General Growth Properties' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb. 5.13 | About: General Growth (GGP)

General Growth Properties (NYSE:GGP)

Q4 2012 Earnings Call

February 5, 2013 9:00 am ET

Executives

Sandeep Mathrani – Chief Executive Officer

Michael Berman – Chief Financial Officer

Kevin Berry – Vice President, Investor Relations

Analysts

Christy McElroy – UBS

Steve Sakwa – ISI Group

Quentin Velleley – Citigroup

Michael Bilerman – Citigroup

Alexander Goldfarb – Sandler O’Neill

Mike Mueller – JP Morgan

Cedrik LaChance – Green Street Advisors

David Harris – Imperial Capital

Rich Moore – RBC Capital Markets

Operator

Good day ladies and gentlemen and welcome to the General Growth Properties Fourth Quarter 2012 Earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session with instructions to follow at that time. Should anyone require operator assistance on the call, you may press star and then zero on your touchtone telephone. As a reminder, this conference is being recorded.

I would now like to turn the call over to your host for today, Mr. Kevin Berry. Sir, you may begin.

Kevin Berry

Good morning everyone. Welcome to General Growth Properties’ Fourth Quarter 2012 Earnings conference call, hosted by Sandeep Mathrani, Chief Executive Officer, and Michael Berman, Chief Financial Officer

Certain statements made during the call may be deemed forward-looking statements and actual results may differ materially from those indicated due to a variety of risks, uncertainties, and other factors. Please refer to our report filed with the SEC for a more detailed discussion. Statements made during this call may include time-sensitive information accurate only as of today, February 5, 2013.

We will discuss certain non-GAAP financial measures and have provided a reconciliation of each measure to its comparable GAAP measure. Reconciliations are included in our earnings release and supplemental information package, both filed with the SEC and available on our website.

It’s my pleasure to turn the call over to Sandeep and Michael.

Sandeep Mathrani

Thank you Kevin, and good morning everyone. I’ll begin with an overview of our financial and operating results, recent activities, and then turn the call over to Michael to review in more detail our financial results and earnings guidance for 2013.

Yesterday we reported FFO per share of $0.31 for the fourth quarter and $0.99 for the year. Total FFO increased about 23% quarter-over-quarter and about 14% year-over-year. These results were driven by strong increases NOI of about 6% for the quarter and slightly better than 5% for the year. We’re obviously very pleased with our results as they surpassed our previously issued earnings guidance and represent an important measure of the progress we’ve made over the last couple of years. We also announced an increase in our quarterly dividend to $0.12, representing a 9% increase.

Our operating metrics continued to post strong results. The portfolio was slightly over 96% leased as of year-end compared to 95.7 last year. However, the level of permanent occupancy increased over 200 basis points from 87.5% to 89.6% during the same period. Part of this increase was driven by converting 640,000 square feet from temp to perm – that’s about 1.25%. The portfolio’s temp occupancy was 5.3% at year-end and signed not opened at 1.2%. Tenant sales were $545 a square foot, an increase of 6.6% from the last year, equating to an occupancy cost across the portfolio of 13.2%, a level considered relatively low for a portfolio of this quality. We expect tenant sales to continue growing, albeit at a more normalized rate as we’ve passed the peak reached several years ago.

Turning to our big box activity, we had a very successful year, closing on 47 leases comprising approximately 1.6 million square feet. In terms of occupancy, about 400,000 square feet commenced last year. Almost 700,000 will commence in 2013, and the remaining 500,000 in 2014. Within the portfolio, we currently have 15 vacant boxes, three of which have executed leases included in the figures above, two are committed, and 10 are uncommitted. So said differently, we started 2011 with 57 vacant boxes; we have 10 left.

On the department store side, we closed on 14 leases comprising approximately 2 million square feet, taking occupancy through 2014 with names including Von Maur, Macy’s, Bloomingdale’s, (inaudible), and our recent announcements with Nordstrom’s opening at Richdale in Minneapolis, the Woodlands in Houston, and Mayfair in Milwaukee. Within the portfolio are 15 vacant anchors, six of which are executed and included in the figures just provided, three are committed, and six are uncommitted.

In tandem with our redevelopment efforts, the step-up in anchor quality at our malls is just one of the key drivers of boosting the overall mall quality and in turn optimizing the value of each property within the portfolio. During the last two years for GGP, the team has accomplished extraordinary results, especially in terms of leasing volume and rental rates, property sales and debt refinancing. A little over one year ago at our inaugural investor day conference, we set forth a number of goals for our company, which I’ll recap. We estimated for 2012 permanent occupancy would be 88%. We’re now over 89%. In addition, I want to highlight that 70% of our leasing goal for 2013 has been reached, and we hope the portfolio will stabilize close to 92% in 2013. We announced 1.6 billion five-year redevelopment strategy and have commenced over 900 million to date Most of the projects include existing space, making it difficult to accurately show percentage leased. Projects that add new square footage, except Ala Moana, are 75% preleased prior to construction start.

I’d like to spend a few minutes highlighting several of these projects. Ala Moana, at a total cost of about 573 million, just commenced last month the street-level reconfiguration and center stage renovation which will be completed by November 2013. We recently provided Sears with formal notice of the early lease termination and plan to raze the existing building in July of this year, which signifies the commencement of the major expansion efforts expected to take approximately 30 months to complete. We are about a year ahead of schedule.

Our costs now include a renovation of the mall for $50 million and the reconfiguration of Level 1; hence, costs went down to $522 million. $522 million plus the $50 million of renovation costs gives us a total of $572 million. Our NOI will be in the range of $56 to $58 million.

Glendale Galleria – we just turned the new space over to Bloomingdale’s. The total renovation is on schedule and on budget and set for completion by late third quarter, early fourth quarter of this year.

Fashion Show – we previously acquired the former 200,000 square foot Robinsons-May box for Macy’s and are converting it into a two-level, 100,000 square foot Macy’s men’s store with the remaining 100,000 square feet becoming new in-line retail shops. The Macy’s men’s store will open later this month. In addition, we just closed on the acquisition of the Bloomingdale’s Home store and our plans include repositioning the space for large format retailers, small shops, and a variety of food offerings. Please note that the first phase, which the Robinsons-May box will start to open in March of this year. The remaining in-line space is 90% leased.

Northridge Fashion Center – we just completed the first phase of the outdoor plaza remodel and renovation, welcoming the Yard House and Bonefish Grill to the Center. Based on the better than expected results of the first phase, we’ve embarked on a new phase in which we plan to bring up to three more restaurants to the Center.

The redevelopment at Northridge is a perfect example of a building block story that we could expect to find elsewhere within our portfolio and could add an additional 500 million to a billion to our existing redevelopment strategy. Our investment criteria for redevelopment remains the same as before, where we expect to yield stabilized returns from high single digits to the double digits, cash on cost for a stabilized year.

We refinanced almost $8 billion of debt, 7 billion at share, lowering the associated interest rate 110 basis points from 5.3% to 4.2%, extended the maturities and generated net proceeds of 1.4 billion, at the same time never losing our focus of remaining within investment-grade range of 50 to 60% loan to value. We repaid $950 million of the Rouse bonds and called another 90 million for early redemption later this month, leaving 600 million due in 2015. This company’s debt structure has been significantly improved as we’ve laddered the maturity schedule, locked in low fixed interest rates for the long term, and eliminated close to $2 billion of recourse to the REIT.

Finally, we sold a substantial amount of non-core properties. Including the spin-off of Rouse which closed in early January, we sold over 60 properties comprising over 27 million square feet. Besides the elimination of debt and net proceed received, GGP has a high quality mall portfolio now producing exceptional operating and financial results, and you could say a better quality of earnings.

Sometimes forgotten amongst all this activity is the opportunistic acquisition we have made within our portfolio. We essentially recycled the net proceeds from property sales back into our long-term portfolio acquiring anchor pads and other big boxes, buying out a joint venture partner at two malls, and increasing our strategic investment in Aliansce. Michael will walk you through the underlying assumptions for our earnings guidance, but I wanted to highlight a few key drivers.

We’ve been fairly transparent with you on where the company’s growth comes from for the next several years: leasing vacant space on a permanent long-term basis, renewing leases at rent levels ahead of expiring rents, generating income from our redevelopments, tightly managing and controlling our operating expenses and overhead, and reducing the costs when applicable of our debt. Of these growth sources, each is contributing significantly to the 2013 earnings with the exception of our redevelopments which will just start to impact our bottom line towards the end of this year.

Before I turn the call over to Michael, I’d like to recap one other goal we set out to achieve, which was to be much more transparent and open with you, whether you are following us from a sell-side perspective, a buy-side perspective, or you’re an employee shareholder. Lastly, I’ll take this opportunity to thank my colleagues for believing in our core values of high performance, having the right attitude, doing the right thing, working together, and thinking like an owner.

Michael will now cover our financial results and guidance for the year before opening it up to you for questions. Michael?

Michael Berman

Thanks Sandeep. I want to take a few moments to outline my agenda for today’s call. I will make a few comments on our fourth quarter and full-year results, followed by a review of our 2013 earnings guidance. I will provide some guidance for the first quarter of 2013 and then we will open it up for questions. At times I may sound very precise with respect to my numbers; however, please appreciate my numbers are intended to be a point on a range.

Our fourth quarter and full-year 2012 results excluding a one-time make whole payment of approximately 15 million related to the early payoff of $600 million, being Rouse bonds that we did in the fourth. For the quarter, same store mall revenues came in at 771 million, up 2.4% to last year. Permanent occupancy ended at 89.6, up 2.4% from December of 2011. Same store mall NOI came in at 563 million, up 5% to last year. We came in slightly above our guidance primarily due to better than expected expenses. Moving to company NOI, we were up 6.2% to 596 million.

Net G&A for the quarter was a minus 39 million compared to a minus 53 million in 2011. We benefited from a one-time legal settlement of $5 million as well as savings from payroll and professional services. EBITDA was 557 million for the quarter or almost a gain of 10% for last year. Financing costs in the quarter were approximately 246 million, down 259 million from last year. While our debt balance has remained about the same, we have significantly reduced our weighted average interest rate throughout the year. In essence, we have used our up-financings to pay off unsecured Rouse bonds.

Overall company FFO came in at 312 million, approximately 19 million better than our guidance and about 59 million better than last year, or an increase of 23%. For the full year of 2012, as we’ve reported, company FFO came in at 994 million, approximately 120 million better than last year, an increase of almost 14%. For a little perspective on 2012, we started the year thinking 920 million for FFO and ended up $75 million higher. Our employees did a phenomenal job throughout the year.

We were also able to refinance 7 billion at share during the year, including 1.4 billion of proceeds of which 1 billion went to pay off Rouse bonds and the remainder funded our development. We disposed of non-core assets, generating over 220 million in net proceeds and generally reinvested those proceeds in Aliansce and the acquisition of two joint venture interests.

Moving on to 2013 guidance, please note that this assumes no acquisition or disposition activity during the year. Same store permanent revenues are expected to be approximately 2.6 billion or an increase of 4.8%. We expect permanent occupancy to end the year around 92%, as Sandeep mentioned, with a goal of total occupancy increasing to approximately 96%. We expect to see temp to perm conversions again this year, which does benefit the permanent occupancy growth.

Total same store revenues from the malls are expected to be approximately 2.96 billion, up approximately 103 million or 3.6%. Remember, this category includes some expected decreases in lease terminations and the temp revenues, as I mentioned, as well as some other one-time revenues in 2012 that are not expected in 2013. We expect same store expenses to increase 2.5% or over 20 million to approximately 835 million for a same store NOI of 2.13 billion, up over 80 million or 4% over 2012. Keep in mind that 2012 was a very strong year on the expense side. Flat expense growth again in 2013 would add a point to our NOI growth.

We expect 25 million of growth in other NOI. Company NOI is expected to be 2.24 billion or up approximately 5% to last year. We expect net G&A of approximately 171 million, up from 156 million in 2012. 2012 benefited from some one-time positives including 7 million in fees that are not expected to repeat and a legal settlement previously mentioned. We expect our EBITDA to be approximately 2.07 billion, an increase of 4.5% or almost 90 million over 2012.

Financing costs are expected to be 975 million compared to 1 billion in 2012. We have approximately 400 million of 2013 maturing debt at share including a little over 90 million of Rouse bonds we will redeem in a few weeks. Of the 300 million or so of 2013 mortgage maturities, we have locked or closed on approximately 200 million. Furthermore in our guidance, we expect to finance 1 billion at share and anticipate generating around 600 million in additional proceeds. Relative to the 1 billion to finance, we closed or locked on almost 700 million of those transactions.

Given our guidance, anticipated cash balances and financing transactions, we expect our leverage level as defined by net debt to EBITDA, in 2013 to be similar to 2012. With respect to the financing of our recent warrant transaction, we are comfortable we have sufficient resources to execute our business plan this year. We are also looking at the preferred market as a source of long-term financing.

Company FFO is expected to be approximately 1.1 billion, a little over 105 million better than 2012 or around 12% growth. We assume an average share count for the year 2013 of approximately 995 million, assuming the year-end stock price of $19.85. Our base share count in common units and stock options total around 950 million shares and the remaining warrants add approximately 45 million shares on a net settle basis. Our recent warrant purchase had reduced our share count by approximately 27 million shares. We expect FFO per share for 2013 to be in the range of $1.08 to $1.12.

A quick note on first quarter 2013 guidance – we expect our EBITDA to be approximately 491 million, up around 5%. Company FFO is expected to be between 245 and 255 million or up almost 14% on a per-share basis. We expect FFO per share of $0.24 to $0.26.

And with that, let’s open it up for questions.

Question and Answer Session

Operator

[Operator instructions]

Our first question comes from the line of Christy McElroy from UBS. Your line is open. Please go ahead.

Christy McElroy – UBS

Hi, good morning guys. Sandeep, just wanted to follow up on your comments on the redevelopment pipeline. Sorry if I missed this, but can you provide some additional color on the Woodlands project? Given the costs involved, it seems like there could be a little bit more involved than just the Nordstrom’s addition?

Sandeep Mathrani

Obviously in the Woodlands was a Sears that we bought back. We replaced Sears with a Nordstrom’s, and we’re adding a little bit of in-line GLA – not much just because of the position of where the Nordstrom’s would go. But it’s essentially a Nordstrom’s project with a little bit of additional GLA.

Christy McElroy – UBS

Okay, got you. And then if I look at the 10% spread on the 2013 leases you’ve executed so far, when you think about the remaining leases you have yet to sign that would commence this year, would you expect that 10% number to trend higher or lower, or remain about that level?

Sandeep Mathrani

I would say it will remain at that level.

Christy McElroy – UBS

Okay. And then just lastly with regard to your comments on more transparency and openness, which has been really much appreciated, what are your thoughts on disclosing sales per square foot by mall?

Sandeep Mathrani

Yeah, we run a business which includes 125 malls, and I think that we’ll stick to—you know, keep running a business which is you have all aspects of malls, so we’re not going to break it up by mall.

Christy McElroy – UBS

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Steve Sakwa from ISI Group. Your line is open. Please go ahead.

Steve Sakwa – ISI Group

Thanks. Good morning Sandeep and Michael. I might have missed this, but on the redevelopment, can you just kind of walk us through over the next couple years the funding strategy; and to the extent that you do acquisitions, how you would think about funding that?

Michael Berman

Generally our funding is going to come from refinancing of debt that comes due in a particular year, and we think it’s more than sufficient to fund the bulk of the development. Most of the dollars that we have to spend are—we spend about 25% in 2012. The big years are really 2013 and 2014, then it tapers off. And then with respect to the Ola Moana transaction per se, we look to go get a separate construction loan for that particular financing, for that particular development.

Steve Sakwa – ISI Group

Okay. Sandeep, you talked about kind of the asset pruning. Given that you’re now down to 125, how do you look at the portfolio and what should we expect for asset sales going further?

Sandeep Mathrani

Steve, good morning. I think we’ve sort of reached approximately where we want to be, maybe there are a couple of assets that we might sell. We’re at our sweet spot of about 120 to 125 malls.

Steve Sakwa – ISI Group

Okay. Can you touch on Brazil? I know you increased your stake in Aliansce through the Pershing Square acquisition. We’re obviously seeing much more development taking place down in Brazil. I’m just curious your thoughts on the supply-demand situation down there and how you look at that business over the next maybe two to four years.

Sandeep Mathrani

You know, Aliansce’s growth has been through the development side. They obviously have a first mover advantage. Actually if you compare Aliansce to the other public companies, Aliansce has been the leader on the development side. We do believe that there will be more development, but I think there is more on the drawing board than actually what will happen in reality. You have a growing middle class in that country. I’ve been a big fan of Brazil. It’s strong in energy, strong in agriculture, and the middle class there actually grows. You have to appreciate that the malls in Brazil are 300 to 400,000 square feet, so actually when you look at the total square footage coming online, it’s a marginal increase so we don’t view that at this moment in time to be much of a threat. In addition, like in this country, it takes three to five years for a project to come online, so I think the assets that Aliansce has are in markets that have barriers to entry. They are much more urban, they are closer to the population. They’re first in, and I think that will keep them a step ahead. Also, the assets are located in Rio and Sao Paolo, which of course are urban; and you could easily say they are way under-retailed.

Steve Sakwa – ISI Group

Okay. And then last question, could you comment on that 70% lease that you’ve done for the year? How does that compare to your expectations? How does that compare to where you were last year? Would you say you’re ahead, behind, in-line with what you thought? And the balance to be leased, is there any commonality behind that or is it just kind of late timing of deals opening in, say, September?

Sandeep Mathrani

Yeah, so I think at the beginning of last year, we were about 60% of sold lease; this year we’re at about 70%, so we’re slightly ahead. Of the remaining 30%, half of it will be renewals of existing leases, which I’m not counting in the 70% so we think we’ll be closer to 85%. There’s only 15% of new leasing activity, and of course the year has just started and that will come online fourth quarter 2013. So we feel we are maybe—I don’t want to say ahead of where—we are ahead of where we were last year. We feel good about achieving the 92% occupancy where we sit today.

Steve Sakwa – ISI Group

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Quentin Velleley of Citigroup. Your line is open. Please go ahead.

Quentin Velleley – Citigroup

Hi, good morning. Just going back to the leasing spreads at around about 10%, and you’re sort of expecting that to remain the same for the year. With occupancy at 95%, more permanent occupancy rather than temporary, and 13% occupancy cost ratios, I would have thought you’d be able to start pushing rents higher. Could you just maybe elaborate a little bit more in what’s going on in terms of leasing spreads, and I guess why they’re being held back?

Sandeep Mathrani

Interesting comment. So sales, when you’re actually doing leasing spreads and you’re basing it upon the tenant renewals, you have to appreciate a couple of things. One is these are end-of-year lease to beginning of year lease. It’s not average, so you’re looking at a 10% spread, you’re looking at the end of their term to the beginning of the new term. Leases have built-in increases and escalations on an annual basis, so that’s 2% a year approximately. The leasing activity is done depending on the mall productivity at about 15% on average, so when you look at the 13.2% occupancy, you’re looking at blended rents on square footage, not new rents on square footage.

I’d like to make one more point in our case, which may be slightly different than our peers. We show gross to gross rents. Once again, if you net out the CAM and taxes, which is about $16 in our portfolio, our increase—our spreads are really 14%, so it’s almost $5.50, $6 a square foot. So on a baseline of 40, it will be about 14%.

Quentin Velleley – Citigroup

Right. And so those 2% fixed bumps, have you been able to increase them? I seem to remember you used to be doing more like 1.5%.

Sandeep Mathrani

Well, I think we try to get between 2 and 3% increase, and I think we’ve been steadily at 2 and 3% increase.

Quentin Velleley – Citigroup

Okay. Just in terms of in your prepared remarks, you spoke about the six uncommitted boxes that you’ve got. Could you just talk a little bit more about the prospects for leasing those?

Sandeep Mathrani

You know, what I actually had said, there was six uncommitted department store boxes and they range in size from 50 to 75,000 square feet. Albeit they come under the department store category, they were originally 200,000 square feet department stores which we had taken back partially and converted them into big box, (inaudible). I think these prospects are very, very good.

Now, you have to appreciate if you—as I said, on the big box, we started off with 57 empty. We’ve got 47 done, we’ve got 10 left. In the case of the department store side, we had a total of, I would say, 20 department stores. We’ve got 14 left, so we’ve come a long way in leasing our vacant department stores. Some of them are going to obviously be in the lower productivity malls. The vacancies in the higher productivity malls have been basically occupied.

So I would say that of the six, at least half should be—at least three of them should be leased in the next 18 to 24 months, and we may have three that are perennially vacant.

Michael Bilerman – Citigroup

Sandeep, it’s Michael Bilerman. Good morning. I just had a question regarding Brookfield’s ownership in Latin America and Brazil and their retail holdings. Just given the sensitivities, both related to BAM’s ownership of GGP and its involvement, but also transactions where BAM has acted with companies where it has ownership, how do you navigate that conflict if you were to enter into a transaction with them for those assets, or even in the ongoing management of both being in the same jurisdiction in terms of operating, and how are the shareholders or effectively the minority shareholders being protected in that case?

Sandeep Mathrani

So let me say one—Brookfield’s assets in Brazil are very high quality. Three of their assets are fortress assets and then may be three of the top seven malls in Brazil. It is unique that our largest shareholder controls these high quality malls, and if we were able to acquire them it would definitely catapult Aliansce GGP to be the second-largest, if not the largest player in Brazil. We are very sensitive to the issue of conflict and obviously we will think about it long and hard before putting the minority shareholders in a position where they are not being satisfied if we resolve any conflicts that may arise in pricing those assets.

Michael Bilerman – Citigroup

But that would be done, I guess, through your views through Aliansce rather than on GGP balance sheet.

Sandeep Mathrani

It could be a little bit of both, Michael. I would say if it’s a fairly large transaction, it could be that Aliansce would take a portion of it and GGP might take a portion of it, because of the size. Aliansce will continue to manage the entire portfolio. Aliansce has a phenomenal operating platform, which I think will actually bring a lot of efficiencies in the plan which today may not be realized by Brookfield. But it will be managed by Aliansce and we are obviously walking through the process of figuring out conflict, figuring out what ownership Aliansce takes and what ownership GGP might take.

Michael Bilerman – Citigroup

Great. And then just final question, it sounds like going down the route of sales productivity by asset is not where you want to go, but is there some thought to maybe just going down the grouping of saying, look, our top 10 assets or our top 20 produce this level of sales productivity and contribute this level of pro rata and why, and effectively do five buckets or six buckets to give more transparency on the high productivity level of your portfolio and the quality of the asset base.

Sandeep Mathrani

Michael, our view is that we run a business and we’re going to report as an entire business. Although on numerous calls we have gone ahead and given you some sort of flavor, we have said consistently we own 70 A-malls that account for 70% of our EBITDA, and so at various times in our calls we have broken them up and charged them just to give you a flavor. We do that internally, of course, just to make sure that we are actually aligned with our peers at minimum, and so we don’t plan to disclose the groupings of it.

Michael Bilerman – Citigroup

Thank you.

Operator

Thank you. Our next question comes from the line of Alexander Goldfarb of Sandler O’Neill. Your line is open. Please go ahead.

Alexander Goldfarb – Sandler O’Neill

Great, thank you. Good morning out there. Just going to the warrants for a second, given the dividend protection feature in those and how the strike price comes down and the number of shares that you have to issue increases over time, can you just talk about your thoughts about why you didn’t act on buying out the PershingSquare warrants from Brookfield, and maybe that’s just something from a capital position, in which case maybe in the next year or two we would expect you guys to revisit that. If you could just discuss that.

Michael Berman

Sure. We were offered the opportunity to purchase the warrants that Brookfield purchase – I think the price was $14.75 for all the shares that the warrants converted into. When we looked at that return, and within a very short period of time we had the opportunity to purchase the ones we ended up purchasing at a much lower price, the returns on the Fairholme transaction to us were 300 to 400 basis points better than the returns available under the potential Brookfield purchase.

So again, we bought back arguably all 27 million shares – I don’t remember the exact (inaudible) count, but it was 45, 50 million. And we looked at that as a great use of capital and we’re very happy with what we did.

Alexander Goldfarb – Sandler O’Neill

I realize that obviously you got a better deal from Blackstone at Fairholme, but still the same math. I mean, over time the number of shares that are going to be issuable escalates, so even though the Brookfield Pershing offer is a little bit more expensive, it would seem like it may be better just to get those over with sooner than having the increased dilution later on. Wouldn’t that be the case, Mike?

Michael Berman

Clearly there’s dilution in there, Alex; however, if you run an IRR analysis, which we think was really the best way to compare alternatives, the Brookfield purchase was, in our view, equivalent to buying the stock back around the price that the stock was trading at when we were offered the deal. The way we looked at the Fairholme purchase, it was arguably a discount to where the stock was trading.

So I’m not going to say we’re never going to buy the warrants, Alex. I’m not going to say there’s a plan to buy them; but at the price we were offered, given where we are in our capital cycle, the warrant transaction that we did we thought was just a great deal.

Alexander Goldfarb – Sandler O’Neill

Okay. And then the second question, Mike, is if you just give comments on CMBS today, the 10-year is obviously backed up a bit. The CMBS market still seems pretty healthy, although there is a discussion of this B-piece retention. So for those of us who are more on the equity side and not deep in the weeds on CMBS, in a nutshell, if you could sort of give the lay of the land as far as your expectation for pricing for CMBS and if any of this talk that we read about has had any practical impact or if it’s more just discussion pieces in various news outlets.

Michael Berman

So big picture from what I read and spoke with folks about the CMBS market in 2012 was order of magnitude 50 billion. I’ve read projections that it’s going to go somewhere between 70 and 90 billion in 2013, that dealers seem to have stabilized, the bids are generally aggressive. We’ll generally put something out into the marketplace and invariably one to two to three players tries to jump the process and put in strong bids. We are trying to finance, as Sandeep mentioned, in the investment grade rating area in the CMBS marketplace – you know, 50, 60, 65% loan to value, depending on the property. Again, those are trailing 12 NOIs, they’re backward looking on the cap rate, they give you no credit for the future. So the underwriting continues to be fairly conservative.

What has gotten aggressive, particularly over the last, I’d say, three to six months are the spreads, and I tend to talk about it over treasuries. The swaps, I think, are in the order of magnitude 9, 10, 11 basis points; but you’re looking at A-malls today that we’re going to get quotes on and close on in the 125 to 150 over treasury, so you’re talking 3.25, 3.5% coupons for 10 years with some IO period. Right now, I’d say at least for the malls that we call B-malls that we offer into a marketplace, maybe you’re adding another 25 to 50 basis points; and again, these are generally 10-year deals. We might look to do 7’s, 8’s and 12’s as we continue to smooth out our maturity ladder. The market seems to be very strong – a lot of buyers, a lot of interest. Like I said, there’s probably 10 to 15 dealers, maybe more, that we deal with on a daily basis.

So I hope I’m answering your question. That’s a lot of information, but generally we feel pretty good. I can’t really comment on what’s going on with the BP stuff. Just given where we do our financings, it’s not really something that we are following extremely closely.

Alexander Goldfarb – Sandler O’Neill

Okay, no – you definitely answered it. Thanks, Mike.

Operator

Thank you. Our next question is from the line of Mike Mueller from JP Morgan. Your line is open. Please go ahead.

Mike Mueller – JP Morgan

Thanks. I guess with respect to the Ola Moana redevelopment expansion, can you talk a little bit about how that NOI should be coming online? I know it’s going to be completed in ’15. Do you expect the NOI to just kind of come in in a lump type amount at that point going forward, or should it filter in beforehand?

Sandeep Mathrani

No, I would view that you’d see about 85% or so of that income roll in in 2016. It will be a grand opening, so we’ll attempt to get the stores opened hopefully simultaneously before Christmas 2015.

Mike Mueller – JP Morgan

Okay. And I know you touched on the remaining mall sales, and you said you’re pretty much there with the mall portfolio. Anything in the non-malls that are left at this point, and how substantial is that?

Sandeep Mathrani

It counts for about a percent of our total EBITDA, and we’ve got a handful of strip shopping centers and really as much as we think shows seven office buildings, it’s really Columbia is the main office complex, which over a period of time we will look to sell. So we hope that by the end of this year, the market stays with us, it will become substantially less. But it’s really insignificant at this stage.

Mike Mueller – JP Morgan

Got it, okay. And then last question – Michael, you talked about a billion dollars of financing for 2013. Why is a billion dollars the right amount this year? Is it just the highest coupon stuff or something else? And then when you look forward to ’14, do you think you’re still going to be refinancing above what’s coming due?

Michael Berman

What we put in our guidance was basically a couple of categories – one, what we needed to do for 2013, which as I indicated is almost done. There’s a slug of January 2014 debt that we’re treating as part of our business plan for 2013 because it comes up so quickly, and then maybe a couple of hundred million dollars right now of opportunistic financings.

We may end up doing more depending on the markets, depending on the assets. We do have the pot of 5 billion of stuff that is pre-payable. There aren’t really any Ola Moana or Fashion Show assets in that mix right now, so we may be opportunistic, we may not. We just wanted to get everybody ground in what we felt we really had to do for 2013.

Mike Mueller – JP Morgan

Got it, okay. Thank you.

Operator

Thank you. Our next question comes from the line of Cedrik LaChance from Green Street Advisors. Your line is open. Please go ahead.

Cedrik LaChance – Green Street Advisors

Thanks, good morning. Just wanted to go back to Alex’s questions in regards to that financing. You talked about spreads for the CMBS side, I believe, Michael. Can you give us a sense of borrowing spreads from lifecos on A-malls?

Michael Berman

It’s probably a little bit higher. Generally speaking, what’s happening is the CMBS market is just very aggressive with respect to being able to move quickly, being able to move—you know, you could lock and close a transaction sometimes within two to four weeks. The life company market is just not as quick, although a very important part of our long-term strategy is maintaining good relationships with life companies. Sometimes it depends on the assets that you’re financing. Sometimes you wake up in the morning and go, boy, I hope the bond market doesn’t move 30 basis points today because I’d like to close that deal.

But life companies continue to be active and will be a part of our repertoire for the long term.

Cedrik LaChance – Green Street Advisors

So if you were to think about your 2013 refinancing, what percentage do you think is going to be CMBS versus lifeco?

Michael Berman

Well, it just so happens that of the stuff that we’ve talked about, almost all of it is—again, the stuff that we have in the guidance, almost all of it, I think, is going towards the CMBS market. We are wanting to make sure we nail down the financings that we lock in, that we move to the point where we can tell everybody that we’ve taken care of 2013 and most of 2014 as quickly as possible. So I think there will be a default towards more CMBS than perhaps we have shown, where the ideal mix might potentially be 50/50.

Cedrik LaChance – Green Street Advisors

Okay. And then just turning to joint ventures, I think—it’s believed that JC Penney is marketing its 50% interest in Coil Springs. What’s your appetite specifically for some of the JC Penney joint ventures, so buying back the real estate that they own in the three malls that you have in joint ventures with them? And just in general, what’s your interest in buying back joint ventures in your own malls?

Sandeep Mathrani

So one, as you mentioned, Cedrik, we have three joint ventures with JC Penney. We would be a buyer for two of those. We do have a right of first refusal on both of them, and Coil Springs—as you may know, we replaced Sears with a Von Maur, so we would be the logical buyer, and I think JC Penney just wants to make sure that the pricing is correct.

Your second question – look, they don’t make A-malls, so the obvious way to actually increase your concentration in the A-mall sector is to look to buy your joint venture partners. And so should they become available, we are obviously very interested in buying more of our A-malls back.

Cedrik LaChance – Green Street Advisors

Okay. So if I think back to the investor day about a year ago, you guys had talked about potentially looking at selling into joint ventures some of your A-malls. Looking at it today, you’d probably say that you would be a net buyer over time of JV interests, or you would be a net seller to joint venture partners of A-malls?

Sandeep Mathrani

I would say that we would be a net buyer.

Cedrik LaChance – Green Street Advisors

Okay, thank you.

Operator

Thank you. Our next question comes from the line of David Harris of Imperial Capital. Your line is open. Please go ahead.

David Harris – Imperial Capital

Hi, good morning. Mike, could you just comment a little bit more on your mention of a desire to issue preferred stock – I mean, volume and potential pricing that you might expect?

Michael Berman

Well, potential pricing, David, that’s not for me to say. That’s for the market to tell me. We are looking at potentially adding that to our repertoire and look at that as a very reasonable source of financing. It kind of splits the baby between the debt and the equity. If you look at our cost to capital, I think it would lower our overall cost of capital, and I think that that’s a marketplace that would be receptive to a company of our quality and size.

David Harris – Imperial Capital

Well, you’re kind of deferring on the question of coupon, but the more recent issuance has been done sub-5.5. If you were 6.5, it’d presumably take you out of the game, wouldn’t it?

Michael Berman

Again, without trying to comment on pricing, we are not an investment-grade rated company. We are an unrated company. Whether I like it or not, there is a discount in that marketplace for that, just because a lot of that is in the retail marketplace; however, we do think the size and scope and the quality of our assets would allow us to offset some, if not all, of that potential negative. So it’s hard to say what the coupons are. You know, below 6% would be great; around 6% would be pretty good, and we’ll see what happens.

David Harris – Imperial Capital

And would you be looking at sort of conventional terms in that market? You’re not kind of looking to redefine the terms, in particular at the 5-year non-call?

Michael Berman

If we were to do something as an initial foray into a marketplace, we would generally look to be within standard market terms, at least in the beginning, until we were able to show better than market performance. Five-year non-call straight preferreds are a standard that we think would be sufficient for us.

David Harris – Imperial Capital

Okay. Sandeep, on Brazil, the economic news has been kind of rather gloomy. The rate of economic growth seems to be slowing down, and people have sort of got fairly cautious about the outlook as we go forward. You’re not seeing that translate into any slowdown in activity in your shopping centers there? I know there’s the big transition in terms of the growth of the consumer and the growth of the middle class, which kind of acts somewhat independently. But if the economy is not growing, you don’t have the wind behind your back, do you?

Sandeep Mathrani

Well again, I think you answered the question. One, it will actually slow down future development. Sales productivity is going to continue to increase because the middle class, which is your primary customer, those salaries are not going down, employment is not coming down. The government is ensuring that jobs remain. It is agriculture and energy-based, so you will see an impact on the consumer in the near term. As a matter of fact, I would actually sit back and say in talking to a lot of the economists in Brazil, they actually view the economy to start to get better in 2013 compared to 2012. They look at 2012 to be the low point, and that’s predominantly because they think the Chinese market is actually getting better and they are back being active in Brazil.

So we think it’s actually—as a matter of fact, we think the trough has been hit in 2012 and you’re going to start seeing it to be better in 2013.

David Harris – Imperial Capital

Well, if we hit a low point in ’12, did you see any slowdown in activity in your malls in that period?

Sandeep Mathrani

As a matter of fact, we reported double digit increase in sales, double digit increase in rent spreads, so they continue to do—to go up. Again, the reason for that is it’s a supply-demand issue. Brazil is under-retailed. Many of these markets have seen malls for the first time, and so you are going to organized retail from unorganized retail and you’re seeing a massive pick-up. So it’s been effectively an emerging industry within an emerging country.

David Harris – Imperial Capital

Good. Okay, thank you very much.

Operator

Thank you. Our next question comes from the line of Rich Moore from RBC Capital Markets. Your line is open. Please go ahead.

Rich Moore – RBC Capital Markets

Hi, good morning guys. You mentioned a couple times on the call investment grade, and I’m curious – given the balance sheet structure and all the secured financings that you’ve done recently, I don’t assume you’re looking at any kind of credit rating at this point. Is that right?

Michael Berman

Yeah. When we comment on investment grade, I just want to be clear for everybody, we are not talking about getting an unsecured rating per se. This is where we think we are borrowing in the mortgage markets at an investment grade level.

Rich Moore – RBC Capital Markets

Okay, so there is no work being done toward a credit rating – is that right, Mike?

Michael Berman

No work being done towards a credit rating. We are shadow rated by S&P. We do talk with them from time to time. We have talked to other rating agencies from time to time. Given our business model on the secured financing side, we’re not really pursuing any unsecured investment grade strategy today.

Rich Moore – RBC Capital Markets

Okay, good. Thanks. And then now that we’re past the holidays and we’re past all the fiscal cliff stuff that was going on, what are you guys seeing from January in terms of sales activity? I mean, how would you characterize, I guess the early part of the year here for sales at the tenant level?

Sandeep Mathrani

Rich, it’s too early to tell. We’ve just started into January. January is usually a slow month. It’s too early to tell where we stand. The only thing we can tell you is from an occupancy perspective or a leasing perspective, momentum is good.

Rich Moore – RBC Capital Markets

Okay, great. Thanks guys.

Operator

Thank you. And again ladies and gentlemen, if you’d like to ask a question, please press star and then one.

And I am showing no additional questions. I’d like to turn the call back over to management for any closing remarks.

Sandeep Mathrani

So we thank all of you for allowing us to pre-pone, if you will, the earnings call, and I’m sure we’ll see a lot of you at the Citi conference in March. Have a great day.

Operator

Ladies and gentlemen, thank you for your attendance at today’s conference. This does conclude the program and you may all disconnect. Have a great rest of the day.

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