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General Growth Properties, Inc (NYSE:GGP)

Q1 2014 Earnings Call

April 29, 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

Vincent Chao - Deutsche Bank AG, Research Division

Ryan Peterson

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

Ross T. Nussbaum - UBS Investment Bank, Research Division

Craig R. Schmidt - BofA Merrill Lynch, Research Division

Christy McElroy - Citigroup Inc, Research Division

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

Steve Sakwa - ISI Group Inc., Research Division

Linda Tsai

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

Daniel Mark Oppenheim - Crédit Suisse AG, Research Division

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

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

David Harris - Imperial Capital, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to General Growth Properties' First Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, today's meeting is being recorded.

I would now like to introduce your host for the conference, Mr. Kevin Berry. Mr. Berry, please begin.

Kevin Berry

Good morning, everyone, and welcome to General Growth Properties' First Quarter 2014 Earnings Conference Call hosted by Sandeep Mathrani, our Chief Executive Officer; and Michael Berman, our Chief Financial Officer.

Certain statements made in the 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, April 29, 2014. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the earnings release and supplemental filed in Form 8-K with the SEC and also available on our website.

It's my pleasure to now turn the call over to Sandeep.

Sandeep Lakhmi Mathrani

Thank you, Kevin. Good morning, everyone, and thank you for joining our call this morning. Yesterday, we reported our first quarter results and outlook for the remainder of the year. I'll highlight a few metrics and let Michael cover the results and guidance in more detail before we open it up to calls.

FFO per share increased 21.4% to $0.31 from $0.25 in the prior quarter. Earnings growth was driven primarily from property operations, as evidenced by the 5.7% increase in the same-store mall NOI and also keeping our property management and overhead cost in check and continued savings from refinancing activity.

Our company's consistent earnings growth is the product of our disciplined focus on our business plan and strategy we established over 3 years ago, which is to be the pure-play owner of high-quality retail properties in the United States. We have executed to this plan and will continue to do so, never losing focus on the 3 drivers of long-term organic growth: increasing permanent occupancy, achieving positive rental rate spreads and generating income from our development and expansion activities.

Operating metrics at quarter end are evidence of our continued efforts. The mall portfolio was over 96% leased and over 94% occupied. Permanent occupancy increased to 90.4%, almost 2% higher than 1 year ago. The increase in permanent occupancy represents approximately 1 million square feet of space now leased on a long-term basis. We set a target of 93% permanent occupancy by year end 2014, and we leased 90% of the space required to achieve our target.

Our development activities remain on track and set to deliver a 9% to 11% return on our $2.2 billion of invested capital, of which $300 million have opened and over $1 billion is under construction.

Initial lease spreads continued to come in strong, with 2014 commencements approximately 11% or $6.60 of [indiscernible] above expiring rent. We expect these positive leasing spreads to continue. Our reported lease spreads have been fairly consistent in the 10% to 12% range, as both the new rents are growing and the expiring rents have dropped.

Expiring leases originally took occupancy 7 years ago on average, and in general, the rent growth hasn't kept pace with the sales growth, thus keeping the related occupancy costs low. Upon expiration, they're reselling rents to market, up creating the tenant mix and overall productivity of the sector. Given there is virtually no new supply of high-quality mall space expected for several years and a strong demand for space from retailers, restaurants, entertainment venues and other users, we're in a strong position to continue seeing positive rent spreads and, thus, growth in in-place rent.

Turning to sales. Over the past year, total portfolio sales recorded, excluding anchors, increased approximately 3% from $18.9 billion to $19.5 billion on a comparable basis, indicating the portfolio continues to capture market share. This metric covers approximately 85% of our in-line GLA. On a comparable basis, for stores occupying less than 10,000 square feet and an occupancy of at least 13 months, sales were slightly up. This metric covers approximately half our in-line GLA.

The current level of retail spending is at a healthy level, approximately 22% above the previous peak in 2007 and 39% higher than the trough in 2009. The GGP portfolio sales peaked at $462 per square foot in 2007, dropped to $406 per square foot in 2009 and ended the first quarter at $565 per square foot. Let me emphasize, sales today are 39% higher than they were during the 2009 trough. During the same short time period, the economy has cumulative grown approximately 9.5%.

Since late 2012, I've been discussing the growth in retail sales compared to the economy. And clearly, it is simply impossible for the growth in retail sales to consistently outpace the broader economy and at as such a spread. However, we're seeing sales continue to grow, albeit at a more reasonable pace. The primary reason for the continued growth is consumer confidence. The economy is experiencing real economic growth that is creating opportunities throughout the country. Overall, consumer confidence has improved steadily since mid-2011 as total employment and personal net worth have risen.

Coming out of the recession, consumers practically halted all spending on discretionary goods. Spending was more concentrated on non-durables. Last year, the consumer redirected some spending to durable goods such as autos and housing items, which naturally led to a moderation in retail sales. Sub-spending patterns are cyclical, and it usually takes time, 12 to 18 months, for consumers to adjust to a new spending level. I expect, by the third quarter this year, we'll start to see higher growth in retail sales.

I'd like to spend a moment on teen apparel. It's no surprise that sales within this category have declined, which also impacts mall sales since the stores generally occupy less than 10,000 square feet. There are 4 main reasons for the decline. The product offering are not necessarily unique. Prices are high. The teen consumer segment is experiencing high unemployment. High school graduates and high school students have unemployment in the 20-plus-percentage range. And lastly, they are burdened by ever-increasing smartphone bills, which run an average of $120 per square month -- square -- $120 per month. As a result, you have seen an evolution in the teen consumer where you've seen impacting sales at certain brands. It's not that the teen segment has stopped shopping on clothes and accessories. It's that they are now shopping at fast-fashion retailers. Fast fashion has quickly evolved to capture this segment by regularly updating their product offering and keeping their prices low. For example, within our portfolio, H&M is reporting double-digit sales growth. Plus, they, along with other names, have major expansion plans in the U.S. and are targeting high-quality centers. Their stores are usually larger than 10,000 square feet.

Turning to omni-channel. We continue to see the benefits our retailers are experiencing from adopting an integrated omni-channel sales and distribution platform. During our last earnings call, I discussed the segment. I want to emphasize several points.

Consumers today want instant gratification and are increasing their use of brick-and-mortar stores as pickup points for merchandise they have bought online. Half of online consumers use a ship-to-store option because it's easier to pick up and return merchandise to a store. Retailers are increasingly meeting their customer demands by syncing their online and physical store inventories. This leads to better inventory management, minimizes markdown and ultimately results in higher profit margins. Higher margins allow retailers to afford higher rents.

The reported growth in online sales is not coming at the expense of stores but from other sales channels, namely the catalog and direct mail. In 1995, before the Internet, the catalog and direct mail accounted for 10% of total sales. Today catalog, direct mail and online purchases combined account for less than 9% of total sales.

Let me emphasize, 95% of all retail sales are by brick-and-mortar retailers. I will not be surprised if we see retailers no longer differentiating amongst the various channels dealing their complementary functions.

I've seen the initiative benefit the consumer and support our tenants by helping them meet their customers' demand. Over 80 retailers have signed on the program, and the early results are promising. We have a plan to open several more centers during the year. The playing field is starting to become more even as states get more aggressive ensuring sales sectors charge on [ph] all purchases regardless of how or where the sale is made. The advantages, once exploited by online retailers, stays in consumer's mind. The products are exclusive, the customer service and experience is unique and the format satisfies consumer's demand for instant gratification.

Let me make a few comments about JCPenney and Sears. We have 81 Penney stores and 69 Sears stores. Typical stores average 140,000 square feet and they generate an average of $20 million per store. Occupancy costs are very low at about $4 per square foot. So on an average, a store owned and leased is generating more than $0.5 million in annual rental income.

We have created significant value from redeveloping anchor boxes. And I believe there are further opportunities to do so within our portfolio given the strong demand from retailers, restaurants and other entertainment venues that stays at high-quality centers. Just for example, let's say we acquire a typical 140,000-square-feet box and replace it with a 50,000-square-feet new leasable area and rent is for $30 a square foot. You can do the math. It's highly profitable. There are extraordinary value-creation opportunity within these centers.

In closing. We are pleased with the strong start to 2014 and are confident in achieving our target for the year. I will be remiss if I did not thank all my colleagues for living by our core values of high-performance attitude, do the right thing, being together and owning it to achieve these great results.

Michael, I turn it over to you.

Michael B. Berman

Thanks Sandeep, and good morning, everyone.

I'll walk you through some details on our first quarter results, followed by second quarter 2014 guidance and an update on our full year guidance. 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.

First quarter '14 to first quarter '13 same-store mall revenues came in at $739 million, up approximately 4% to last year. Same-store expenses declined almost 1% to $205 million. We did have some incremental weather-related expenses during the quarter, but those were offset by a favorable real estate tax variance related to 2013 activity.

Same-store mall NOI came in at $534 million, up 5.7% to last year. Company NOI for the quarter, up $25 million, better than last year, or 4.8% growth. Net G&A for the quarter was a minus $47 million [ph] , about $5 million higher than 2013 but basically on our plan. We remain comfortable with our January guidance of $175 million for net G&A for the full year.

EBITDA was $501 million for the quarter, up $20 million from last year, a growth of 4.1%.

Financing costs for the quarter were $211 million, down from $230 million. Overall FFO came in at $292 million or approximately $0.31 per share, an increase of over 21% on a per-share basis. This is above the top end of our previously stated guidance range of $0.29 to $0.30 and approximately $40 million better than last year. The share repurchase we completed in February aided our results by approximately $0.005 during the quarter, so our operational results were still above $0.30 per share.

Moving on to second quarter guidance. We expect same-store NOI of approximately $534 million or just over 4% growth. We expect EBITDA of about $505 million, again a little over 4% growth. Financing costs should be approximately $215 million compared to $222 million in the first quarter of 2013. We expect FFO in the range of $275 million to $295 million or $0.29 to $0.31 FFO per share, representing approximately 12% growth at the midpoint.

For the full year of 2014, we are updating our FFO guidance to a $1.30 to $1.32 or an increase of $0.02 at the midpoint. As I said earlier, we added a little less than $0.005 to our first quarter FFO per share due to the February share repurchase. We are adding a little over $0.01 to the remainder of the year for the share repurchase. And we are assuming that our operational beat during the first quarter holds true, giving us approximately $0.02 of additional FFO per share from our original guidance.

Moving on to our balance sheet. On our February call, we discussed plans for approximately $200 million to $250 million in net financing proceeds during the year. However, and with the use of our line of credit to facilitate our share repurchase in mid-February, we have increased the 2014 pipeline to be approximately $750 million in net proceeds. We anticipate reducing the line of credit balance during the second quarter.

During the first quarter, we closed 3 deals, refinancing $530 million of maturing debt at share and then generating an additional $160 million of proceeds. The weighted average rate on the loans went from 4.7% to 4.4%. We have 2 deals in documentations that we expect to generate about a $110 million in net proceeds. And additional deals we are planning during the year are expected to generate around $480 million in net proceeds.

Finally, we plan on closing in mid-May on a $450 million construction loan for expansion project at Ala Moana. We are currently in the market on a construction financing for Baybrook Mall near Houston, Texas, where we are planning a $150 million expansion of which our share is 50%.

Progress continues on our development pipeline, and we continue to expect approximately $600 million in development expenditures during the year, including major projects at Ala Moana, Baybrook Mall, Ridgedale Center and Mayfair Mall.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Vincent Chao of Deutsche Bank.

Vincent Chao - Deutsche Bank AG, Research Division

I just wanted to go back to the commentary on Sears and JCPenney. I'm just curious, I mean they're -- those obviously are not necessarily the best traffic drivers today, and you mentioned some math regarding replacing them with $30 rents even if it's less than the full-amount of space on average. I'm just curious how you think the profiles of the overall mall changes with sort of the move away from these traditional anchors for some of these more fast-fashion or smaller anchor-type tenants.

Sandeep Lakhmi Mathrani

Yes, as you sort of indicated, Vincent, basically, the JCPenney and Sears today are not traffic generators. So if you replace them with the H&M, the Zara and a new entrant in the market, which is Primark, with restaurants, it's obviously going to generate more -- higher productivity and sales. It'll be a traffic generator and will help the leasing in the JCPenney and the Sears wing. Please appreciate, the "very back of the envelope" math I gave you shows how profitable it is to replace them, but one thing you don't factor in is that the increases in rent and occupancy levels come in the JCPenney and Sears wing, which is the weakest part of the mall today.

Vincent Chao - Deutsche Bank AG, Research Division

Right, right. Okay, so sort of a derivative benefit to that wing of the mall, got you, okay. And just curious on the sales side of things: Last quarter, I think you mentioned that B mall sales were sort of flattish and A and B+ malls were up. Just curious, excluding weather impacts, if you can net that out, have things gotten any better for the B mall tenant sales?

Sandeep Lakhmi Mathrani

I mean it's exactly the same. Again, I mean A malls performed the best. B malls were flat -- and B+ malls were flat and the B malls were obviously slightly negative.

Operator

And the next question is from Ryan Peterson of Sandler O'Neill.

Ryan Peterson

Yes, 2 quick questions here. The first one is, I noticed from the sup you have 18 properties, on Page 25. I'm just wondering if these properties are candidates for disposition and, if so, when we could expect them to be sold.

Sandeep Lakhmi Mathrani

To answer your question, I think, just flip to Page 25. These are the strip shopping centers that we have, except the last one, which is Owings Malls, which is a project in redevelopment in a joint venture with Kimco. So over a period of time, these -- except for the street retail, which is 200 Lafayette, 830 North Michigan and Union Square, at some stage, we would look to dispose of them in the next 12 to 24 months, depending on market conditions.

Ryan Peterson

And then, the second one is for -- on the topic of street retail. Are you guys only looking at established areas? Or are you also looking at more pioneering areas such as below 48th Street on 5th Avenue, for instance?

Sandeep Lakhmi Mathrani

I would say 42nd and 48th Street is no longer pioneering. With the new Topshop; a new H&M; a new Zara -- 2 H&Ms, actually; Lacoste; Urban Outfitters; Aritzia, I think it's pretty established. But the answer to your question is we do look for locations that are in established markets, and it needs to be of a certain scale.

Operator

And next we have a question from DJ Busch of Green Street Advisors.

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

Can you talk a little bit about the opportunities at that Southwest Plaza? This project looks a little bit different, I guess, than what you guys have been doing recently, which is largely focused on your A malls. Can you talk about what opportunities there are at some of your B malls?

Sandeep Lakhmi Mathrani

Okay. So again, you need to sort of go back and understand what different -- what's an A mall, what's a B mall. And the way we look at Southwest Plaza, it's a fantastic piece of real estate. It has superb demographics. And effectively, if that was a vacant piece of land, we would look to acquire it to put a mall on it. And it just so happens that we happened to own it. The mall was neglected for numerous years. And what we've done is invested in the mall substantial dollars to reinvent it to be a -- what could be potentially an A mall in our portfolio. We've done a fantastic job of re-leasing it. At this moment in time, we've been able to capture the tenant that will drive traffic. And we think it could be a powerful sales producer, just like Park Meadows is. So the demographics, what actually enticed us to sit back and say, "Hey, maybe we should be buying a piece of land here to do a mall." And so why not take a mall that has been neglected, reinvent it, spend the dollars and effectively rebuild the mall to create something that could potentially be an A mall? So we don't view this to be a B mall. We view this to be an A location. We look at it as a -- I mean, effectively a piece of land which has the anchors already in it and how do we rebuild it. And so we're rebuilding it.

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

Okay. And how many other opportunities like a Southwest Plaza do you think there are in the portfolio?

Sandeep Lakhmi Mathrani

We think there could be a few. I mean we're doing a similar investment in Lynnhaven Mall in Norfolk. Again, it's a very strong mall. We are reinvesting in the asset, adding new tenants to the mall that will increase the productivity. And we're recycling the lower-productivity tenants out of the mall. So we are, at this moment in time, doing it at Lynnhaven and Southwest and we'll see how -- whether we're successful. And if we are, we'll go to the next few that we think have similar potential in our portfolio. As I mentioned to you in previous calls, we have sold 47 malls up to this point, 30 in the Rouse spinoff and 17 in one-off sales. We are pleased with the portfolio we have. It doesn't mean we won't trim them because our job is to recycle capital. However, we do believe the assets that we have kept have the potential from B to becoming B+ and B+ to becoming A.

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

Okay, great. And then maybe just one quick question for Michael. You mentioned quickly on real estate taxes the decline due '13 activity. Can you just give a little more color on why that number declined so materially in the first quarter?

Michael B. Berman

It was a -- we had a multiyear onetime big settlement in 2013 that was just outsized relative to the total real estate tax bill. I mean it doesn't get any more complicated than that. We actually will have in the second quarter a little bit of the reversed situation where we got a refund that will also impact the line item. So the real estate tax thing can be impacted. There was nothing outside of that one event that really led us to believe we were off target, but again, it was a onetime. On a normalized basis, this quarter was probably closer to normalization than otherwise.

Operator

The next questioner is Ross Nussbaum of UBS Securities.

Ross T. Nussbaum - UBS Investment Bank, Research Division

Two questions. First, when I look at the supplemental, I think it's Page 17, where you're showing your rent spreads for '14 and '15, only about half of the space that's been leased is, I guess, comparable on a suite-to-suite basis. And I'm just curious if there's sort of any commentary you can give us on the other $2.5-plus million fee that isn't in that sort of comp set?

Sandeep Lakhmi Mathrani

Let's go back to what I was saying earlier, when it comes back to -- even the sales productivity, you've got to have contained space of -- I want to think, base releasing. And when you expand tenants, when you relocate tenants, they don't go into the formula. So -- and then you've got to go back of average sale -- average rent of the portfolio, which reflects all the tenants. And if you look at the average rents for less than 10,000 square feet within the high 60s, and if you look at all tenants, it's in the high 50s. So it gives you an indication of looking at that versus expiring rents, and that will sort of give you an indicator of what the NOI growth can be as a result of rental spreads.

Ross T. Nussbaum - UBS Investment Bank, Research Division

Okay, that's helpful. And then on the development side, can you add some color on Ala Moana, obviously, your biggest project. And specifically, how the leasing is going and how the competition from what Towman's [ph] has going on down the road is having an impact or is not having an impact?

Sandeep Lakhmi Mathrani

So firstly, the construction is well underway at this moment in time. As you know, we have relocated Nordstroms, and we have a new lease of Bloomingdale's. As the total expansion area is about 600,000 square feet, and we're close to 70% leased in the new wing. So that's one benefit. The second is it's having a very positive impact on the existing mall, and we have started to see very healthy spread and a remerchandising that's going on as a result of the expansion and the addition of the luxury anchors. Ala Moana has always been a different shopping destination than Waikiki. They are, I forget, 20, 30 retailers that are duplicated today, whether it's Victoria's Secret, whether it's Louis Vuitton, Gucci. They are duplicated in both markets. They do incredibly well in both markets. And we don't view Towman's [ph] property to be competitive, and we think it can be a fantastic project, and both parties can coexist and succeed.

Operator

The next questioner is Craig Schmidt of Bank of America.

Craig R. Schmidt - BofA Merrill Lynch, Research Division

Returning to Southwest Plaza, what is the degree of de-leasing you need to do to start the work there? And will the existing anchors be able to stay open during the project's redevelopment?

Sandeep Lakhmi Mathrani

So I don't have an exact answer, Craig, to you, but I think, we are -- it had a substantial amount of vacancy, something like 30% to 40% vacancy. So we had to relocate, call it about 20% or so of the tenants. So we took it down to effectively a 40% occupancy round numbers, and we've started the releasing process. And I think, today, we are over 80% pre-leased in the mall.

Craig R. Schmidt - BofA Merrill Lynch, Research Division

That's great. And then maybe just a little bit of commentary on Staten Island, what is the overall vision for that project?

Sandeep Lakhmi Mathrani

Again, it's a very captive market, there's almost 600,000 people on Staten Island. It's a one mall market. Sales are very strong. And we are in the process of going through approvals for an expansion, and the expansion will house, again, a larger format stores that will house entertainment, that we are negotiating leases with in a relocated food court. But it's going to be food, entertainment and a larger format stores, and I think it's a couple of hundred thousand square feet. I don’t know the exact square foot, I'm sure it's in the supplemental. Actually, we had a cost but we don’t have the square footage of that. But I think it's a couple of hundred thousand square feet.

Operator

The next questioner is Christy McElroy of Citi.

Christy McElroy - Citigroup Inc, Research Division

Just wanted to follow-up on a prior question about redevelopment versus dispositions. If I look at those sort of the 47 malls that you have classified as B or B+ that you categorized, I think they have about average sales of 370 to 400. Sandeep, I know that in the past you sort of developed a pretty detailed idea of your sort of vision for each mall that you own. If I think about those 47 malls in the next 3 to 5 years, how many of those can you -- would you conceivably put into the redevelopment pipeline and think about upgrading those malls to an A mall? And then, as we think about future dispositions, how many of those malls can you realistically sell?

Sandeep Lakhmi Mathrani

Let me answer the question a little differently. In the next couple of years, we think that the investment is still going to be in the B+ and the A mall. And the difference between B+ and A mall is because they are literally on the cost, to go from a B+ to an A. We have a tremendous amount of demand right now. I mean, Dick's Sporting Goods once, 50 to 100 stores a year. Hopefully, we'll get our fair share of it. I mean, Primax is going to expand in the Northeast. H&M continues to look for another 200 locations. They are looking for 100 locations. UNIQLO is looking for 100 locations. And they're going to be in the best malls and to be able to accommodate them, we're going to have to add square footage to the B+ and A malls. And I think, if you then focus on the B malls, I could sort of sit back and say, at least half of them can have a development component to them to hopefully upgrade them. As it relates to the scales, once again, our job is to recycle capital. We're happy with the portfolio the way it exists. Does that mean we would not sell any of them? No. It would mean that we would sell a handful of them to recycle capital for better use of our money. But we don't view the portfolio to be at risk. We're not so hung up on sales productivity as a measure to sell assets. And we're focused on the aspect of whether the mall -- the decline over a period of time or is it strong in its market place, whether it can continue to capture market share, whether it can continue to lease to that increased total market share in the market it serves, and what the supply demand characteristics are. The demand is high for that space, H&Ms and the like. GAP is going to continue to go into strong B malls. And we don’t want to just get so hung up on sales productivity and try to upgrade the sales productivity because, again, my view is, it's a very narrow focus a way of looking at life, which is just look at sales of tenants less than 10,000 square feet, and then those malls, as a matter of fact, there are more tenants larger than 10,000 square feet. So now you're sure that's the right metric to look at. As I indicated, our sales for the total malls, excluding the anchors, up 3.4%, which means our market share is increasing. So we focus on multiple factors than just a sales productivity to drive a decision. And I'm not so hung up on just increasing the sales productivity, which only reflects half the story anyway.

Christy McElroy - Citigroup Inc, Research Division

And then just in terms of your partnership with RetailMeNot. What sort of initial capital investments are you committed to make, if any? And can you give some examples of how you think this platform can help to drive increased traffic to your centers?

Sandeep Lakhmi Mathrani

It's got 0 investment for us. It's actually an income producer for us. We are effectively using our malls as an advertising medium for RetailMeNot. And the advantage we get out of it is our only asset in the entire industry, is that if you are close to a store, it automatically shoots you coupons and events that are happening within the stores. So it's a way to drive traffic into the stores while you're walking the mall. By the way, if you download the RetailMeNot app and you're walking in Manhattan, it'll give you deals that are available for where you are. So location-driven, a pusher of deals by the tenants. So I think it is just another step towards trying to create or recreate, what I would call flash sales, while you are within a retail environment. But it is completely an income driver for us. We collected income to advertise their brand within our location.

Christy McElroy - Citigroup Inc, Research Division

And then just lastly, the last quarter you talked about 8% to 10% re-leasing in spreads expectations for the -- in your opening remarks, you talked about 10% to 12%. Was there something that changed there, can you give a little bit more color on how that should trend this '14 and '15 sentiment to trend.

Sandeep Lakhmi Mathrani

So what I said last quarter was I anticipate 2014 leasing spreads to be 8% to 10%, and in my opening remarks, what I mentioned was, the 10% to 12% leasing spreads have been the leasing spreads over the last 5 quarters, differentiating between the 2 comments. And do I continue to believe that the leasing spreads for the remainder of the year are going to be 8% to 10%? I think, I was conservative or said differently. Demand far exceeds supply, and we've been able to drive spreads to the double-digit numbers. And up to this point, what we're seeing in 2015, albeit, would you see it leased executed. I also get to see leases approved. It seems to be quite strong in the double-digit. So leasing spreads, I think continued to be strong. And I think the one aspect of leasing spreads that's important is that the lease rate is actually increasing at the top level. So the spread based upon, obviously, increasing expiry rent, and increasing initial new rents.

Operator

The next questioner is Jeff Donnelly with Wells Fargo.

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

Sandeep, there's something of a, I guess, it's a haves and have-nots dynamic in leasing right now, given the uncertainty, if you will, around Sears and Penney's. So heading in the ICSC, I'm curious, do you guys have a specific message for retailers around your future plans, broadly speaking with malls or a particular set of goals for leasing people that you can share with us?

Sandeep Lakhmi Mathrani

So I -- we don't make any plans for ICSC. ICSC is what I've call, quick lovemaking, every 30 minutes [indiscernible] Not sure you can accomplish much in that period of time. To us, it's our relationship with the tenants that we built over the year. We have leasing goals per asset. We don't focus our leasing goals for an event like ICSC. ICSC is more a time to get to know socially, talk basically about new things coming, exchange ideas, talk about the industry. For us, it's not really a dealmaking. Our dealmaking gets done either in our offices when we do portfolio reviews with tenants, or when we visit our tenants at their offices to review portfolios. Again, we have 120 malls. We'll make deals in a 40, 50 deals, 60 deals with the tenant a year, which cannot be accomplished during ICSC. So we don't really had any specific goals to get done during an ICSC event. We don't really think it's, at this moment in time, that beneficial except for mingling and getting to know people socially and gathering information and exchanging ideas.

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

Well, I guess, I need to ask it differently. I wasn't focused as much on the leasing activity as are you expecting retailers to be looking to you guys as the landlord for sort of a future plan around. I guess, maybe providing them comfort with what's going on in the retail space right now, or is that maybe less of a focus?

Sandeep Lakhmi Mathrani

I guess, I think if you speak to the retailers, which we do all the time, they seem still pretty -- feel pretty good about how 2014 is going to come out from a sales projection. I mean, they focused on weather being harsh. They focused on Easter being -- coming in late. But their predictions for the 2014 sales seems to be quite good. And also, again, one quarter's data means nothing in their future planning. It's a question of supply demand. The question of getting the right space in the right mall. And quite honestly, they make decision for the next 5 to 10 years. And so they're focused on expansion in malls they want to be in, and to be able to get the location within the mall that they strive for. So they understand the business is long term. And as I said, market share, I keep going back to that word, of the malls is increasing, not decreasing.

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

And just one last question. I reckon, if you don’t own a substantial number of, I'll call, lower quality malls anymore. But it appears to bring a substantial number of them to the market. Several billions dollars of them are already coming to the market. The CMBS doesn't really touch malls with lows sales productivity. So do you feel enough, I guess I'll call it, depth of capital that an equity to get all these malls transacted at reasonable prices?

Michael B. Berman

Hi, Jeff, it's Michael. I would say that the CMBS market will do B mall. Below $300 of square foot, I think you might have a challenge and even then, the bank market, depending on the project, might be willing to provide capital. So it's not like it's this terrible place for the lower end of the property. We might have to pay a little bit more in spreads. We might have to pay a little bit more in -- lose a little bit in underwriting. But it's not like there's no capital available. I think that would be an unfair characterization. So we do have some private equity players that are looking to build portfolio. They're not doing unbelievably large transactions, but they're continuing to build their base. And if there was no CMBS market or no bank market, those transactions probably wouldn't be taking place.

Operator

And our next question is from Steve Sakwa of ISI Group.

Steve Sakwa - ISI Group Inc., Research Division

Michael, first one for you, just could you maybe tell us what happened in the other income line item? I know it was up about $6 million, and could you also just be maybe a little more specific on how utilities and kind of the snow removal maybe impacted in Q1 results?

Michael B. Berman

Yes. In the yellow line item, we had a couple of onetime events that may or may not be repeated. They were part of our guidance when we came out. The snow removal by itself order of magnitude impacted our results by around $7 million in the quarter. And we made up for it in other areas in terms of managing our expenses.

Steve Sakwa - ISI Group Inc., Research Division

And then I guess Sandeep, as it relates to the deliveries and the service that you guys have set up, how quickly do you think you can get more retailers into that system, and how quickly can they get their inventory systems to really be, I guess, real -- kind of real-time in order to kind of handle higher traffic and higher sales?

Sandeep Lakhmi Mathrani

Sure. So the answer to your first question, Steve, is we got 80 retailers signed up. I do believe that we will have, I'm going to say, 80% or 90% of retailers signed up by year end. I think it will be quite fast from this point in. The bigger challenge is for the retailers to basically have the ability to buy online pickup at store and have their inventory sunk. We know that most retailers are in the process of spending money on the backbone. It is a challenge, We know Foot Locker will be -- could be one of the first few that's going to have that program in place in the next week or 10 days. And so we're hopeful within 12 to 18 months, they can all be doing that, because of the key then becomes, that's going to really impact their margins. I think the margins are going to go up substantially. And that bodes well for the mall. So I'm assuming by, sometime in 2015, we'll see a large percentage of the retailers having sunk their online inventory. And then monitor them real time.

Steve Sakwa - ISI Group Inc., Research Division

So I guess, it's really not fair. I guess, it sounds like you're going to need at least 12 months from here, possibly even a bit longer to kind of really evaluate the success that uptick.

Sandeep Lakhmi Mathrani

I would say 20 to 36 months from this point on.

Operator

And our next questioner is Linda Tsai of Barclays.

Linda Tsai

Your commentary regarding teen retailers and how it's weighing on the sales per square foot. If you excluded the subset of underperforming teen retailers in the quarter, would sales per square foot had been -- would they've been up at the B and B+ malls, I'm just trying to get a sense of how much of an impact the sectors is having?

Sandeep Lakhmi Mathrani

I mentioned them just to show you what's going on with the retail base, but it would be -- it's like blaming the weather or it's like blaming a retailer. Our job is to replace them. Surely if you replace them, if you exclude them, productivity goes up at all malls. However, at the same time, someone can sit back and say exclude Apple, which is an advantage to all malls, or exclude Michael Kors, or lululemon, which is a productive tenant. You're dealt with a certain set of cards. I don't want to just start excluding and being selective. All I was basically indicating was the teen power retailers, having model issue, the business issue that they are correcting on certain versus it'd be the millennial shopper who is not shopping that store. But, yes, it will have a positive impact obviously because sales of those retailers are down 9% to 10%.

Linda Tsai

Got it. And then just some early feedback on the same-day delivery, is there any feedback you could provide us around the shopping behavior, like when people -- when shoppers buy online and then pick up in store, are they also -- are the retailers getting incremental sales when the shoppers go to pick up?

Sandeep Lakhmi Mathrani

Yes. I mean, there's plenty of experiments out there which shows that you got a journey 25% to 50% top when the pickup occurs. So the impulsive shopping, which is what is supposed to drive increases. But we're also seeing, which we never anticipated, that people buying in the mall and just having it deliver to their home, which is a service that we provide, but we didn't anticipate that to be of that relevance, which is they're not even using the Internet to buy online. What they are doing is they're web grooming, which actually is the opposite of show rolling. So the web grooming instead of go online and you pre-shop, but you actually, physically make the purchase in the bricks and mortar store. But we're seeing a lot of that and we're seeing a lot of delivery resulting from purchasing at the stores, which is having it delivered to your home.

Operator

Next is Rich Moore of RBC Capital Markets.

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

So Sandeep, on that last question, do stores have to be bigger to do this same-day, sort of have the inventory for same-day delivery or pickup at the store delivery?

Sandeep Lakhmi Mathrani

Firstly, the reason actually stores are increasing in size is not from -- not to increase the inventory, it's because as the industry becomes more friendly toward fast-fashion, where they basically have 12 different changes of fashion a year versus the traditional 4. Okay, they need to display more merchandise and they need to rotate it much faster. Okay, so that's why Victoria's Secret store size is getting bigger and H&M want to show their full assortment of 25,000 square feet. I think the jury is out, okay, whether they will need to increase their back of the house to accommodate either the same-day delivery or overnight delivery or ship from store delivery. I think the jury is out at this stage, but It could very well be the case.

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

Okay, but you're seeing an increase in some stores sizes at this point?

Sandeep Lakhmi Mathrani

Correct.

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

Yes. Okay, got you. Now on percentage or in skies, the level this year was down from last year, was that just the weather as everyone is indicating? Or is that something structural in your leases that is capturing more of the rent and base rents than percentage rents?

Sandeep Lakhmi Mathrani

I think it's a little bit of both. Obviously, when we get the renewals of the tenants, we try to capture on a fixed rent basis as much as the percentage rent that they were paying, which would mean the breakpoints go up. So I think it's a little bit of that. And obviously, the slowdown in sales has had some impact, a little bit of both.

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

Okay. And then the year, I'm assuming is just about over in terms of leasing for 2014. So do you have an update on your occupancy thoughts for the year end?

Sandeep Lakhmi Mathrani

We think we should be better than 93%.

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

Okay. And then last thing for me, bankruptcy thoughts. Have you gotten any -- obviously bad debt was up a bit -- have you got any broader thoughts on the bankruptcy environment for retailers?

Sandeep Lakhmi Mathrani

So I was actually going to say -- that was going to be my follow-up, which is we're finally experiencing retailers who are having -- had a difficult time for the last 5 years, who are finally feeling the pain because they haven't been able to recover, even though there has been an expansion in retail sales. And after this point, one, is we've taken into account the ones we know about, like Cold Water Creek and Sbarro. And looking forward, there are a handful of names, which we all heard about Brookstone, Radio Shack. But again, we look at that to be a short-term issue and a long-term gain, because it gives us an opportunity to take great real estate and repurpose there to higher productivity tenant. So you might see it's having more impact with what RadioShack decides to do and what Blackstone decides to do and if there are others are coming up on very well. But at this moment in time, you may not see them make major closure decisions in 2014, this is a possible chain back-to-school and the all-important holiday season. So usually, it will be now in the next 60 days, but buying 99%.

Operator

Our next question is from Dan Oppenheim of Crédit Suisse.

Daniel Mark Oppenheim - Crédit Suisse AG, Research Division

It is interesting to hear your comments in terms of just options with some of the B malls in terms of ability to transform them and in terms of upgrading them versus than going the other path in terms of disposing them. How do you think about that in terms of the cap rate spreads that you need between A and B. Presumably if it's a narrow spreads there, you would look at that in terms of disposing some of those class B malls, whereas if you see that widening, you then might think about upgrading and transforming. What sort of -- how do you think about that in terms of the investing capital there and looking at them, what spread you need overall?

Sandeep Lakhmi Mathrani

Now actually, I don't really look at cap rate. I look at cash flow, okay? If I'm able to capture market share, increase cash flow, which will eventually lead to a better mall that will be more the center of attraction, that's what I look at, to meet increasing cash flow -- supply, demand and increasing cash flow. And I can't live my life on cap rates and spreads. I have to live my life on the basis of, I run a business, okay. Is this mall going to survive. Is this mall going to exist. Is it a declining mall, is it an accelerating mall. What does the demographics look like. What does the mall look like. It's about increasing cash flow.

Operator

And the next questioner is Michael Mueller of JPMorgan.

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

I was wondering, are there any updates on the Norwalk development and are you getting or expecting any blocking attempts from the other landlords that you're kind of in the middle of Apache site?

Sandeep Lakhmi Mathrani

I don't comment on the second part of your question. It is a wonderful site. We're getting a lot of demand from anchors, department stores, and it's the project and development. They're going through the approval process right now, and we'll see how to stand up.

Operator

Our next questioner is Ki Bin Kim of SunTrust.

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

Okay. Just a couple of quick follow-ups. Going back to your original comments about JCPenney, Sears and getting and potentially $30 rent, 2 quick questions, was that just for A malls? And second, what was the -- I'm not sure of the bigger range, but the associated CapEx per square foot be required to get that kind of rent?

Sandeep Lakhmi Mathrani

So my back of the envelope is, that one is it's applicable to any mall, as long as you can get the demand from the tenant, you can get the rent. Okay, so it's not -- because that is $20, $30, $40 rent number, you're at a power center rent number, and so that's one. Two is, approximately at $100 is worth or so. So if you're building 50,000 feet, it may cost you $5 million. And you're getting an incremental income of about $1 million, which is without taking the due advantage, but I could probably add a couple of restaurant pads and do other things, that would be very conservative when I say 50,000 feet to replace 140,000 square feet. So essentially, you get $1 million, $1.5 million return on a $5 million investment.

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

Okay, that's helpful. I guess, and just the last question. Omni-channel is a term that you hear frequently from retail REIT, but at the end of the day, a retailer can pay $4 a square foot in rent at warehouse versus $80, $90 at a mall, and to really use that expensive square footage for distribution, doesn't seem to make a whole lot of sense, especially long term. So my question is, how does the market value of every square foot in the mall actually benefit from omni-channel?

Sandeep Lakhmi Mathrani

I mean, you are making an assumption that basically all distribution will occur from warehouses, but I will tell you, rent is not the only expense. It's putting in infrastructure, wi-fi, tellers, people. It's a complete duplication, and if you actually look at the incremental square footage that you're talking about, that will probably get shipped from the mall, it may be miniscule in comparison to what you have to go to get. You can't go rent 300 or 500 square feet in every market, get a distribution center and staff it, okay. So when you're looking at incremental costs, as a matter of fact, it will be a lot cheaper from a human resource perspective, inventory perspective, duplication perspective, than having a duplicated in each market? So I don’t view that to be that important. Second point is 95% of all retail is done by bricks-and-mortar retailer. What that means is half of all online retail is captured by the bricks-and-mortar retailer, okay. And so, up to this point, and as we get playing field to be level from a sales facts perspective, one advantage we've had and always had is, we already have the bricks-and-mortar location, which already produced 90-plus percent of the retail sales. It's not like you are going to build it again and do it, and we've got exclusive product. So on the contrary, I look at it differently. If they can use existing bricks-and-mortar retail stores for distribution, they have 0 warehousing cost.

Operator

Our next question is from David Harris of Imperial Capital.

David Harris - Imperial Capital, LLC, Research Division

Mike, excuse me if I missed this, did you tell us that the fresh, the amount of debt you're expecting to refinance this year? And could you upon touch the terms on which you are underwriting today, if they are any different from that which you would have provided with your initial guidance?

Michael B. Berman

In terms of the incremental amounts, we're increasing our net proceeds by around $500-plus million, that's in order to pay off the line, share repurchase, that was not in our first quarter guidance. Outside of that, our guidance is the same with respect to our capital plan. Spreads and rates continue to give you coupon for 10-year deals, 4 handles, maybe on a bad day, gets to 4.7, on a good day, it could be 4.1. 3 years deal are in the 3.5% range, a 5-year deal is in the 3.5% range, it's been fairly consistent. I tend to quote on all the treasuries, 150 to 200 over depending on the quality and the location, has been fairly consistent. The market is healthy. Demand for loan seems to be strong. If you are not looking to be an aggressive borrower, there's plenty of capital.

David Harris - Imperial Capital, LLC, Research Division

Okay, so just so I'm clear on your $500 million that you referenced by way of proceeds. I had a note from an earlier conversation about $1.3 billion of debt to be financed this year, is that still a good gross total of which the aspect $500 million to be taken -- proceeds to be taken out?

Michael B. Berman

Sorry, of the $1.3 billion, that was our original plan, and in that we were generating order of magnitude 250 of net proceeds. That did not include the 2 construction loans, and it does not include the incremental 525.

David Harris - Imperial Capital, LLC, Research Division

Right, okay. Almost simply equity chips, so you have to walk me through this stuff. So $1.3 billion is still a good number, but you then got the additional loans on the line of credit -- I'm sorry, not the line of credit, but the construction loan finance, which are incremental to what we previously referenced?

Sandeep Lakhmi Mathrani

Yes, and the 525 is incremental.

Operator

I'm showing no more questions in the queue. I would like to turn the conference back to Mr. Sandeep Mathrani. Please go ahead.

Sandeep Lakhmi Mathrani

Thank you for joining our call this morning. And always please contact Michael or Kevin with any follow-up questions. Have a great day. Thanks.

Operator

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

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