CBL - NYSE

Good morning and welcome to the CBL Properties' Second 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 second 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 non-GAAP financial measures to the comparable GAAP financial measure is included in yesterday's earnings release and supplemental that will be furnished on Form 8-K and that is available in the Investor section of the 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 were 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. As our results for this quarter indicates, 2017 is a year of challenges for CBL and for the retail real estate industry. That being said, there continues to be a huge disconnect between the magnitude of these challenges and the grossly exaggerated reports declaring the end of bricks-and-mortar retail. Claims that 55% of malls will be shutted in the near future and nearly 9,000 stores will close this year of the product of poor research and sensationalism. We're not denying that the retail industry is changing, but CBL along with our peers owns the highest quality retail properties in the best markets and locations. The new term loans we announced earlier this week, not only validate the quality of our properties, but also our overall market dominance strategy. We greatly appreciate the support of our banks and their ability to see pass them as leading headlines to grasp the significant value and opportunity at CBL. The pace of retailer bankruptcies and store closings has increased this year due to a number of factors including high amounts of debt by many companies. Online shopping is taking an increasing share of sales, but retailers are aggressively adding online capabilities to compliment and further enhance the in store experience. The vast majority of retail sales are still dining stores and pure play online retail have yet to figure out how to be profitable. Even mighty Amazon has validated the value of a physical store presence with their Whole foods acquisition. New technologies are helping retailers understand and reach their customers more effectively and retailers are investing significant time and capital to satisfy the demands of today's consumers. All of these changes will fuel the continued evolution of retail properties in the US. As I mentioned last quarter, CBL is focused on reinvention of our company in many respects and of our properties as we navigate this dynamic environment. We have made tremendous progress last year on upgrading our balance sheet and our portfolio. Our market dominant locations positioned CBL to benefit from these strengths as we transform our properties into suburban town centers that provide our customers with a differentiated experience. These experiences include value retail entertainment, dining, fitness, beauty, health and wellness, services and other uses with each market requiring its own strategy and tailored mix. So far this year, we've made significant strides in our redevelopment plans with leases out for signature or LOI's executed nearly all of our major projects. Our merchandising mix continues to broaden as we lease to entertainment concepts such as Breakout of escape rooms, iFLY and Dave and Busters and beauty, health and wellness tenants, like Ulta Beauty, Lush Cosmetics, Firenet Fitness [ph] and Asha Solon. Customers are asking for a socially conscious emphasis and we're responding by adding stores like [indiscernible]. Food and beverage is expanding in our portfolio with robust demand. We currently have 65 restaurant deals underway, including 15 executed, 12 out for signature and 38 in active LOI discussions. These deals represent ground lease transaction, pad sales and traditional leases and include great concepts such as Bar Louie, Lucky 13 Pub, Bonefish Grill, Old Chicago and Panera Bread. We also know that capital is precious and we look to add these uses and others across our portfolio, we're maintaining a short focus on tenant credit. Many times we're limiting our investment by ground leasing or selling the pad to these users. Innovation is a priority for us. We're utilizing new technologies to better connect with the customer and to help our tenants drive higher in store traffic, which I think traffic hammers at several centers that will not only provide us a traffic information, but will also provide us and our retailers with better demographic data. Our digital marketing is reaching broader audiences than ever before with our fresh new mobile friendly property websites and a fully integrated social media platform. With multiple channels competing for shoppers attention, it is vital for us our centers to offer a fresh experience for customers on each visit. Pop Up stores are not a new thing and we have a very successful seasonal business built around these short-term leases, but we've taken a new approach to this established idea. We rolled out the Pop Up shop in a number of our centers which feature news each week, providing an opportunity for local and online boutiques to showcase their merchandize. The word gets out quickly to social media, attracting unique and seasonal vendors such as prompt investors in spring, local artisans, natural beauty products and custom jewelry. Our dominant locations are for greater traffic in critical maps which appeal to these local merchants and allow our centers to reflect trends and popular products in their local markets. Additionally, regional boutiques like the Villas [ph], Southern Charm and Lizard Thicket help us to diversify from national chains and bring their large and loyal customer following with them. New leases such craft breweries, wine bars, boxing gyms and other distinctive concepts are being added to our centers and we're actively working to add hotels, office and residential components as part of anchor redevelopments where appropriate. We've also made significant progress, upgrading our portfolio for active asset management discipline. During the second quarter we wrapped up our stated disposition program with transactions executed on 19 malls at a value of more than $750 million, including this quarter's sale of two Tier 3 assets as well as the conveyance of Chesterfield mall. We also recently entered into an agreement to sell our remaining 25% interest in River Ridge mall through our JV partner. That transaction is expected to close in the third quarter. Going forward, we'll actively review our portfolio for disposition opportunities as a source of capital to reinvest and as a means to optimize our portfolio. Year-to-date these asset sales have generated nearly $100 million in net equity, which contributed to the decline in total debt of more than $330 million, compared with second quarter 2016. As I mentioned earlier, we extended our debt maturity schedule closing the extension and modification of two term loans that were set to mature in 2018. We have also completed a preliminary agreement to modify the one secured back AD&A [ph] mall. With adjusted FFO per share, $0.50 and same-center NOI declined 1.3%, our result for the quarter were in line with the expectations. While we are not at all satisfied, we're working to maximize results in the current environment and also focusing on positioning our portfolio for the future. I'll now turn the call over to Katie, to discuss our operating results and investment activity.

Thank you, Stephen. Occupancy has been impacted by the retail trend Stephen referenced earlier. During the second quarter it declined 100 basis points for the portfolio with the same-center mall pool declining 140 basis points to 90.6%. Bankruptcy activity impacted mall occupancy by 240 basis points and 453,000 square feet. We're making good progress investing in new applications is roughly 45% of the space released are in active negotiation. Despite media reports, demand at our properties remains strong. During the quarter we actually heated over 1 million square feet of leases in total. On a comparable same space basis we signed roughly 465,000 square feet of new and renewal mall leases. New leases were signed at an average increase of 8.1%, while renewal leases were signed at an average of 3.5% lower than the expiring rent. Renewal spreads were negatively impacted by several renegotiated payless deals executed in the quarter. Given the challenging retail environment, we're prioritizing occupancy and income and anticipate pressure on leasing spreads throughout the remainder of 2017. Our new leasing activity is certainly demonstrating our focus on non-apparel uses and traditional apparel retailers represented only about 30% of new leases executed year-to-date. Sales for the second quarter were flat, an improvement over the declines we experienced earlier this year, with most border markets posting increases following the rally in the peso. On a rolling 12 months basis, stabilized mall sales for the portfolio were $373 per square foot, compared with $382 on a same-center basis. Year-to-date, we've opened only 600,000 square feet of development and redevelopment projects including our new outlet center in Laredo. The center is performing well, since its opening in April and we just opened a number of new additions over the course of July holiday to a great reflection. Our remaining current construction pipeline is comprised of 170,000 square feet of redevelopment projects, which reflects a refined focus on our existing portfolio. In our pipeline today, we have only one remaining new development of a grocery anchorage center that we expect to start construction on within the next few months. Our anchorite developments are receiving a lot of attention with strong interest and high performing retailers, entertainment operators, sporting good stores, restaurants and other uses interested in joining the project. Our existing retailers are also very excited to benefit from the planned improvement. We anticipate making announcements shortly for construction in 2018 as plans are finalized and leases are executed. We recently opened a number of new additions to our mall, including a new Ulta Beauty store at Turtle Creek mall, York Galleria, Welcome Gold's Gym which joined a recently opened H&M. In April Dick's Sporting Goods opened in the former sports authority location apparel and town center. Beauty academy opened at Thread mall. We also opened a new 20,000 square feet T.J. Maxx in May at Dakota Square mall. Spheres recently announced that they were closing their location at this center, which we had expected and we have a LOI currently negotiation to replace Spheres after they close. This fall we will open a new T.J.Maxx store at Hickory Point Mall. We're currently renovating East Towne Mall, where we opened Planets earlier this year. We'll also add Lucky 13 Pub, which is currently under construction and next spring we'll open Brewhouse and H&M. I'll now turn the call over to Farzana to discuss our financial results.

Thank you, Katie. During the second quarter adjusted FFO per share was $0.50, including $0.03 per share of abandoned project expenses, as we wrote off pre-development cost for certain projects we're no longer pursuing. Portfolio same-center NOI declined 1.3% and same-center NOI for the mall portfolio declined 2.1%. FFO per share as adjusted for the quarter was $0.09 lower than second quarter 2016. Major variances impacting FFO included, $0.01 per share due to lower same-center NOI, offset by contributions from new properties; $0.03 per share of abandoned projects expense; $0.04 per share of dilution from asset sales completed in 2016 and year-to-date; $0.01 of low outparcel sales and $0.01 of higher interest expense. Same-center NOI declined 2.3 million, with revenues declining 4.3 million, primarily due to lower occupancy and percentage rent. We partially offset the revenue decline with 2 million in lower property operating expenses. Since last quarter's call, several anticipated bankruptcy filings have occurred and we're now finalizing negotiations with retailers for rent concessions that are going through the organization. Based on those discussions and our current expectations for the remainder of the year, we believe that $20 million to $24 million are for bankruptcy embedded in our guidance to be sufficient for the year. We're maintaining our adjusted FFO guidance in the range $2.18 to $2.24 per diluted share and same-center NOI in the range of negative 2% to 0%. As always, our FFO guidance does not include any unannounced transactions. We're projecting to end the year with stabilized mall occupancy of 93% to 93.5%. We ended the quarter with total debt of 4.8 billion, a decline of 336 million from the prior year quarter and 260 million lower sequentially. Similarly, the lines of credit declined to 181 million as of June, 2017, compared with 252 million at prior quarter. These reductions were a result of equity raised from properties sold in the quarter as well as the conveyance of mall to the lender. We ended the quarter with net debt to EBITDA of 6.5 times. This week we announced the extension and modification of two unsecured term loans that were set to mature in 2018. We closed $45 million term loan replacing the $50 million loan set to mature in February of next year. Including extension options, the term was extended to 2022 at a rate of 165 basis points of our LIBOR. We also extended and modified the $400 million term loan maturing in July 2018. The new term loan initially increased by 90 million through July, 2018, then it will be paid down to 300 million, a net $100 million reduction. This term loan also has a final maturity in 2022, assuming all extension options are exercised. Our goal, as we approach these financing was to extend our maturity schedule, maintain our low cost of borrowing and further optimize our debt capital structure by reducing short-term flowing rate debt. With these financings, we're extending our maturity schedule and incorporating $100 million reduction in our term loan exposure planned for next year. We recently reached a preliminary agreement with the special servicer to modify the $125 million loan secured by Acadiana Mall, in Lafayette Louisiana, which matured earlier this year. The principal will be bifurcated into $65 million A-note and $60 million B-note. Interest will be payable on a current basis on the A-note. Interest will accrue, payable at maturity on the B-note. The loan maturity is expected to be extended to September, 2020, with a one year extension option for final maturity date of September, 2021. The interest rate will remain at 5.67% with no amortization payments. Lafayette's economy is largely dependent on energy and it has been and it has seen a rise in the unemployment rate due to the stalling energy market. This has significantly hurt more sales and is beginning to impact NOI. However, we believe there is an opportunity for the Senate to recover lost sales and NOI. The modification provides us with a time for the economy to recover. Cash flow after debt service will be invested to reposition the property and support leasing efforts. Based on our negotiation on our projection of future cash flows, we concluded that our investment was not a curveball and recognized a $43 million loss on impairment this quarter. We have exercised the extension option for the $350 million term loan to extend the maturity to October 2018 and have one remaining option that will extend the final maturity to October 2019. We retired the $2 million loan secured by the Phase III of Gulf Coast Town Center during the quarter and have just one remaining maturity in 2017 a $62 million loan secured by the Outlet Center in El Paso. This property is our owned in a 75-25 joint venture. We anticipate refinancing the loan by the December maturity date. Our focus on liquidity and improving our balance sheet is evident in the accomplishments we have achieved year-to-date. As it stands today, our credit metrics are some of the strongest in the peer group and reflective of a strong balance sheet. 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 property. Our plan for growing EBITDA through redevelopments and reducing debt balances will help us to progress towards our goals. I'll now turn the call over to Stephen for concluding remarks.

Thank you, Farzana. Despite the challenges in our business and the negativity in the press, we are far from discouraged. In fact, we are energized by the opportunities that are available in our portfolio today. Our careful focus on balance sheet improvements and liquidity put us in a position to take advantage of these opportunities to create growth and value for our shareholders. We appreciate your continued support and we'll take your questions at this time.

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Christine McElroy of Citi. Please go ahead.

Hi. Good morning, everyone. Just hoping to get a little bit more color on the write off on the development projects, what projects were they and where and do you see have land title?

Hi, Christi. Good morning. So we haven't disclosed which specific projects but it's a combination of projects. It includes outlet centers, conventional projects, several new developments. And we didn't have a lot going but we had accumulated costs over the past few years that we've been working on these. And just given the environment we wanted to focus a 100% on our redevelopments, I did say there's one. Katie said there's one exception where there's a supermarket and anchored project that's a joint venture that is virtually fully leased and that should begin later this year. But beyond that we're focused on the redevelopments in our existing portfolio, which is what we think we should do. And just given that focus we feel like this was the right time to go ahead with the write offs.

Okay. And then Farzana just some thinking about the expansion modification of the term loans, sounds like you're using the $85 million of net proceeds to pay down the line of credit, but as you think about sort of - sorry if I missed this, do you think about sort of capital needs into next year in paying down the $190 million in a year from now, what's the plan for funding that and other funding needs sort of as you think about your free cash flow generation, your redevelopment pipeline and other capital raising you might need to do?

Hi, Christi. Good question. Couple of different answers on that. We do have significant free cash flow of $225 million each year as you are aware of that and we are using that to fund our redevelopment pipeline. In addition with our lines of credit balance down to as of the end of the quarter is $180 million but the $90 million of excess proceeds that we raised that further reduces the lines of credit. So our lines of credit balance is very low. We will be using that lines of credit to pay off $190 million. I also want to remind you our lines of credit balance has come down because of the properties we sold and we raised $100 million in net equity so far. So all in all our liquidity is very strong and it should be able to fund not only the payoff next year as well as the redevelopments that will come from free cash flow.

Okay. Thank you.

Thanks, Christi.

Our next question comes from Nick Yulico of UBS. Please go ahead.

Hi. Good morning. This is Greg McGinniss on for Nick. Sort of couple quick questions about I can see in leasing, it's very tough, right now folks are thinking about tenant improvement dollars, I mean how it relates to getting leases signed and since you're kind of promoting occupancy at this point I'm just wondering if there's been any upward trend in tenant improvement dollars on new leases?

Well you can look and you can see that year-to-date our tenant allowances have actually been down. So we were roughly $32 million, $33 million in 2016 down to $20 million and a lot of that is that we did a wave of H&Ms over the past few years and so we're doing few of those because we put them in most of the centers that make sense. There still are some we're working but the pace has slowed down. And we're doing a higher percentage of renewals to new leasing, renewals typically don't involve any type of tenant allowance. So we're very mindful of that like I've said we're doing the restaurant deals, we're looking to ground lease or sell pads as a way to limit our investment there or manage our investment there and make sure that we're not taking undue risk.

Right. And then in terms of the back half occupancy, how much economic occupancy lift-up are you expecting in 3Q and 4Q?

I think Farzana mentioned in our call that we expect to end the year at 93% to 93.5%. So that's kind of where we see that we're actually there. Our thin belief that will hit in the third quarter but we also have some leasing activity that should offset that. So we're expecting a back half lift. We don't give quarterly guidance but year-end should be in that range that we projected.

Okay Thank you.

Thanks.

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

Hi. Good morning, guys. I appreciate the time, just a quick question and Stephen maybe this is for you. You had mentioned in your beginning prepared comments that maybe some of the research regarding store closures was not great research. So I'm curious Cushman & Wakefield I think is talking about maybe 13,000 store closures next year. What do you think that that's maybe different and could you give us more color on that?

There's a lot of reports out there and retailers are talking about store closings, potential store closings and a lot of that is being used as a pretense to try to reduce our oxy cost and this is not new, I mean we deal with retailers negotiating all day long and year after year. And the environment is definitely tough. They're feeling that they've got more negotiating power today because of that. And so they put out numbers, but typically they don't close the numbers that they put out. And when we're seeing across our portfolio is that the retailers that announced store closings ended up closing less than they initially announced. So I feel like, like I said that's really overblown and overstated and sensationalized, I don't know where Cushman & Wakefield comes out with 13,000, we don't see the 9,000. And I'm not saying that there haven't been more store closings. This year we admit it, but people like to throw out the headline numbers and the press picks up on it. That's just not the fact that we're seeing.

Got it. That's actually really, really helpful, Steve. And I appreciate that. Just one follow-up question when you mentioned the announced stores versus what actually closes, what sort of ratio due you guys expect when you say?

I can't tell you exactly, Rich. I mean all I can say is that it never ends up being what they announce and you can look I mean earlier in the year I think Macy's probably did about 75% of what they said. Payless, we had 56 stores in our portfolio, they're closing 4. Rue 21 have 48, they're closing 9. So these companies assuming that they're able to get through bankruptcy, which fortunately this most recent wave has done that they're preserving most of their stores, Gordmans, we had 5, initially they were going to close 4, they ended up closing 1, so, I mean it's - they don't want to close stores if they're making money. And stores play a vital role to their fall business even though online sales go down when stores close. People don't like to say it, but the stores are really important and critical part of these retailers' strategies and that's where their primary sales are still being done.

Got it. Thank you, Stephen. I appreciate that. I'll jump back having any question.

Sure, thanks. Thank you.

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

Hi. Thanks. Good morning. Just first question just sticking with the closures a little bit, I think last quarter you suggested occupancy would fall further but in the quarter same-store occupancy was slightly higher sequentially. I know you maintain your own occupancy of 93%, 93.5% but just in the quarter was the better occupancy timing related or due to delays or are store closures not materializing as you anticipated?

Yeah, I think, Todd, good morning. I think it's both. There weren't as many stores closed as initially were announced and then there's been some timing delays, but, yeah, I mean occupancy was up sequentially. Like Katie said, we've got embrace sort of close in the third quarter but we're making a lot of headway like I said in my remarks where we're going beyond the traditional nationals in terms of our leasing, we're doing a lot more local, it's a lot more regional, it's more pop ups, different county uses, and I'd tell we're going to make up for the closings that we've had this year. It's a little different than in '15. In '15, we had the bankruptcies and most of those replaced with nationals and more traditional retailers. This time, we're being more creative, we're looking at different types of uses more like we've talked about more food, more services, more personal related wellness, those types of categories are really doing well in this environment. So that's where most of our leasing is focused.

Okay. And do you have a sense for sort of the Payless', Gordmans' and some others that you mentioned there, how far along they are in their restructuring and how comfortable you feel you are with where they stand at this point with regard to their store fleets?

Yeah, I think they're pretty far along. Rue 21, Payless, Gordmans are all pretty far along with their process. And in terms of the stores that Gordmans closed temporarily in a few locations that they've reopened and these retailers tag strong sales because of the bankruptcies, but now they're moving ahead. And you look at Aeropostale, Aeropostale as everyone knows went through bankruptcy last year, closed a lot of stores, they redid their merchandise but now they're doing really well. We're seeing good sales gains across our portfolio. So these retailers have a strategy and if they're closing the stores or they have the high oxy costs that are out of line then they can come back and be profitable and now if they're focused on their merchandise then they can be successful long term.

Okay. Great. And just lastly I was just wondering if you could go back to the Sears and Macy's anchor boxes that you captured earlier in the year and just maybe run through and provide an update on some of the progress so far?

Yeah, sure, well just to remind everyone we purchased on a sale-leaseback 5 stores from Sears, 2 Auto Centers and we also purchased 4 Macy's and we haven't announced I'm sorry 3 Macy's, we haven't announced any specific redevelopments where we're making progress but we don't want to really announce anything until we're ready to start. And we anticipate starting a couple of those. The Auto Centers are smaller with Sears. So those will happen quicker. And we anticipate starting a couple of those and we do have a 6-month notice with Sears. So we don't give that notice until we satisfy pre-leasing and have the returns on the pro-forma at the level that we need them to be. So there's not anything definite I can announce. I will tell you that we're getting really good activity in terms of letters of intent, moving to leases, negotiating leases, there's a lot of entertainment as part of the mix, a lot of food and restaurants that we're getting interest from, we're working on the Sears with several locations. And so it's primarily outdoor exterior type stays that we're having success. But it's a real complement and these who give a tremendous shot on the arm to these properties.

Okay. Great. Thank you.

Thanks.

Our next question comes from Tayo Okusanya of Jefferies. Please go ahead.

Hi. Good morning. Just along the lines of debt refinancing, yes, you guys continuing to do very well in that department. Just curious what you're targeting next in regards to debt reduction, debt refinancing? And could you also talk a little bit about how come the market still feels so open and why lenders those feel very comfortable with debt refinancing are giving you guys that just when equity markets seem to be much more reticent about the retail environment?

Well that's because CBL is a strong company. And so in terms of the term loan, we had a strong 18 different banks participated in our term loan and they are across the board in all our facilities. We had several that stepped up. The few banks that are leaving that we are paying off, they are generally Asian banks and Canadian banks, so it doesn't fit their model, doesn't fit their future plans. So we are the - U.S. banks continue to be strong supporters of CBL and they understand our business a lot better. So there is debt support. And in terms of what we are going to do in future, we have as we mentioned a loan that's coming up later this year, secured loan, which is a joint venture property loan. We will be financing that and is definitely a good strong market. It's an outlet center. And next year, we have couple loans coming up, one specifically is CoolSprings Galleria that's going to have a lot of attention, attraction from different lenders. It's a very strong property for us. I'll also remind you that we have a very high interest rate on both El Paso and CoolSprings Galleria, almost 7%. We have couple other loans coming up next year. Both strong properties, high debt yield, also have high interest rates. So some we will refinance and get excess proceeds and we'll use that to pay off our other secured debt that's coming up and unencumber them.

I'll just add Tayo that when we get our bank term loan when we were first starting talking to the banks, we had them on call or come to CoolSprings in Nashville and we held the bank group meeting in Kings Bowling which is part of the Sears redevelopment. And they could see firsthand how we had taken a Sears, had added the entertainment, the restaurants, ULTA, American girl, H&M, Belk and really how transformative that was to the center, help boosted sales in the following year by double digit and that, that really gave them tangible comfort with our strategy. And picking up on that even with the climate being as negative as it is the bank showed a lot of confidence and like I said we really appreciate their support.

Gotcha. Thank you very much.

Thank you.

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

Hi. This is Justin Devery on for Craig. I was hoping we could spend some time this morning trying to talk about dispositions, namely the two that you sold in 2Q if we could start there and any details around those transactions whether it would be cap rates or number of bidders that you had on the properties?

Hey, Justin. This is Katie. We don't disclose the cap rates on our mall sales because we are still active in the market. And so it hasn't benefited us from a competitive standpoint. They were great transaction for us. They are very good solid properties that had nice stable cash life. So the buyers of those will be well and it was a good transaction for us as well 50-plus million of equity price. We were able to reduce debt with. So there were a few buyers out there as we've talked about before the buyer pool is not incredibly deep in this environment, but there are interested players out there that understand the markets and understand the types of assets. And we've been most successful in targeting local and regional buyers and finance that and other properties that are similar to that.

Okay. Thanks, Katie. And maybe as a follow-up to that for the properties that you don't envision to be the urban town centers of tomorrow, I'm curious when you're evaluating what mass to sell I know that performance and location matters to you, but the size were come into play as well? If I look at Tier 3 strolled malls pretty small it's like 400,000 and then you can go as high as Kentucky Oaks or Monroeville, which are over a million. I'm just curious are they the incoming calls, do they discriminate against size?

Yeah, I mean, I think there is a buyer that targets transactions that are under a certain value that's not really the size of the property, but it's the amount of the transaction because to get an equity piece becomes you know bigger, part of it when you're talking about larger transaction size. So there is some variability there and some buyers that can only write a check under $15 million or some buyers that are interested in doing something larger.

Okay. Great. Thank you.

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

Hi. Good morning. I was just wondering if you could talk a little bit in the beginning in the prepared remarks, Stephen, you mentioned that in the future you might have more hotel, office, residential users and then more recently in the Q&A mentioned mixed users. Just wondering if this is actually happening yet, if it's just a topic of conversation at this point and would it be something that would go into your existing space and made it a case of an office or would that be built kind of outside of the mall?

So, Caitlin, it is something that's happening now in the planning for the redevelopment. We haven't announced any projects. Typically we've done a lot of around the ring road where we sold to hotel operators, there've been office buildings built that type of thing. And now we're looking to incorporate it more into the redevelopments looking at office and medical office on top of retail, bringing the hotels closer in or residential, it's not something that we're planning to do from an investment point of view to make it a big part of our NOI, we would use - we would bring in partners, we'll ground lay so shop is a way to finance it but it does, it's an important part of the mix of today's projects and we're seeing the demand from consumers and that's what's driving it.

Okay. Great. And then also just on the leasing, I noticed if you look at the total leasing volumes you guys showed that last year you had a lot of development square footage but even they were leasing out but even excluding that year to date on the new leases and the renewals. It does look like you're down year-over-year and it's not just you, like Macy's even mentioned it on their call yesterday. But I was just wondering as you go forward and try to show the vacancies that have occurred, what should we take from seeing that leasing volume is down, is it just that it takes time and that it just hasn't picked up yet or what should we read from that?

Yeah, I mean, I'd say it's a combination of things. The development was mostly driven by the radar. And so that was the fact - that the factor there. As far as the total leasing, we did have a higher amount of renewals and especially some larger spaces and boxes and some anchors and that goes into total leasing. And then on the small shops, a lot of the vacancies have just occurred or haven't even so that does take time to replace them. We'll bring in temps on an interim basis but we do see like we said getting back to the 93% and 93.5% level by year end. So we do feel like we're going to - confident that we're going to call that back. And we're seeing good demand from these other types of uses that I mentioned. So we feel very comfortable at the leasing environment.

Okay. Great. Thank you.

Thanks, Caitlin.

Our next question comes from Michael Mueller of J.P. Morgan. Please go ahead.

Hi. Quick question on the year-end occupancy 93% to 93.5%, is that total portfolio, the mall portfolio or some segment in the mall portfolio?

That's total portfolio. So it's about 150 basis points below where we ended last year.

Got it. Okay. And then Farzana, you mentioned $20 million to $24 million reserve kind of capturing what you are thinking about with discussions? If you go through when you talked with the tenants about the concessions, two quick questions here, one, when a concession actually takes place, do we see it in the lease spreads or is that outside of the spreads? And then how should we think of the marginal change in NOI from Q2 in terms of what's already in that run rate based on what you know versus how much marginal deterioration we can see I guess at the margin?

Yes. So the lease spreads around concessions are in this lease spread as Katie mentioned earlier Payless had when concessions and that kind of showed up in the lease spreads. So that's already baked in. And as we go through the quarters next two quarters, we don't obviously get quarterly guidance. But in our reserve number about half of it is already come through and another half is going to come through the second half of the year. So bottom line, this quarter was probably the hardest hit. So as we go forward, it should kind of get better and we end the year in the guidance we've given. The range is still solid and in terms of FFO as well as the sales and NOI.

Got it. Okay. Thank you.

Thanks.

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

Great. Thanks for taking my question guys. Stephen, I wanted to get your comments on the trends for temp occupancy and how does that performs and how do you see the outlook of that going forward?

So for temp occupancy is save all in terms of the trend. I mean it's been give or take a $100 million business for us over time. And that varies and it depends a lot on the ability of inline space because we pray in both common areas inline space together in our specialty leasing group. I talked about in my remarks that pop up shops that we're doing where we rotate every week or every other week different local retailers or online retailers and that's been very successful for us in terms of both bringing in new users and also bringing in customers. And it's an important part of the business. It's a way to incubate new retailers and new users. So we put a lot of focus on it. We have a great team and it's not something new, but it's something that we're continuing to innovate and love to be really creative with.

Great. And maybe also I guess the temp I guess that includes the specialty, talk maybe some of the initiatives on electronic billboards or you're seeing some of your competitors do that, are you are you bringing more of those into your malls and what do you see back part for the business?

Yeah, so we've been doing a lot of sponsorships, business development deals, we've been doing that. It's not a new thing, but again it's continuing to grow and one of the benefits of our malls is in the market we're in, we're getting a lot of traffic. We have critical mass. And so local hospitals, local car dealers, local professionals advertise in the property, they sponsor players, they sponsor mall walking programs, they sponsor customer service centers, they advertise on banners. We've done digital bill boards, digital directories so that's a great source of income. So there is lots of different ways that we can capitalize on the traffic that we are generating and generate income. We are adding fiber optics in terms of technology and we are offering internet and digital services to retailers and bringing in Wi-Fi and that's a way to enhance the customer experience and in certain cases that gets sponsored by cable companies or internet providers as a way to differ the cost of that. So we have a full sales team that is after working all this different types of initiatives and this is very successful.

Great, and may be if you could remind me that the gap between your science and similar [ph] open and your actual physical occupancy. Is there any sort of meaningful change there?

Floris you're violating the two question limit, but we actually don't provide that information, but Katie can talk to you all fine about it, thanks.

That's great. Thanks.

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

Good morning. What was your occupancy cost in the quarter?

We don't do it by quarter, Carol. We do it at the end of each year. And but we are consistently end a twelve range and that's - we don't see anything changing with that our sales would down a little bit, but are coming back as we said. The second quarter was better than the first in this process. So we see it - that continues to improve as the year goes on and actually cost should be relatively steady.

Okay. Thanks.

Thank you.

Our next question comes from Daniel Busch of Green Street Advisors. Please go ahead.

Hi, this Spenser Allaway on for DJ. Even you mentioned that you as if an adding somewhat local and regional boutiques on the Pop Ups side of your properties. Can you talk about how the rent levels and the occupancy cost ratios for your tenants compared with the portfolio average?

Hi, Spenser, it's a case-by-case basis and what we see is with the Pop Ups. There is a higher percentage rank component and so depending on how well they do. We do well, so also there - and for a short period of time the rank can actually add up and be very favorable as these retailers or these users start to generate more income. And so we are looking at - I can't tell you specifically, but overtime we expect to get back to the levels that we were at before and also with the space is being built out, we had minimal cost to bring in the new Tier 2 users.

Okay, thank you. And then and just in terms of properties you guys have deemed as repositioning malls, can you provide any update as to what you envision for these malls moving forward?

So Carrey in North Carolina, he announced in May and so that's phenomenal. We were working to the approval that likely to open till 2020. So there is a long approval process in returning, but they will purchase - basically the former seers in may see [ph] and that will be a huge catalyst for the redevelopment of that property and we are working on plans for the redevelopment of the remainder of the property. So that's really exciting and then at Hickory point, we had the T.J. Maxx deal that was part of our development pipeline that is underway and we are basically working on other boxes to come in there. It's kind of an enclosed mall, but it also has a lot of boxes with [indiscernible] and so we see that continue to be the strategy there and as we are closer to the refinancing we will be determine what makes in those sense in terms of selling or putting new data in place or what will do going forward with that.

All right. Thank you.

Thanks.

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

Hi, at this point given what you know, the 24 million to 25 million in term of bankruptcies for 2017, would this be a reasonable amount to expect for '18 as well?

Hopefully not, I mean that's really based on this year and we don't see that this to seem to go in waves and we are still orderly to say in 2018, but we don't expect to be at that level.

Hi, thanks and in terms of Cena [ph], have you engaged in any discussions with them yet and any sense of the percentage of the leases in your portfolio that could be impacted?

Sure. We are engaging. Currently we are in discussions with them. It's primarily focused on renewals for next year and for the most part there are some stores that what we know, but for the most part they will and we are just working after terms on that.

Thanks.

Thank you, Linda.

And we have a follow up question from Christy McElroy from Citi. Please go ahead.

Hey, it's Michael Brennan here for Christy. Stephen I just had a question, guess a constitutive question where to tell your portfolio is performing relative to the Pop Up peers and you have talked a lot of that your asset base being market dominant with less competition more base competition in the markets that you operate and relative to those loan assets the loan accurals or in some of the major cities around the country whether it be multiple malls. And I am just curious into which [indiscernible], but those market dominant mall should be able to perform better. Again so your results would read as to the conclusion considering your top samestores has been much weaker from an operating perspective. So how much of it is the market that you are in. I just look for the driver of that - how would you describe that's driving that on good performance in some ways I think the strategy that you've talked about being having these market dominant malls not necessarily and the top markets in the country where there is more limited competition. What's leading the way at that in your operational results well for it appears?

Hi, Michael. I think that's - they surely - the major factor that's impacting our performance this year has been the occupancy in percentage rent, so that's what is our same-center NOI so for this year. And in terms of our strategy, we sold lot of properties over the past three years and upgraded our portfolio. There is some properties that have been had harder, because of the border traffic and oil and gas and similar cofactors and those have been the drag on our results also, but we feel really good about our long term strategy of about the redevelopment program. A lot of malls over roughly two thirds or single level so they have the ability to be redeveloped and take advantage of the parking lots as part of that and to add the boxes and the other uses greater in demand and merely we are focused on getting the best results we can and giving CBL the best long term platform to operate and grow. And that's really where our focus is - not on go to our competitors or not our competitors or our peers are getting.

Well, it looks as just I hear same store-store growth perspective it's been I would say for going recession your same-center has been recurring. I am just trying to better understand what maybe behind some of that where arguably you have less more competition in your local markets given that you typically are the only game in town for a certain larger radius and so there's got to be some other factors going on that's depressing your same store and your asset based relative to broader peers are?

Yeah, I mean we have said forever that our malls are more stable. We don't have booms, we don't have bumps [ph]. This is year tough because of the store closings, but last year our same center NOI was in the 2% to 3% range. Our goals have been - be in the 2% to 4% range. Historically we have been 0% to 2%. Other companies are going to perform differently depending on their channel mix, depending on their market. But we are who we are and we feel like we got a really good long term strategy we made tremendous progress on our balance sheet getting the term loans done this year, earlier quarter shares and the banks still have confidence and liquidity that we have. We are executing on our plan so I think we are in a good position.

Just on refinancing, I guess what was the decision to pull back after a year in terms of that term loan amount and how does that yield out for the other loans you have with the same banks and arguably yes, they gave you a little bit a more - they gave you an extension, but they're pulling back the commitment next summer, relative to what you have today, so I'm just trying to better understand those dynamics that are rolling on?

No, we had our adjusting term loan didn't expire until next year. So the banks that were in, the term loan that are not extending their money is - continues in the term loan to next year and then the new loan really kicks in next year. But we intentionally brought that back. And we have said we want to cut down our exposure to short term floating rate debt and want to cut down our level of debt. So we did not - that didn't happen because it was forced on us, that happened because that's what our plan is from a balance sheet point of view and it does accomplish that because we reduce by roughly $100 million next year, our total exposure is short term floating rate debt and we use disposition proceeds and our free cash flow to fund that. So that's our goal, we're down to 6.5 times debt to EBITDA. We want to bring that down to six and the balance sheet is really important to us and liquidity really important to us and that's a big rational behind our focus on the redevelopments as well. So I think it all fits together and hopefully you can see that.

You are using the line of credit. You are using floating rate debt to pay down that extra hundred?

So, that's just the interim Michael, we have used the refinancing, the dispositions and the free cash flow. I mean that's the source. The line of credit is interim step if we needed, but our real goal is - and we will continue to look at the unsecured debt markets, to raise more long term debt depending on how those go and so and our goal is to have longer term fixed rate, use our line of credit as interim stop and also to bring down our revolve level of debt.

Thank you.

Thank you.

That is all the time we have today for our question-and-answer sessions. I would like to turn the conference back over to Mr. Stephen Lebovitz for any closing remarks.

I do have a just a quick quote I want to read and this is from Cheesecake Factory, CFO in their release yesterday and it's on the topic of mall traffic and I think it to work in earlier, but no one asked about it. And his comment was that, there are core gas are going to the malls much or more than they used to and there has been a lot of report to our traffics being down, but for most food users and other users we see traffic stable and I think that's important to recognize and it's good to see that other companies are making that comment because I think that's important for the market to see as well. With that we will conclude and thank you for your time.