Rouse Properties Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 5.13 | About: Rouse Properties, (RSE)

Rouse Properties (NYSE:RSE)

Q3 2013 Earnings Call

November 05, 2013 10:00 am ET

Executives

Stephen C. Swett - Managing Director

Andrew P. Silberfein - Chief Executive Officer, President and Director

John A. Wain - Chief Financial Officer

Benjamin Schall - Chief Operating Officer

Analysts

Daniel Joseph Busch - Green Street Advisors, Inc., Research Division

Operator

Greetings, and welcome to the Rouse Properties Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Steve Swett of ICR. Thank you, Mr. Swett. You may begin.

Stephen C. Swett

Good morning. We would like to thank you for joining us today for Rouse Properties' Third Quarter 2013 Earnings Conference Call. In addition to the press release distributed last evening, we have filed a Form 10-Q with the SEC and posted a quarterly supplemental package with additional detail on our results in the Investor Relations section on our website at www.rouseproperties.com.

On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today.

Examples of forward-looking statements include those related to revenue, operating income, financial guidance, as well as non-GAAP financial measures such as same-store results, FFO and core FFO. We also caution that prior period results that are referenced in any comments today may not necessarily be reflective of the results had Rouse truly been a standalone entity during the periods presented.

As a reminder, forward-looking statements represent management's current estimates. Rouse Properties assumes no obligation to update any forward-looking statements in the future.

We encourage listeners to review the more detailed discussions related to these forward-looking statements contained in the company's filings with the SEC and the definitions and reconciliations of non-GAAP measures contained in the supplemental information package available on the company's website.

This morning's conference call is hosted by Rouse Properties' President and Chief Executive Officer, Andrew Silberfein; Chief Operating Officer, Benjamin Schall; and Chief Financial Officer, John Wain. They will make some introductory comments, after which, we will open up the call to your questions.

Now I will turn the call over to Andy.

Andrew P. Silberfein

Thank you, and good morning. On our call today, I will begin by reviewing the operating performance and leasing accomplishments for the quarter. And then, update you on our progress with regard to recent acquisitions and the execution of our strategic initiatives. I will then turn the call over to John who will review our balance sheet, provide further details on our financial results for the quarter and review our guidance for the remainder of the year.

Let me start with a review of our results. Last evening, we reported third quarter 2013 core FFO of $0.37 per fully diluted share, representing an increase of 28% compared to the third quarter of 2012. As expected, same property core NOI for the third quarter was essentially unchanged from the prior year. But beginning with the fourth quarter, we expect our core NOI to begin to materially benefit from our significant leasing efforts over the past 2 years, especially relative to the size of our asset base, as well as our targeted property improvement initiatives. In the third quarter, our leasing value remained robust, as we signed 530,000 square feet of leases, bringing the year-to-date total to over 1.7 million square feet, an increase of 13% over 2012 levels. As a result, the lease percentage of our portfolio continues to improve. At the end of the third quarter of 2013, Rouse's portfolio inclusive of anchors was 94% leased, an increase of 210 basis points year-over-year. Excluding anchors, our portfolio was 90.7% leased, which represents an increase of 140 basis points year-over-year and 79 basis points sequentially. We have increased our leasing levels by 299 basis points since our spending, which means we are more than 50% of the way to our stated goal of being 93% leased by 2016. As we have stated previously, the total increases we have seen in our leasing percentage have not yet been reflected in our occupancy rate due to the significant volume of leases we have executed but have not yet opened. At the end of the third quarter, we had 707,000 square feet of tenants signed, but not yet opened or SNO. Of this amount, 518,000 square feet, or 73%, will occupy space that is currently vacant. As we have consistently said, we expect this SNO to come on line beginning in the fourth quarter and continuing throughout 2014. The revenue from these leases represent more than $11.1 million in incremental annual NOI being added over the next 5 quarters, which alone would represent a 7.4% increase in our 12 month trailing NOI. As a result, we expect our same property core NOI to grow in the mid-single digit range in the fourth quarter with similar improvements expected as we move into 2014. We also continue to make substantial progress on improving our composition of permanent and temporary tenants within the portfolio. Our permanent leasing percentage has improved to 79.7%, up 268 basis points year-over-year, and up more than 550 basis points since our formation. We are now almost half way towards achieving our permanent leasing goal of 86% by 2016. Our leasing spreads also remained strong. Initially, spreads for the third quarter on a suite-to-suite basis, improved 6.2% as a whole, with the majority of the increases coming from renewals. Year-to-date, our leasing spreads have increased 7.7%. Our tenant allowances for leases under 10,000 square feet, excluding our strategic capital projects for the quarter, averaged $23.18 per square foot.

Drilling down, I would like to highlight a few of our significant recent leasing achievements. We executed a lease with the AMC Theaters and our Chula Vista Mall for a 35,000 square foot multiplex, complete with our latest innovations including fully reclining seats throughout, enhanced digital cinema projection and a premium audio experience. And along with our recently completed cosmetic renovation, Chula Vista Mall is another example of how we are creating more a dynamic and relevant retail experience by bringing together the latest entertainment concepts, high-volume restaurants, and popular fashion retailers. And it's already resulted in significant increases in traffic, sales and leasing levels for the mall. This lease represents the fourth theater multiplex we've added to our portfolio since our formation.

At our Cache Valley Mall in Logan, Utah, we have added a 62,000 square foot Herberger's, a division of Bon-Ton to fill a recently vacated anchor. This will be the first location in the state of Utah, and it's another example of our ability to quickly release the vacant anchor space with more market development in retailers.

Last month, we announced that Rouse has entered into agreements with Nestlé Toll House Cafés to anchor the center courts at 18 of our malls around the country. The cafes will feature high quality gourmet coffee, cookies and pastries, that serve as a social gathering point for each mall. A Wi-Fi is also up and running from the end zone to end zone throughout the portfolio. In just the last 90 days alone, more than 130,000 unique users have accessed our Wi-Fi network. Not only can we significantly grow our database of club members to communicate with on a regular basis through mall and retailer promotions, but we can better understand consumer patterns and needs. To adding cafes, Wi-Fi, soft-seating and other common area amenities are important elements in our commitment to deliver a better shopping experience for our customers and retail partners and drives gains in the frequency and duration of shopping trips to our malls. Although it takes time to experience the full impact of these improvements, we are quite encouraged by how well they've been received and by leading indicators such as the significantly improved tenant retention rates on renewals since our spending.

Finally, we were thrilled to announce a recent partnership with One Potato Two Potato, a joint venture production company founded by Gordon Ramsay to host the second season of Food Court Wars at 13 Rouse malls over the next 4 months. This is a significant win for Rouse, providing valuable exposure, awareness and advertising for our malls. Hence, should be a huge hit in terms of driving increased traffic and customer interest across our portfolio.

To moving on, let me provide a progress report on our anchor vacancies. To recap, we have 6 vacant anchors that are spending. We acquired 2 anchors for strategically development purposes and post-spin, we've had an additional 4 anchors go dark [ph]. Of these 12, 8 of these vacancies have been released and length is currently out for signature. Leaving only 3 vacant anchor stores throughout our entire portfolio, remains to be addressed at the end of the third quarter.

So turning to acquisitions. As previously announced, in July, we acquired Greenville Mall at Greenville, North Carolina for $48.9 million. As the only mall within a 40 mile radius, the asset fits perfectly within our "only game in town" enclosed mall strategy with a significant opportunity for incremental upside potential. We are already implementing our plan to enhance the key metrics, tenant quality and sales productivity of the mall. Since our formation, we have acquired over $230 million of malls. And we continue to pursue a pipeline of potential opportunities that fit our criteria. We've recently filed an 8K stating that we've entered into a purchase and sale agreement to acquire 2 regional malls from Macerich for $292.5 million. The 2 malls on the contract are the Chesterfield Town Center in Richmond, Virginia, and The Centre at Salisbury in Salisbury, Maryland. As I'm sure you understand, we are subject to confidentiality agreement. I cannot provide further details at this time. Upon completion, Rouse will have acquired $520 million of malls and increased our portfolio presence to 21 states. As we've said, we believe that we're on of the few companies with the size, established operating platform, retailer relationships, and balance sheet strength, necessary to successfully operate middle-market malls on a national basis. We continue to pursue further opportunities to grow and expect that we will see additional properties for sale from other public REITs such as Macerich.

Turning now to our capital projects. We continue to implement our strategy, our strategic and cosmetic capital improvement plans. As we sit here today, we have completed, commenced, or will be commencing shortly, cosmetic or strategic projects for over 40% of the portfolio. For those projects underway or completed, we are beginning to see the initial benefits in our customers experience, leasing activity, and the quality of the retailer mix. In the third quarter, we commenced the cosmetic renovation project at Mall St. Vincent, our 530,000-square foot single level enclosed mall at Shreveport, Louisiana. Our plan is to complete an interior and exterior makeover to position Mall St. Vincent as the dominant higher-end retail and retail destination in the Shreveport-Bossier City marketplace. And as previously announced, we have obtained DIP financing to allow us to fully recapture our upfront cost for the project through sales taxes for purchases at the mall. With regard to our cosmetic renovation project since our formation, we have completed 3 projects and commenced 3 projects. As we have communicated to you in the past, our cosmetic improvement programs are designed to unlock the potential of each asset to a targeted upgrade and enhancement program, uniquely tailored for each mall. As we move into the balance of the year, we still expect to commence an additional 1 to 2 strategic capital projects in addition to those already under construction. The total capital spend we expect to incur in the projects currently underway, for those that will start this year, is estimated to be between $90 million to $100 million, with completion expected within the next 12 to 18 months. The projected yields on the strategic capital projects are expected to be approximately 9% to 11%. This reinvestment is a crucial component of our long-term strategy to increase cash flows, and unlock the value within our portfolio. And with that, I will turn the call over to John to discuss our financial results.

John A. Wain

Thank you, Andy, and good morning, everyone. In my comments today, I will first review our third quarter operating results then address our balance sheet, including recent financing transactions and their impact on our capital structure and liquidity, and finally, comment on our 2013 guidance for core FFO. Starting with a review of our third quarter operating results. Yesterday, Rouse reported core funds from operations of $18.7 million or $0.37 per diluted share. Compared with $14.5 million or $0.29 per diluted share in the third quarter of 2012. The 28% year-over-year increase in core FFO per diluted share is primarily attributable to 2 items: one, a positive contribution of $2.9 million in core NOI from the acquisitions of Turtle Creek and Greenville Mall, completed in December, 2012, and July, 2013 respectively; and two, a $3.1 million reduction in interest expense due to the several refinancings we've completed in the past year. Year-to-date, through September 30, 2013, core FFO was $54.2 million, or $1.08 per diluted share, an increase of 21.3% compared to the same period in 2012.

Turning to the balance sheet. We continued to make significant progress in strengthening our balance sheet by lowering our interest rates, extending and smoothing our maturity schedule and generating excess refinancing proceeds to further support our growth strategy. To this end, in September, we closed on a new $52 million floating rate mortgage loan, secured by West Valley Mall, our 887,000 square-foot enclosed mall in Tracy, California. The loan has a 5-year term with 1 5-year extension option, and carries a rate of LIBOR plus 175 basis points. The loan is interest-only for 3 years, with a 30-year amortization schedule thereafter. Subsequent to closing, our lender increased the loan commitment by $7 million to $59 million. At Rouse's option, the loan can be swapped at any time to a fixed rate of interest. This provides us with an attractive current rate, as well as the flexibility to reduce our exposure to variable rates at a time of our choosing. Proceeds from this financing were used to repay the previous mortgage which had been scheduled to mature in January 2014 and had an interest rate of 3.43%. Net proceeds to the company after related closing costs are expected to total $11.4 million, assuming the additional $7 million commitment is funded.

Since our formation, we have refinanced 7 mortgage loans for a total of $451 million which has extended our maturity ladder, lowered our interest rates, and resulted in aggregate net proceeds to the company of approximately $78 million. At the end of the third quarter, we had total debt outstanding of $1.19 billion, of which, 74.2% or $882.3 million was fixed rate mortgage debt with a weighted average interest rate of 5.28%. We had $187.9 million outstanding on our term loan facility, and 0 outstanding on our $150 million bank revolving credit facility. Since our formation, we have lowered the weighted average interest rate on our debt by 57 basis points to 4.98%, and extended our weighted average terms to maturity to 4.2 years from 2.9 years. With regard to our financial flexibility, at September 30, 2013, we had approximately $298.4 million of liquidity, including $48.4 million of cash and callable deposits as well as $250 million of available capacity on our 2 revolvers, both of which are fully undrawn. This provides us with sufficient capacity to support our operational and strategic growth objectives. We have no maturities for the remainder of 2013 and are actively working on our remaining 2014 maturities. After refinancing, the West Valley Mall mortgage loan, we now have 2 mortgage loans scheduled to mature next year, including a $71.4 million mortgage loan secured by Southland Mall, and a $48.4 million mortgage loan secured by Steeple Gate. We have only one mortgage loan maturity in 2015, Greenville Mall, one of our recent acquisitions. Regarding our corporate facility, which also matures in 2015, we are in discussion with our lenders to potentially replace this facility. We expect that the new facility will provide the company with expanded capacity, extended term, and a meaningful reduction in interest rate. We would expect to provide additional information to you in the near future.

Additionally, as previously mentioned, we had $397 million of existing CMBS property debt, which is freely prepayable without penalty. This affords us flexibility in refinancing these loans at a time of our choosing without incurring make whole costs or other penalties. As we continue to implement planned improvements across our portfolio, we expect to look at opportunities to refinance these loans at the appropriate times on a property-by-property basis. We continue to see strong interest from a variety of lenders in the market, and we expect to be able to continue to take advantage of favorable rates and market conditions as we further execute on our refinancing strategy. With regard to our dividend, our Board of Directors has approved a quarterly dividend of $0.13 per share. The dividend will be paid on January 31, 2014 to stockholders of record on January 15, 2014.

Now, looking forward to the balance of 2013, based on our results to date and our expectations going forward, including the impact of publicly announced and completed transactions to date, we are reaffirming our guidance for 2013 core FFO of $1.49 to $1.55 per diluted share. This range represents 18% to 23% growth compared to 2012 core FFO of $1.26 per diluted share. Please note that our guidance does not include the effects of any future property acquisitions, dispositions and refinancings.

With that, I will turn the call back to Andy for some concluding remarks.

Andrew P. Silberfein

Thanks, John. We continue to make progress in executing on our strategic initiatives. With each quarter, our portfolio continues to get healthier as evidenced by our strong leasing activity, higher occupancy and lease percentages, improving retail sales and increasing interest for major retail and entertainment tenants who see value throughout our portfolio. Our balance sheet is strong with access to ample capital to fund our growth strategies, as well as the flexibility to pursue acquisitions and grow our platform. Once we complete the acquisition of the 2 malls we have under contract, we will have grown our asset base by approximately 25% since our formation less than 2 years ago.

With that, we will be happy to answer any questions that you may have. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Daniel Busch of Green Street Advisors. Please go ahead.

Daniel Joseph Busch - Green Street Advisors, Inc., Research Division

Maybe I'll start with John. I think I've asked you something similar on every call, I think this time it's a little different. I know you guys can't speak specifically about the acquisition with Macerich, but it looks like when that closes, the leverage will probably increase to 200 to 500 basis points, debt to EBITDA may be a full turn. I know in the past, you've talked about deleveraging -- like a natural deleveraging through NOI growth, but given the increased levels, are you going to do something a little more material to kind of bring that leverage back down to an appropriate level?

John A. Wain

As we consistently said, acquisitions have always been a part of our program. And we have the capital available to us to pursue our growth strategy, and depending on opportunities, we do have other liquidity and capital levers available to us. So while individual transactions may impact leverage on a short basis, we do expect over time, our metrics will naturally improve with improved operations of our portfolio. I pointed the SNO number as a good near-term addition to that. So long term, we maintain that we're still targeting a debt-to-EBITDA of 7.0x to 7.5x.

Daniel Joseph Busch - Green Street Advisors, Inc., Research Division

Now, but -- after, I think, kind of pro forma debt to EBITDA will probably be closer to 8.5x. Doesn't that really push out, I guess, getting to that goal of 7x to 7.5x now with the new acquisition, I guess, through just natural NOI growth?

Andrew P. Silberfein

Daniel, this is Andy. We always have said from day 1, that we expected to do acquisitions. Since it's really a part of our plan, part of our program. I think we indicated early on that if we didn't do our acquisitions it'd be at an even lower number, but we have overlaid acquisitions into that 7x to 7.5x type number.

Daniel Joseph Busch - Green Street Advisors, Inc., Research Division

Okay. And, I guess, finally, at what point -- I know you have an internal NAV, but given where the stock price trades, at what point in time does maybe issuing equity become a great source of funds to fund some of these acquisitions?

Andrew P. Silberfein

Well, we ended the quarter with almost $300 million in cash and available credit. So we have more than sufficient liquidity to complete our whole capital improvement program and to continue our acquisition programs. And as John mentioned, we have a number of liquidity levers that we can we pull such as our ongoing refinancing efforts and our normal recycling of capital that we've done and been successful at since we've started in early '12. I would say depending upon the opportunities we see, we can look at additional options for increments of capital. But that will be dictated by, really, the relative attractiveness in the size of potential acquisitions that we may see going forward.

Daniel Joseph Busch - Green Street Advisors, Inc., Research Division

Okay. And then Andy, you mentioned on the call -- can you remind me when you spoke about fourth quarter NOI, core NOI being in the mid- single-digits, was that same property?

Andrew P. Silberfein

Yes.

Daniel Joseph Busch - Green Street Advisors, Inc., Research Division

Okay. Maybe, I got one for Ben. You guys have had pretty good success bringing junior anchor-type tenants in theaters and to some of your boxes. I'm just curious on what those lease structures look like compared to what they would be in their traditional locations like a power center. I guess, what makes them want to come to the mall? Are they getting a break in rent, more cam or is just the traffic draw, I guess, enough to make that opportunity look attractive to them?

Benjamin Schall

What we have in many of these markets are very well-located real estate. We obviously have the synergies that exist about being part of a mall that's doing $150 million to $200 million of sales. And what we've been successful in doing is taking either our unproductive anchors or vacant anchors or under product -- unproductive in-line space, and activating it with entertainment and other types of junior anchors. So a lot of these anchors are a part of our strategic programs. We've talked about kind of the returns that we're getting on those being in the 9% 11% range. So, it's supportive of the types of capital outlays that we have.

Andrew P. Silberfein

Yes. And Dan, it's interesting if you think about it, many of these properties were built pretty early on in the cycles in their markets. So we tend to be at the corner of Main and Main Street in most of our markets. And the retail hub is really built around the property. So for retailers to come into our property, you're getting best available real estate. You're really protecting yourself. If a competitor comes into the market and then at the same time, you're getting to enjoy the benefits of not only the visibility from our mall but the sales that's all around you that you're going be part of. So we're seeing that really as a common threat throughout our portfolio, and we're taking great advantage of that.

Daniel Joseph Busch - Green Street Advisors, Inc., Research Division

Okay. And then, the tenant allowance, you spoke about a little bit, and it's obviously up over last year, just, I guess, because you've been doing a lot on the leasing front. When does that tenant allowance kind of normalize? I guess, I'm trying to figure out if that will stabilize once the portfolio is leased up? Or is it just a function of you guys having to spend more money to keep the space occupied again? Does that make sense?

Andrew P. Silberfein

I think, in general, Daniel, we're seeing very little, if any, tenant allowance for renewals. Just as a general side note. I think we've run pretty consistently on our under 10,000, right around $20 per foot type numbers. We are looking to better describe the change of our disclosure on that to provide further clarity behind that.

Benjamin Schall

We updated our supplemental this quarter. The goal is to provide some additional disclosure on our capital spend. So it's been updated to provide some more breakout on what we consider to be our ordinary capital spend, our cosmetic spend, and provide some more visibility on the normal run rate on [indiscernible]. And then we'll continue, obviously, to provide disclosure on the strategic projects as they...

Daniel Joseph Busch - Green Street Advisors, Inc., Research Division

Okay. And then one final question, I guess. The occupancy cost ratio has been at 12.4% for a while, what are you able to -- on average, what are you -- signing new deals that are -- what's the goal of new deals?

Andrew P. Silberfein

We've only said from day 1, this is not necessarily an occupancy cost story. This is an occupancy play. This is how do you get sales per square foot and how do you get the occupancy up. And obviously, our 300-basis-point move on a occupancy year-over-year, it's pretty exciting. So, it's definitely taking hold, but I would say, it's not about -- we target 12% to 12.5% to 13% in that range, but this is not about focusing so much on the occupancy cost. It is getting -- getting the occupancy up to that 93% of which we're more than halfway there in just 7 quarters. And getting that sale per square foot up which is why we're spending so much time, attention, management attention on the cosmetic side of the business, how do you create a more relevant product for the customer, how do you -- especially in our markets, have them come more frequently and spend more time there. So, it's also those things with this, certainly, replacing the temp to perm, and then finally, really replacing less productive tenants with more productive tenants. So think about it that way. By putting in better quality tenants, you can charge more rent because your occupancy cost is going to be lower. So, many times in this portfolio when we looked at, we spent the first year, really, doing a lot of defense, and now, we're doing a lot more offense. So you can expect that we're going to be focused on more and more on making sure we have the right tenants in our properties.

Operator

[Operator Instructions] Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to management for any additional remarks.

Andrew P. Silberfein

We want to thank you for joining us this morning, and we very much look forward to sharing our progress with you at the end of the fourth quarter. And we hope to see a number of you at NAREIT.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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Rouse Properties (RSE): Q3 FFO of $0.37. Revenue of $60.31M. (PR)