General Growth Properties, Inc. (GGP)

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General Growth Properties, Inc. (GGP)

Q2 2011 Earnings Call

August 2, 2011 1:00 pm ET

Executives

Andrew Joa – VP, IR

Sandeep Mathrani – CEO

Steve Douglas – CFO

Analysts

Alexander Goldfarb – Sandler O'Neill

Jay Haberman – Goldman Sachs

Steve Sakwa – ISI Group

Michael Bilerman – Citi

Kevin Kim – Macquarie

Nathan Isbee – Stifel Nicolaus

Christy McElroy – UBS

Ross Nussbaum – UBS

Sukumar Mukherjee – Barclays Capital

Rich Moore – RBC Capital Markets

Cedrik Lachance – Green Street Advisors

Ben Yang – Keefe, Bruyette & Woods

Andrew Rosivach – Credit Suisse

Presentation

Operator

Good day ladies and gentlemen and welcome to the General Growth Properties’ second quarter 2011 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder today’s conference call is being recorded.

I would now like to turn the conference over to your host Mr. Andrew Joa, Vice President of Investor Relations. Please go ahead sir.

Andrew Joa

Thank you, operator. Good afternoon everyone. Thank you for joining the General Growth Properties’ second quarter 2011 earnings conference call. The conference call could contain forward-looking statements about General Growth Properties. Such forward-looking statements are based upon the current beliefs and expectations of GGP management and is subject to risks and uncertainties, which could cause the actual results to differ from the forward-looking statements. Such risks are more fully discussed in GGP’s filings with the Securities and Exchange Commission and the information said forth herein should be considered in light of that risk. GGP does not assume any obligation to update the information contained in this conference call.

And with that I’d like to turn the call over to Sandeep Mathrani, Chief Executive Officer.

Sandeep Mathrani

Thanks Andrew and good afternoon, everyone. Before we get into the review of the quarter you are likely aware of the press release we issued last night announcing that our Board of Directors has approved a plan to spin-off a 30-mall portfolio to GGP shareholders to the distribution of taxable special dividend. The company will be named Rouse Properties Inc and the distribution will be made to GGP stock holders as of the dividend record date, which we anticipate to occur during the fourth quarter. Rouse is expected to qualify as a REIT and be listed on the New York Stock Exchange.

Over the course of the year, we have articulated this as one potential execution of our plan to streamline GGP’s portfolio. So we are pleased to report we now have a tangible plan towards achieving this objective. This transaction is certainly a giant step in the right direction as you work to solidify GGP’s position as one of the nation’s top tier mall owners. Two quarters into the year, I’m very pleased with the progress our organization has made on a variety of key objectives. While we knew 2011 would be a transition year for GGP on a variety of levels I’m heartened by the progress we have made towards refinancing and lathering [ph] our debt, streamlining the portfolio, developing strategic business plans, reinvigorating our leasing efforts and rightsizing the organization.

As we look at our portfolio today, we have 166 malls with about 67 million square feet of non-anchor mall space. Tenant sales for the second quarter was $465 per square foot, which is up 8.4% over the prior year. Our top 20 malls by productivity represents 15% of our G&A, contributes 26% of the company’s NOI and generates sales of $775 per square foot, which is up 12.6% from a year ago. We’ve expected a performance of the various merchandize categories within our portfolio the growth is fairly broad based with every category registering year-over-year sales growth. In fact, the top 25 tenants ranked by year-over-year sales growth in our portfolio is generating sales growth of almost 22%.

Turning to rent spreads, our leasing activity that commenced versus expired during the quarter we achieved an uplift of 1.9% for the quarter and 2% for the year. While this metric is helpful in partially determining the NOI impact of current quarter leasing activity it typically represents leasing rates that were approved several quarters ago. As a matter of fact almost 60% of the leasing activity for 2011 was signed prior to the beginning of 2011 i.e., in 2010. So it is somewhat of a lagging indicator for rent spreads.

From the perspective of deals signed during the quarter the average signed rents were 8.6% higher than the average rents on expiring leases during the same period last year. On a year-to-date basis that spread is 9.1%. With respect to the portfolio occupancy cost it is roughly flat from the prior quarter at 13.5%. But this is primarily a function of tenant sales growing faster than rents. If you strip out the effect of increasing sales by comparing current in place rent to second quarter 2010 sales the occupancy cost would be almost 15%. So we are in fact moving rent upward and benefiting from a positive sales growth environment. With that portfolio 92.5% leased and considering the approved deals we have in the pipeline, which we believe will get signed we should be able to achieve an additional 100 basis points of occupancy by year end but the actual magnitude will depend on what actually gets signed and the timing.

So this is still my view of GGP’s mall platform I simply say that we have a very high quality portfolio with significant embedded offsite potential we are working to capture every day. Given the nature of our business the fruits of our labor will be manifested over the coming quarters. As one example, while we are currently 92.5% leased typical occupancy is at 89.3%, so this means we have signed leases for about 3.2% of our GLA that is yet to contribute to occupancy and rent. As viewing an average rent of $55 this represents roughly $100 million of rental revenue that is contracted but yet not in our reported income as the tenants have to yet to occupy the space.

Brazil

Brazil is a little jewel in our portfolio. We own 31% of a public company called Aliansce. Aliansce own 16 malls totaling 5.5 million square feet and they have two malls under development. GGP invested about $126 million in Aliansce since 2004 and our share of this publicly listed company is now valued at over $500 million almost three times our investment. Aliansce is consistently delivering very strong results, occupancy is at 97.4% and same store sales average over $700 per square foot, which is up over 10% from the prior year. We do not include any of these statistics in our GGP consolidated or non-consolidated numbers. This is truly a high growth business in a high growth market and we think we have opportunity to grow further in Brazil.

So with that, let me turn to our results. Core FFO for the second quarter was $0.20 per diluted share or $199.6 million, compared to $206.1 million in the prior year. This change is primarily due to lower lease termination income and other non-profitable adjustments, which Steve will get into further. On a year-to-date basis FFO totals $0.42 per diluted share but the second half of the year will be stronger as a consequence of accelerating volume of leases taking occupancy and from increased tenant retail sales during the back-to-school and Christmas season. Hence, we are very optimistic that we will achieve the full year results that we anticipated at the end of the first quarter.

With respect to our progress on dispositions excluding special consideration properties by year-to-date non-core asset sales totaled $382 million comprised of seven strip shopping centers, two malls and one mixed-use shopping. These sales resulted in the elimination of $69 million in property debt from our balance sheet. Of this total $193.3 million was completed during the second quarter and included the sale of our third, one-third ownership interest in Arrowhead Towne Center and Superstition Springs Mall to Macerich in exchange for six big box anchor locations located at our malls and $75 million in net cash proceeds to GGP. This was a fantastic deal as we were both able to gain control a strategic real estate and add value to our existing investments.

A further $282 million in asset sales is under contract. These properties have approximately $100 million of associated debt. A particular note is the Westlake office property in Seattle, which is under contract to an institutional all cash buyer for well over $110 million. Also during the quarter, we sold one special consideration property to a third party pursuant to a lender directed sale eliminating $113 million of associated debt. During this year, our total divestitures including special consideration properties have resulted in approximately $470 million in debt reduction.

On the acquisition front, we are under contract to buy Plaza Frontenac in St. Louis and potentially joint venture this property along with another GGP mall in the area Saint Louis Galleria with a large institutional partner. This transaction is consistent with our philosophy to own the best malls in the market. We already own Saint Louis Galleria so acquiring Plaza Frontenac enables us to control the best malls in this market. There are only nine malls in the country in both have (Inaudible) markets with this acquisition we will own three of them.

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