolio was affected by higher operating expenses such as property level payroll expense as well as increases in janitorial and maintenance expense.

Based on our current outlook and expectation, we're providing guidance for 2012 FFO in the range of $2 to $2.10 per share, while this guidance is consistent with last quarter, it is effectively being increased due to lower interest expense as well as increased contributions from new properties offset by the preferred redemption charge that we will record in the fourth quarter. The guidance incorporate our same center NOI growth forecast of 1% to 2% and portfolio occupancy improvements of 100 to 150 basis points for the year to a range of 94.6% to 95.1%. This is 50 basis points higher than our previous occupancy target.

In previous quarters, we reviewed a number of headwinds that could potentially decelerate the growth rate we have been posting this year. While we know we are facing harder comparables numbers in the fourth quarter, our entire company is focused on doing what it takes to end 2012 at the high end of our NOI guidance range.

Now I will turn the call back to Steven for closing remarks.

Stephen Lebovitz

As Farzana outlined, we are working on some very exciting initiatives that will both improve our financial strength and create flexibility as we pursue future growth opportunities. The third quarter was extremely productive for CBL and exemplified the strength of our market dominant portfolio. As we are nearly halfway through the fourth quarter, we are looking ahead to our objectives for 2013 and we are building on the progress we have experienced this year.

External growth opportunities including our recently open development redevelopment projects, acquisitions and our current development pipeline will contribute to future growth. Retail conditions remain very favorable for the CBL portfolio, with healthy retail expansion plans and virtually no new supply in our markets.

These positive conditions, the advantageous operational position of our portfolio and the improvements we have made and continue to make to our capital structure, bode well for us achieving our goals in 2013 and beyond. We look forward to seeing everyone in next week, and we now will be happy to answer any questions you may have.

Question-and-Answer Session

Operator

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

Todd Thomas - KeyBanc Capital Markets

First question in terms of guidance for the remainder of the year it seems that the range implies are much more muted seasonable uptick here in the fourth quarter. And even if you normalize for the preferred redemption charge, I am just wondering if there is anything big into the fourth quarter forecast.

Farzana Mitchell

Thank you, Todd, for your question. There are several items that are going into our fourth quarter numbers that is keeping our FFO muted. Not only is the $3.8 million preferred charge that you will see in the preferred dividend that will show up in the fourth quarter. We will also have higher preferred divided because we have issued additional preferred shares.

In addition, we will be retiring our $167 million term loan that has a lower coupon of 1.35% interest rate and we will be retiring with our unsecured lines of credit. So that also increases our interest expense. So that's the reason and we also have some bad debt provisions and also anticipate a bit higher G&A expense. So combination of all of that makes up the FFO that we are giving guidance to.

Todd Thomas - KeyBanc Capital Markets

Okay and then do you expect to stabilize more same-store NOI growth to be negative in the fourth quarter?

Farzana Mitchell

We hope not, we think it will be positive.

Todd Thomas - KeyBanc Capital Markets

Okay. And then just in terms of leasing, how much of the new leasing GLA was attributable to the conversion of short-term leases and what would have the new lease spreads looked like excluding those short-term conversions?

Farzana Mitchell

I don't have a number to give you on the square footage but there is a number of conversions that occurred in new leasing that we did. We also had a little bit of benefit in the renewal leasing where we were able to convert some of those shorter-term deals into longer-term deals as the retailers’ performance has improved. But overall in our new leasing, we had positive lease spreads across the double-digit positive lease spreads across the whole portfolio of new leasing that we did. So it was really a strong performance and really strong results. So I don't have the square footage to give you that.

Todd Thomas - KeyBanc Capital Markets

Okay and then last question I was just wondering if you and either on your own or with Horizon, if you have looked at the Charlotte market at all for an outlet project and whether you have any thoughts about that market?

Stephen Lebovitz

No, we haven't looked at it and we think there's already plenty of competition there. So our strategy so far has been to supply under the radar as much as we can. It is competitive in the outlet space, no question but in Oklahoma City we were able to come into that project and Horizon got in the project to the point where we didn't have competition. In Atlanta which is under construction and is going really well and roughly 80% of leasing committed right now, (inaudible) came in but they really came in late and we had all the major leasing done at that point and we've got other opportunities we are working on and trying to stay out of the away of other people as much as possible.

Operator

And our next question comes from the line of Mike Mueller with JPMorgan. Please go ahead.

Mike Mueller - JPMorgan

Couple of things, sticking with guidance for a second, I mean out of curiosity how much in incremental bad debts do you have in there, I mean I hear what you are saying about having a little bit of extra preferred dividends because of timing and some other things but I mean if you look at the past couple of quarters, the quarter-over-quarter numbers were up, I mean the year-over-year numbers were up probably $0.03 to $0.04 in each of the quarters and if you look at the implied guidance even with the preferred charges in there you've got a pretty significant year-over-year decline baked in there just to even get to the high end of the range, so I was just curious what else maybe in there, any more color would be appreciated?

Farzana Mitchell

I think its mostly in the interest expense days, days are going to be increased because we had paid off some of our properties earlier from our lines of credit and the full interest expense when we did the new financing results are coming into play in the third and fourth quarter. So bad debt may not be a bigger for number but more importantly it’s the interest expense and the addition of preferred dividend.

Mike Mueller - JPMorgan

Okay. And shifting gears for a second, in terms of mortgages when vendors are going out in underwriting the properties for refinancing, what sort of cap rates are they applying to your portfolio? What's the range of cap rates that they are using for underwriting?

Farzana Mitchell

It varies. I don't think there is any specific answer; we [can] give you a specific answer as to what that cap rates might be. It just depends on the property, its position in the marketplace of course; our sponsorship has a tremendous value. So they look at all different aspects of the property. And more so it's the debt yield they use and the cap rates have compressed overall. So, there is not a specific answer.

Mike Mueller - JPMorgan

Okay, I mean are you generally seeing cap rates being utilized in the 6s or are they in the 7s?

Farzana Mitchell

Again, it depends on the property we're financing, sales per square foot, occupancy, its market dominance, so it is in the 6% to 7% range.

Mike Mueller - JPMorgan

Okay, and last question, just wondering if you are seeing any more products hit the market in terms of middle market malls?

Stephen Lebovitz

Yeah, sure. We're seeing some products but still not a lot. There is a few properties out there that have kind of been in and out of the market this year and then there is some things being talked about but it really hasn’t hit the market. We think there will be a steady flow going into next year and we think we will have good opportunities. There seem to be, there is a package just came out that’s more of a distress portfolio that is an REO portfolio that came out that’s being marketed, but there are also we think there are some good middle market malls for us to take a look at.

Operator

And our next question comes from the line of Ross Nussbaum with UBS. Please go ahead.

Ross Nussbaum - UBS

I was hoping you could clarify the same-store NOI growth for the mall portfolio at 0.3% this quarter because I was a little confused by some of the comments I heard that there was a little bit of impact from higher operating expense, but I would have thought that that would have been reimbursed by tenants, is that not the case?

Farzana Mitchell

We are on fixed [camp], so as you noted the cost recovery ratio is lower compared to last year, last period. However, our year-to-date same center NOI is 2% compared to 1.6% from last year and malls the same center NOI year-to-date is 1.9% compared to 1.7%. So you can’t look at any one quarter year-to-date, we have done, it has really improved.

Ross Nussbaum – UBS

So what percentage of your leases are now on fixed camp?

Farzana Mitchell

About 85% to 90%.

Ross Nussbaum - UBS

Okay. So if I think about the same-store revenue growth rate and I am just thinking how loud you had decent year-over-year occupancy gains, contractual rent growth, positive leasing spreads, can you breakout what the same-store revenue growth was versus the same-store expense growth, I am wondering how much of a negative impact that truly was to offset the revenue side?

Stephen Lebovitz

There is a lot on the revenue side because we are reporting for lease spreads or lease assigned. So there is a timeframe before those lease is kick in, in terms of the higher runs and the sales also takes longer the sales put through, but the expense increases happened immediately and so that's I think accounting for the comfortable impact really more than anything else.

Ross Nussbaum - UBS

Okay, Farzana, I can shift over to the balance sheet for a minute. Two questions, the first is just looking at the Starmount loans, is that your intention to payoff not just the November maturity but the April ‘13 maturity with the line of credit?

Farzana Mitchell

That's correct; we will be paying that of next year the 228.

Ross Nussbaum - UBS

So that would probably bring up to somewhere around call it half drawn on the new capacity line of credit, is that about (inaudible)?

Farzana Mitchell

Not, no we really have total capacity of $1.3 billion with the 1.2 that really simply, we have the lenders have committed and we help to close fairly soon. So we should be well below the half that you mentioned.

Ross Nussbaum - UBS

But if I just take the four, give or take nearly $400 million on Starmount plus we had outstanding at the end of the third quarter, that gets me, I think gets me north of $600 million is that?

Farzana Mitchell

Right and we also had a reduction because of the excess proceeds from preferred offering just that we recently completed.

Ross Nussbaum - UBS

Okay and then the final question is toward your longer-term goal of investment grade rating, so what are interim steps as you have the secured mortgages maturing; what do you plan on replacing those with, I assume the rating agencies are going to want to see a lower amount of secured debt on your book; so is it bank term debt that replaces those mortgages, what's the thinking on how to get to that goal?

Farzana Mitchell

That's correct we will start off by using our unsecured lines of credit and then as we proceed forward, we will retire the secured debt through lines of credit and then term loans and we will have, it’s a process we will go through and then we also hopefully will execute on asset sales and use those proceeds to reduce our secured debts.

Ross Nussbaum - UBS

So should we make an assumption then usually the bank term market doesn't want to go out 10 years that you are going to be shortening up the maturity schedule in the interim with three and five year term loans and obviously the line of credit as an interim step to getting more unencumbered assets?

Farzana Mitchell

Yeah we will be laddering our maturities; the two, the term loan, the unsecured lines of credit that we have, we will be closing shortly will have a lateral maturity for 600 and will come June 16th and the other 600 in 17 and then we will try and do the same thing with term loans; we’ll ladder it such that we will keep getting the stepping up of the ladder in terms of maturity. So yes, those term loans would be five years, but our goal would be hopefully in 18 to 24 months, in that timeframe be able to obtain the investment grade rating and then access other capital sources. And we can also access private placement market as well.

Ross Nussbaum - UBS

And then not to drag on, but this is a pretty notable shift in financing strategy for CBL which has gone the generally non-recourse secured mortgage front for the better part on the company history. And obviously you are taking over the CFO role, can you talk maybe Stephen can you sort of address why the sudden, maybe sudden is not the right word, but this is a pretty dramatic shift in how this company has been financed historically?

Stephen Lebovitz

Yeah, it is I guess sudden in terms of the announcement, but its something we've talked about and thought about for a long time and one of the benefits of being a public company is having access to all the public market equity and debt and we just feel like now we've been able to get our balance sheet into a position where this is a realistic option for us to pursue. It’s then a goal that we've talked about internally for a while and it is a change from the property specific secured non-recourse debt, but that didn't preclude us from continuing to access that market as long as we can deal within the parameters of the rating agencies.

So I am not trying to downplay it at all, because its, I think it’s a really exciting change for us that we are going to move in this direction and we've been talking how important we feel it is to have a strong balance sheet to delever and have strong ratios to make sure that our dividend is safe and I think this will allow CBL to be a stronger company financially for a long time into the future.

Operator

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

Cedrik Lachance - Green Street Advisors

Thank you. Just to the follow on Ross, a very big change in how you finance your company moving from secured to unsecured. Are you able to complete that process without issuing new equity?

Farzana Mitchell

We have all options under table. So we are exploring all sources of capital in order to achieve our goal.

Cedrik Lachance - Green Street Advisors

I mean, so exploring is one thing, but in terms of specific question as to whether or not you can fully complete a transition to unsecured without issuing equity. Is it something that is doable at this point or is issuing equity at some point in the future a necessity so as to please the rating agencies in regards to your leverage ratios?

Stephen Lebovitz

Well, I would say raising equity is going to be a prerequisite, but issuing the stock isn’t the only way to get there and we talked about it with the joint venture that we did, was with Teachers’ was a major step in terms of raising equity for the company and delevering and the joint venture markets are I mean there is more money today out there for joint ventures than at any point in the past five years. And the dispositions, we have non-core properties, office buildings, community centers and certain malls that we think make sense for dispositions. So we don’t feel like we're back into a corner and the ratings process also we have the time to do it right. So we feel like it’s important to make the market aware of this change in our strategy and this direction, but we feel like it just gives us more options going forward.

Cedrik Lachance - Green Street Advisors

Okay. And are you in negotiations for any potential joint venture partners on some of your assets?

Farzana Mitchell

We are not at this moment.

Cedrik Lachance - Green Street Advisors

And just moving to the operations, when I look at the average base rent in your portfolio on page 13 for stabilized malls, the average base rent has declined over the last couple of years and yet new leases and including the lag in terms of what’s in your report in terms of what signed and when it starts, but new leases over the last almost two years now have been at a positive re-leasing spreads and what explains the decline in the average base rents?

Katie Reinsmidt

Cedrik, this is Katie. The average base rent declined year-over-year just because we have increased the pools, and included the outlooks that we have acquired or have developed.

Cedrik Lachance - Green Street Advisors

And what’s the impact from selling some of the properties you sell versus clearly of above average quality?

Katie Reinsmidt

I mentioned the properties that we have sold were considered non-core, so they weren’t included in the calculation anyway.

Operator

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

Quentin Velleley - Citigroup

Just going back to Cedrick’s first question, in terms of delivering, what’s your expectation, how much delevering would you need to do whether that come from issuing equity or asset sales, do you need sort of another $500 million to get an investment grade rating and can’t leverage ratios?

Farzana Mitchell

Well, its not just the deleveraging, its just one metrics, it’s the only other metrics that focus on and other metrics are very strong and as time goes on with asset sales and our plan is to continue to deleverage, but doesn't have to be overnight, it takes time and that's what they like to see is the trend, the trajectory and our commitment.

Quentin Velleley - Citigroup

And can you sort of give us a sense of what your expectation on timing would base at sort of two year process or it could be something longer than that?

Farzana Mitchell

It will definitely be at least a two year process and I think we have a really good window of opportunity to give that with lower interest rate environment and this whole strategy will also reduce our overall cost of capital and that’s important to us.

Quentin Velleley - Citigroup

And then just in terms of the assets that you have sold, Hickory Hollow, Towne Mall and Willowbrook, how much annualized NOI was coming from those assets?

Stephen Lebovitz

Actually, the three of them were generating negative NOI, if you add them all together.

Quentin Velleley - Citigroup

Okay. And was that like negative $1 million or was it that more than that?

Stephen Lebovitz

Really not much; I mean it was just a slight thing, but it made sense for us to go and sell these. We took the impairment on Towne and Hickory Hollow in ’09, and so these are properties that we signaled and told people for a while that have issues and challenges and it took a while to sell them, but we are really pleased we are able to do so, and Willowbrook is a community center that has had some ups and downs too and we've got our buyer on that who has got a plan to do some redevelopment, rework or works for them.

Operator

Our next question comes from the line of Craig Schmidt with Bank of America.

Craig Schmidt - Bank of America

How long might the higher operating expenses be a limit to your same store NOI metrics?

Stephen Lebovitz

I would say there's more pressure today than we've experienced in the past few years. We've been able to write that down really since the recession, and now we are seeing pressure with healthcare costs coming up, with people having taken wage cuts but now wage pressures and salaries going up and utility cost. So it’s the type of thing where we are anticipating seeing reasonable increases. The thing is that we are able to build in increases in cam into the coming year. So as expenses go up, we can build that into our recoveries. Even though the leases are fixed we are getting 3% to 5% increases on an annual basis, so that helps mitigate it as well. So we feel like the recovery ratio that we are at is something that we can maintain at this level. We don't see it being depressed further but this quarter and next quarter we are taking the hit on a comparable basis because we didn't have to recognize it last year.

Craig Schmidt - Bank of America

What percent of your leases are on three years or less? I think after second quarter conference call you pegged it around 45%.

Farzana Mitchell

This quarter about 40% of the leases that we signed were three years or less and that’s of the total lease assigned in the last quarter.

Craig Schmidt - Bank of America

And is that sort of what you want to be or do you want to be even lower than that.

Farzana Mitchell

Yeah, I think we would like to see that come down, I think of probably at a more normalized rate and maybe a third of the leasing that you do just because you are always moving somebody around or you have a local or regional tenant that doesn't like to do longer term leases. So I think that will continue to come down over time.

Operator

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

Carol Kemple - Hilliard Lyons

When looking at our 2013 model, do you think the current leasing spreads are a good run rate for next year, do you expect to be renew leases at 8.6% better, new and renewals or where would you look at 2013.

Stephen Lebovitz

Yeah, I think that that's a good assumption to make. We would obviously like it to be higher, but I think in the mid to high single digits, which is where we are so far year-to-date is a good number to use going forward. We've had consistent sales increases that definitely plays into that, and then like we’ve said earlier we are able to convert the short term leases to longer term or we've had good results on that. So I think we will be able to be consistent in that range.

Carol Kemple - Hilliard Lyons

Okay, and earlier in the call, you were exploring more outlet opportunities. Are those on your own or with Horizon?

Stephen Lebovitz

We're working with Horizon. We’ve got a great relationship with them and the partnership has been terrific and so we're continuing to work with them.

Carol Kemple - Hilliard Lyons

And with Horizon, do you wait to like get all the permits and every all their duct in a row before you all would announce any deal with them or would you announce it earlier?

Stephen Lebovitz

It's really a combination, Carol and we like to have the pre-leasing, get through a certain level and it depends on how controversial the permitting might be. But we're typically more conservative as far as the announcements and financing plays in to in terms getting our commitment for a construction loan. So we don’t like to announce anything premature. We like to have a good strong announcement when we announce a new project with them.

Carol Kemple - Hilliard Lyons

Is it realistic to assume you all can have one opening in 2014?

Stephen Lebovitz

We're hoping to and we're hoping to have an announcement over the next one sometime in the first quarter of next year?

Operator

And your next question comes from the line of Ben Yang with Evercore Partners. Please go ahead.

Ben Yang - Evercore Partners

You guys mentioned assets disposition or joint ventures to raise equity obviously for a variety of uses, and then you also mentioned the future joint venture as one of your recent successes. The question is, could we see a similar partnership where you guys create liquidity by selling off these [really] best assets going forward.

Stephen Lebovitz

Yeah, I think with the joint ventures the positive with the market is that the B Mall category which we don’t like to actually use that terminology, but the market uses it so we can’t fight it. But I think the category has really gotten a lot stronger reception, and when we did the Teacher’s joint venture, the world was more conservative, the recession was fresher in everyone’s mind, the capital markets were tighter, and we were still struggling with our metrics. We didn’t have NOI growth across the portfolio, our lease spreads were still breakeven or negative.

So it’s a different world today in terms of the broader portfolio and the performance, and that really has gotten the attention of investors. And then the other things is yields are so low and the A, A plus assets are trading at yields that are sub five, and cap rates have come down for malls in the 300s as well, but still on a relative basis that’s a very attractive investment.

So I think from capital sources point of view, our entire portfolio is really attractive and it gives us a lot of options as we just explore the discussion with it with a different people out there.

Ben Yang - Evercore Partners

So it sounds like something like the Teachers’ joint venture wasn’t a one-off and that we could see something similar going forward, I guess I couldn’t really get. I don’t really understand whether the answer was yes or no based on that?

Stephen Lebovitz

Well, it was yes or no. Yeah, I think you’ve heard me. We didn't announce the Teachers’ joint venture till we had signed documents and it was real. These deals, any deals whether it’s a joint venture or a disposition have so many different ups and downs, that and conversations are at different levels. So I am not answering your question, yes or no. I am just that we feel really good about the different options that we have available, and with our new line of credit, we’ve got a really low cost of debt there and equity whether it’s a joint venture or dispositions that the places that we have to use that capital right now are only paying their [lines], we don't have a lot of capacity, we can do that.

So we don't feel like we’re rushed to do anything which gives us options. Westfield the preferred is coming next year, but again there is still time for that. So we feel like we are just in a good position given where the markets are.

Ben Yang - Evercore Partners

Okay, fair enough. Everything’s on the table at this point. And last question, as we got through your budgeting process and I know it’s only a small part of the portfolio today, but you think the core growth can be better in the outlet or your malls may be for next year and even longer term?

Stephen Lebovitz

The outlets are such a small piece they are not going to meaningfully impact the overall growth. The outlets though are - the two that we bought in El Paso and Gettysburg, we think there's good opportunity to grow those, there's been new leasing activity and so that should translate into some real strong growth there and in Texas, El Paso for example Texas is probably the area the country where we are seeing the best sales growth. So the El Paso asset definitely has strong NOI growth potential and Oklahoma City is a 100% leased. So from leasing we are not going to get that much an uptick, but we are continuing to see good sales results and so that one will contribute as well. But its hard to say on an apples to apples basis because its such a different kind of portfolio.

Ben Yang - Evercore Partners

Yeah, well, I guess I was thinking that as you grow your outlook obviously it will become more meaningful, and I guess longer term I mean is it your view that outlets are going to continue to be very attractive for the retailer as I think about you know growing their businesses.

Stephen Lebovitz

Its definitely a goal for us to grow it and we’d cease that opportunity and the new developments, the returns have been phenomenal, they have been double digit and so they have been very accretive. When you are opening a new project in general, you get good growth as it stabilizes over the first three to five years. So its something that we are seeing, but also the mall we bought in Minot has been a great acquisition and with the economy there and the sales growth we are seeing tremendous increases in NOI budgets going forward. So the outlets are great but the core malls have tremendous potential too.

Ben Yang - Evercore Partners

And then just last question actually from me, as you think about acquisitions would you ever entertain going into Canada to take advantage of the opportunities up there or is that a market that's just so foreign to you guys that you would not; you didn’t even consider buying stuff out there?

Stephen Lebovitz

Yeah, I mean we would consider it, I can't say we are looking at anything there but there's really no reason not to, its not, I mean the geographical distance isn't really a barrier to operating malls as long as you have the retail relationships and North Dakota isn't that far from Canada.

Operator

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

Rich Moore - RBC Capital Markets

My first question is on the NOI side of things. You guys were talking about a soft or a tough comparison for the third and fourth quarter in fact, when I look at the first and second quarter of next year versus the same quarter of this year it actually looks harder. The fourth quarter doesn't look all that difficult. So I'm curious if this sort of softness, this sort of slowdown in the fourth quarter in same-store NOI growth spreads into the first half of next year?

Katie Reinsmidt

Rich if I'm getting your question right, you are asking whether our slowdown is going to go into next year, is that right?

Rich Moore - RBC Capital Markets

Yeah, Katie its like the, I know you've done a lot of your leasing already for I'm sure especially the first half of ’13 and I look at the quarterly comparisons for 4Q ’12 versus 4Q ’11 and it doesn’t look that difficult to be honest with you and then the first half comparison of 2013 versus ’12 looks about more difficult so yeah exactly.

Katie Reinsmidt

You are right that we do have tough comparables going into next year but I think we have a lot of [winded] going cost positive momentum that we created through the positive lease spreads throughout the year and they is always kind of lag before the effect takes place. So we do, we should see some more strength in 2013 hopefully and be able to, although we do have tough comparables perform pretty well throughout the year. Last quarter when we talked in the conference call, we said that our second half of this year was going to be tough and there were few big reasons for that. We always hope that those things turn out better than we expect and are definitely pushing for that but we do have a few things, little anomalies in the fourth quarter that will continue our tough comp period.

Rich Moore - RBC Capital Markets

Okay, so the amount of leasing guys that you done for 2013 so far is that tracking, would you say pretty similarly to the amount of leasing you typically do at this time of the year for the following year?

Katie Reinsmidt

Yeah, you are correct, Rich. We're about in the same place that we normally do for 2012 and 2013 renewals. So we're about half way through I think next year’s renewal.

Rich Moore - RBC Capital Markets

Okay, good thank you and then on the outlet side of things, again if I could, you have Steve Tanger who says he is looking at 20 different kind of markets, 20 different markets in the country in the US and I guess Canada as well and then you have Chelsea that I am sure is doing the same thing. Do you guys have an approach sort of similar? I mean are you kind of canvassing the US looking for opportunities with Horizon or is that you may find one here or there that just sort of opportunistically pops up?

John Foy

No, Horizon has a strategy. It's not like Horizon is new to the business. So they’ve been looking at markets for quite sometime and our goal is a new project every year to 18 months. So, we're not trying to do as many as Tanger or Simon, but we have a good pipeline and Horizon has great relationships with the retailers and it’s not that different in the outlet, it’s really driven by the relationships, it’s just different retailers that drive that projects whether it’s Saks Off 5th and Nike and Polo and (inaudible), those are really the key tenants in the outlet space. So Horizon has those relationships for quite some time.

Rich Moore - RBC Capital Markets

And then Stephen on the redevelopment side of things does that pick up your thinking on the regional mall side of things especially more in 2013 than it has to-date or is it sort of same level say 2012?

Stephen Lebovitz

Yeah, it’s definitely picking up and it takes some time to implement these projects, but we have got a couple of malls where we have focused on expansions that we will look forward to announcing hopefully before year end or early next year and then there is always a consistent flow of redevelopments with the department stores we are talking (inaudible) about some opportunities there as part of their strategic initiatives. So there is definitely going to be acceleration there.

Rich Moore - RBC Capital Markets

And then the last thing I had guys is I think you have one preferred left right, that is that I think [probable] as well does that get taken out like to see do you think?

Farzana Mitchell

The (inaudible) at any time I think we took advantage of nice window of opportunity in the market to price the six and five and eight. And if we saw some additional demand, a nice coupons we may consider taking out with, but right now we are pretty happy with where we are.

Operator

And your next question comes from the line of Nathan Isbee with Stifel Nicolaus. Please go ahead.

Nathan Isbee - Stifel Nicolaus

Yeah, just going back on to the expense issue, I know how quickly did have some visibility on the rising expenses even to the beginning of the year when you issued your original guidance. Can you talk about as you went through your leasing process this year, what type of success you had in terms of perhaps increasing the camp charge and passing through this expected expense increases?

Stephen Lebovitz

Yeah, I mean, you are right. We did have a sense that this was coming and insurance was really the thing we are most worried about early in the year. The security and maintenance is something that as the year is going on, there is more upwards pressure and also the utilities have continued. So, but with the retailers it’s a negotiation and they are really focused on occupancy costs and gross rents and camp is one element of that. So it’s a case-by-case basis obviously we are trying to get as much as possible everywhere we can and the retail environment fortunately is healthy for the most part but there are also some retailers that are challenged for whatever reason. So hit the balance and we are pushing to do as well as we can.

Nathan Isbee - Stifel Nicolaus

And then Farzana, you had mentioned earlier on the going from the secured to unsecured to considerable administrative savings, can you quantify that?

Farzana Mitchell

I can quantify generally, not specifically but here there is a tremendous amount of legal cost. When you are securing assets you have to post the collateral, you have recording deeds and taxes and legal opinions, appraisals, environmental. There's just a huge amount of expenses that goes along with each secured asset. So the cost of not having to post those as collateral to say tremendous amount of investment dollars invested as well as time. There's a lot of time involved from all of us here in putting, in posting the collateral.

Operator

And our final question is a follow-up from the line of Quentin Velleley with Citigroup.

Michael Bilerman - Citigroup

Actually it’s Michael Bilerman. Is John in the room, I thought you said John’s in the room.

Stephen Lebovitz

John’s in the room.

Michael Bilerman - Citigroup

How did you keep up [muzzled] the entire call?

John Foy

I was savoring over that headline you did today, thank you very much.

Michael Bilerman - Citigroup

Well, it was a great parting gift and we definitely thank you for your 40 years of service but I did have a question for you and while I have only been covering the company for 16 years, for the 16 years you probably gave the whole secured debt strategy and why it makes sense for the assets in the company and was it a morning you woke up on the other side of the bed that you sort of decided what's been going right for 40 years is not the things that (inaudible) 40 years?

John Foy

No, I think that we've got a great team in place and it was time for Farzana to take over and Katie to be recognized by the market as well. And I think we've always discussed all along that we want to put our balance sheet in a position where we could get an investment grade and I think it was just this time to recognize and to promote our people and to show the world what a great organization we have and the depths that we have. So it’s been great and I'm still here.

Michael Bilerman - Citigroup

In the press release you had talked about you staying on as Executive Vice-Chair in the near-term, what does that suppose to imply how near is near-term?

John Foy

Well as near as to your heart. So I'm still here.

Stephen Lebovitz

He will be in San Diego, Michael so you can, we can all talk about it there and you guys can have a nice hard talk.

Operator

I will now turn the call back to you Mr. Lebovitz.

Stephen Lebovitz

Alright, again we would like to thank everyone for joining us today and we are looking forward to seeing you in the fair weather in San Diego and having lots of good meetings out there. Thank you.

Operator

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

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