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Executives

Sandeep Mathrani - CEO

Michael Berman - EVP and CFO

Analysts

Michael Bilerman - Citi

General Growth Properties Inc. (GGP) Citi Global Property Conference March 5, 2013 1:35 PM ET

Michael Bilerman - Citi

Welcome to the 1:35 p.m. session of Citi’s 2013 Global Property CEO Conference. This session is for investing clients only. We are extremely pleased to have with us General Growth Properties, Sandeep Mathrani and Michael Berman. Sandeep, I’ll turn over to you for some opening remarks and then we’ll kick it off for Q&A.

Sandeep Mathrani

Thanks Michael, thanks for inviting General Growth to the annual conference. As you said, you have it a booking us some 7:30 till the conference ends and we do enjoy, we learn a lot. GGP, we have been at GGP for now little over two years and we come a long way in these two years. Our focus has been in the owner of great retail properties predominately in the United States.

We are I would like to sit back and say a fairly boring company now. We own 78 malls, 30 B plus malls and 25 B malls for a grand total of 125 malls. Our growth is all internal, predominately from increasing occupancy, increasing rents, and in redevelopment expansion pipeline. As we’ve said earlier, this year we anticipate a 4% NOI growth this year which equates to little over 5% EBITDA growth and a double digit FFO growth.

We anticipate that growth level for the next few years with the internal growth that we have highlighted. We are very focused on the three-leg approach for our growth and on the hedge side we’ve continued to latter our maturities and Michael will expand on that a little effectively. We have finished by the first quarter our targets for 2013. On the leasing side almost 80% of our target for 2013 has been accomplished already, so we feel pretty bullish that we will get to our targets for this year.

And now I can turn it to for any questions you’d like ask to us.

Question-and-Answer Session

Michael Bilerman - Citi

Great, Sandeep, I don’t know if you’ve seen any of the summaries but we’ve been opening up each of these sessions with the same question which is, what do you think is the most value creating opportunity that you currently have within the company that you don’t think the market is attributing much a value for?

Sandeep Mathrani

You know, Michael, I thought about that question that very hard since I’ve seen every CEO trying to answer that question and my answer is going to be exactly what I said earlier. My job is to focus on the internal growth which is to continue to focus on increasing the occupancy, increasing rents and focusing on my redevelopment. All I can do is focus on growing NOI, growing EBITDA and growing FFO and the market will do what the market will do.

Michael Bilerman - Citi

But do you think the market is not giving you the appropriate value for those increases right now?

Sandeep Mathrani

It's not for me to value that. I am not going to sit here and hunt on what the market is valuing or not valuing.

Michael Bilerman - Citi

My other question is whether there is something within the entity that has upside that just hasn’t been crystallized or that you don’t get asked about that you are like, god, there is a large redevelopment or if we look at our redevelopment platform or our ability to source capital or our ability to on a balance sheet which we can lower our debt and refinance all these proceeds, I think sponsorship income is going to grow and has a big opportunity as we synergize. I can go on but I don’t want…

Sandeep Mathrani

I know Michael you can and my view is that quarter-over-quarter as we perform, okay the market will continue to reward us and that’s pretty simple. I think it’s very hard for us to sit here and say, you know something, you haven’t seen that billion dollar development pipeline, you are not valuing that correctly and I read every one of the people’s report and it’s very hard for me sort of sit back and say that someone is not listening to something that we have said because I firmly believe that all of you listen to everything we say. That’s okay. So I find it incredibly hard that people make comments that you are not listening and so I really believe, it’s really a question, the business is quite simple, we tell you something and we have to perform and if we continue to perform, okay the market will reward us and that’s our job.

Michael Bilerman - Citi

But I would say if you go back what the market wasn’t giving you the appropriate value for previously was the quality of the asset base and to do that you ended up spinning off out of bankruptcy was how it was used and then you spun off a Rouse. So I don’t know if there is any other sort of elements within the company that or just there is a better value for elsewhere or that now that we're in this portfolio that there is more upside.

Sandeep Mathrani

I think once again, I think the market values the fact that you continue to perform. If your FFO continues to go up the market will reward you, it will be evident. I think time will tell. And that’s why me telling you that there is more development. If there is more development, I'll develop and when I develop I’ll produce the income and when I produce the income you will reward me. For me to sort of sit here and tell you that there is some future development of $1 billion that will come online in 2018, that you should reward me today; it’s kind of foolish. I am not going to make that comment.

Michael Bilerman - Citi

May be just in terms of the U.S. consumer and your view on retail sales at the moment, given tax increases, uncertainty in DC, with the share market where it is. So how should we be thinking about the strength or otherwise of the U.S. consumer?

Sandeep Mathrani

So, the mall shopper, again our demographic of the profile upon malls is 70% of our NOI comes from the A-mall sector, 30 B+ malls so if you take the 100 malls over 90% of our NOI comes from these top 100 malls.

The demographic that we serve is generally; it's got a higher income profile. 20% of the higher income profile of this country spends 40% of the consumers spending and is less impacted by either the sequestering or by the higher taxes. So, generally there should be less impact, the retail sales should be less impacted because even though the wealthier need to pay more taxes, the amount of consumer spending they will do will be less.

However, the people on the value chain store should be more impacted. So I actually think the retail sales as a result of the taxes will be less impacted. For about a year, I have been saying retail sales will start to moderate and I have always said that the retail sales would moderate not because of taxes, not because we have this fear of the economy slowing down, but because retail sales today have passed the peak.

As a matter of fact in the A-mall sector, in our A-malls, they are way past the peak actually 10% to 20% and above peak. Retail sales cannot climb at that level when the economy is growing at 2%. They do have to start moderating at some level, they do plateau. So retail sales will plateau purely because they have reached a stage that's beyond; they sort of reached a saturation level. So they will grow to 3% to 5%, not from any other factor but for the fact that they have sort of plateaued.

Michael Bilerman - Citi

How far are our new gross rents off the peak?

Sandeep Mathrani

Sorry, say that again?

Michael Bilerman - Citi

In terms of gross rents, so you got five growths that are now above the peak, but where are gross rent versus they were in the peak inside 2007 or '08?

Sandeep Mathrani

Gross rents today are above peak levels; that we are reinventing it today because today you are ending back to for example at least say 15% occupancy cost of. So if sales today are above peak and you are ending at $90 a square foot and they're $100 above where they were, sales a $100 above where they were in 2007 and they were let’s say 14% there, so you're actually renting above peak levels. So you've actually passed peak.

Michael Bilerman - Citi

Did people have some questions? No? Maybe if you just talk a little bit about, I guess the temporary occupancy that's still in the portfolio; you're sort of at around 90% on permanent occupancy. How should we think about that upside and some of the temporary occupancy that you've got?

Sandeep Mathrani

We ended last year at 89.6% permanent occupancy okay, and the total occupancy for the year was I believe 95% or 96%. So, this year we intend to get up to 92% permanent occupancy and temp occupancy will be 3% and S&L will be 1%. So we'll have the same 96% at the end of the day, but we'll have 3% temp and 92% perm.

As I mentioned to get to the 92% permanent occupancy, 80% of the leasing has been accomplished. So we feel, we'll have converted if you will, 2% of the temp to perm this year. Now it may very well be like it happened last year that the total occupancy may be a point higher and that maybe because temp may remain at 4% and perm may still be 92% if you know what I'm saying.

Michael Bilerman - Citi

Just in terms of operating expenses, you'd managed to make quite a few savings over the last two years. Are you starting to see more pressure on operating expenses now?

Michael Berman

We took into account in our guidance, 2% overall expense increase. In 2012 we were flat. You have to expect at the beginning of the year that you're going to have increases in utilities as opposed to them being flat, increases in real estate taxes. Where we are on a controllable expense side, basically you’re assuming it's flat. So what we can control we are and what we can't we're trying to be realistic in terms of what might happen.

Michael Bilerman - Citi

And then also you'd made a lot of savings over the last 3-4 years in terms of the actual management platform of general growth. Are there still further savings to come, given you've continued to sell down assets or are we sort of at about a point where G&A and management expenses are, you've achieved most of those savings.

Sandeep Mathrani

I would say from an asset basis we're at 125 malls today. Whether we sell a couple, we might, but I don’t think there is a necessity to sell any assets. We feel pretty comfortable with the asset pool that we have. I think from a G&A perspective we have reached to where we feel very comfortable. We never want to say that we are fully efficient, but I think we have reached a level that we feel quite comfortable today. And we shouldn’t expect any further G&A sales, is my point.

Michael Bilerman - Citi

Might be if we just switch to Brazil. You are now on 40% of Aliansce. Brookfield have two significant portfolios of good quality assets in Brazil. On the last call you mentioned that that maybe an opportunity for Aliansce or even potentially if you own balance sheet. So how should we be thinking about that opportunity?

Sandeep Mathrani

Brazil is 2% to 2.5% of our NOI. If we do any further investment in Brazil it will be through Aliansce, simplistically.

Michael Bilerman - Citi

But it didn’t sound so simple on the conference call.

Sandeep Mathrani

It is simple now.

Michael Bilerman - Citi

Pardon me?

Sandeep Mathrani

It is simple now. I told you I am going to make my life very simple.

Michael Bilerman - Citi

Would you put, so you would put in.

Sandeep Mathrani

And boring.

Michael Bilerman - Citi

Why do you want to be boring. So you put additional, if they go out and they do a transaction, you would just fund as the shareholder?

Sandeep Mathrani

Correct.

Michael Bilerman - Citi

Right, so the same way that if GGP has to go out and do things, BAM would be a supporter of GGP and potentially put capital and is that the way you sort of view your relationship with Aliansce, the same way that BAM views.

Sandeep Mathrani

It’s correct, exactly correct. We just want to row to one platform. We don’t want to be competing platforms.

Michael Bilerman - Citi

Now does BAM have any interest in owning a stake in Aliansce? I mean is there a way for that, because they could take back script in that way as well, if they wanted to.

Sandeep Mathrani

I think if it comes to that, look I think, I don’t think the Brookfield fund comes due till 2017 so I don’t think there is any real rush to do anything from their perspective either. But if the asset became available and if it was, I don’t know the answer to that question to be perfectly honest.

Michael Bilerman - Citi

The weak general growth, GDP growth in Brazil recently and significant supply additions to the market, does that concern you, or do you still think that the industry structure down there is such that there is still significant upside in that market.

Sandeep Mathrani

The fundamentals of Brazil are still sound. Again, I want to emphasize deal, it’s only 2.5% of our NOI. The fundamentals of Brazil is still sound. It is energy rich, agriculture rich and a growing middle class. The assets of Aliansce are still 98% occupied. Same store sales is still highly strong. Same store NOI growth is very strong. The middle class is still, the shopping class, you don’t expect to see high unemployment.

So as long as you don’t see a rescission and the GDP growth continues to be positive, I don’t anticipate the asset class that is own through Aliansce will experience any negative growth. So, we think it to be fairly stable. You may see a slowdown up to growth on development but you’re not going to see a slowdown in the growth in the income level.

Michael Bilerman - Citi

So the redevelopment obviously is the pipeline it’s something that’s potential growth driver for the company, Ala Moana obviously being the biggest piece of that in terms of redevelopment and expansion. Can you talk a little bit about how that’s progressing? The asset probably has sensation demand, but can you just talk a little bit about where things are coming in, how far long, how we should think about our returns?

Sandeep Mathrani

Sure. So Ala Moana, we’ve accelerated the development timeline. Originally the development timeline was to be it would start construction July of 2014. We are going now start the development on 2013 and the reasons for starting at 241 is we have the approvals and place to start the development earlier from the governmental authorities and we’ve made very good headway in the leasing of the fashion department store and what I call the bigger format stores in the market. So, hopefully we will be able to start construction in July of this year for an opening hopefully by Christmas 2015.

Michael Bilerman - Citi

And so what is that due to sort of redevelopment CapEx for ’13 and ’14 relative to original plans in capital spend?

Michael Berman

It doesn’t change it all that dramatically, maybe it accelerates a little bit, it’s a $250 million, $300 million number that we were spending over 24 to 36 months. So, it’s not really going to change our liquidity outlook that much.

Michael Bilerman - Citi

Right, and so 250 or 300, how many other sort of sized projects. Is there anything that comes into scope when you look across those 100 assets which make up 90% of NOI or you can expunge that amount of capital and generate that sort of return?

Michael Berman

I’m sorry. That was a lot more words in that sentence. Mike, you think you could simplify it for us?

Michael Bilerman - Citi

So you are putting a $250 million or $300 million in one asset. You have 99 other assets that comprise 90% of NOI. Is there any other sort of big size opportunity to put out capital on an individual asset basis where obviously you’re going to be generating pretty attractive returns? So just thinking about whether there is any other big opportunity within the portfolio to meaningfully add capital to where it really drives growth.

Sandeep Mathrani

Well we identified $1.6 billion in 50 projects. So up to 50 projects between Ala Moana, Fashion Show, Woodlands and Glendale, that’s about 50% of spend. Glendale is opening in the fall of this year; fashion show. The first phase actually opens in March which is this month and so those produce healthy returns. The remaining are all tenant driven projects which have been slotted to start construction as and when we get the approvals. We’re not holding back any of the development based upon any of the cash needs. They will start as we get the approvals. Leases have been executed. It’s just a function of when you get governmental approval to start construction. This is not a function of capital. It’s really a function of approval.

Michael Berman

And the other thing is that Ala Moana right now is the only project we’re working on where we’re building significant in line space.

Sandeep Mathrani

It is the only one, correct. That’s speculative from a leasing perspective for in line space. Everyone else is pre-released.

Michael Bilerman - Citi

And then can you just remind us of the Sears boxes that you brought back. Obviously Ala Moana is the biggest profile redevelopment but the other remaining boxes where you are?

Sandeep Mathrani

So we’ve brought back 11 Sears boxes. Off the 11 Sears boxes we are well on our way to leasing 10 of them and if I remind you we brought them, we had slotted nine of them where we thought we had perspective transactions and we’ve actually been able to formalize transactions now on 10 of the 11 of them. So we will be able to announce them very shortly on all 10 of the 11 Sears boxes. Some of them we’ve already announced, you know for example, Von Maur in Quail Springs Nordstrom and Woodlands and the like.

Michael Bilerman - Citi

I mean if you suddenly got back all of those Sears boxes, all of the remaining Sears boxes, I assume it wouldn’t be that easy to lease them all up and get alternative tenants in.

Sandeep Mathrani

So, this is where I would like to say, when we took over two years ago, we had 77 vacant anchor boxes. Today we have 16. So if I add the 11 that we actually brought back from Sears, okay so we would have that 77 plus 11 that would be 88, and we are down to 17 empty boxes. So we have made quite a headway in the last two years.

With the quality of portfolio we have, we have approximately 70 odd Sears left. It won’t happen overnight but I firmly believe that in two to three year period or four year period we could lease some out and I might add that malls of that quality can exist with one vacant anchor because they have and we have existed and we have had 77 vacant anchor boxes for the last few years. As the matter of fact Fashion Show mall for the last decade had an empty vacant box and most of you didn’t even know it existed and the mall produced call it $1,000 a square foot. At Fashion Show there is, we have things up. You didn’t realize you are walking by a vacant anchor.

Michael Bilerman - Citi

Correct.

Sandeep Mathrani

So, we just had the two year anniversary, it’s called the Barricade.

Michael Bilerman - Citi

It had some nice pictures, which I’m sure you sold and earned income off of, two years.

Sandeep Mathrani

It’s called alternate revenue.

Michael Bilerman - Citi

Is that in NOI or below NOI? Doesn't matter…

Michael Berman

In NOI trust me.

Michael Bilerman - Citi

So, we just hit, with the past year anniversary Sandeep of joining GGP. Take us through sort of you know you had that 40 day plan and obviously you got through the year and now you have settled in extraordinarily well. How has your focus changed, as you sit here today thinking about the next three to five years relative to when you joined the company and just your perception of jumping into this versus sort of where we sit now.

Sandeep Mathrani

So, couple of thoughts right. So one is, we are highly focused now on executing the plan. Like I said again not to be repetitive but still very highly focused on.

Michael Bilerman - Citi

What you are repetitive then everyone knows with the value creating plans are so that’s okay.

Sandeep Mathrani

So, I’ll be repetitive. So it’s again back to and this is for the benefit of everyone on the webcast at my office who is listening right. So they want to know that I am really repetitive.

Michael Bilerman - Citi

They just want to know they are going to get big bonuses?

Sandeep Mathrani

If they produce. That’s right and if they beat the 92% they should know the bonus is increased. So, it’s back to the three drivers which are very important. So we are very singularly focused on that. Two, I am very focused on the culture of the organization. We are very focused on making sure that we have the right culture, we fortify the culture within the organization and it’s very important for a company to last beyond any individual CEO, to have a culture to win.

So I am very focused on people outside of the organization. We spent a lot of time on flattening the organization. You have to appreciate, we started off with almost 3000 people. We are a little shy of 1700 people today. And so we have come a long way. We have a very open door policy, open communication, high performance culture, do the right thing culture and own it culture. So, we are very focused on building that across our entire organization. I travel extensively to the properties and the purpose of that is to be able to want have people in the field communicate with me and for us to be able to drill down and to drive the business. And so to me, it's still about the assets, I am an operating CEO and it's about building the right culture within the organization and I think if you have the right culture, you’re going to win.

Michael Bilerman - Citi

Is there a questions from the audience?

Sandeep Mathrani

I have one; one per session at least.

Michael Bilerman - Citi

There’s a lot of shareholders in this room.

Unidentified Analyst

Maybe they just love our questions so much as far as two points. How worried are you about JC Penney, the help of JC Penney?

Sandeep Mathrani

Say that again. I'm having difficulty hearing.

Unidentified Analyst

Must by my accent. How worried are you about the health of JC Penny.

Sandeep Mathrani

You were still at (inaudible) when the investment was made. But look at the end of the day JC Penney is a great brand, JC Penney I think will be there for a long time to come. I think it has obviously taken a path that needs to be resurrected at some form of fashion and I think it will be. And I think even if it had to take a path for the worse, these things take as we all know very long periods of time to go astray five, 10 years and that’s a long-long period of time. I don’t expect it to go in that direction, I think JC Penney will find its way back and be a viable retailer. I honestly believe that.

Unidentified Analyst

Have your leasing things had any I guess push back on leasing given any reduction in traffic around JC Penney boxes or is it just not noticeable even though there's been a 30% reduction in sales?

Sandeep Mathrani

So you have to appreciate that JC Penney has been a low performer for over a decade. They've been, they do, call it a $100 a square foot for long periods of time. The JC Penney and Sears wings have always been weaker in the lower performing malls anyway. In the higher performing malls it almost doesn't matter, you could lease the end cap in the Sears wing and almost didn't make a difference. So the fact that sales productivity has gone down, it is not really that impactful.

Unidentified Analyst

Just maybe a question on multichannel or omnichannel retailing. How are you working with retailers in terms of technology firstly and then secondly how do you see them all evolving as a result of changes to multichannel….

Sandeep Mathrani

So obviously I think onmichannel is very important to the success of the retailer as well as the mall. And we all have to figure out a way to allow the mall to be a point of distribution. Because the one differentiating factor of the mall to call it Amazon is the mall is if you will exclusive products, as in the brands and the mall is a warehouse or the point of distribution. So we are in discussions with numerous retailers to figure out how we make the mall a 24\7 point of distribution and it's an ongoing process right now.

Unidentified Analyst

I was curious, just on the, when you talk about lease, lease, lease and getting the occupancy up, is there a split between the growth sort of as let’s say some of this more sponsorship and other income and how the growth rate of that relative to everything else.

Sandeep Mathrani

Well the principle driver is still occupancy. You're maximum income comes from leasing space, whether it vacant space is the principle driver, converting temp to perm is the second driver. Alternative revenue is important it's a big number, but incrementally as a percentage it's not going to move the needle dramatically. It's millions of dollars but incrementally if I lease a vacant space it's a bigger driver of income. Although I will tell you we're investing in digital technology, we're investing in digital billboards and we find that the in return on investment is tremendous. So we do seek some tremendous amount of advertising income from investing in the top MNCs in digital billboards. So we do see a lot of additional income coming through there.

Unidentified Analyst

It’s there, as you think back to the first couple of years of CEO is there, and building the culture and the organization and doing a lot of the strategic things that needed to get done, you think about Rouse been off and buying back stock and getting rid of the warrants and buying stake in Aliansce which fall in positive benefits, the buying of the Sears boxes and doing some of those redevelopment. From a management perspective what have you learned or changed as being CEO and I guess, is there had been any focus from when you came in versus how you want to manage going forward?

Sandeep Mathrani

I think we will lay hands on operating company today. Okay so the answer is you want to continue doing what you do best which is have a flat organization and have open communication; be there to be able to make decisions. And I think that’s what we do well. And I don’t think i want to change any of that.

Unidentified Analyst

And we have talked about, you rather played with all the toys that you have versus going out and buying new toys in terms of going into outlets or going more to global, has that changed at all in your mindset?

Sandeep Mathrani

None. That's the only thing is that, we obviously have, every aspect of our balance sheet has improved. Obviously our asset class has improved. It doesn’t happen that often but if great assets do come to the market, we should be in a position to be able to buy them. So the answer is if there is an A mall that comes to market, which is rare, they don’t come up that often. Only five to eight malls have come to market in the last two years, and we would be definitely a potential acquirer of those assets. And I don’t call them new toys because they are not different from the assets we have. But if you are pointing, will we get into building an outlet, or will we get into buying a singular outlet; the answer would be no, that’s now what we have.

Michael Bilerman - Citi

So we have three rapid fire. Will the same store NOI growth be for the regional mall sector in 2014?

Sandeep Mathrani

Same store NOI growth?

Michael Bilerman - Citi

For the sector, the regional mall sector in 2014?

Sandeep Mathrani

3% to 4%.

Michael Bilerman - Citi

If you had to work property sector other than your own would you personally invest in right now?

Sandeep Mathrani

Residential

Michael Bilerman - Citi

Multifamily or?

Sandeep Mathrani

Multifamily.

Michael Bilerman - Citi

Do you expect to see more or less public companies in your property sector one year from today?

Sandeep Mathrani

Same.

Michael Bilerman - Citi

As this is what happens to regional mall sector, right. Why the same, next question?

Sandeep Mathrani

A year from now, the same. Five years from today maybe a different story.

Michael Bilerman - Citi

Less?

Sandeep Mathrani

Less.

Michael Bilerman - Citi

Thank you very much.

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