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General Growth Properties (NYSE:GGP)

Q2 2013 Earnings Call

July 30, 2013 9:00 am ET

Executives

Kevin Berry - Vice President of Investor Relations

Sandeep Lakhmi Mathrani - Chief Executive Officer, Director and Chief Executive Officer of GGPLP

Michael B. Berman - Chief Financial Officer and Executive Vice President of Capital Markets

Analysts

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Craig R. Schmidt - BofA Merrill Lynch, Research Division

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Michael Bilerman - Citigroup Inc, Research Division

David Harris - Imperial Capital, LLC, Research Division

Quentin Velleley - Citigroup Inc, Research Division

Samit Parikh - ISI Group Inc., Research Division

Christy McElroy - UBS Investment Bank, Research Division

Vincent Chao - Deutsche Bank AG, Research Division

Joshua Patinkin

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Cedrik Lachance - Green Street Advisors, Inc., Research Division

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division

Benjamin Yang - Evercore Partners Inc., Research Division

Benjamin Yang - Keefe, Bruyette, & Woods, Inc., Research Division

Operator

Good day, ladies and gentlemen and welcome to the General Growth Properties Second Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this conference could be recorded. I would like to introduce your host for today's conference, Mr. Kevin Berry. Mr. Berry, please go ahead.

Kevin Berry

Good morning, everyone. Welcome to General Growth Properties Second Quarter 2013 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 reports filed with the SEC for a more detailed discussion. Statements made during this call may include time-sensitive information only as of today, July 30, 2013. We will discuss certain non-GAAP financial measures, and then provided a reconciliation of each measure to 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 Lakhmi Mathrani

Thank you, Kevin. Good morning, everyone. I'll begin with an overview of our financial and operating results, recent investment activities and plans, and then turn the call over to Michael. Yesterday evening, we reported FFO per share of $0.27 for the second quarter, $0.04 or about 18% above the second quarter 2012 and $0.02 above the midpoint of guidance. Total funds from operations increased 17% to $267 million. EBITDA reached $503 million, 5.2% above second quarter last year and same-store NOI increased 6.8%.

Year-to-date, FFO per share is $0.52, almost 15% higher than last year. EBITDA is up 5.5% and same store NOI is up 5.2%. Our financial performance to date and expectations for the balance of the year allow us to increase our full-year guidance to $1.13 to $1.15 per share from $1.11 to $1.15 per share, hence, at the midpoint, guidance has gone up by $0.01. This increase takes into account the partial sale of Grand Canal and the expected sale of our stake in Aliansce, which I'll discuss later. But for these 2 transactions, our guidance would have been $0.03 higher. Michael will discuss our revised guidance in more detail. We're increasing our quarterly common dividends from $0.12 to $0.13 per quarter, a direct result of our financial performance to date, and also our expectations for the near term.

Turning to operations. The U.S. mall portfolio was 95.9% leased at quarter end compared to 95.7% at this time last year on a same-store basis. Occupancy, which includes permanent and temp tenants ended the quarter at 93.6% compared to 92.4% on a same-store basis. Permanent occupancy ended the quarter at 88.8% compared to 86.8% on a same-store basis at the end of the second quarter last year. We forecast that portfolios turn of occupancy to be above 92% at year end and total occupancy to be 96% to 97% by year end. Leasing activity for 2013 is complete. As shown in our supplemental, we continue to realize healthy rental rates spread on a suite-to-suite basis, making the comparison on growth trends.

For this year, we have 3.9 million square feet signed at initial spreads of 11%. Including the deals that we have approved, but not yet signed, brings the total square footage for comparison purposes to 4.7 million square feet and the spread at 9.9%. As we are leasing into 2014, we reported to you the square footage signed to date. On a suite-to-suite basis, we signed 580,000 square feet, resulting in rent spreads of 8.9%. Including the deals we have already approved, but not signed yet, raised the total square footage to just over 1.1 million square feet and rent spread of 14%. As we expect to close this year over 92% permanent occupied, we are targeting 93% to 94% perm occupancy by the end of 2014. Through July of this year, about 60% of the incremental leasing towards this goal is complete. Year-to-date, we converted over 100 leases, comprising 270,000 square feet of a temp basis to a perm basis, more than doubling the rent of about 25,000 square foot to about 50,000 square foot. Our big-box leasing activity continues to be very active. Through June 30th, we executed 17 leases for 535,000 square feet and approved 21 leases for 625,000 square feet. Of that total, 400,000 square feet will take occupancy this year, followed by about 660,000 square feet next year and about 110,000 square feet in 2015, hence, this year, we would have done 20 -- 38 leases for about 1.1 million square feet. If I compare that to 2012, coincidentally, we executed 38 leases last year, covering 1.3 million square feet.

Some of the notable openings in the past quarter include a Sprouts supermarket at Fallbrook Center in California, a cinema theater at Mall St. Matthews in Kentucky. We have 6 department stores scheduled to open this year, including Boscov's at Woodbridge, New Jersey; a Lord and Taylor at Mizner Park in Florida; a Carlson's at Glenbrook Square in Indiana; a Bon-Ton's at the Maine Mall; BonMar at Riverchase Galleria; and of course, Bloomingdales in Glendale, Galleria, which caps off our complete redevelopment of that mall.

Across our portfolio, over the past several years, we have completed an extraordinary amount of big-box in department store leasing, a testament to the resurgence of this retailer class and the efforts of our team. We currently have just 3 vacant department stores, and 10 vacant big-box stores remaining in the entire portfolio. Rent sales of the U.S. Mall portfolio ended the quarter at $560 per square foot, continuing a positive trend that began in 2010 and 5% above last year's sales figure of $533 per foot. Looking ahead, we expect sales to continue to grow, however, to moderate. The recent portfolio sales are 20% above to 2017. With the U.S. economy growing at 2%, our sales growth is above that, demonstrating the underlying fundamental strength of the high-quality regional mall portfolio.

Turning to our redevelopments, we currently have 900 million in process, with a little over 1/3 already invested. In addition, we've completed almost $100 million of redevelopments, including the successful opening of a Macy's Men's at Fashion Show Mall in Las Vegas. We continue to expect initial returns at or about 10% on the entire pipeline. As we progress through the existing pipeline, we'll update you on any material changes if they occur. We expect to increase our redevelopment pipeline by approximately $500 million in the coming months. I will begin to disclose in details as we finalize the underwriting.

Although our major redevelopments like Ala Moana and Glendale garnered much of the attention from the public, I want to shed some light on the other activities we do throughout the portfolio. Let me take an A mall, Mayfair in Milwaukee, is in a trade area that has been undergoing a gradual demographic shift. We recently announced Nordstrom's planned opening, and we expect to invest approximately $70 million to improve the mall. Let me take a B mall, Hulen, in Fort Worth, Texas, was actually our first renovation project, and we invested about $6 million. Prior to the renovation, the mall had sales of about $325 per square foot. Since our renovation, which included replacing floors, improving the lighting and signage, we've been able to secure new restaurant at the center, brought new tenants to the mall that otherwise may not have come and have positioned this Class B mall well within its trade area, with embedded NOI growth and sales approaching now $400 per square foot.

My executive team and I visit our malls on a regular basis, sitting down with our leasing and management teams at the mall to identify and improve leasing and capital plans, plans that can bring a B+ mall to an A mall, a B mall to a B+ mall and certainly maintain an A mall. Our focus is on our U.S. regional mall portfolio and executing on our mission to be a pure-play owner of high-quality retail properties. Acquisitions must be consistent with our mission, and may comprise of joint venture buyouts, acquisitions of new assets and disposition of existing assets. At the end of June, we acquired the remaining 50% interest in Quail Springs Mall in Oklahoma City from our partner, JCPenney. The sales of the transaction were not disclosed, but I can say the cap rate was at the mid-7s. Quail Springs Mall comprises almost 1 million square feet, is 98% occupied and generate sales in the mid-300s, with current occupancy cost less than 13%. As you may recall, this mall was one of the Sears anchors we purchased when we acquired 11 Sears anchors in early 2012.

We recently announced the planned opening of Von Maur in place of the Sears. Von Maur will open in late 2014 and first 2 in Oklahoma. The upside here is evident in the leasing and redevelopment strategy, which also include the planned opening of an H&M later this year. The mall has the real potential to reach sales productivity in the small hundreds, given its location in part of a country that is booming from the energy industry and agricultural business. We're in a financial position now to be a net acquirer of high-quality retail assets. I want to emphasize that we don't need to expand our portfolio in order to meet our growth targets.

When we talk about the future earnings of the company, it soars entirely for the portfolio and redevelopment opportunities we have today. However, if an asset becomes available, and it is consistent with our strategy and mission, then you can expect us to be highly interested. We are firm believers in the philosophy that good things happen to good assets, and it's been proven through in numerous transactions, including GGP's own acquisition of Ala Moana many years ago. We look at the embedded growth within the assets over the long-term as a potential redevelopment opportunities that haven't been seen among other factors. These assets include the traditional regional mall and also urban retail outlets. In the case of urban retail, we're focused on flagship locations that are complementary to the mall business and of the highest quality. There are only a handful of locations within the U.S. that has such attributes. One such asset is 830 North Michigan Avenue, located across the street from Water Tower Place here in Chicago.

We recently entered into a definitive binding agreement to buy 100% of this asset in an all-market transaction expected to close before year end. 830 North Michigan Avenue has prime frontage on Michigan Avenue and is home to Topshop. We see significant value creation opportunities as we focus our attention to the existing vacant space, and catching higher rents when leases expires. Topshop has below-market revenues.

Finally, as we focus our attention on the U.S. portfolio, we've made the decision to exit from our Brazilian platform. As announced by Aliansce, and in our earnings announcement yesterday, we've entered into an agreement with Canada Pension Plan, and Aliansce is founder and management to sell our entire stake of the company. We expect the transaction to close within the next 30 to 60 days, subject to closing conditions, and to redeploy the proceeds into our U.S. portfolio. Although we're exiting the investment, we remain very optimistic over the long-term of Brazil, the mall sector and Aliansce. Aliansce, through the efforts of its management team and employee, is a world-class company and they have been an exceptional partner to us. Some of the terms of the transaction are as follows: Our shares have been sold for BRL 24.21 each, about a 20% premium to the current price. Gross proceeds are 690 million, netting $630 million after local tax, but providing approximately $180 million of financing to management for their investment. The sell of financing provides us with 9% interest over 5 years, payable annually with some principal amortization, and is secured by the shares, the additional shares held by management.

Post the sell of financing, we net all $450 million. On an IRR basis, accounting for the sell of financing over a 5-year period at an average interest of 9%, the return to GGP is over 18%, with about 50 basis points attributable to currency fluctuations over the period. We're very pleased with this transaction. Due to the tremendous efforts of our capital markets team for the past several years, we have a very strong balance sheet. No one year represents an inordinate amount of maturing debt. Less than 70%, and I'll reemphasize, less than 70% of our debt comes due over the next 10 years, significantly less than the mall rate average.

Our Latin maturities and use of fixed-rate debt have significantly minimized our exposure to changes in interest rates and the effects on earnings. We'll continue a consistent leverage strategy in the future. Before turning to Michael to cover our financial results in more detail, I'd like to express my sincere gratitude to all my colleagues at GGP. We had a terrific quarter, and are on track for an exceptional year, results only possible by working together as a team towards achieving the same goals, a testament to our core values of high-performance, having the right attitude, doing the right thing, working together and owning it, all on behalf of our 5 constituents: our customers, the retailer within our malls, each employee of GGP, our community, and last but not least, our shareholders. Michael?

Michael B. Berman

Thanks, Sandeep. I'll make a few comments on our second quarter results, followed by guidance for our third quarter and an update to our guidance for the full year 2013. Finally, I will provide an update on our balance sheet activities before we open it up for questions. Please remember my numbers are intended to be points on a range. Our second quarter 2013 results, excluding one-time make-whole payment of approximately $20 million related to the main payoff of $610 million in Rouse bonds, we have completed our paydown of $1.6 billion of unsecured Rouse bonds that has an average coupon of 6.8%. In the second quarter, same-store mall revenues came in at $703 million, up 4.1% from last year. Permanent occupancy, as Sandeep mentioned, was up almost 2%, underpinning more growth. Same-store mall NOI came in at $514 million, up almost 7% from last year and $13 million ahead of our expectations. We continue to manage our operations well. Company NOI for the quarter came in at $548 million, $35 million better than 2012 or 6.7% growth. Keep in mind, we gave up almost $5 million of NOI in the quarter due to the sale of the 49% interest in Grand Canal.

Net G&A for the quarter was $45 million, unfavorable to 2012 by approximately $10 million. Net G&A from 2012 included approximately $6 million in one-time fees that we did not expect to repeat this quarter. EBITDA was $503 million, up $25 million from last year or over 5.2%. Financing cost for the quarter were approximately $235 million, down from $253 million last year. Overall, company FFO came in at $267 million, an increase of over 18% on a per-share basis. This was above the top end of our previously stated guidance range of $245 million to $255 million, and almost $40 million better than last year.

Moving onto third quarter guidance. We expect third quarter same store NOI of around $515 million, growth of around 5.5% to 6% and EBITDA of approximately $500 million or 3.5% growth over 2012. Growth would have been 5.5%, if not for the Grand Canal joint venture transaction. When we sell our entire interest in a property, the results move to discontinued operations for both periods. However, the Grand Canal transaction was only a partial sale, therefore, the half of the mall that we still own is included in our same-store NOI, and the results for the half we sold are in non-same-store NOI. For the quarter -- in the third quarter, we expect financing costs of approximately $227 million compared to $253 million in 2012. We expect third quarter FFO at $265 million to $275 million or approximately $0.26 to $0.28 on a per-share basis, growth of approximately 20% over 2012.

2013 full year guidance, we now expect same-store NOI growth between 5% and 6% for the year, up from 4.4% on our last call. Our updated 2013 FFO per share guidance is $1.13 to $1.15 or approximately 16% growth on a per-share basis. Keep in mind, we lose approximately $0.02 of FFO per share in the second half related to the joint venture transaction at the Grand Canal Shoppes, combined with our sale of our stake in Aliansce.

I'd like to take a few minutes to discuss some details on the Aliansce transaction and how it impacts our FFO guidance. As Sandeep mentioned, the weighted average share price of the sale is approximately BRL 24. Gross proceeds are approximately $690 million, plus $60 million in Brazilian tax to $633 million. After $180 million in the sale of financing, net proceeds are approximately $450 million to us. Aliansce is contributing approximately $6 million of FFO in the third quarter, and we assume for modeling purposes the transaction will occur at the end of the third quarter. In the fourth quarter, we replaced our Aliansce $9 million FFO assumption with interest income of approximately $4 million from the loan.

Moving on to our balance sheet. During the second quarter, we refinanced $2.1 billion in mortgages and generated $340 million in proceeds. Year-to-date, through June, we've refinanced $3.5 million in mortgages. These are the gross proceeds on the new deals, and generated around $1 billion in proceeds, taking the weighted average range on these loans from approximately 465 to 3 1/4. During July, we refinanced another $480 million of share in mortgage loans, generating an additional $90 million in proceeds. We have approximately $30 million less maturing in 2013, about 615 million to go in 2014 and 950 million in 2015 maturities. These 3 years represent less than 10% of our total debt portfolio, and have a weighted average rate of around 5%. Even given a 1% increase to the rate on this group, the annual impact on interest expense would be only approximately $16 million. As noted in our earnings release, we are increasing our dividend again. Our expected 2013 free cash flow is around $150 million. Last year, for 2012, it was $50 million. 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 Jeff Donnelly with Wells Fargo.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Sandeep, I'm just curious about your opening remarks. You said you have an expectation for decelerating sales growth. The pace of deceleration is never equal in retail. So when the tide goes out, which categories are you more concerned about?

Sandeep Lakhmi Mathrani

Actually, looking at the numbers, if we break it down by category, the category that's actually been hurt the most has been women's apparel and shoes, ironically. And so usually, when we see declaration, you actually see it in restaurant sales because that's the first thing that people cut back on. When they're tight for money, they start eating at home. Although we haven't seen that recently, and so our -- I actually think it'll start stabilizing across the board, but usually, it's been restaurant and food sales, and this time around, it actually happened with women's apparel and accessories.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Have you seen a diminished appetite for unit growth of the margin because of this? And I guess, Michael, as a follow-up, are there any categories or retailers that maybe standout as the largest contributors to your percentage rent line item?

Sandeep Lakhmi Mathrani

I'll just address the second issue first. I think it's important. In our revenue, it's over $3 billion. Percentage rent is only $70 million, and so it's not a big contributing factor and I'll let Michael answer the question of how we modeled the fourth quarter from a percentage rent perspective. But actually, of we're going forward from this point, through the end of the year, I actually will see -- I'll see -- we may actually see sales increase versus even decelerate because I think June and July have been not the best months for retail sales, and so there's always this situation of pent-up demand that will roll out for back to school and the rest of the year. So I can actually take a view that sales will continue to be at that 5% marker for the end for the year.

Michael B. Berman

So as you know, Jeff, we model in our percentage rents. Keep in mind that as we get fixed rent increases, it increases the break points and makes the target for the percentage rents a little harder. So far this year, the percentage rents have been down year-over-year, around 10%. We're modeling down a little bit in the third quarter and in the fourth quarter, we're modeling flat. So we'll see. Like Sandeep said, it's not a big number overall in our results.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Just one last question, Michael, I guess, maybe for you. I just want to be sure it's maybe a presentation, but in the supplemental, you have there regional mall operating statistics. The in-place rents for, I guess, I'll call it, all small spaces and spaces that are not anchors, declined year-over-year. Is that just a -- it's not an apples-to-apples comparison in those tables?

Michael B. Berman

What we report -- the prior year is literally what we reported. The trends in the rents are positive. This is really more of a mix issue inside the portfolio in this particular quarter. It's not a comment on the gross rates.

Operator

Our next question comes from the line of Craig Schmidt with Bank of America.

Craig R. Schmidt - BofA Merrill Lynch, Research Division

I wonder, what would be your preferred run rate for redevelopments, looking out beyond for the work you're doing on Ala Moana, Glendale Galleria and Fashion Show?

Sandeep Lakhmi Mathrani

Up to this point, we established by about 1 billion stakes. So it will come online. Got about $0.5 billion dollars a year from 2015 onwards to 2015, '16 and '17. I mentioned we've found -- we are in the process of finishing underwriting on another $0.5 billion dollars. So we would expect that, that would come online in 2018, 2019. So up to this point from now, until 2017, 2018, you got about $15 million at 10% coming online, fourth quarter 2015 onwards and 2016, '17 and '18. I can't tell you that run rate goes on forever, but I do believe that we have that run rate until 2017, 2018.

Craig R. Schmidt - BofA Merrill Lynch, Research Division

Okay, and will the focus still be on some of your best assets? Or will you be doing more redevelopments on, say, B or B+ assets?

Sandeep Lakhmi Mathrani

Up to this point, 80% of our investment has been in the A malls, and so, I think, as opportunities knock, as I mentioned, we're investing in B+ malls to get them to the A malls, and B malls to get to B+ malls, but up to this point, that entire 2.1 billion, almost 70% to 80% is the A malls.

Operator

Our next question comes from the line of Alexander Goldfarb with Sandler O'Neill.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

First one, nice negotiating on the sale of the Aliansce stake. Two questions, my first question is on the Aliansce. First, the expected net gain that will show up in reported FFO in the third quarter, and then the second part of that question is, Sandeep, what changed in your thought process from a year ago where you bought the Persian Square stake to your decision now to sell it? I mean, on one hand, maybe you guys just had a really good view on the stock and your ability to generate nice return in the past year, but curious from a strategic standpoint, GGP's decision to invest capital then and now the decision to pull that capital out.

Michael B. Berman

So Brazil had maintained and has continued to maintain a good market. It has all the right growth factors, rich in energy, rich in agriculture, a strong middle class. A year ago, I thought that it could be 10% of our business, okay? There will be consolidation. There will be ability to grow. And as we focus on the U.S. businesses in our growth year, and look at emerging markets and how difficult it is to consolidate, it's only 2% of our NOI today. We couldn't see over the next 5 years of how it would get to 10% of our NOI. And so it was a question of human capital and distraction. Do we invest on time, focusing on 2%, which is in an ironic way, less than Ala Moana, okay, or do we focus in our U.S. business. The volatility that occurred in Brazil recently was actually not a factor in us selling it because, albeit the transaction that consummated and signed yesterday, it was obviously in the works for the last 5 or 6 months, and these things take a long time. And so the principal reason for us to sell was given 2% of our NOI, the distraction for management, we don't control it ourselves. The public can buy Aliansce shares directly. They don't have to buy it through GGP, and the growth in business this country is quite exceptional, and we felt that it was better to bring back the money and invested in the U.S. portfolio.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then Mike, did you say what the net gain is that will show up in the reported FFO?

Michael B. Berman

First of all, we won't be running the gain through FFO, it will be through GAAP earnings. Keep in mind that the way we've accounted for this is as if we own the property. So the IRRs and the cash flows are going to be totally different than the accounting mechanic. The accounting mechanics include all the investments that Aliansce has done over the last few years into our basis and, then there's been foreign currency volatility, both up and down, over the long term, that will go up in a couple of years. The dollar has strengthened against reais so the gain will not match expectations with respect to the IRR.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then the second question is just thinking about interest rates, and obviously, you guys spoke a lot about it. But if the prospect is that interest rates do rise, one of your secured reverence just made the shift to investment-grade. Another secured mall company made the shift to investment-grade. And just thinking about as rates rise, whenever they do, depending on who comes in to the Fed, just sort of curious, your thought, you're getting this windfall of cash back that could be used to unencumber 1 or 2 malls. Just curious, your thinking, Mike, as far as if anything has changed in the past few months, that would make you say "Hey, you know what? Maybe starting to unencumber may actually help free up capital longer-term instead of having to refi from 1 mall to invest in another mall.

Michael B. Berman

Boy, that's a lot of questions there, Alex. So big picture, we like our strategy. 1 mall, 1 loan, we get excellent firms. We're financing generally at investment-grade level in the CMBS market. You don't see us still moving funds. There's a shift to the unsecured model. If I borrowed a revolver, if I borrowed 30% loan-to-value, which is generally my perception of where you would need to be to get a strong investment-grade rating, clearly, the rate would be down, but you've been putting a lot of capital into the asset that you could otherwise free up for development. So not so sure that I'd buy into, for us, moving into the unsecured model. In terms of interest rates, if you look at our debt maturity schedule, Sandeep mentioned 70% coming due this year. If you were to present value our liabilities, were to present value our assets, I think our debt to EBITDA would drop fairly dramatically. We have very little risk in the near-term in terms of rising interest rates. On an almost $20 billion of debt, we have got $1.5 billion that's floating. So we feel pretty good about our exposure and our risks with respect to the interest rate environment. One other thing I would point out is rates in the marketplace have clearly moved up in the last 3 to 6 months. But if you go back to the beginning of 2012, you're basically looking at the same level of coupons, maybe a little 25 basis points higher that you were, say, 18 months ago. So no shockker here Alex, markets go up, markets go down.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

They absolutely do, and it sounds like firetrucks also go by.

Operator

Our next question comes from the line of Quentin Velleley with Citi.

Michael Bilerman - Citigroup Inc, Research Division

It's Michael Bilerman here with Quentin. Sandeep, just a strategic question for you on the sort of urban retail strategy and I recognized you have water towers, so you do have some urban retail already. But I'm just curious, the first time that we've heard about the potential of increasing more into urban retail was in [indiscernible] 50 Madison came up. And you paired with BPO, your majority shareholder, sister company. And I'm just sort of trying to understand a little bit how the strategy has evolved, and why now, versus really focusing all your attention on the regional mall business.

Sandeep Lakhmi Mathrani

Michael, so yes, as we look to grow the business, as I said in my comments on growth rates I've been talking about is purely from operations and redevelopment. If we were to invest, if there were the Class A mall, that came up, we would look into investing it. The urban business as I've been saying is the most complementary to those regional mall business. Their flagship locations, they provide great access to tenants. It's almost an irony that when you have a flagship location, tenants gives you the access at the top levels. You could be their biggest landlord and never have access to them. So we believe that a lot of complementary from a tenant perspective, owning flagship locations on the urban side and the mall business. So it can be upside potential in the urban retail business has proven over and over again, has been dramatic. The numbers that came out [indiscernible] or SL Green or anyone else, you look at on a retail or urban business perspective, that has been spectacular. We have a clear advantage. We have a national footprint. There are 4 or 5 cities that you can play in on the urban side. We have great relationships with tenants. It was most complementary to our business. So in other words, we could spend a lot of focus and energy growing that business with the business we like.

Michael Bilerman - Citigroup Inc, Research Division

And I guess can you talk about the bidding process together with Brookfield and how that came about and I guess how you got comfortable sort of with the majority shareholder, the working with another company about ultimately how pricing would've come out?

Michael B. Berman

So Michael, maybe, I think we've maybe Quentin was there when we explained how that came about but essentially, we are not at the opportunity to buy the retail. And it was unnoted by us teaming up with QIA, and we wanted to figure out what to do with the office building. QIA thought it was a good idea to bring BPO in and we felt that QIA was arbiter of price between the office and the retail. And I might just add that sincerely, one party will pay more than the other. The impact of ownership would be so great on the 40% stake yield in GGP that I don't believe that people write businesses where there's not a fair practice of pricing. In our case, we had garnered QIA to be a partner both sides of the equation. At the end, we did not bid for the project because it got little pricy with innovative units fantastic, and we think the ownership is now with Vornado would do very well.

David Harris - Imperial Capital, LLC, Research Division

And I'd -- Quentin did update me on that, but I thought it was helpful to get that out fully in the public domain, hence, why I asked the question. Quentin one as well.

Quentin Velleley - Citigroup Inc, Research Division

Just in Brazil, I believe you won the 35% direct stake in Shopping Leblon. Is that part of this transaction in any way?

Sandeep Lakhmi Mathrani

Quentin, Shopping Leblon is not part of the transaction. This purely a sale of our stake in Aliansce and over obviously, since we made a decision to exit Brazil, at the appropriate time, we will exit from Leblon as well.

Operator

Our next question comes from the line of Samit Parikh from SIS Group (sic) [ISI Group].

Samit Parikh - ISI Group Inc., Research Division

It's actually Samit Parikh from ISI. I had a question on the recovery ratio, Michael. It was up something like 7% year-over-year, which is a pretty significant raise. Would you expect -- was there something one-time in that in the expense line that made expenses lower, recoveries higher? Do you expect that to moderate going forward?

Michael B. Berman

Couple of comments. One, as we look at our recoveries, we don't sit there and worry about recovery ratio in any particular quarter. There's a lot of stuff that flies through -- all the line items that make it very difficult to sound scientific with respect to that recovery ratio. That's the incentive we did. We did manage our expenses very well in the second quarter, and we did have a good recovery quarter. But I would say a lot of them on the recovery side, some of it is just sometimes timing. It wasn't like we expect a huge uptick for the rest of the year. There have been pressure on real estate taxes, utility costs and have actually been pretty favorable to us, whether or not that continues, we'll see. And like I said, the operation team is just doing a great job managing them all.

Samit Parikh - ISI Group Inc., Research Division

Okay, that's helpful. And then taking into accounts sort of the $450 million of net proceeds from the Aliansce sale. And probably whatever you're going to spend on 830 North Michigan, it looks like you're sitting somewhere around $1.2 billion in cash today. I know, Sandeep, you said that you're looking to invest that back into the mall portfolio, but with free cash flow, it seems like you're more than funded for your redevelopment pipeline. Are there acquisitions out there right now that you're looking at possibly buying out some partners and some assets? I know that Water Tower has been rumored.

Michael B. Berman

Before Sandeep respond to the acquisition question, I just want to point out that we don't expect the cash from the Aliansce transaction to show up until October 1, and we're -- we are unlikely to spend that money ahead of ourselves.

Sandeep Lakhmi Mathrani

So to answer your question on acquisition, buying Water Tower based, which is in the market today, it's an interest and available. We're in the bidding process. Obviously, our first job is to be custodian to the shareholders, and we'll be wise in any acquisition we make. So [indiscernible], the process is ongoing.

Samit Parikh - ISI Group Inc., Research Division

Did you think that the recent interest rates rises put any pressure on cap rates for sort of the type of assets that you would look to acquire?

Sandeep Lakhmi Mathrani

The irony is absolutely not. We are be watching actively the bidding process or the top place and you wouldn't think interest rate growth one bit.

Operator

Our next question comes from the line of Christy McElroy with UBS.

Christy McElroy - UBS Investment Bank, Research Division

Just a follow-up on 830 North Michigan. I'm sorry if I missed this. Did you mention how much you're paying for your asset? I think Cranes reported around $150 million. And are you able to give us a sense for the cap rate? And I think, Sandeep, you mentioned 4 or 5 attractive urban markets, but are you targeting only New York and Chicago at this point?

Sandeep Lakhmi Mathrani

So one, don't believe everything you read in the Cranes. The answer is we did not give the price of what we pay for the asset. Again, it's the cash outflows by the end of the year. So stay tuned. The cap rates for the asset is in tune with the Class A malls so it's called sub-5. What was the next part of your question, I forgot?

Michael B. Berman

The other cities.

Sandeep Lakhmi Mathrani

Oh, the other cities. So they think -- again, we like Chicago, we like New York. If you ask me to the other cities that we already own street fund retail in Seattle. As a matter of fact, we have owned it for a while; as you were putting them flagship in Dallas, still right there, right now. Not to say we're going to expand Seattle, we just happened to order from Seattle. We own [indiscernible], we owned it for a while. Again, they were putting in flagship Forever 21 store. So this is not that it's new to us. We've been doing it. The other cities that we like are San Francisco, Los Angeles, Miami. But again, I can't think of any other cities beyond New York, Chicago, San Francisco, L.A. and Miami. We've been giving it some thought. Again, this not a core focus. It's going to be much more opportunistic. We're not going to divert our -- Energy looking for these assets, there's so much for opportunities.

Christy McElroy - UBS Investment Bank, Research Division

And then regarding the $500 million of planned additions to the redevelopment pipeline, are there any large projects that you can highlight at this point? And would these be 15 deliveries or later?

Sandeep Lakhmi Mathrani

No. We think you these deliveries are more '17, '18, '19. And I think, again, as we are in the process of underwriting it, I don't want to pick a asset from within the pool to highlight. But there is one large, one in that pool. It happens to be in the state of Texas.

Christy McElroy - UBS Investment Bank, Research Division

Got you. And then Michael, just to follow-up on your comments in the financing market, it sounds like you're still doing the bulk of your mortgages through the CMBS market. I think there's recently been a little bit of a shift on how competitive the life insurance companies have been versus CMBS. Can you talk about that dynamic a little bit since you're sort of pretty active in the market?

Michael B. Berman

Sure. We closed some transactions with life companies in the last quarter or so. The CMBS market has been, I would say in hindsight, a bit of hiccups, seems to be that as business as usual, although perhaps a little bit higher level. We try to mix things up. We did a bank deal early in the quarter for about $1.5 billion. So we're trying not to limit ourselves to just the CMBS market.

Operator

Our next question comes from the line of Vincent Chao with Deutsche Bank.

Vincent Chao - Deutsche Bank AG, Research Division

Just a follow-up on the street retail. I know we spent lot of time on it, but just curious, it's a one-off opportunistic kind of thing, but how big do you think that can be as presented NOI over the next 5 years, or say, and what kind of returns do you expect there relative to your other opportunities, the redevelopment in sort of 10% to 11% range?

Sandeep Lakhmi Mathrani

Once again, our primary focus is going to continue to be the redevelopment opportunities. Because that has the best return, right? You've got 10% code of returns on capital, on cash and cash and cost returns. So that's what we're going to focus on our energies. Because I said, if you look at what's going on in the other regional environment, it's highly competitive. They are entirely fragmented. The cap rates are low. When you saw the trade upticks in 50 Madison and what it traded for, we just bought it off North Michigan. We've seen other transactions, but Michigan Avenue have all been in the 4 to 5 cap range. So we're going to do it opportunistically. If we see upside potential, if we see the below market rent leases. So to us, you want to buy these things, almost treat them like parking lots, you're making 4%, 5% unlevered returns. Okay, leases grow in 5, 7 years and then you get big bump in lease. Supply is less getting you 8%, 9% development yield. You can't have that. No, we're not going to be focusing on buying anything that's going to be flat. We're not buying a bond. We're not in the bond business. So how big can this be? Again, it's opportunistic. So time will tell. We don't have a prescribed amount that we want to invest in it and -- but it's a good business. If we could find the appropriate assets, but our primary focus and our energy is focused on the redevelopment and leasing subportfolio, that we wanted to make sure our occupancy is 93% to 94% next year. We can stabilize portfolio by 2014, and we have to make sure that our developments that are coming online in '15, '16 and '17 are on target. That's where our energies are being focused.

Vincent Chao - Deutsche Bank AG, Research Division

Okay. And just going back to the sales commentary with sort of restaurants not falling off as you might expect and you give what's going on and women's and shoes being a little bit weaker, can you find any other color in terms of maybe geographic, anything notable? Do you think geographically or between Class AB or between luxery value?

Sandeep Lakhmi Mathrani

Geographic perspective, we obviously have nationwide portfolio. We don't really see much between East/West and central regions. If anything, I'll tell you maybe West is slightly ahead, but that's been ongoing now for the past year. But it's pretty stable across the country. The A malls obviously continue to do better, then the B malls, but they're all increasing. But they tend to do better and, actually, we haven't seen luxery fall off yet.

Operator

Our next question comes from the line of Josh Patinkin from BMO Capital Markets.

Joshua Patinkin

Just one additional follow-up on the street retail. I'm wondering if there's a different set of underwriting standards that you'd employ on the street retail assets versus mall acquisitions?

Sandeep Lakhmi Mathrani

Josh, again, as I mentioned, the answer would be no, because we're in the Class A mall business which has a very attractive cap rate. You shouldn't really pay more than you would be willing to pay for a Class A mall for street retail unless you have tremendous upside potential. If you've got a way below market rent lease that comes up in 3 years or 4 years, what you're are doing again is you're buying the parking lot, okay, with the specific intent of leasing it at markets 3 to 4 years from today. So it's noted from the development deal again. On the contrary, in the development deal, you don't get any return while you're going through the process of approvals, construction and lease-up. Again, from our point of view, we want to buy assets that have tremendous upside potential that have below market rent leases and that are truly complementary to our business.

Joshua Patinkin

Very good, and -- that regional mall business, being very consolidated, is there a larger deal volume in street retail assets that fit your criterion versus regional malls?

Sandeep Lakhmi Mathrani

I think you will see more availability of street retails because it's so fragmented compared to the mall business which is a lot more consolidated. But again, I want to focus everyone back to -- I will say I'm going to spend billions of dollars on street retail because our investment is better suited in the developing pipeline which is about $2 billion.

Operator

Our next question comes from the line of Rich Moore with RBC.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

With the cash you're building in the refinancing, refinancing your doing, et cetera, any thoughts on -- I realized you're not headed toward an unsecured, overall unsecured strategy, but any thoughts on encumbering some of the debt coming due as opposed to always going for refinancing?

Sandeep Lakhmi Mathrani

One interesting thing that we've been talking about, although I'm not sure we're going to pull the trigger, is given the cash that we have, which, again, on a $40 billion company is not really out of line. We might pay down a loan in order to generate some interest income, but it would be on an asset that we could have as a source of capital later. On encumbering 1 or 2 assets and 120-plus more portfolio, I'm not really sure there's change in our risk profile and the federal work, quite honestly.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Sandeep, it gives you a little flexibility, Mike, on doing redevelopment, I guess, in the future?

Sandeep Lakhmi Mathrani

Sure, based of my observation. I don't have the cash today.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. And then on the $1.5 billion loan that you guys put together across collateralized the loan among the various properties, is that a CMBS precursor loan or what is that exactly, I guess?

Sandeep Lakhmi Mathrani

We had a number of assets that had an opportunity to be refinanced. We had an existing bank loan at the time that we expanded out. Most of the assets, I think, if not all the assets are undergoing either a redevelopment where we think there's going to be a big pickup in income, or it's an asset that we have thought about potentially selling. We do have a very favorable flexibility with respect to pulling assets out if we chose. So we thought that this was a nice way to finance this group of assets and you're very pleased with the transaction.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

On the pricing of debt, Mike, the rates you've gotten are very good. I assume you put in place, however, those that pricing a while back. If you went on today to get new pieces of debt in order to lock in new rates, what do you think? How would the pricing compare?

Michael B. Berman

Yes, again, let's just talk about today. So rough numbers, 10-year treasuries around 250 and I would give myself over treasury since you're could be anywhere from 10 to 20 basis points extra on the swaps, but kind of embedded in my spread discussion in [indiscernible] numbers. So call it 200 to 250 over 4.5% to 5% in general, better quality assets were at the lower end of range, short of maturities, or below that range, if you borrow less than 60% you get a better deal. So from what we have been doing, I would say coupons today are in the 4.5%, 4 3/4%, potentially 5% range. Lately, the triple A's have moved, I believe, down 25 basis points last couple of weeks. We would expect that to start flowing through the spreads that we got quoted, but I think I did mention we only have about 1 loan left in 2013. It's a little early for the 2014 maturities that we have to start working on them. So we're not going to be active in the second half as we've been in the first half.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay, great. And last question, Coach shares are having a bit of a tough morning this morning after their earnings came back, and I'm curious, Sandeep, in what you think about the whole women's accessories category, exactly about women's apparel. And I'm curious, seeing on the accessories side of the equation, what you're thinking?

Sandeep Lakhmi Mathrani

I think Coach is a little different. I think their attention is focused to the whole incentive business, having that hurt their margins. And dramatically, I don't think that's a bearing on the women's clothing, shoes and accessory business. Again, I think it's more technical. This happens to be what got us hit, if you would, in June and July, May was actually a good month. So it was really the impact of the quarter was focused on June more than May, but I don't think the 2 issues are completely related.

Operator

Our next question comes from the line of Cedrik Lachance with Green Street Advisors.

Cedrik Lachance - Green Street Advisors, Inc., Research Division

Sandeep, we already talked about noncore assets be disposed. It appears to me that given the growth profile of Grand Canal, even if it's a high-quality property, you could have considered as an noncore property where you can harvest a lot of capital. All growth, the reinvestment, your redevelopment pipeline. Do you have other high-quality malls where you see little growth and where you can reinvest proceeds?

Michael B. Berman

Cedric, if I think out loud, the malls that sort of fit that category usually are more than our land constraint. And so breaking at our portfolio, there's very few that are truly land-constrained. So I'd have to go back and look at the top 50 malls and see which ones have a lower growth rate and what the reasons for it are. But none that come to mind, like I said, there's only 1 that comes to mind that has that land constraint and I would rather not mention it on the call. But I don't think so, I don't think so.

Cedrik Lachance - Green Street Advisors, Inc., Research Division

Obviously, a land constrained mall in which you may have an interest in acquiring an interest. How does that translate in terms of the growth profile?

Michael B. Berman

It's a very good question. Time will tell.

Cedrik Lachance - Green Street Advisors, Inc., Research Division

Okay. And specialty leasing or short-term leasing is about 5% of your total lease mall at this point. Where do you think it can be in a state wide environment taking time to come down from 7 to 5, where do you think it can go?

Sandeep Lakhmi Mathrani

Well, I think it can fall a little bit especially leasing, right? So you've gone from, I mean, aspect leasing takes into account, short-term in-line leasing takes into account cars and kiosks, signage. So it evolves over time, and what we've seen recently is that the car business is sort of declining but the kiosk businesses going up dramatically, which I actually think is better for the mall because it sort of cleans up the mall and at the same time, we don't give up income. We've also seen signage income go up. The stores, some big, LED screens in a few malls and they've been highly productive. So there's going to be continued evolution on what goes into special leasing and what the income is. You're going to start using technology to generate income just as we saw in the golden days, we saw gift card sales as a good source and it gets much dried-up. So it's going to continue evolving, so I don't see it -- ours has continued to be quite stable if not rise over the last couple of years. But the a component that may that up continue to change depending on how the markets progress.

Cedrik Lachance - Green Street Advisors, Inc., Research Division

Okay, then final question. You acquired the interest in Quail Springs which I think with the partnership with JCPenney where you had the most shares on rest of the assets. In regards to the 2 malls where you have a partnership with Penney, are you currently in negotiations acquiring assets in any other state?

Sandeep Lakhmi Mathrani

The answer is we're not in negotiations to acquire Penney's stake in the other 2 malls, and -- but again, time will tell, but we're not in negotiations right now to acquire in a [indiscernible].

Operator

Our next question comes from the line of Michael Mueller with JPMorgan.

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Just had a quick on leasing spreads and looking at the supplemental, obviously, the sample sizes are different between 2013 and 2014 commencements, but the 2013 commencements are at about an 11% spread, 2014, a few hundred or couple hundred basis points lowered about 9%. I mean, any thoughts as we move towards 2014 if the 9% is where things pencil out, we'll start to see some moderation? Or is it just skewed on the downside for one reason or the other right now?

Sandeep Lakhmi Mathrani

So in my comments, what I mentioned was that the leasing done [indiscernible] to 2013 showed 11% at about 3.9 million square feet. If I add the remainder lease of that, we'll get signed this year in the pipeline that are approved. It's about 800,000 feet, but with the leasing spreads at 9.9%. As a matter of fact, if you fast-forward to the end of 2013, it's better going to be called at 9.9%, just a 10% for our numbers. But 2014, this late in the game, about 600,000 feet has been leased, it's about 9% spread and another 500,000 feet have been in the pipeline have been at leased for 14% spreads. So I mean, it's too early to tell what completely strategy be used in 2014 but at occupancy costs that's up 13%, we said that spreads for 2014 will be in the 8% to 10% range. Sales continue to rise even at 5% marker. I hope we can get to the higher end of that 8% to 10% range. Because it normally because of lagging sales even if the sales start do decelerate. As long as they don't go negative, they'll continue to get bond of stretch.

Operator

Our next question comes from the line of Ki Bin Kim with SunTrust.

Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division

The similar question I'm going to ask, but if you could expand on that a little bit. I think it was could initial run spreads average rent spread at 14% you can talk about, what does that look like an average rent spreads?

Michael B. Berman

So while I hunt for that answer, which I think I have, again, I want to remind everyone that when we quote rent spreads, it's on gross to gross. So if you actually take out the time and taxes, and you collected net-to-net, the net rent is about $40 and the spread about $6 at only 13%. So if you're comparing apples to apples, again the reason you see the numbers you're seeing today is because this is a function of the work having done by the team 2 or 3 years ago and then the leasing activities finally rolling in. Rolling in really at that $6 spread which, I'm not sure, I want to reemphasize unless someone's found it, so the average rent spreads for 2013 are almost 20% and the average rent spreads for 2014 are almost 17%. It's honestly there, pointed out approximately leases on annual basis.

Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division

I guess, I'll be referring to the leases that aren't on the supplemental that you have signed, or that are in process or signature that they were higher than the 17%? Or did I hear that incorrectly?

Sandeep Lakhmi Mathrani

No. I think, you're okay. They're 2 different questions. Let me answer them both again. The first one was in 2014, there are 500,000 square feet approximately of leases that are approved but not signed, that have a rent spread -- of initial rent spread of 5.14%. That's question A. Question B, I told you was what is the average rent spread over the term of the leases? The average rent spread for the terms leases that we have either signed or approved, which is about 1.1 million square feet in 2014 is about 25%, 26%.

Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division

And here that you said that lobby leases were from the previous management team are signing -- signed from like 2 to 3 years ago. Are there any leases that you signed for 2015? And what would that look like? What do you actually expect from when you combine your lease expirations schedule and where sales are today?

Sandeep Lakhmi Mathrani

2015 is a little early to be giving you something.

Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division

All right, and just one last...

Sandeep Lakhmi Mathrani

The existing management team has been in place for almost 2.5 years.

Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division

Yes, that's said. And just one last quick follow-up. On the debt redemption fee that you paid this quarter of $20 million, is that different -- was that economic? Did you actually pay that in cash or was that just an accounting charge?

Michael B. Berman

It's actually an accounting charge, and we paid in cash, and I think we picked up 2 points on, call it, $600 million, so I would say it was economic.

Operator

We have a follow-up question from Quentin Velleley with Citi.

Quentin Velleley - Citigroup Inc, Research Division

Yes, just quickly. I think in the prepared remarks, you gave an example of moving some 10 space from about $25 a foot on average, $60 a foot? Roughly how much space is that?

Michael B. Berman

270,000 feet.

Operator

Our final question comes from Ben Yang with Evercore.

Benjamin Yang - Evercore Partners Inc., Research Division

Sandeep, can you just remind us what cap rates were on Grand Canal and then also on Quail Springs? And then also, I believe the 50% interest at Quail Springs was listed with brokers and I believe all is under $400 a foot. So a second question also, why buy an asset that's diluted to the quality of the portfolio? And obviously, you already on the piece of that, but why not try to tell your piece along with your partner?

Sandeep Lakhmi Mathrani

So 3 questions, I think you asked. The first question was the cap rates on Canal shops was sub-5%. The second question was Quail, cap rate was in the mid-7%. And the reason that you acquire the remaining portion was we put it in new anchor, Walmart, and Walmart is very Nordstrom liking, if you've been into a Walmart, the higher-end department store. And we believe that there's upside potential in that asset but in that asset is someone like 300 malls or maybe mid-400 malls. And we felt that acquiring in a mid-7s, the cap rate would at the end of redevelopment would definitely be accretive to us.

Benjamin Yang - Keefe, Bruyette, & Woods, Inc., Research Division

I mean, did that mall receive any bid beyond your bid obviously?

Michael B. Berman

It was a bid for 50% of the -- we are just selling 50% interest in the assets and the bid was pricely paid.

Benjamin Yang - Keefe, Bruyette, & Woods, Inc., Research Division

And then just generally, in your opinion, do partial interest sales in any way impact the pricing, maybe not just for [indiscernible] but in general in the mall phase?

Michael B. Berman

Very interesting question. You would think intuitively it does -- but watching a workout place, watching what happened at the couple of assets that were sold in Florida, in a partnership sold, it seems not.

Operator

I'm showing no further questions. I would like to turn the call back over to Mr. Sandeep Mathrani for any closing remarks.

Sandeep Lakhmi Mathrani

Thank you, all, for attending the Second Quarter Earnings Call this morning. If you have any questions, please don't hesitate to contact Michael or Kevin. And we will all -- we will see you soon. Bye-bye.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.

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