CBL - NYSE

Good morning and welcome to the CBL & Associates Properties Inc. First Quarter Earnings Conference Call. All participants will be in listen-only-mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Scott Brittain, with Corporate Communications. Please go ahead.

Thank you and good morning. We appreciate your participation in the CBL & Associates Properties Inc. conference call to discuss first quarter results. Presenting on today's call are Stephen Lebovitz, President and CEO; Farzana Khaleel , Executive Vice President and CFO; and Katie Reinsmidt, Executive Vice President and CIO. This conference call contains forward-looking statements within the meaning of the Federal Securities laws. Such statements are inherently subject to risks and uncertainties. Future events and actual results, financial and otherwise may differ materially. We direct you to the Company's various filings with the SEC for a detailed discussion of these risks. A reconciliation of the non-GAAP financial measures to the comparable GAAP financial measure is included in yesterday's earnings release and supplemental that is furnished on Form 8-K and available in the Investor section of the Company's website at cblproperties.com. We will be limiting this call to one hour in order to provide time for everyone to ask questions, we ask that each speaker limit their questions to two and then return to the queue to ask additional questions. If you have questions that are not answered during today's call, please reach out to Katie following the conclusion. I will now turn the call over to Mr. Lebovitz for his remarks. Please go ahead sir.

Thank you, Scott, and good morning everyone. It's no secret that the narrative surrounding retail and malls has been unbelievably negative this year and in fact this is a challenging environment for our business. But as our peers articulated clearly in their calls, the depth of the mall is far from upon us. Instead as anyone who visits our properties can see shoppers are still shopping, parking lots are busy, and traffic is strong. Nevertheless changing consumer habits on online shopping are affecting our business. Consumer spending slowed starting in late 2016 and that is impacted sales performance. At the same time bankruptcies and store closures by unhealthy retailers accelerated, often due to their unsustainable debt loads. This combination of factors is negatively impacting our NOI this year. While we are disappointed with our results for this quarter and that they do not provide ammunition to dispel the negative reports in the media. The good news is that we also see tremendous opportunity in these challenges. Retailers are adjusting their strategies and we are doing the same. Healthy retailers are evolving leveraging physical and digital assets to offer the convenience value and experience the customer demands. But it is not enough for retailers to evolve. Owners have to change as well. Our leasing strategy is focused on bringing in dynamic new users, food, entertainment, beauty, fitness and value. These users not only drive additional traffic in sales, they also reduce our concentration in traditional apparel in juniors. Our properties enjoy prime locations, excellent access, strong demographics and longstanding relationship with the communities in which they are located. Our strategy of owning the dominant retail real estate in the market positions us to attract new users and benefit from retail consolidation. The word of the year at CBL in 2017 is reinvent. Given the trends occurring, this is even more fitting now. In fact we have to reinvent faster. We have proactively gained control of anchor locations and surrounding land for redevelopment, allowing us to quickly and thoughtfully transform our properties. Our vision is to create a growing portfolio of vibrant suburban town centers. There is no question that 2017 is going to be a tough year for a number of retailers and we will experience a short term impact as a result. But the challenges we are facing today will allow us to accelerate the transformation of our portfolio into stronger, more valuable properties for the long term. Another major strategic priority is to build on the significant improvements we have made to our balance sheet and further reduce leverage. Our commitment to achieving these objectives was clearly demonstrated with the sale of The Outlet Shoppes at Oklahoma City that we announced on Monday. The property was sold for a $130 million generating net equity proceeds of $38 million at our share after payoff of the debt enclosing cost. We record a gain on sale from this transaction approximately $44 million in second quarter results. This was a tremendous transaction for CBL and our shareholders. We originally developed this outlet in a joint venture with horizon in 2011 and through this sale generated an ROR of approximately 40%. The proceeds allow us to further improve our balance sheet as well as provide increased liquidity for future redevelopment projects. We also entered into a binding contract for the sale of two other malls in our original target disposition less for total gross proceeds of $53.5 million. Due diligence has expired, the buyer posted a significant nonrefundable deposit and we anticipate closing later this month. With the completion of these two additional asset sales, we will conclude our portfolio transformation program having that most of our originally outlined goals. The quality of our portfolio composition over the past three years has vastly improved as we've sold lower productivity, higher risk properties. Through these sales, we generated significant proceeds to improve our balance sheet and fund investments in higher growth assets. Tier 3 NOI has declined to just 6% of mall NOI as of March 31 and would decline even further following this transaction. Going forward, we will sell assets as part of our capital recycling program or where we see opportunistic pricing as we did with Oklahoma City. Moving onto our first quarter operational results, portfolio increased 50 basis points to 92.1% primarily as a result of the disposition of lower occupancy malls and lease up our associated centers. Occupancy in our same-center stabilized mall pool declined a 100 basis point primarily due to the 110 basis points loss from store closers this quarter. We expect occupancy to decline further in the same-center pool for the second quarter as a result of the additional retailer bankruptcy and store closers that have been announced since February. Our leasing team is focused on backfilling these spaces as quickly as possible and has executed several replacement leases already in the first quarter. As you may recall, we had a similar bankruptcy experience in 2015, starting the year with a 320 basis point decline in occupancy. By year end 2015, we had cut this in half; and by year end 2016, we are 10 basis points ahead. The demand for spacing our portfolio is strong as evidenced by the nearly 3,000 square feet of new leases executed during the quarter. This includes more than a 130,000 square feet of new leasing for mall space under 10,000 square feet signed at an average increase of 18% over the prior rent. While renewals spreads were down 3.4% this quarter, we typically see the lowest renewal spreads in the first quarter and this decline is consistent with renewals spreads generated for the same period last year. Our goal is certainly to improve spreads throughout the remainder of the year. Rolling 12 months sales for the portfolio were $372 per square feet. Sales for stabilized malls were down 2.6% on a same-center basis and 1.6% compared with last year's unadjusted number. While some retailers missed the mark on fashion trends, we also witnessed normally strong brands post double digit decline due to certain merchandizing in decision they made. March demonstrated some improvement and we anticipate a better April due to the later Easter this year. I’ll now turn the call over to Katie to discuss our investment activity in more detail.

Thank you, Stephen. In April, we celebrated the grand opening of The Outlet Shoppes at Laredo. The project opened approximately 82% lease. Reports from retailers following the opening were positive with most new stores exceeding their sales plan. Traffic and sales have been solid since the opening with many shoppers coming across the border to ensure the broadest assortment of new retailers. We also opened an expansion at our Mayfaire Town Center in Wilmington, North Carolina with H&M and Palmetto Moon. Our redevelopment activity is robust with nine projects underway and one recently completed. Planet Fitness opened at College Square in Morristown, Tennessee in space formerly used as storage. We will open a new 20,000 square feet TJ Maxx at Dakota square mall this summer and we'll also open a store at Hickory Point Mall in Forsyth, Illinois this fall. In April, we opened a 48,000 square foot Dick's Sporting Goods and a former sports authority space at Triangle Town Center. At Turtle Creek Mall, we are redeveloping soft space for a new open beauty store, which will open this spring. Dillard's is currently building outer their space at Layton Hill Mall in Layton, Utah in the former Macy's location. The opening is planned for the fall. As we announced last quarter, we are working on plans for three Macy's locations that we purchased in January as well as the five Sears stores that we gained to control of through a sale leaseback transaction. We expect to be able to announce more substantive plans through several locations later this year as leases are finalized. Plans include entertainment, restaurants, value retailers, sporting goods, service and other nonretail uses, as we evolve our properties to suburban town centers. As we mentioned last quarter, we estimate the total cost for these eight projects will be in the $150 million to $200 million range over the next three to four years, which is in line with our normal redevelopment spend. I will now turn the call over to Farzana to discuss our financial results.

Thank you, Katie. For the fourth quarter, we generated adjusted FFO per share of $0.52 in line with consensus. Same-center NOI declined 1%, and same-center NOI for the mall portfolio declined 1.6%. FFO per share, as adjusted for the quarter was $0.04 lower than the first quarter 2016. Major variances impacting FFO included $0.05 per share of dilution from asset sales completed in 2016 as well as the office building sold in January. $0.01 of lower NOI for same-center properties, $0.01 of higher interest expense, partially offset by $0.03 higher gain on price of sales. Same-store NOI declined $1.8 million, while we generated an increase in minimum rent of $1.4 million from embedded rent growth. This was offset by $2 million of lower percentage rent and $2 million of lower tenant reimbursements and other income. Property operating expense in maintenance and repair improved by $2.2 million during the quarter, primarily as a result of lower small renewal and contract expense offset by a $0.4 million increase in bad debt expense and real estate tax expense increased $1.4 million. At the time we issued 2017 guidance in February, we incorporated the impact of bankruptcy activity announced today. Since that time, a number of additional retailers have declared bankruptcy and/or announced store closures. While the status of some of these retailers is still being determined, we’re estimating an additional prorated impact to NOI for the remainder of 2017, in the range of $10 million to $14 million, or $0.04 to $0.05 per share. We are also estimating approximately $0.04 per share of net dilution from the recently completed sale of The Outlet Shoppes of Oklahoma City and the two malls under binding contract. As a result, we are adjusting our guidance to a range of $2.18 to $2.24 per diluted share, and same-center NOI in the range of negative 2% to 0%. As always, our updated FFO guidance does not include any unannounced transactions. We are projecting to end the year with stabilized mall occupancy of 93% to 93.5%. The decline in the year-over-year occupancy will likely increase in the second quarter as we absorbed additional store closures, but we expect to narrow the margin as lease up is completed later in the year. As Stephen outlined, we are aggressively working to replace the spaces vacated by store closing. We are also bringing in new uses as part of our strategy to transform our properties into vibrant, suburban town centers. We ended the quarter with total debt of $5 billion, relatively flat from year-end as the debt reduction from Midland was offset by the acquisitions of the Sears and Macy's boxes at the end of January. We will contribute more than $300 million to further debt reduction, as we apply dispositions -- disposition proceeds and as the foreclosure of Chesterfield and Wausau are completed. Our net debt to EBITDA of 6.6 times at the end of the quarter remained relatively flat from year-end, and improved from 6.9 times at the end of the prior-year period. In the first quarter, we unencumbered 4 properties with a total loan balance of approximately $159 million, and a weighted average interest rate of 5.67%. These loan retirements increase the percentage of a consolidated, unencumbered NOI to 52% of our total consolidated NOI. We have $184.7 million of operating property loans remaining that mature in 2017. We are currently in negotiation with the special servicer to restructure the $125 million loan, secured by Acadiana Mall, in Lafayette Louisiana and anticipate finalizing the restructuring in the near term. As we've discussed previously, Acadiana is a strong property, but it is located in an energy market and its sales have been significantly impacted. We believe it is appropriate to restructure the loan to provide additional term for the market to stabilize and utilize free cash flow after debt service to fund improvements at the property. We plan to refinance two joint venture loans secured by The Outlet Shoppes at El Paso with an aggregate control balance at our pro rata share of $53 million, ahead of the maturity. We are also in early discussions with the banks to refinance two unsecured term loans, totaling 450 million, which mature in February and July 2018. We will announce more details once this is finalized. The profits we've made over the past 24 months in reducing our debt balance, lengthening our maturity schedule and reducing our variable rate exposure provides us with the flexibility to fund our business and take advantage of the tremendous opportunities ahead. Our goal is to lower net debt-to-EBITDA to six times, reduce the secured debt-to-total asset ratio to below 25% and further increase our unencumbered NOI from high quality properties. Our plans for growing EBITDA through redevelopment and reducing debt balances will help us progress towards our goal. I'll now turn the call over to Stephen for concluding remarks.

Thank you, Farzana. As I hope you realize, we are not at all satisfied with the numbers we posted this quarter. But, we are not discouraged either. We are actively responding to the immediate market challenges by bringing new retailers and new users to our centers. At the same time, we are energized by the opportunity to redevelop underperforming anchor stores and transform our malls into dynamic and entertainment and multi use suburban town centers. We appreciate your continued support, and we'll now take your questions.

We will now begin the Question-and-Answer Session. [Operator Instructions] The first question comes from Christy McElroy of Citi. Please go ahead.

Hi, good morning everyone. I just wanted to follow up on some of your comments. You talked a lot about sort of proactive anchor recapture and redevelopment and also bringing in new uses to transform the properties. How should we be thinking about the pace of annual spend, on sort of repositioning CapEx and development spend and box re-trending as well as the funding for that spend? You mentioned asset sales, but just try to get a sense for sort of how much free cash flow covers it and how much more capital you would need to raise?

Hi, Christy. Sure. It really is consistent with what we've been spending, which is roughly $125 million a year and it's spread out over time. So, we have the five Sears and the four Macy's though one of the Macy's is under construction with Dillard's this year. But most of the spending is going to occur, spread out over '18, '19 and even into '20. So, what we said $253 million could spread over that timeframe. So that's what we're looking at and we still generate over $225 million a year in free cash flow, back funds, CapEx, deferred maintenance, lease cost and also the redevelopment program. We've supplemented that with the asset sales. Like I said, we're going to continue to do asset sales where it makes sense. But we feel comfortable that with the cash flow that we have that we can fund this program.

Okay, and then Stephen you mentioned the public market narrative being really negative. On their call earlier this week GDP discussed the meaningful NAV discount and ways for them to close it including exploring bigger strategic alternatives to sort of crystallize private market value and return capital to shareholders through buybacks or dividends. How are you thinking about ways to sort of close out NAV discounts, narrow that NAV discount? And would you consider a privatization, is that option for presented to you?

Sure. Well like I said last quarter, all options are on the table. We never rule anything out. We're public company and that's part of being a public company. So privatization is certainly one of those options. But the best way we can narrow the discount is to fill the vacant space, get better lease spreads, move ahead with the redevelopment program and run our business and put up better results like we did this quarter. And like I said, we're disappointed with what we experienced this quarter. We did have a lot of headwind between the bankruptcies and store closing and the sales that unfortunately contributed to these results. We want to be realistic about where we stand and that's why we went ahead and we reduced our guidance, because we see this being a tough year. But we're focused, and like I said, we are encouraged by this opportunity, we're not discouraged. We've been through this before. In 2015, we had basically the same amount of bankruptcies and we called back that occupancy over a 24 month period. And we're just doing the same thing now, which is filling in space. The difference is that it's different types of uses. We're not going as much to juniors or apparel, we're bringing in new categories, we're bringing in more fitness and wellness and services and not traditional retail, but we're getting a lot of demand from those kind of categories and values and areas as well, that there's a lot of demand. And then with the redevelopments, we are even seeing a lot of demand from mixed use: Residential, hotels, office, medical office, and so that's a category that we're going to be seeing more and more across the portfolio.

The next question comes from Todd Thomas of KeyBanc Capital Markets. Please go ahead.

First question on the guidance provision, just to clarify that $10 million to $14 million of additional loss that you're embedding in guidance, is that for announced store closings and bankruptcies that have already been announced, but where the outcome is not yet known? Or does that include additional store closure announcements that have not been made altogether that you're potentially contemplating in the future and that's embedded in guidance?

Hi, Todd. Yes, it's really all of the above. Like you said, we do have -- we guided another 10 million to 14 million in these retailer bankruptcies and that includes a little bit of a cushion $3 million to $5 million that we are anticipating, but it will be later in the year. So we are giving us some room to absorb additional store closures or rent reductions.

Okay. And then just second, following up on Christie's question, I guess, as you execute, you start to fill some of the vacant department store boxes and find replacement tenant's for some of the in line retailers, you know to the extent that the negative narrative persists. How long do you wait, until you act on to do something to close that GAAP? And what do you do? I mean do you look to sell more assets aggressively maybe some other outlets centers or higher quality assets and buyback stocks. What options are at your disposal sort of longer-term that you're evaluating, if this disconnect or if this environment persists?

Yes, I mean, we're not waiting at all. I mean I think the outlet center sale demonstrates that we're proactive. I mean that sale didn’t happen overnight. It takes time to execute these sales and we talk about what we can do, on a daily basis. So, I don't want to give the impression that we're waiting around and just hoping that things are going to get better because that's certainly not the case. The question was, are you doing a strategic alternative process and no, we're not doing that. We're not hiring bankers or anything like that, but there's a lot of leverage we can pull within the portfolio and we're evaluating that constantly and that's our job. The Oklahoma City asset, it was a Tier 2 property, we had a great cap rate, we generated proceeds, to help our balance sheet. And we're looking opportunistically where it makes sense at other assets and like I've said in the past, we look at joint ventures, we look at other dispositions. So there's a lot of different opportunities throughout the portfolio for us to do things.

Thank you. The next comes from Nick Yulico of UBS. Please go ahead.

Hi. Good morning. This is [Indiscernible] on for Nick. I'm just curious more about this anchor box redevelopment and the potential shutdown of the Sears stores. With '16 lease and 47 total boxes, how you guys thinking about redeveloping these assets?

Good morning. So, we closed earlier this year on the acquisition of five stores for Sears there, they're leaseback. So, Sears is still operating, but we're working on the redevelopment, we anticipate the first of those starting in 2018, we've had really good demand and it's given us the opportunity to broaden the uses, more restaurants and food, but fast casual and sit down, more entertainment, more value and you've got TJX with their different divisions expanding Ross, Old Navy, so Alta in the beauty categories doing really well. And then like I've said, non-retail uses have also been interested in these locations. So, our goal is to chip away at Sears through these five and then others where they have leases that are expiring. So, we see this number contained to come down, we had 72 at the peak and we brought that down dramatically and that's what's going to continue over the next few years. So, that's really our strategy with regards to them.

Okay. Great, thanks. And is there any risk of co-tenancy clauses when these guys close?

So, with the co-tenancy, there is a short-term situation that we have backfilled that would cure any co-tenancy. And also typically in the malls, the co-tenancy doesn't trigger, it gets triggered by one department store anchor, it's more than one. So, we're very cognitive about we run that analysis. We make sure and we also talk to the retailers and let them know what we're doing, so that they are aware and they have been cooperative as well to try to work through that when it's the case, but it really hasn't been a contributor. It wasn't a contributor to what we experienced this quarter and it's something that we're comfortable that we'll be able to mitigate and work through.

The next question comes from Craig Schmidt of Bank of America. Please go ahead.

Yes. Good morning. I was wondering where you thought the leasing renewal trends would be for the rest of the year versus the first quarter?

Hi, Craig. Well, it's going to be better but it's still not going to be great. We're are in that mode of preserving income and doing renewals and preserving occupancy versus driving tenants out and trying to replace them with new leases. We've got the vacancy that was created by the store closings. We've got some more coming up. So, we'll -- we're anticipating that we'll be positive, probably comparable to last year, maybe a little lower but it's still going to be a challenging environment.

Great. And then the store closings, did you have more occurring in Q1 versus Tier 2 or Tier 3? I noticed the sales fell less in Tier 1 than Tier 2?

Yes, I mean, the sales in Tier 2, the decrease was really driven by some of the malls that are in that category, which are on the borders, North Dakota, or the ones on the border with Mexico or the energy related. So it was more that versus store closings that impacted us. And then we had a couple where there was some new competition. So it's really more just the properties in those markets and we are seeing some stabilization in energy, so we're optimistic that, that will flatten out and start to come back. And also usually when we have competition it's an impact for the first year but again that bounces back.

And so the store closures across Tiers were pretty but evenly divided?

Yes, that's correct.

Okay thank you.

The next question comes from Rich Hill of Morgan Stanley. Please go ahead.

Hey good morning guys. Maybe a follow-up question about the store closures across tiers and taking a little bit of different direction. But the same-store NOI decline that you saw this quarter and maybe you're guiding towards for the full year. Do you expect those to be relatively consistent across tiers? Or do you see more you see some variation between the Tier 1's and Tier 2's?

Yes, I mean, we -- our Tier 1 has had stronger NOI performance then Tier 2 and 3. It's historically been pretty linear and that's the case this quarter and that's the case going forward. So we see the best result out of Tier 1 and Tier 3, the reason that we've sold a lot of those assets is because we weren't getting the NOI growth as much out of those and trying to invest more in Tier 1. So that's pretty much been the case and we see it continuing.

Got it. And in terms of the releasing spreads, if my memory serves me typically the releasing spreads have actually been pretty decent. So, I think I was maybe a little bit surprised to see the weakness there. Was there any sort of one-off thing, or how should we think about that?

Yes, I mean, we were within a 100 basis points of last year first quarter on those spread. So, and first quarter is typically the weakest I mean we did have some of the retailers, children's and juniors where the renewals were weaker, just because their businesses been more competitive and we're seeing -- as we add more H&M's, and more fast fashion, it does impact some of the traditional juniors in the properties and that's contributed to some of the bankruptcies and store closing. But it also hurts us on the renewals. But we didn't see this being an outlier, our new leasing was a little bit lower, but again we had a really strong amount of new leasing. And so, we're focused on getting good quality renewals in lease spreads but again, part of it is dictated by where we are with occupancy.

Okay, got it. And just one final question from me. You guys have mentioned that some of the properties that have been coming up for maturity in the CMBS market are stronger. I think, at least looking at the metrics, I would generally agree that they look like maybe could have been refinanceable, any reason that you haven't been tapping the CMBS market more frequently than you have the past? Is it just because the properties are coming due you either want to un-encumber them or they just want to stabilize? And maybe that's a question for you Farzana.

Yes, sure, I'll answer that question. As you know we've been moving towards the unsecured strategy and we've been unlimbering a number of our secured loans. So that's a strategy we are on and we mentioned for several quarters now that the joint ventures are up for refinancing. So this year we have one loan that we will be refinancing that's El Paso town center or outlet center and that's --

Excuse me this is the conference operator. There is been an interruption in the call. Just one moment please. [Technical Difficulty]

Excuse me, I have reconnected the speaker location, and I believe the question was coming from Rich Hill of Morgan Stanley.

Thanks Farzana, hopefully I didn’t -- hopefully that wasn’t reflection of my question.

No, no did you get all the answers.

I cut off mid sentence, but if you could maybe just elaborate on it really quickly?

Okay. I’ll just re-summarize. The unsecured strategy that we have been pursuing, so we will be continuing to pay off our secured 100% wholly owned secured debt that they all high quality properties that have very high debt yield, we think those off. But when it comes to joint venture properties, we are refinancing the joint venture properties in the CMBS market or any other financing markets that’s available.

That’s very helpful. Thank you. I am done.

The next question comes from Michael Mueller of JPMorgan. Please go ahead.

I apologies, if I miss this, but if you are looking at the pool of our space that you are looking to relay that you just into getting back from the closers and bankruptcies, can you talk about like what portion of it has been spoken core with portion of that you feel really good about and just kind of walk us through kind of where you stand on it?

You didn’t miss it, because we haven't said that. And I mean it's really something that it's just too early to say, a most of these -- a lot of these stores haven't even closed and so that’s one of the challenges that makes a tougher this year. The timing is uncertain or coming in later in the year in 2015. The closings were announced in January. We have the whole year. Now, we are 21 been rumor, but they haven't filed yet. So we don’t know the timing on that and then some of the other big one that’s out there pay less which has filed, but there is still operating. So, there is just uncertainty with that. We are working on the backfills. We really look at it from two perspectives, we look at it on a short-term from specialty leasing and backfilling it through the holidays and that’s a source of income that’s important to us. And then we are also looking for the longer term more prominent replacement and both of those are really important as we look for how to increase our income this year.

Okay. And I guess something you tied that too, when you originally talked about your comments at the beginning of the call, you talked about retaining less food, entertainment, fitness I think I feel the categories. And when I think of those tenants I think of department store box because a way and you are placing with other big box oriented tenants that have lower rents which you would have in the shops. So I guess number one, first of all, where those tenants listed you were thinking of boxes or were you thinking of those as replacements for shop? And I am assuming its boxes, so following up on that like. Can you talk about some of the tenants you are seeing in these small shops that have replacement opportunities?

Yes, now, I mean I was talking about both. In fitness, you have large boxes and you have smaller users like in Orangetheory or Cycling that type of thing, the spin classes, restaurants you have sit down, you have past casual, which is again 3,000, 4,000 square foot spaces, that's really active. With cosmetics, we've done a lot of offer deals in the malls and they've replaced vacant spaces. And then there's other categories that are doing well, whether it's anything that's related to a mobile phone, or wireless technology, personal accessory, sunglasses, jewelry, is still doing well, personal services, shoes, there is retailers like Hot Topic has new concepts that they're expending. We're doing more leasing with local and regional boutiques that we have in the past, pop up stores is something that's been publicized. There's a lot of across the whole spectrum of sizes that we're seeing interest. And it's just where we do the reliance on apparel in juniors because that's where we're seeing most the problem in terms of the store closings, but we're seeing really strong answers from these others users and this whole narrative is just out of control, ridiculous as far as malls going away. And like I've said, in my comments, if you go to any of our malls, they're busy, the parking lots are busy, there's shoppers there's traffic. I mean it's just crazy, what's being printed out there. And it has no relation at all to reality.

The next question comes from Caitlin Burrows of Goldman Sachs. Please go ahead.

Hi. Good morning. I was just wondering first if you guys comment. It looks like two expansion projects you guys had in the past one away at Hanak Landing and Brookfield Square. So, I was just wondering if you are not planning to afford with that or kind of what the change was there?

Hanak Landing open so that’s why they are mall.

Okay.

And then Brookfield Square, we decided to delay it because that was one the Sears that we purchase with the lease back. And so it was we just wanted to see how it we’re tie in with the Sears and so we just held off on that.

Got it. And then also I think Farzanaa, it was you that mentioned earlier that or maybe some of the outside that within the Tier 2 some of the sales impact was by the energy market, but also by new competition. So, I was just wondering what kind of new competition that was, if it was I'm guessing not enclosed malls. But if there was other open air centers or outlet or kind of what that was?

There were couple of outlets in Lower Rock and Daytona Beach, new outlets open and so that hit the mall sales. And we’ve seen that in other markets we had in North Carolina few years ago. And we’ll see some sales decreases kind of in the mid single-digits for a year, but then it increases and it recovers back.

The next question comes from Carol Kemple from Hilliard Lyons. Please go ahead.

Good morning. I know this is a Board decision but considering you expect FFO to be down this year. Do you think that have any impact on the dividend?

Well, like you say it’s a board decision. And we’ve got the Board Meeting coming up. But, we still have a very low payout ratio of less than 50% of our FFO. It’s a dividend even with these decreases. And so, we see what's happening this year more short-term and we also -- we’re looking at paying out tax full income, tax full income gets impacted by the dispositions and the gains on the sales. So, we got to look at all that together in terms of that consideration.

Okay. And then as far as the portfolio transformation, I think as far as the total number of malls you all talked about 2014, is there is few more than you’ve actually done. Are you all just fine with sitting with the other Tier 3 assets for now or those something you'll sell overtime?

So, with the ones we announced, we have 20 of the 25 that are basically accounted for. And then the others are really properties that since that time have redevelopment projects that will transform them and will make a big difference in the valuation and the cap rates. So, that’s why we decided not to go for with selling those and we’ll look at it down the road and see if it makes sense. And we’re looking at all our properties from an asset strategy point of view and saying where it make sense to invest through the department stores where it make sense to possibly sell. And that something we do on our ongoing basis.

The next question comes from Floris van Dijkum of Boenning. Please go ahead.

Great. Thanks. Steve could you maybe you talked about reducing your reliance on a payroll. Could you remind us what apparel as a percentage of your overall tenant base and where would you like to go in two or three years time?

Yes, I don’t know the exact number off top my head. But you look historically and the malls have been 70%, 80% apparel. And the food is grown as a percent come from 5% to greater than 10%. That's going to grow probably in the 20% range and then some of these other uses, that I've talked about, are going to grow as well. So, I can't give you exact numbers. We don't have a specific target, but it's definitely going to shrink and it's -- due to store closures, that accounts for some of it, but also being more proactive and replacing some of these retailers that there's just too many of the same in the malls.

Okay. Thanks. My other question had more to do I guess with guidance, and obviously there is a pretty large increase in the bad debt reserve, I guess that's mostly due to Route 21 and Payless, I suspect. The lower guidance actually doesn't seem to reflect any incremental sales and against -- my question to you is most of the investors, when they look at your portfolio and see over 20 C malls in your portfolio, those typically get sold at high double-digit or high single digit cap rates. How much should we prepare for potential further dilution if you get bids for some of those assets? And I know it's tough to put in there, but how do you manage the expectations? Or how do you prevent from cutting your estimates, progressively down the road, as you sell more of these assets?

Hi, Floris. As we mentioned, we don't provide for anticipated dispositions that's just kind of too much of a variable to include. We will include that, as we know that these dispositions will occur. We included two this quarter, because we had it under a contract. So that's just really not how we make our -- provide our guidance. And to your question, regarding just the bankruptcies, we have provided at the 2% bottom and negative 2% guidance. $10 million to $14 million, we are taking into account some additional potential closures or rent reductions. So that's really our best estimate today. And we are, we hope-- we're not going to chase this estimate, and unless something catastrophic happens which we don't expect. So therefore, this is really our best estimate today, that negative 2% to 0% is where we'll be on same-center NOI.

I don't know what you're saying about 20 C malls, because we have 6 properties in Tier 3 after these dispositions and that includes in outlets, joint ventures and 1 center is open-air. And like I've said, the others are redevelopment and that's why we decided not to sell them. So I don't think that's -- we're not just dumping properties and going to cause any further dilution.

The next question comes from Linda Tsai of Barclays. Please go ahead.

In terms of the two malls that you have a deposit on, how long have you been in discussions with the buyers? And are you approaching the negotiation process any differently, than say from a few years ago?

No. We've got, like we've said, we had a signed contract, due diligence expired, closing is shortly sometime this month. So that's the only reason we announced it had a closing, because it's eminent. And we don't get into, how long and all that, these things take time, they've taken time over the period we talked about it. And, but I can't tell you how many months or anything like that, it's a process.

But are you approaching the negotiation process any differently?

The negotiation process, honestly, everyone is different, every buyer is different, every property has different characteristics. I mean, these, one of them had some redevelopment, where we replace the JCPenney and we brought in some boxes to do that. And that positioned the property to get an attractive offer. And we're very pleased with the pricing that we're able to receive and it was significantly better than we would have, if he wouldn't have done that. So, but there are all unique negotiations, and I wouldn't say we're doing it different today than we have in the past

Thanks and then just a question for Farzana. In terms of the additional 3 million to 5 million baked in guidance foreclosures that you don't know about yet. How confident are in terms of it being a sufficient cushion? What sort of the thought process that goes into it?

We try to make the best estimate. We look at all the different negotiations that’s going on. We look at the announcements that have been made. We read about, we talk a leasing department. This is a lot of working that goes into coming up with that number. So at this moment when we realized our guidance, we took into consideration what we believe potentially may occur. So that $3 million to $5 million is including that assumption. So we feel confident that what we have today is after thoroughly going through our analysis coming over that number.

The next question comes from Jeff Donnelly of Wells Fargo. Please go ahead.

Maybe I guess the first question maybe for you Farzana, just with the pressure that we are seeing in the industry from store closers and other factors, do you expect you might be doing increasing the volume of assets sales in the future just beyond what maybe was your original expectation to achieve your net debt to EBITDA goal I think was around six times or even more weakness you have things on unfold?

No, actually our net debt to EBITDA is going to improve. We are in the process of returning couple more properties Wausau and Chesterfield that has very low debt yield, then again we are paying down debt from just a recent disposition that gave us a good bit of resources to pay down debt and we will continue to improve the EBITDA to all these redevelopments that we are very excited about. So combination of the two will continue to improve, there is no reason to believe that we will not achieve that goal. So we have our eyes on that metric, very focused on it.

And maybe one for you Stephen, I am just curious to hear about kind of the I guess a lateral better term the cadence of small shop leasing activity, with the churn that we are seeing in the industry, more retailers kind of rationalizing base. I am just curious as how we should be thinking over the next 12 to 24 months as we going to turn to more tenants, should we expect to see more downtime, or do you think the demand from retailers out there is sufficient that maybe downtime between lease or remain pretty confident, I am just curious how to think about that?

No, I mean we see it being consistent with what we have had in the past and typically will have six to nine months of downtime, when we have a vacancy and a lot of it depends on what time of year the vacancy occurs and will back with short term specialty in the main time. But most of the store openings happen in second and third quarter. So that’s when we are going to start to see the pickup in occupancy and given where we are in the year, it's hard to get that much done this year, which is the major reason, why we have adjusted the guidance.

And so far, as the capital needs for that recycling been pretty consistent as well, and the reason I am asking I am just thinking between all the initiatives you guys are trying to execute whether it's deleveraging and also maybe potentially facing sort of the higher turn rate with tenants, I am just thinking about how do you go about funding the possibility of higher releasing cost, the redevelopment cost in the future?

No, I mean we have had in the ballpark of $50 million of tenant allowances for the last four or five years and we feel like that’s more than adequate. Just given that we -- the spaces are built out they are in good shape. Where some cases where we -- most of that is when we have spaces were combining for large users like H&M and that where we moving around that’s the primary source I mean use for those tenant allowances, but where we are back spaces that are in place, we typically don’t have significant tenant allowances.

And just one last one I know that dividend is a low as a payout of FFO. Can you just remind us where it is on, on the basis of taxable net income, I just wasn't sure where the payout was on that basis?

Our payout ratio is 100% of our taxable income and it's been around below 50%, so that’s the payout ratio.

The last question due to time constraints is Haendel St. Juste of Mizuho. Please go ahead.

One question for me, Steve, and I know you said it was an opportunistic sale. But does the outlook sale Oklahoma City is signal perhaps the shift you view on that business. You previously indicated that you like the business and even I talk about the desire to grow it or is it perhaps that you're seeing this that as a better source of liquidity to help fund some of your readout activities?

Well, it's not at all an indication that we’re less bullish on the business to other power centers that we have in the portfolio are having good sales growth and have good upside. So, from that point of view, we’re not looking to sell others, when we look at Oklahoma City just given that point it was in the cycle we felt like it was a good time to do a transaction and also it generated a tremendous return for us and for our partner and first or our shareholders. And it accomplished what you said in terms of raising significant liquidity, the pricing was attractive. So, it was accretive to where we trade and it does help us from a balance sheet point of view, so just kind of looking at everything together if we saw like it makes sense.

So, going forward is it reasonable to assume that outlet sales could play a role in future sourcing for your re-debt?

No, that wasn’t I what I meant imply. I mean I think we’ll look across all the properties and the outlet centers at this time the other ones are having good and we don’t have any plans doing thing with them.

And we have a question from Andrew Molloy of Bank of America. Please go ahead.

Yes. Hi. Thank you very much for taking my call. My call is regarding co-tenancy clauses and circling around that. First, do you provide a percentage of total tenants that have co-tenancy clauses in the lease agreements? And to date have you seen tenants trigger this cause and how does this compare historically. And I have a follow-up as well.

Yes. We do not provide that percentage. I will tell you that it’s -- there is some kind of co-tenancy provision. And the majority of the leases but there is no consistency its different for retailers, its different in different locations. And it hasn’t been material it didn’t impact our results this quarter. And going forward we don’t see it being an issue either.

Thank you. And this might be a more of question for [Howard], but when it anchored those dark, and this does change the definition of anchors stores in the lease agreement. And how does that change the definition?

Yes. I mean again its different and for different retailers, but there is rights to cure, there is more than one anchor that have to close the trigger co-tenancy. There is the ability to be flexible in terms of replacement from both the square footage and the use point of view. So, we’re always working to make that as favorable from the landlord's point of view as possible and the retailers are negotiating with this on it and it's evolving.

This concludes our question-and-answer session. I would like to turn the conference back over to Stephen Lebovitz, President and CEO for any closing remarks.

Thank you again for your time today. If you do have any follow-up questions please feel free to reach out and we look forward to seeing many of you at the Reckon Conference in Vegas and then NERIET in June. Thank you.