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General Growth Properties, Inc. (GGP)

Q2 FY08 Earnings Call

July 31, 2008, 9:00 AM ET

Executives

Tim Goebel - Director of IR

John Bucksbaum - Chairman and CEO

Robert A. Michaels - President and COO

Bernard Freibaum - EVP and CFO

Analysts

Jeffrey Spector - UBS

Craig Schmidt - Merrill Lynch

Christine McElroy - Banc of America Securities

Paul Morgan - Friedman, Billings, Ramsey & Co.

Louis Taylor - Deutsche Bank

Mike Mueller - JP Morgan

Jay Habermann - Goldman Sachs

Thomas Baldwin - Goldman Sachs

David Fick - Stifel Nicolaus

Ben Yang - Green Street Advisors

Steve Sakwa - Merrill Lynch

Jeff Donnelly - Wachovia Securities

Michael Bilerman - Citigroup

Presentation

Operator

Good day everyone and welcome to today's General Growth Properties second quarter earnings conference call. Today's call is being recorded. At this time for opening remarks, I would like to turn the call over to Tim Goebel, Director of Investor Relations. Please go ahead, sir.

Tim Goebel - Director of Investor Relations

Thank you, Glen. Please note that this conference call and webcast will contain forward-looking statements, including guidance for 2008 core FFO. Actual results may differ materially from the future operations suggested by these forward-looking statements due to various risks and uncertainties. Please consult documents General Growth Properties, Inc. has filed with the SEC, specifically the most recent forms, 10-K and 10-Q for a detailed discussion of these risks and uncertainties. The company disclaims any obligation to update any forward-looking statements. GGP has furnished its quarterly supplemental information to the SEC in an 8-K filed yesterday, as well as posted it to our website ggp.com. During Q&A, we respectfully request that you limit yourselves to two questions or one with a follow up.

With that I will turn the call over to John Bucksbaum, our Chief Executive Officer.

John Bucksbaum - Chairman and Chief Executive Officer

Thank you, Tim. Good morning. Thank you for joining us. Also with us this morning are Bob Michaels and Bernie Freibaum. During the second quarter, we produced core funds from operations of $0.72 per fully diluted share. Core FFO for the quarter decreased $0.01 versus second quarter 2007. It comes as no surprise that we are in a difficult business environment and this includes almost all industries, not just real estate and GGP. What is most important is how we, GGP, remain successful and work our way through this period.

Over the last 55 years, the Bucksbaum family has led GGP and all of its predecessor companies by always having a plan to guide our company. Whether it is to build them all, redevelop a project, lease the center, or finance the property our plan is always to do what is right. We have implemented many different plans during different cycles and this is no different. During our history, we have completed 100% of our developments and repaid 100% of our loans. Tens of billions of dollars of construction loans, acquisition loans, and mortgages that have always been repaid in full and on time, every penny borrowed has been repaid. You will not find many real estate companies anywhere near our size that can make the same clay.

Yes, credit markets are different today and nobody at GGP will suggest that it's business as usual in those markets. For those of you who have been tracking our progress, you have seen that we have refinanced every mortgage that has come due in 2008 and we have multiple plans and options available to us to take care of our remaining 2008 and 2009 maturities. For those who have questioned or doubted our abilities, you should understand that everyone in this company is focused on the execution of core operating properties, development, redevelopment, and financing in the most efficient, realistic and profitable manner.

One of the right decisions as we move forward is to temporarily delay some of our development projects. It's important to note that we are not canceling these projects. We are simply moving back the opening dates. Financing, of course, plays an important role in these decisions, but of equal importance is the consumer environment. Now it's not the best time to be opening new projects and we'd have the full support and encouragement of our major retailers to delay these project openings. The retailers want to do what is right just as we do. Despite the weak consumer environment, we did have a very strong quarter of leasing. Signed leases totaled approximately 2.1 million square feet, just off our all-time second quarter record of last year, and well above the 1.6 million square feet signed in the first quarter of '08. We also opened 401 stores during the quarter versus 319 in the first quarter.

Retailers continue to expand and open and are not backing out of agreed upon deals. Another good indicator that retailers are continuing to look for productive locations is evidenced by the 204 portfolio review meetings we held throughout the quarter, an increase of over 65% versus the first quarter. The quarter was highlighted by a new record occupancy of 93.2% versus the previous second quarter high of 92.9% in 2007. This is a powerful endorsement of the long-term strength of our retail real estate and the retailer relationships we have built over the last 55 years.

Comparable NOI gain for the quarter in our consolidated properties was 2.6%, while unconsolidated properties increased by approximately 7.9%, resulting in an overall portfolio gain of 3.4%. Year-to-date we have a strong 4.5% comparable NOI increase. Last quarter I spoke to you about historical periods of slowing retail sales that have not necessarily translated into a marked increase in mall store closings. Most small retailers remain in better financial shape with stronger balance sheets than retailers in years past. The data I have studied regarding store closings shows that retailers today are far more efficient unless susceptible to economic downturns than in years past. Their resilience could well be one of our most valuable assets. While we read about a great many store closings, the numbers are actually down nationally for the first half of '08 versus the same period a year ago. And of the approximate 72,000 store closings, only approximately 5% of those are shopping center related. We did see a slight increase in closings due to bankruptcies during the quarter, but they remain a fraction of 1% of our total square footage. It's important to note that the majority of these closings had good locations and strong properties, making re-leasing a very viable alternative for this space. It appears the survey by Marcus & Millichap that reported retail vacancy is expected to increase by only 50 basis points on a national average in 2008 is holding true. This is a powerful endorsement of the strength of mall real estate.

Total sales per square foot remained constant with last year at $459 and comparable sales increased eight-tenths of 1%. Indicative of the strength within our portfolio is the performance of our 50 most productive United States centers. These properties generated average sales per square foot of approximately $648. Not only do these 50 centers produced tremendous sales per square foot, but they also represent approximately 50% of our total mall NOI. This is one more example of the quality of our portfolio and quality will be more important than ever as we move forward in 2008 and 2009. There is no question the world we operate in has changed dramatically from last year. The credit markets we have known are either not available or have changed considerably. The strong employment environment we have enjoyed during the last three years is weakening.

Consumer confidence is down albeit it did tick up in the last report, but sales have softened. Is this reason to set up the alarms and abandon ship? Of course not. But it is reason to draw upon our experience and our approach to business, which allows us to continue to grow and operate as a consistent, stable and profitable company. This continues to be who we are. You will find in an environment of increasing difficulty the company with the best properties, the best talent, and the best plan will be the most successful. We expect a lot from ourselves and I know you expect a lot from us as well. Despite the challenges facing us and our business partners, we still expect to produce approximately 15% per share of core FFO growth in 2008.

I'm convinced that we will successfully manage the shorter-term challenges we face because of our talent, collective focus, and the passion we have across GGP. Because of this, I remain very enthusiastic about our business. The world we live in today has changed dramatically from a year ago. We have recognized this change and we are adapting to it. This company is blessed with great properties and great people. Certain external challenges do exist, but I promise you that just as we have done in the past, we will meet every challenge.

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