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General Growth Properties, Inc (NYSE:GGP)

Q4 2013 Earnings Call

February 04, 2014 10:00 am ET

Executives

Kevin Berry - Vice President of Investor Relations

Sandeep Lakhmi Mathrani - Chief Executive Officer and Director

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

Analysts

Joshua Patinkin

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

Vincent Chao - Deutsche Bank AG, Research Division

Craig R. Schmidt - BofA Merrill Lynch, Research Division

Daniel Oppenheim - Crédit Suisse AG, Research Division

Steve Sakwa - ISI Group Inc., Research Division

Christy McElroy - Citigroup Inc, Research Division

Andrew Schaffer

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

Caitlin Burrows - Goldman Sachs Group Inc., Research Division

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

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

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

Linda Tsai

Operator

Good day, ladies and gentlemen, and welcome to the General Growth Properties Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to Kevin Berry. Sir, you may begin.

Kevin Berry

Thank you, Shanna. Good morning, everyone, and welcome to General Growth Properties' Fourth Quarter 2013 Earnings Call hosted by Sandeep Mathrani, our Chief Executive Officer; and Michael Berman, our Chief Financial Officer.

Certain statements made during this call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially due to a variety of risks, uncertainties and other factors. Please reference our earnings press release and SEC filings for a more detailed discussion. Statements made during this call may include time-sensitive information, accurate only as of today, February 4, 2014. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the earnings release and supplemental filed and Form 8-K with the SEC and available on our website. It's my pleasure to now turn the call over to Sandeep and Michael.

Sandeep Lakhmi Mathrani

Thank you, Kevin. Good morning, everyone. I'd like to wish everyone a very Happy New Year. I'd like to note the passing of Matthew Bucksbaum on November 24. Matthew was a true innovator of the shopping center and mall industry in this country. With his [indiscernible], he transformed the family-owned grocery store company in Iowa into General Growth Properties. Matthew was a visionary, a respected leader, philanthropist and a friend to many. Matthew was known for his business acumen and unwavering focus on integrity, hard work and respect for others. Matthew's qualities have a foundation of the core values we live by today, high-performance, having the right attitude, doing the right thing, working together and owning it. On behalf of my colleagues here at GGP, we extend our sincere condolences to the Bucksbaum family.

Now turning to our results. Last night, we reported [indiscernible] earnings per share of $0.36 for the fourth quarter, representing a 17% increase over last year, and at the high end of our guidance range. Same-store NOI increased 6.2% when compared to the fourth quarter last year. FFO per share was $1.16 for the year, representing an 18% increase over the last year. These results meet the initial expectations for the year by over $50 million, even with the sales of Aliansce and Grand Canal and Palazzo.

Same-store NOI increased 6% when compared to the last year. Our earnings guidance for 2014 is $1.27 to $1.31 per share and is based on a 4% to 4.5% same-store NOI growth and a 4-plus percent EBITDA growth. Guidance represents about 11% FFO per share growth over last year.

In addition, we expect FFO per share of $0.29 to $0.30 in the first quarter, about 18% higher than the first quarter of last year. The mall portfolio boosted occupancy of 96.4% as compared to 94.9% last year and over 97% leased.

Within the occupancy figure is 92% permanent occupancy. We expect permanent occupancy to reach 93% by year end. It is good to note that to date we've completed over 70% of the leasing required to achieve our 2014 goal. Suite-to-suite lease spreads for 2013 commencements were 12% higher than expiring rents. 2014 commencements for leases down to date are 10% higher than expiring rents. This spread will likely adjust as we continue signing leases for 2014, which should settle between the 8% and 10% above expiring rents.

I'd like to provide some commentary on overall retail trends and expectations and discuss the trends we're seeing in our portfolio. As you know, there have been numerous reports about e-commerce and related traffic declines. I'd like to address the impact of e-commerce have had on the industry, noting that its impact has been positive and negative. First, let me reiterate. Retail sales were up 2.2% this year and our portfolio reported a 3.6% increase.

The current level of retail spending is generally at a very healthy level, over 20% above the previous peak reached in 2007. Previous peak sales per square foot were $463 per square foot in the GGP portfolio, and we ended 2013 at $564 per square foot. [indiscernible] before e-commerce was born, sales that were not conducted at the store were generally made through the catalog and direct mail. In that year, catalog and direct mail accounted for about 10% of total sales.

In 2013, e-commerce accounted for less than 9% of total sales. The initial reaction when hearing that growth in e-commerce is that it must be at the expense of the store. Not entirely true. The growth in e-commerce is primarily coming at the expense of sales that were previously made to the catalog and direct mail. I'd like you to note that 83% of e-commerce sales represent that of catalog and direct mail sales in 1995.

In addition, about half of online consumers have used a ship-to-store option when buying items online and they choose bricks and mortar retailers with an online store for a few reasons: the ability to return merchandise to the store; the push of a coupon or promotion to a smartphone when the consumer is near the store; and simply the ability to buy online and pick up at the store, instant gratification.

Successful retailers are implementing an omni-channel method of selling their products, complementing their bricks-and-mortar locations with a robust online store, leveraging their physical store network to provide a powerful and efficient distribution source that ultimately leads to higher sales. And to this scheme, the Internet adds a threat to their business, retailers are using it in complementary ways and to grow their sales. For example, Nordstrom reports that multichannel shoppers buy 3x to 4x more than single-channel shoppers. In addition, the majority of Macy's inventory is integrated with the online store, allowing customers to arrange pickups from their neighborhood location. When customers pick up in the store, they usually buy additional items as well.

Interestingly, some of the traditional online only retailers are beginning to establish bricks and mortar routes to grow their brands, especially as search marketing and customer acquisition costs on a pro -- per click basis continues to rise. For example, Boston Proper, a women's fashion retailer now owned by Chico's, opened 4 locations last year and plans to open more in the future. Just Fab, a retailer specializing in women's accessories, opened their first store in Glendale Galleria. Piperlime, owned by The Gap, is now opening stores. Athleta, also owned by The Gap, is a great example of an online retailer that has achieved scale through bricks and mortar. Athleta has over 65 stores in 27 states.

In yesterday's Wall Street Journal, there was an article about a store called Storenvy. It was about pop-up online retailers, okay -- to bricks-and-mortar stores. Online is becoming the best incubator for future bricks-and-mortar stores. Not only are the retailers adapting, but the mall owners are as well. For example, last year, we, along with some of our peers, joined forces with a new company called Deliv to provide same-day delivery service for customers that order online or purchase in the store. The program has been in place for 2 to 3 months at 9 malls and over 50 retailers have signed on with more in the pipeline. It’s early sales but the initials results look promising.

In 2013, sales of general merchandise like clothing, sporting goods, electronics and furniture increased approximately 2%. Sales of other items, some of which are purchased infrequently, such as vehicles, house ready [ph] goods and other non-store items increased approximately 5%. It seems that consumers may be redirecting dollars to these types of items, such as auto sales, which are up almost 9%, at the short-term expense of general merchandise sales.

Another factor having an impact on retail sales is the increase in tax of last year as a result of the American Taxpayer Relief Act of 2012. Citibank actually forecast that to be about $110 billion. U.S. consumer spending is strongly related to the overall health of the economy. When the economy is growing and consumers feel good and confident about the future, then spending generally grows and vice versa.

One year ago, when the more recent reported sales growth several times the pace of the overall economy, I commented that sales will continue to grow but the rates will moderate. The prediction has turned out to be true. We are in a period where sales have caught up and will now likely grow at a rate in line with the overall economic growth.

It's reasonable to expect stronger growth in the higher-quality centers. Retailers' demand for high-quality centers is strong and it's coming from a variety of retailers. Domestic and international uses a smaller format and big box. Please note, Victoria's Secret increased its selling square footage by 50% between 2007 and 2012 to an average store size of over 7,600 square feet. Their sales were up 50% chain-wide.

Fall [ph] Fashion and bridge retailers are expanding aggressively. Names such as Uniqlo, Zara, H&M, Kate Spade, Michael Kors and Madewell. Restaurants and entertainment venues are expanding, such as BJ's Restaurant & Brewhouse plan to open 19 new locations this year. Bar Louie plans 25 openings. The Yardhouse is currently opening 50 locations and plans to reach 200 nationwide. Season 52, Barry Steak House, the list is long. We added -- GGP added 69 new restaurants in 2013, 56 in 2012 and 35 in 2011.

Other entertainment concepts that we look to use in our malls are Dave & Busters, which plans to open a store count by 10% each year from their current count of 150 new theaters for the dining option. The mall customer is generally an affluent shopper, highly educated, fully employed. In addition, the mall is more than just a place to shop. The mall is a place for entertainment, dining and social activities. These features, coupled with an exceptional offering of retailers, continue attracting people to the mall. Once there, they stay longer and shop. Over 85% of the U.S. population has shopped at a mall during a 3-month period.

And you should note, over 90% of online shoppers have visited a mall during the same 3-month period. In addition, consumers who shop e-commerce and the store, shop at average 9 times a year compared to web-only shoppers who shop 3 times per year. Overall, the trends we see are quite positive. The economy is growing, consumer confidence is growing and we're in the period of no real change in supply coupled with growing demands of space.

For GGP, we've defined our mission as owning high-quality irreplaceable retail properties. We firmly believe the portfolio will continue to be sought after by retailers to maintain and grow their business. Our centers are places where people shop and go for entertainment. They also offer opportunities for creating value to redevelopment and expansions.

Tenant sales per square foot of the GGP portfolio grew 3.6% to $564. Our A and B+ malls, which comprise 85% of the total NOI, recorded positive comparable sales trend over last year, however, generally flat in the B mall sector.

To development. Today, we've opened $250 million of projects, $1.4 billion is under construction and we have an additional $800 million in the pipeline for the total of just over $2.2 billion. I'll highlight and provide an update of some of the projects. Our largest redevelopment and expansion is underway at Ala Moana Center in Honolulu. The old Sears store has been demolished to make way for 650,000 square feet of new retail. Last year, we announced Bloomingdale's commitment to the expansion. I was recently at the property and I was pleased to see the progress of the redevelopment, and I'm also pleased that 50% of the expansion area has been pre-leased.

Yesterday, we announced the purchase of the leasehold interest of Nordstrom's. It's a 206,000 square feet box. With the acquisition cost in development of the Nordstrom box, we anticipate a cost of about $85 million. And at $40 a square foot in rent, the income will be about $8 million. Last year, we closed on the acquisition of a land offered in Norwalk, Connecticut, which represents the future site of an upper-end shopping mall. We expect to announce the on-anchors in the near-term and receive zoning and planning approvals by the end of this year, commencing construction in summer or fall of 2015.

At Ridgedale Mall near Minneapolis, we're adding a 2-level mall Nordstrom, which should open in late 2015. We are very pleased with the completed renovation of Glendale Galleria. The Bloomingdale's at Glendale opened in Thanksgiving last year. Glendale was our first major redevelopment since 2010 and came in within budget and timing and the NOI reached our projections is a true example of many GGP colleagues working together as a team toward a common goal. The result is a fantastic Class A center in a very strong market.

As you know, over the past 3 years, we pruned the portfolio and strengthened our balance sheet with one mission in mind: to own and operate best-in-class retail properties in the United States. Since 2010, we've disposed lower quality malls, shopping centers, office properties and our investment in Aliansce. We refinanced over a 100 properties, locking in low interest rates and laddering maturities so no one here represents an inordinate level of refinancing risk. Our balance sheet strength allows us a financial flexibility to continue to improve the portfolio and creating value for our shareholders. As you know, in December, GGP was added back to the S&P 500 Index, a recognition we're very proud of.

We believe a high-quality portfolio will continue to be in demand from retailers and by customers. My expectations for earnings this year represent the quality of the portfolio and the strength of the balance sheet. 2014 is a critical year for GGP as we increase the level of owner occupancy and execute on our redevelopment opportunities. Our achievements are the results of pilot efforts of my colleagues at GGP. As we close out a very good year for the company, we have set the bar higher for 2014. I believe we have a winning culture and a team to be placed to achieve our goals. Now, Michael will give you more depth on our results and our guidance.

Michael B. Berman

Thanks, Sandeep, and good morning, everyone. I will make a few comments on our fourth quarter and full year results, followed by guidance for the full year 2014 and first quarter guidance for 2014. Finally, I will provide an update on our balance sheet activities before we open it up for questions. As always, please remember my guidance numbers are intended to be points on a range.

With respect to the fourth quarter of 2013 versus 2012, same-store mall revenues came in at $785 million, up 5.3% from last year. Same-store expense growth was 2.9%. We did see some continued pressure on real estate tax expense. Same-store mall NOI came in at $582 million, up over 6% for last year. Company NOI for the quarter came in at over $600 million, $27 million better than 2014 or almost 5% growth. Keep in mind we gave up approximately $10 million of NOI in the quarter due to the sale of a 49% interest in Grand Canal earlier in 2013.

Net G&A for the quarter was a minus $45 million, up $7 million from 2012 but basically on plan. The primary variance to last year stems from one-time transaction costs in 2013 as we had implemented a; stretch bonus plan during the year. EBITDA was $556 million for the quarter, up $20 million from last year and financing costs were approximately $215 million, down from $237 million last year. Overall, company FFO came in at almost $350 million or $0.36 per share, an increase of 17% on a per-share basis. This is at the top end of our previously stated guidance range and over $35 million better than last year --

A few comments on the full year 2013. Company FFO came in around $1.15 billion, over $155 million better than 2012 or almost 16% growth. FFO per share was over 18% growth. For some perspective, our initial 2013 FFO guidance was $1.1 billion and FFO per share was $1.10 at the midpoint. We are able to beat our initial expectations by over $50 million even with the Aliansce and Grand Canal transaction sales, thanks to the exceptional performance of the entire GGP team.

Turning the page to 2014, we expect FFO per share in the range of $1.27 to $1.31, representing approximately 11% growth at the midpoint over 2013.

A few comments on how we build for our guidance. We expect same-store permanent revenues of approximately $2.6 billion in 2014, growth of approximately $130 million or over 5%. We expect permanent raw occupancy to reach at least 93% by year end and this includes approximately $30 million incremental development revenues that come online during the year.

Total same-store revenues were expected to be approximately $3 billion, growth of $115 million or 4%. This includes decreases in temp revenues as we convert temp to perm, as well as some other one-time 2013 revenues that are not budgeted to recur in 2014. We expect same-store expenses to increase approximately 2.5% or $20 million in 2014. As a result, we expect same-store NOI of just over $2.2 billion, growth of approximately 4% to 4.5%. This growth will vary by quarter. For example, the second quarter expense growth will be impacted due to timing of real estate tax expense in that quarter in 2012 -- 2013.

We expect other NOI of approximately $55 million, slightly down from 2013 as we see the last of the dilutive impact of the Grand Canal JV and the full year impact of our 2013 acquisitions. Also, we expect net G&A of around $175 million, approximately even with 2013.

Company EBITDA is expected to be approximately $2.1 billion, an increase of over 4% or $80 million from 2013. We expect financing costs of approximately $860 million compared to $880 million in 2013. We are benefiting in 2014 from the final payoff of the Rouse bond that we did back in May of 2013.

Company FFO is expected to be approximately $1.25 billion for the year or approximately $100 million in growth over 2013. Assuming 970 million shares throughout the year, yields FFO per share in the range of $1.27 to $1.31 over 11% growth per share at the midpoint.

A few quick ones on first quarter guidance. We expect same-store NOI of approximately $530 million or about 5% growth. We expect EBITDA of about $500 million, representing over 4% growth. Financing costs should be around $215 million compared to $230 million in the first quarter of 2013. So we expect FFO in the range of $285 million to $290 million or per share numbers of $0.29 to $0.30, representing growth of approximately 18% per share. Please remember that the biggest impact of our 2013 share repurchases will be seen in the first quarter.

Moving on to our balance sheet. Our financing activity for the fourth quarter is detailed on our press release, but I want to take a moment to review our full year 2013 activity. We closed on 29 transactions and refinanced over $4.1 billion at share, generating proceeds of $1.4 billion. The weighted average rate on the loans was reduced from 4.9%, down to almost 3.5%.

Our financings did include a $1.5 billion term loan at LIBOR plus 250. At the beginning of 2013, our average rate on the entire portfolio was 4.8%. And at the end of 2013, it is down to around 4.3%. Our pro rata debt balance remains around $18.9 billion and our remaining average term has increased from 6.7 to 7.3 years.

In 2014, we have less than $200 million of debt maturing. However, we plan to refinance an additional $1.3 billion in mortgages at share, generating around $200 million to $250 million in net proceeds. This represents a little more than our scheduled amortization for the year. In addition, we are in the process of securing construction financing for our Ala Moana development. The $200 million that's maturing is an asset that we have already locked rate on and expect to close in the next month or 2.

Finally, we plan to spend approximately $600 million in development during the year. And with that, let's open it for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Josh Patinkin of BMO Capital Markets.

Joshua Patinkin

Sandeep, your comments on A's versus B sales, I'm curious, what did main difference is in tenancy that drive relatively flat growth at Bs and strong growth at A's in 2014 -- '13?

Sandeep Lakhmi Mathrani

Well, in the A's, you have a few tenants that have done incredibly well. You've got the up-and-coming Michael Kors, Kate Spade, J.Crews, Apple, of course, you've got that type of tenancy which drive sales. And the Bs, you still haven't seen the migration of the Michael Kors going into the Bs and it's sort of hurt by -- teen retail, which has actually seen a decline the -- what should I call -- the 3 As: The Abercrombie, the American Eagle and the Aéropostale as we've seen them to be sort of hurt in 2013. So there lies the disparity ---

Joshua Patinkin

Okay, and the teen retailers that didn't do so well in the B malls, have they done -- have they grown equivalently in A malls to some luxury of the retailers that you have mentioned.

Sandeep Lakhmi Mathrani

No, teen retailers have been hurt to A and B malls.

Joshua Patinkin

Okay. And then, your discussion on durable sales. As you look into 2014, are you anticipating a shift from durable consumer spending to apparel and could that be good for Bs from here?

Sandeep Lakhmi Mathrani

As we're a predominantly an A and B+ owner -- I'm going to stick with the A and B+ comment, the answer is we do think that they will start to be a shift by the fourth quarter. As people either continue to spend or they continue to get -- adapt to their higher outlays, whether it be car lease payments or credit card bill payments and they start to adjust to the payroll tax, we do start seeing that sales will be in the 3% to 5% range for 2014. I might add, as much as I said in my comments that we're going to grow the economy, I don't think -- we think the economy is going at 3% to 5% this year. So therefore, consumer spending in the mall sector should slightly outpace the GDP growth in the country.

Joshua Patinkin

Okay. And then finally, on the lease spreads. As we look into 2015 and beyond, are you anticipating that the portfolio is pretty well marked-to-market at this point or you think you continue to see a continuation of strong leasing spreads with the future?

Sandeep Lakhmi Mathrani

I think we'll continue to see a strong leasing spreads and the reason is because we have to appreciate that the leases in 2015 are those that have been done in year 2005 or 2010. And so there's been great sales growth in that point. The annual increases in the rents are 2% to 3%. So that still leaves you a healthy, call it, 10% spread that's due to get back to where they were when the leases were done 5 or 10 years ago. So you're going to continue seeing this leasing spread because there's a lag in our industry.

Operator

Our next question comes from Ki Bin Kim of SunTrust.

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

I'm not sure if I missed this in the opening comments, in your guidance, did you give some color on what your lease spreads expectations are for 2014?

Michael B. Berman

No, but we expect them to be similar to where they are in 2013.

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

Okay. And tell me if I'm wrong, but your lease spreads that you disclosed on Page 18 on suite-to-suite lease spreads are supposed to commence in 2013 and 2014, those don't include the upside from temp to perm leasing, is that correct?

Michael B. Berman

No, they do include them.

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

Fully? Is it 100%?

Michael B. Berman

Yes.

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

Okay. And just one separate question. I appreciate your comments on e-commerce and on retail versus industrial. But when I look at the industry, there's probably one bright spot, which is the increase in supposedly U.S. tourism bureaus outside the country to facilitate more visitors coming in from China and Brazil. Obviously, you guys are probably closer to that data than I am. I was wondering if you could provide a quick update on where we are in that process and what you expect.

Sandeep Lakhmi Mathrani

Again, we obviously get exposure to the Chinese, Japanese, Korean population in Hawaii, and we have continued to see -- as a matter of fact, even when Japan was having a debt crisis, we continued to see an increase in travel, as well as tourism and spending. As a matter of fact, from China, they're increasing the direct nonstop flights between Beijing and Shanghai, and Honolulu, which again is a complete advantage to the shops to Ala Moana and the shops in Hawaii. And the main reason besides the increase in tourism is the cost of merchandise in both Brazil and in China is 30% to 40% higher because of import duties. So it is a complete advantage to come and shop in the United States. Besides, shopping is a pastime on vacation. It's also structured to be for people come and have this plan just for shopping because of the savings in their own countries.

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

Do you have a data on what percent of sales is tourism dollars on a portfolio level?

Sandeep Lakhmi Mathrani

I do not.

Operator

Our next question is from Vincent Chao of Deutsche Bank.

Vincent Chao - Deutsche Bank AG, Research Division

Just want to go back to the sales side for just a minute. I think I heard you say 3% to 5% up for 2014. Just curious based on what you saw in fourth quarter as well as sort of early first quarter here if you think we are -- we should expect tenant sales growth to sort of bottom in the first quarter and then sort of tick higher from there or do you think we sort of stay steady here for a little bit longer?

Sandeep Lakhmi Mathrani

I would say with the January sales, you're going to hope that first quarter bottoms. I mean, January, I think was the additional month -- would be additional month purely because of weather, for no other reasons but weather, throughout the country whether it be Midwest, even in the South, Southeast. East Coast has had tremendous bad weather. So I'm going to say that first quarter, which should be the bottom, and you'll start to see by the third quarter a pickup.

Vincent Chao - Deutsche Bank AG, Research Division

Okay. And just given your comments about weather, which has been in the news quite a bit, I mean, do you expect any increase sort of utility costs, dollar move that kind of thing. I know a lot of it gets reimbursed, but should we expect any rise there?

Michael B. Berman

To the extent we have increases in utility costs, we generally recover them any way through our leases. 2013 was a pretty good year on the expense side for us. We probably budgeted it up a little bit on utilities, but 1 month does not make a year. It does tend to fluctuate throughout the year, but we've took a little bit more of a conservative approach this year than the actual 2013.

Sandeep Lakhmi Mathrani

The only one I would sort of sit back and say is no more could be higher in 2014 because we only had quite a snowfall active January, and we anticipate it to be more snowfall in February.

Vincent Chao - Deutsche Bank AG, Research Division

Okay. And then just the last question. I know you're pretty fully occupied at 96.4% temp to perm -- or permanent to temp should be going to 93% or more. Do you think 96.4% can hold steady on a total occupancy level or should we expect that to fall a little bit?

Sandeep Lakhmi Mathrani

I think it can hold.

Operator

Our next question is from Craig Schmidt of Bank of America.

Craig R. Schmidt - BofA Merrill Lynch, Research Division

I was just wondering with regard to your tenant sales if you had any regional breakout. Particularly, I'm looking to see if there was a weather impact. So if we compare California to the Northeast or Midwest?

Sandeep Lakhmi Mathrani

So the answer is the East Coast performed the best, the Midwest performed the worst and the West was in between. So there was -- when I say the worst, the Midwest was flat, East Coast was up fairly steady substantially and the West was up slightly.

Craig R. Schmidt - BofA Merrill Lynch, Research Division

Great. And then I -- just looking at the Lakeside Mall in Detroit, it had -- I just wondered what the strategy might be to lift the occupancy there?

Sandeep Lakhmi Mathrani

So Lakeside is a B+ mall. I think the occupancy is somewhere in the 80s, and we have actually done substantial amount of new leasing to the bigger box retailers. So we should see an uptick in occupancy by year end. It should go from, for today, it's about 83% to, I would say, this probably should get 2, 3 points additional occupancy by year end.

Craig R. Schmidt - BofA Merrill Lynch, Research Division

Okay. So as a B+ mall, it still fits in with your high-quality mall portfolio?

Sandeep Lakhmi Mathrani

Yes.

Operator

Our next question is from Dan Oppenheim of Crédit Suisse.

Daniel Oppenheim - Crédit Suisse AG, Research Division

I was wondering if you can talk a little bit more in terms of the shift to in terms of temporary or permanent. And clearly, a lot of 2014 will be aided by that, but it sounds as though at the start of the call, you're tempering the expectations in terms of the leasing spreads. Given what we've generally seen in terms of the higher lease on the permanent occupancy, can you talk a bit more about that?

Michael B. Berman

Can you repeat the question, so that I could hear you?

Daniel Oppenheim - Crédit Suisse AG, Research Division

Sure, I'm sorry. It sounded as though you were talking about re-leasing spreads that would be 8% to 10% for 2014 based on the comments to the earlier part of the call, even though 2014 would benefit from a big shift of temporary to permanent, wondering if you could comment on that, given the general uplift to rents from the shift from temporary to permanent?

Sandeep Lakhmi Mathrani

Okay. So the reason for that is essentially the demand that's coming from retailers is the larger format retailers such as Zara, UNIQLO, H&M, and they tend to pay slightly lower rents than what I would call smaller inline retailers. So when we give you our spreads, they're all inclusive, and that actually drives it down a little bit.

Daniel Oppenheim - Crédit Suisse AG, Research Division

Okay. And I guess, the second question, I was wondering about the development in Norwalk. It looks as though the cash on cash return expectations there 8% to 10% or so at the low end in terms of some of the larger projects that you're pursuing, but we think about that as potentially a greater risk in terms of ground-up development towards [ph] redevelopment. How do you think about that and sort of what do you want in terms of pre-leasing to get started in the fall of next year?

Sandeep Lakhmi Mathrani

Okay. So firstly, I would sort of sit back and say, yes, it is got marginally more leasing the risk and the marginally more leasing risk comes from the fact that it is -- it has a zoning requirement, okay? Albeit, all the other redevelopments are actually ground-up additions to the mall. So from a construction perspective, it's got similar risk. The slightly lower returns in Norwalk are driven because you have a land cost and infrastructure cost, which you don't have in the existing shopping center. And if one can actually build a high-end $600-plus regional mall at an 8% to 9%, you did say cash on cost, it's actually -- you said cash on cash, it's actually cash on cost that's completely unlevered return that would meet every one of our criteria to develop specifically since you'd see A+ malls fading in the full cap range.

Operator

Our next question comes from Steve Sakwa of ISI Group.

Steve Sakwa - ISI Group Inc., Research Division

Sandeep, I was wondering if you could just talk a little bit about the redevelopment portfolio. You've done a nice job kind of growing that. And then as you kind of look out a couple of years beyond what's in place, how big and what do you think the good run rate is for kind of redevelopment spend over the next 3 to 5 years?

Sandeep Lakhmi Mathrani

We've got about a 2-ish -- just a little bit over $2 billion pipeline. We sort of said that we're going to do $300 million to $500 million a year. This happens to be maybe the biggest year with $600 million. Again, from now until 2017, 2018, it's going to be the $300 million to $500 million a year. Again, to go beyond 2018, we're not prepared to do that right now.

Vincent Chao - Deutsche Bank AG, Research Division

Okay. And then in terms of, I guess, kind of talking about dispositions, where do you stand in just terms of kind of non-core assets that are sort of left in the portfolio, whether it be non-retail? And then of the retail assets, how many more malls do you kind of look to sell in 2014?

Sandeep Lakhmi Mathrani

So the non-retail assets account for a little less than 2% of our NOI. Opportunistically, we will continue to sell those assets through the next 12 to 24 months. On the mall portfolio, where we create what I would call the B assets as sources of capital, and we'll continue to improve the portfolio to recycle capital. There's no fixed number in mind at this stage of the game, were happy with our 120-mall portfolio. But could you see us selling more assets? Absolutely.

Steve Sakwa - ISI Group Inc., Research Division

Do you look to follow in some of your peers' footsteps in selling any parts of your 80 malls to raise capital or is that kind of not part of the financing strategy?

Sandeep Lakhmi Mathrani

Once again, we are opportunistic and if it seems to be that the way to raise capital is to sell any mall, we might go down that path. But we don't have a plan as of right now as we do not have a need for capital.

Operator

Our next question is from Christy McElroy of Citi.

Christy McElroy - Citigroup Inc, Research Division

Michael, I wonder if you could provide a little bit of color on what you're seeing in the financing market since you've been pretty active the last quarters. What trends are you seeing on cost, LTVs? And when financing malls, are lenders thinking about department store closings and obsolescence risk any differently than they have in the past?

Michael B. Berman

An interesting thing happens in the financing markets, Christy. As you turn the calendar, everybody's got their new allocations, and concerns they might have had with the end of last year kind of evaporate because they've got to put money out. I'm not saying they go away, but they become less of a discussion. We have plans to do about 8 to 10 deals. We are going to try to take advantage of the market early on. Spreads continue to be very favorable. You're talking continue to see 150 to 200 over treasury that's how I quote them for the A malls and maybe another 25 to 50 for B malls and I would say A and B+ are in that 150 to 200 category. You're still seeing 10 years. You're still getting interest-only or maybe only a couple of years of amortization. The loan-to-values are still in the 60% to 65% range. There has not really been a dramatic improvement from a borrower perspective in terms of underwriting criteria. It's still -- people are still looking at transactions in a rearview mirror as opposed to what's going to happen over the next 12 months. You do have conversations from time to time about Sears and JCPenney, they tend to be very property-specific. And in our case, we like our portfolio and have really had no issues in our financings with respect to the anchors. And I would say, right now, again, the current -- the treasuries have dropped, I don't know, 50 basis points and the market continues to be strong for the bonds that come out of this CMBS deal. So we like the market right now.

Christy McElroy - Citigroup Inc, Research Division

That's helpful. Was there anything that impacted -- anything onetime that impacted your provision for doubtful accounts in Q4? And any sort of overall expectations for retailer health and potential closings in '14?

Michael B. Berman

Doubtful accounts may have been impacted by the sales. I'm not sure which particular piece of paper you're looking at. We have had a very good credit in the portfolio the last few years. Bad debt expense has been significantly less than budget. You're seeing very few retailer issues despite what you might be reading in the paper. That's not translating into, "Boy, we've got to take that reserve up." You always have some people who are doing better, some people who's doing worse. But from an overall credit perspective, I would say things seem to be in pretty good shape.

Christy McElroy - Citigroup Inc, Research Division

Okay. And then just lastly to follow up on dispositions, regarding the 3 malls that you sold in Q4, any chance you could discuss cap rates on Burlington and Eden Prairie? And then on Pine Ridge, how do you approach the decision to sell an asset versus handing back the keys?

Sandeep Lakhmi Mathrani

So Pine Ridge, I think, was a $200, and in anticipation of you asking that question, $245-a-square-foot mall. We did have -- I think it was part of a cross-collateralized loan. So obviously, that means you don't hand back the keys, and we sold the asset at a double-digit cap rate. Hidden Prairie was done predominantly for huge tax reasons. There was a huge tax loss and we took advantage of that in 2013. Burlington Coat was sold as a $270 mall. It was sold in the high single digits.

Christy McElroy - Citigroup Inc, Research Division

And if I think about your 120 malls, how many do you classify as A versus B?

Sandeep Lakhmi Mathrani

I think we use the GSA classification just because it's the standard. And I think it's 73 A malls and I don't recollect how many B+ malls, but I think its half B+ and half B.

Operator

Our next question is from Andrew Schaffer of Sandler O'Neill.

Andrew Schaffer

In regards to long-term occupancy costs, do you think U.S. retailers would accept levels similar to once seen internationally around that 15% or certain retailers already accepting these levels but are being washed away in the portfolio average, given the constant turn and length of leases signed?

Sandeep Lakhmi Mathrani

Once again, I mean, in the international community, whether it be in Asia or whether it be in Europe, occupancy cost is actually approaching almost 20%. The U.S. has always been lower. The better quality malls are at 17%, 18%, and the B+ malls are about 15%. So we think that the B+ and better can do 15%.

Operator

Our next question comes from Nathan Isbee of Stifel.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

On the Norwalk mall development, this is the first new mall you've built in a long time. And I'm just curious, given the clean slate you're giving here in the design as we are in this "new omni-channel world," can you perhaps give us some insight on how this design is evolving and if there's anything different that you're -- any different approaches you're taking as you design it maybe from a -- in terms of building technology into the "bricks and mortar" storage space or anything that the retailers are asking for?

Sandeep Lakhmi Mathrani

Actually, the only thing that we're going to be more cognizant of is to make it more convenient for people to do same-day pickup. Barring that, we're inspired to build a mall of the highest quality with the best design that people will be attracted to come to. So the only thing is to ensure ease for same-day delivery of same-day pickup.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

Okay. So on the storage side in terms of fulfillment center, that's not something that you're really focusing on?

Sandeep Lakhmi Mathrani

Actually, if you see what the retailers are doing is it's not that they're increasing their store size. I mean, as a matter of fact, Urban Outfitters CEO made a comment that he's -- as much as e-commerce is a threat to directly increasing the size of their stores to show more product to the customer, and they're using the product in the stores, okay. They're not actually going into the back room to take out from storage. So that basically becomes easier to pack and ship or pack and have ready for pickup. So it is being incorporated within the store, not put away into what I would call some side room.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then you mentioned in passing the traffic issue, can you just address what you're seeing traffic trends in your portfolio? And there's some data sources out there that are quoting some pretty Draconian numbers, if you can maybe address those.

Sandeep Lakhmi Mathrani

I sort of will concur with my peer that if those traffic trends were correct, we would not be seeing a 3.6% sales increase. We would not be -- actually see all the perk if price go up. And have you seen a traffic slowdown over the period? The answer is yes. But if you actually look at being in November and December, did we have as many peak periods as we did in 2012? Our portfolio is dead. So has traffic slowed down? Yes. Has it been Draconian? Absolutely not.

Operator

Our next question is from Caitlin Burrows of Goldman Sachs.

Caitlin Burrows - Goldman Sachs Group Inc., Research Division

Could you just talk about the natural demand for JCPenney space and who the moving-in tenants could potentially be going forward?

Sandeep Lakhmi Mathrani

Firstly, you've just made an assumption that JCPenney was not going to be around, which is not true, in my opinion. In my opinion, 5, 10 years from today, JCPenney will be part of the retail landscape. Will they shutter some stores? Yes. And the obvious uses of that stores are in a restaurant, big boxes and the Dick's sporting goods, the lifestyle tenants. You could tear it down and clip on a lifestyle center. So in our portfolio, we actually think as we got these boxes back, they would be an advantage. We'll appreciate as I get clear space $2 of square foot on our portfolio. And I think JCPenney pays $3 a square foot on our portfolio. Average size is about 200,000 feet. So you could see how would you own an A or a B+ mall or you're in a B mall for that matter that we capturing these will be a complete bonanza for the mall owners. So firstly, I think the uses are tremendous. The demand is tremendous. We have no place to put a bigger box uses the H&M's and the Zara's of the world, the Anthropologies, the Urban Outfitters, anyone which is larger format, the Dick's Sporting Goods, and this makes a perfect position for us to tear the box down and add on a clip-on with all those types of tenants. So this could be a tremendous home run for the mall industry, but we don't anticipate getting any of them back to speak of?

Caitlin Burrows - Goldman Sachs Group Inc., Research Division

Great. And I think we definitely agreed, just wanted to hear your side. And then I guess you were kind of commenting on it, but we're originally wondering, do you think there's enough demand from the large format stores or would they have to be broken up? It seems like perhaps broken up into a restaurant not quite the size of a large anchor store.

Sandeep Lakhmi Mathrani

So once again, I mean, I see going back to this one that we had I think 76 empty boxes in 2011, and we have 7 left. So you could sort of sit back and say there's a 2.5-, 3-year period. We absorbed almost 70 boxes.

Operator

Ladies and gentlemen, we are nearing the end of the call. [Operator Instructions] Our next question is from Michael Mueller of JPMorgan.

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

Looking at the lease, I guess, the lease spread schedule, it looks like the average term that you're signing is about 6 years. Do you see that changing over the next few years in terms of going up? And I was wondering can you talk a little bit about the composition of that? Is it a bunch of 3-year leases and a bunch of 10-year leases or are they largely in that 5 to 7 range?

Sandeep Lakhmi Mathrani

Can you please repeat the question?

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

Yes, the average signings that you're doing are about 6 years in duration of lease term. I mean, do you see that number growing and getting longer, moving up to, say, 8 or 10 years or should we expect it to stay in the 6 range?

Sandeep Lakhmi Mathrani

I think you're going to see it in the 6 range. They're going to be 5- and 10-year leases.

Operator

Our next question is from Cedrik Lachance of Green Street Advisors.

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

I just want to go back to a previous discussion on Sears and Penny, and just how easy or potentially, they would be absorbed their space. With that in mind, how much progress or how often do you have discussion with them to recapture these boxes proactively like you did 2 years ago? And how many of them do you think you could recapture over the next, say, 5 years?

Michael B. Berman

Cedrik, that's a -- it's a hard question to project. Do we speak to them often? Yes, very often. Do we recapture them based upon demand? Yes. I mean, recently, we bought back the Sears box in Columbiana mall to expand a Belk into the space. So we are proactive at it when we see the need arise to recapture space. We recaptured -- in the process of recapturing a vacant box in Peach Tree mall. So as and when we predemand, we do go back and recapture the space, it has to make economic sense. And will that get more active as we start to rethink what we can do with the various boxes? It could depending on the economics. Can I tell you that, that process will accelerate over the next 5 to 10 years? We'll keep chipping away at them, and that's what we've done. We bought a few. We've leased them. We bought a few more. We've leased them. And that's sort of our MO is to do it peacefully and hopefully chip away. In 5, 10 years, hopefully, the exposure will be much smaller.

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

And maybe just a follow-up on that. How comfortable are you with -- in particular with Sears actually moving along by itself and bringing new tenants in its space and being the recipient of that brand?

Sandeep Lakhmi Mathrani

We've actually seen that done in a few of our malls. Oakbrook in Chicago is one. We actually did not have the room and the space to put in the Pottery Barn Williams-Sonoma. And to me, as I said previously, if they want to spend the capital and bring them in, we're not going to stop them. We think it's an advantage to the mall to have that end of the mall anchored by the higher-productive tenants. And personally, that could help Sears drive traffic into their stores. And so as I said on Friday at a podcast that I'm not going to bet against any landlord who's incredibly bright. He was at the forefront of actually making his stores technologically advanced. And I really can't sort of sit here and tell you who's going to win the battle 5, 10 years from today when you take e-commerce into the equation and you marry that with bricks and mortar. So I'm not against them doing that. I prefer doing it myself, but I'm not against doing it. And don't forget, if they do come and RE has required our approval and we consented to them because we think it's the right thing for the mall.

Operator

Our next question is from Rich Moore of RBC Capital Markets.

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

Do you actually have anything you're marketing, any regional malls you're marketing for sale at the moment?

Sandeep Lakhmi Mathrani

None.

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

Okay. And then if I could real quick, Sandeep, this whole notion of the stores of fulfillment center, I think it's kind of interesting, but it's expensive real estate for fulfillment. And my understanding is that the retailers are actively looking for more warehouse space to kind of meet their e-commerce commitments going forward. Do you think the idea of your stores being fulfillment centers is more of a fad, kind of a short-term solution to eventually be a warehouse solution?

Sandeep Lakhmi Mathrani

I actually don't think so because actually, if you think about this, if the online inventory and the store inventory could be transparent, the retailer will not have to duplicate merchandise, will not have to duplicate real estate cost and will not have to duplicate manpower. So as a matter of fact, if they're able to service it, okay, from the store, okay, it'll be far more efficient way for them to operate. So -- and the other aspect you have to appreciate is that the goal here is to basically drive the traffic into the store so you get the additional sales. I think Macy's may have said, I'm not sure, that when they've done this, the sales increased by 25%. And so if 50% of the online shoppers want to pick it up at the store, there's a reason for that and no retailer is going to deprive them. And every retailer that's doing online is doing it in a profitable manner versus the pure online-only retailers. So the bricks and mortar, we think, is a critical part of the growth path.

Operator

Our last question is from Linda Sai (sic) [Tsai] of Barclays.

Linda Tsai

It sounds like you're pretty pleased with the rollout of Deliv [ph]. Can you just give us some more details, what types of malls are participating, who are the customers, are there certain merchandise categories that are more conducive to delivery? And I realize it's early in the cycle, but what kind of metrics might you be looking at or can we expect you to release any metrics in the future to track the progress of this initiative?

Sandeep Lakhmi Mathrani

It's a service we provide. I'm not sure we're going to, again, break out the progress we're making. Right now, we've picked -- in our portfolio, we've picked 4 malls: San Francisco, San Jose, L.A. and Chicago, for obvious reasons. One, there, we think the customers in those markets are much more technology-friendly. If the retailers have been across the board, we signed up 50 retailers. It's actually ironic that you might actually find the jewelry retailers have done the most versus anyone else and you would actually think that to be counterintuitive. So it's still early. We do want to roll this out into a handful of more malls in 2014. More importantly, we've got to ensure we get more retailers signed on and the most important is the point I made to Rich, which was basically you need to have transparency of the online inventory and the store inventory, which the retailers that are actively working on to be true omni-channel retailers.

Operator

Thank you. That concludes our Q&A session. I would now like to turn the conference back over to Sandeep Mathrani for closing remarks.

Sandeep Lakhmi Mathrani

Thank you, all, for joining us this morning. Please contact either Michael Berman or Kevin Berry for any questions you might have. Once again, Happy New Year. Thanks.

Operator

Ladies and gentlemen, this concludes today's conference. Thanks for your participation, and have a wonderful day.

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