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Rouse Properties, Inc. (NYSE:RSE)

Q1 2014 Earnings Conference Call

May 5, 2014 17:00 ET

Executives

Steve Swett - ICR

Andrew Silberfein - President and Chief Executive Officer

John Wain - Chief Financial Officer

Benjamin Schall - Chief Operating Officer

Analysts

Alex Avery - CIBC

Todd Thomas - KeyBanc

Craig Schmidt - Bank of America

Paul Morgan - MLV

D.J. Busch - Green Street Advisors

Operator

Greetings, and welcome to the Rouse Properties First Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mr. Steve Swett of ICR. Thank you, Mr. Swett. You may now begin.

Steve Swett

Good afternoon. We would like to thank you for joining us for Rouse Properties’ first quarter 2014 earnings conference call. In addition to the press release distributed today, we have filed a Form 10-Q with the SEC and posted a quarterly supplemental package with additional detail on our results in the Investor Relations section on our website at www.rouseproperties.com.

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

Examples of forward-looking statements include those related to revenue, operating income, capital expenditures, dividend, leverage, financial guidance, as well as non-GAAP financial measures such as same-store results, FFO, core FFO, NOI and core NOI. As a reminder, forward-looking statements represent management’s current estimates. Rouse Properties assumes no obligation to update any forward-looking statements in the future.

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

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

Now I will turn the call over to Andy.

Andrew Silberfein

Thank you. On the call today, I will begin with an overview of the operating performance and leasing accomplishments for the first quarter 2014 and then update you on our progress and outlook in executing our growth initiatives. I’ll then turn the call over to John to review our balance sheet to provide further details on our financial results for the quarter and discuss our guidance for 2014.

Let me begin with a summary of our results. Earlier today we reported first quarter 2014 core FFO of $0.39 per fully diluted share representing an increase of 5.4% per share over the first quarter of 2013. Our results were roughly in line with our expectations and we’re extremely pleased that we continue to post solid growth in core FFO per share as we execute our initiatives that opportunistically grow our portfolio. We had a solid start to 2014 and our metrics continue to improve as expected. Our core portfolio was 90.7% leased at the end of the quarter up 150 basis points from a year ago and including anchors we’re now 93.5% leased.

Our permanent tenants now represent 80.7% of our portfolio up 260 basis points year-over-year and up 660 basis points since our formation two years ago. We’re well on our way to achieving steady progress toward a permanent leasing target of 86% across our portfolio. And finally our portfolio sales increased to $303 per square foot on a trailing 12-month basis.

The driving force behind the continued improvement in our portfolio metrics is the strong leasing pace we’ve maintained for the last two years. In the first quarter we signed approximately 530,000 square feet of leases. This represented in each straight quarter of leasing in excess of 525,000 square feet reflecting the quality and value of our malls, the hard work and dedication of our leasing and operating teams and the effectiveness of our focused platform.

At the end of the first quarter we had about 817,000 square feet of leases signed but not yet opened of our SNO including 712,000 square feet per space currently vacant representing about $16.5 million in net annual revenues. Now this was up 27% from the year end 2013 and represents the new record amount for SNO for our company. It’s important to reiterate that none of these leases have yet to contribute to our bottom line. About 85% of this leasing is to three key categories. Entertainment uses such as theaters, vibrant large-format retailers, and high volume restaurants, which will significantly change the character and relevance of our malls.

In the past three years, we’ve leased nearly 1.2 million square feet for these uses which will bring in new customers at a wider spectrum of time during the day and evening hours, driving traffic for all of our retailers and creating a more vibrant experience for the overall malls. However capturing the benefit of the drawing power of these game-changing tenants thus take time for a number of reasons.

First, we need to create or reconfigure this faith for the new stores and operations which reduces revenues in the near term. In the first quarter alone terminating or not renewing certain in-place tenants to make room for new and better retailers caused us about $350,000 in lease revenue in the quarter or about 1% of our same-store NOI.

Second, it takes time to build-out the new stores for the high volume tenants we’re bringing in. Entertainment tenants which account for about 330,000 square feet of our SNO can typically take 12 to 14 months to build-out prior to our opening. Another 350,000 square feet of our SNO was leased to large-format junior box retailers such as ALSAA, Forever21, LA Fitness and others and these stores typically take nine to 12 months to build that. Another 50,000 square feet is leased to restaurants which takes six to nine months in general to prepare for occupancy. The point here is that we have, we are and we will continue to incur near term drag on our results before we begin to capture the significant benefits from our leasing activity.

Third, it’s important to remember there is a timing of openings within each year if not evenly distributed but it’s weighted towards the third and fourth quarters in each year which reflects the store opening calendars of most retailers. We saw this in our 2013 openings calendar and 2014 is shaping up in a similar way. On a long-term basis however it’s important to remember the substantial benefits that accrue to us over the longer term from executing these strategies.

First, we can typically capture significant upside in rent. For example for the tenants we vacated in the first quarter to make room for the SNO pipeline, the annual rent in-place was about $1.9 million. The new tenants were there in place will be paying total annual rents of about $3.7 million or nearly double the previous rent. While we have some short term pain the long-term benefit is substantial in terms of rent growth.

Second, these new tenants greatly change the character and customer profile of the mall which we believe will drive sales per square foot and rental rates and have a multiplier effect on the in line retailer demand.

Third, these tenants provide a great deal of long-term stability for the malls as they typically sign leases of between 10 and 15 years and they also serve to reduce our long-term capital expenditures. As we did last quarter let me provide some color and how we expected the SNO to come online for the balance of 2014 and next year. As the 817,000 square feet of total SNO at March 31, 2014 we expect about 75% of the square footage to commence occupancy in 2014 providing about $4 million to $4.5 million of incremental net lease revenue throughout during the remainder of 2014.

The remaining square footage is expected to commence occupancy in 2015 with incremental net lease revenues throughout of about $8.5 million to $9 million which includes the full year benefit of the 2014 openings as well as the incremental contribution of the 2015 openings. The remaining $3 million to $4 million of net revenue benefit from our 2015 openings will be captured in 2016.

Before I move on let me emphasize two points. First, the embedded revenue growth related to our SNO which to be clear is presented on a net incremental basis adjusting for the revenue loss as leases in place expire or are terminated to make room for the new retailers is real tangible rental revenue related to leases which are already signed.

Second, our ability quarter-after-quarter to execute large volumes of leases with vibrant and growing retailers so once move into our stand in our malls it’s a greatest foundation of what we’ve been saying for the last two years that our portfolio was misunderstood and then we focus active level leasing grants and targeted capital we could transform this portfolio into one that would be extremely attractive to growing retailers across the country.

As we communicated earlier this year we expected same-store NOI for the full year 2014 to continue on the same positive trajectory as it has in the prior years. In 2012 our same-store NOI was negative 5.7%. In the last year, we generated same-store NOI growth a positive 2.25%. This year we expect same-store NOI to continue to accelerate to a range of 3% to 4%. The change in our same-store outlook for this year is due to the impact of the severe winter weather and store closures due to some bankruptcies it does not reflect any change in our plans or programs.

So while particular quarters may be lumpy, our progress has and will clearly be seen looking at the full picture over our longer term. As others have noted this severe winter weather resulted in higher seasonal expenses than normal, without which our same-store NOI growth for the first quarter would have been 1.8% rather than flat.

I’d like to take a moment to provide some thoughts on retailer’s omni-channel strategies as it relates to our portfolio. In our discussions with various retailers it is clear to us that retailers will continue to rationalize their space needs with a focus on those markets where they have too many locations. As their brick-and-mortar stores service showcases and fulfillment centers and internet sales archived to having at a hard asset presence in each market. They actually touch and feel the goods for ship to store convenience, for the point of purchase experience and to make returns. Our only game in town focus dovetails nicely with their omni-channel strategy.

Now moving on let me provide a brief update on our strategic and cosmetic capital improvement program. Through the first quarter of 2014, we’ve completed about $45 million of strategic and cosmetic projects with an additional $90 million underway. As I’ve communicated on prior calls we’re already seeing the benefits of the investments we’ve made and the leasing in terms of the vibrancy and character of the malls where we have started our completed projects.

We’re pleased to also announce that we’re getting ready to commence our largest strategic initiatives in our portfolio at NewPark Mall in the East Bay of San Francisco. We recently signed a 55,000 square foot lease in AMC Theaters, which will include the IMAX in the market anchors its Repositioning project. And we look forward to sharing more details with you after our press event unveiling this project later this month.

We continue to look at pipeline of strategic capital investment opportunities of up to $200 million to $225 million in total spend including those projects already completed or underway. We still anticipate capturing returns on this spend generally within 9% to 11% range and we’ll provide further specifics on individual projects as we move forward. As the benefit of these projects ramp-up a greater activity and as projects are completed the additional growth will only augment the growth we’re already experiencing with the leasing and occupancy improvement throughout the portfolio which should serve to sustaining our above average NOI and FFO growth for a number of years to come.

Finally I’d like to address our continued success from sourcing and closing new acquisitions. This afternoon we announced that we are under contract to acquire Bel Air Mall, a 1.3 million square foot superregional mall located in Mobile, Alabama for $135.2 million. Built in 1967 and renovated in 2006. Bel Air is anchored by Belk, Dillards, Target, J.C. Penney, and Sears and features over 130 stores including such national retailers such as Victoria’s Secret, Bath & Body Works, Buckle, Forever21, Francesca’s and Foot Locker.

As the only opposed mall within a 60 mile radius Bel Air serves an expansive trade area of more than 570,000 people across Southern Alabama, Mississippi and the Florida, Panhandle, an area that is driving as evidenced by Airbus investing over $600 million to build the state-of-the-line jetliner assembly facility nearby. Bel Air Mall is a perfect fit for our portfolio of dominant only game in town middle-market mall. In line sales are approximately $345 per square foot and we’re purchasing the asset in an attractive entry price at just under 8% with incremental opportunities to create value through targeted improvements.

We expect to close this transaction by the end of the second quarter. At closing, we will assume that a $113 million non-recourse loan with a 5.3% interest rate and a December 15 maturity date. The remaining funding will be from cash on hand. Since our formation with this purchase we also have acquired almost $670 million of malls which are dominant only game in tenant enclosed malls where we could apply our platforms operating and leasing strategies to improve the quality, cash flow and value of each property.

We continue to see significant pipeline of potential acquisitions and expect to continue to be active moving forward. With the quality and track record of our national platform and our recently completed follow-on stock offering, we believe that we are one of the best position acquirers of middle-market malls and that there are and will continue to be great acquisition opportunities available in the near term for Rouse to continue to grow its platform.

With that I’ll turn the call over to John.

John Wain

Thank you, Andy and good afternoon everyone. In my comments today I’ll first review our first quarter operating results, then address our balance sheet including recent financing and equity transactions and their impact on our capital structure and liquidity, and finally update you on our 2014 guidance for core FFO.

Starting with a review of our first quarter operating results. Earlier today Rouse reported quarterly core funds from operation of $22.4 million or $0.39 per diluted share compared with $18.3 million or $0.37 per diluted share in the first quarter of 2013. The 5.4% year-over-year increase in quarterly core FFO per diluted shares primarily attributable to two items. First, a 12.4% increase in total property NOI compared to the first quarter 2013 due to the benefit from three acquisitions totaling $342.8 million completed in the last 12 months.

And second, a $440,000 reduction in interest expense driven by several refinancing at lower interest rates over the past year, the debt reduction associated with the divestiture of the Boulevard Mall, has offset by the new debt associated with acquisition for those properties acquired in the last 12 months. Offsetting these two positive drivers will higher general and administrative expense.

Our same-store NOI was flat in the first quarter of 2014 compared to the same period last year. As Andy mentioned our first quarter same-store NOI was impacted by a higher snow removal and winter related expenses and increase in store closures due to bankruptcy and proactive decisions not to renew certain tenants to create space for new FFO tenants at substantially higher rents.

Looking ahead to the balance of the year, we expect some lingering impacts from higher store closures already to the bankruptcy occurring near the end of the first quarter and into the second quarter. As our FFO comes online later this year we expect our same-store NOI growth to accelerate quarter-to-quarter as we saw last year.

Turning to the balance sheet. Our financial flexibility and liquidity remain strong as we continue to benefit from the progress we’ve made over the past two years in strengthening our balance sheet by lowering our interest rate, extending including our maturity schedule and generating excess refinancing proceeds to further support our growth strategy.

In the first quarter we completed a follow-on equity offering in which we issued 8.05 million shares of our common stock at $19.50 per share raising net proceeds of $150.7 million. Proceeds from this offering we use to reduce the amounts outstanding on our $285 million revolving line of credit and will be further used to fund future acquisitions and for general purposes. The offering achieved several important objectives for Rouse including providing us with additional equity capital to help fund our growth initiatives, increasing our float in average daily trading volume and increasing and diversifying our institutional shareholder base.

As a result of this offering our share count increased by 16% and we ended the first quarter with 57.7 million shares outstanding. Other than the offering financing activity in the first quarter of 2014 was fairly light. In January we entered into a LIBOR floating to fixed rate swap with our vendor on West Valley Mall, effectively fixing our all-in interest rate at 3.24% until March 2018. In February we repaid our mortgage loan balance on the Bayshore Mall which had been our highest coupon mortgage loan at 7.13%. Also in the first quarter we exercised the accordion feature on our corporate facility and increased our revolver by $35 million to a total of $285 million. This was accomplished by adding a new lender to our bank (group) in the facility.

With regard to our financial position at the end of the first quarter at March 31, 2014 total debt outstanding was approximately $1.39 billion with zero outstanding on our $285 million revolving credit facility. The current weighted average interest rate on our debt is 4.66% down from 5.49% at our formation and our weighted average term to maturity is now 4.8 years compared to 2.9 years two years ago. With regard to our financial flexibility as of today we have $66.2 million with cash and callable deposits and zero outstanding on our $285 million revolving credit facility. This provides us with sufficient capacity to support our operational and strategic growth objectives.

We have only one maturity in 2014, a $47.5 million non-recourse first mortgage loan secured by Steeplegate Mall which matures in August. During April this CMBS loan was transferred to special servicing and discussions are ongoing. We have two maturities in 2015, the assumed loan on Bel Air as mentioned by Andy and the loans secured by Greenville Mall which we acquired in 2013. That maturity in 2015, the loan balance on Greenville is expected to be $39.9 million and we will update you on our refinancing plan as the maturity date gets closer.

Turning to our guidance. In March we provided guidance for 2014 core FFO of $1.54 to $1.58 per diluted share. We’re amending and raising our value by $0.03 at both the high end and low end. The 2014 core FFO of $1.57 to $1.61 per diluted share. Our amended guidance reflects several key assumptions including the acquisition of Bel Air Mall by the end of the second quarter, full year same property core NOI growth of 3% to 4%, general and administrative expenses of $24.4 million to $24.6 million and net interest expense of $65.9 million to $66.4 million.

Please note that our guidance does not include the effects of any future property acquisition other than Bel Air, disposition other than Steeplegate and its maturity or refinancing. With regard to our dividend, our Board of Directors has approved a $0.17 per share dividend for the second quarter of 2014. This dividend will be paid on July 31, 2014 to stockholders of record on July 15.

With that I’ll turn the call back to Andy for some concluding remarks.

Andrew Silberfein

Thanks, John. In the first quarter of 2014 we continue to maintain our strong leasing pace and made progress on executing our strategic and capital improvement program. With another acquisition set to close we continue to grow our platform demonstrating our ability to source enclosed malls has fit our strategic focus, our returning criteria in our national platform.

And with that we would be happy to answer any questions you may have. Operator?

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question is from Alex Avery of CIBC. Please go ahead.

Alex Avery - CIBC

Thank you. I just want to dig a little bit into the same property net operating income number in Q4 you were up about 7.3% and this quarter after the effect of winter and other things, you’re pretty much flat. And I was just I guess trying to dig into where the remainder of that drop-off would be I mean some of that would be the different periods and perhaps different portfolio. But we would have expected something closer to the sort of 7.3% range sequentially. And just wondering if that was the bankruptcies or if there are other items in there?

Andrew Silberfein

Hi, Alex. This is Andy here. Thanks for the question. I think that there is a couple of things that work here. One is that, we continue to make progress on our same-store NOI trajectory, but the portfolio can be a little bit lumpy. Yes, some of the differences are but certainly the winter which accounted for about $600,000 of it. So excluding that our – the impact on same-store NOI would have been about 1.8%. When you add back also the tenants that we hadn’t take offline that is another roughly $350,000 so that’s another roughly 1%.

So if you add those together it will give you a true picture of the period and what’s really important to understand as we’ve taken this drag so that we can improve the long-term growth potential of the assets by taking in this case rents of about $1 million, $1.9 million and (replacing) in the tenants that are going to pay $2.7 million. So that’s some of the drag that goes on and it’s like the more lease of what we do the more cosmetic and actually more strategic projects that we do the more of that drag is we continue to improve the portfolio. So I think we’re pretty clear in explaining to people in the first quarter you don’t have a lot of movings in the first quarter, those tend to happen later on the New Year and that’s why you tend to have the move-outs in the first quarter and not a lot of move-in. So that sort of explains it all together.

Alex Avery - CIBC

Okay. And then just on the bankruptcy side, obviously sort of a occurring in natural part of the retail landlord business. But is there anything notable about I guess the types of retailers or the locations or anything else that you can give us some color on?

Andrew Silberfein

Well I think certainly you could say that it’s elevated over the previous year, previous years if you will. I think that when we’re looking at who we’re talking about generally of the tenants that cost about half – disclosures about half of them have been to borrow and the other half is really a split between the Coldwater Creek of the World and couple of other tenants including Echo and Ashley Stewart those types of tenants. So it’s something that certainly is elevated my fear and it’s something there’s going to be a drag on our figures for the second quarter, but we’re getting retraction of releasing space, it just takes times to get that done and bring them on the line.

Alex Avery - CIBC

Okay. And then on the Bel Air acquisition, is this an unusual opportunity or is this sort of representative of what you can find in the market and perhaps if there’s any other color you could add to what made this deal particularly attractive for you?

Andrew Silberfein

Sure. The Bel Air acquisition was a off-market transaction really from a private seller. And there’s really – we look at it there’s a lots of like about the acquisition and it’s in the third I think it’s the third largest city now in Alabama with over 570,000 people. And it’s the only mall within 60 miles. So it draws from the whole Panhandle of Florida, Southern Alabama, Eastern Mississippi those areas and they have 1.3 million square feet, it’s really one of the larger more productive – will be one of the more larger more productive assets in our portfolio. So it’s got strong acre volume is typically what we look for in terms of the in line sales, as we’ve said before we look into $340 a foot, this is $340 a foot, several occupancy costs and it’s the seller and that we’ve a great deal of success buying a previous asset. So and we think we could do the same thing as Bel Air. So that if you look at all together it’s certainly similar to what we are doing throughout our portfolio where we can really apply our platform to improve the leasing and quality of retailer or merchandising mix and the productivity of the asset overall have – obviously at the end being there in terms of both growing NOI and the sales productivity of the asset. So we are really.

Alex Avery - CIBC

Understood, I might have missed it but did you disclose what the occupancy on the mall is or perhaps any incremental capital plans you have for the mall?

Andrew Silberfein

We have not disclosed that yet, I think those – some of those details will come out after we close it. But where we are buying it as a (tad) under 8% cap. So we like the entry price. We like the upside to the asset and typical of the other thing is we have bought and we have seen that we have been having a great success than what we bought today and it should be another one in those in that line of acquisitions.

Alex Avery - CIBC

Okay and just I guess in light of the cap rate on that transaction and that’s another thing I guess that you recently issued equity, but that the share price has been soft recently and is there any part of you thinking about buying back some stock with some of your excess capital?

Andrew Silberfein

Not at the current time. I think from our point of view it’s been a long-term process here and we are seeing good opportunities out there, so we think we would do better sure pursuing those opportunities.

Alex Avery - CIBC

Okay, that’s great. Thanks guys.

Andrew Silberfein

Thank you.

Operator

Thank you. The next question is from Todd Thomas of KeyBanc. Please go ahead.

Todd Thomas - KeyBanc

Hi thanks. Good afternoon just continuing with the acquisition environment a bit I was just wondering if you can talk just talk more generally about your appetite by property, certainly all the malls in the market and I was just wondering how you sort of think about along the properties out there in terms of the investible universe today for Rouse. So some of the malls put on the market of sales in $300 to $400 square foot range, but they may not be the only game in town, I was just wondering sort of where those malls fit into your overall strategy?

Andrew Silberfein

Yes. I think certainly this is solid pipeline of opportunities that we are looking at. And it’s clear that this is a growing pool of the assets for sale that are either in the market or will be hitting the market in the near future. So we do expect to be active on that front. I think evidence of that is this recent acquisition just announced. But I think from our point of view we – a lot of those properties we are going to stick to what we are focused on. And what we are good at and I think maybe one or two properties if you will that have different rationale for pursuing them, but in general I think we have been pretty consistent on what we are buying and what we like. And I think that’s a competitive advantage for us and the fact that we are – we can buy properties anywhere in the country. So it’s for us with our strong platform we think is an advantage. So we will look anywhere in the country that makes sense within our given box that we have seen as we laid out before.

Todd Thomas - KeyBanc

Okay and then you mentioned Bel Air was off market but how competitive is the investment landscape today for the malls that are being marketed and how competitive will Rouse get for some of the properties that does fit the strategic criteria that the company is looking for?

Andrew Silberfein

I think it’s got certainly little more competitive than it was last year but I got to be honest with you with all this products hitting the market, I am not sure where it’s all going to go. But that enables us to have certain amount of discipline and choose from the lot of products that’s hitting the market. Whether the sellers will have reasonable cap rate remains to be seen. Always depending on we have now brought $670 million sales – sorry $660 million of properties and we have been pretty consistent in what we were looking forward. And we also are focused on really what are the longer term IRR is on the property. We are not as cap rate driven as we are – what is the embedded growth.

Todd Thomas - KeyBanc

Okay. And then maybe a question for John, with this acquisition with Bel Air once you close, you will be levering up and you will still have some cash balance in untapped line, but I guess how much more capacity do you have for acquisitions. And how comfortable are you ticking up leverage at this point maybe you could also remind us if whether or not you have sort of a year end leverage target in mind?

John Wain

So if I layer in Bel Air and include NOI on a full year basis for Bel Air we are in the mid-8 range for leverage. As we said before our longer term goal is to operate in the mid-7. So right now I mean we feel good we have also said in the past that we would temporarily take our leverage a bit higher. If we find the right acquisition, so right now we are happy with where we are.

Andrew Silberfein

Let me just chime in here. And I think we certainly feel like we have ample capital (indiscernible) to pursue a number of acquisitions and growth strategy. And depending on the opportunities that will see, I think it’s fair to say that we have a variety of capital leverage available to us. And we will reevaluate that based upon the pace of acquisitions that we see out there.

Todd Thomas - KeyBanc

Okay, that’s helpful. And just lastly I was just wondering if you will be able to tell us what comp sales were like in the quarter?

Andrew Silberfein

Comp sales were I think Ben why don’t you respond to that?

Benjamin Schall

Yes, on the total portfolio basis we ended the quarter at $303 of book let’s say up slightly on a total portfolio. On a comp basis we were down slightly, bigger impact on the East Coast and Northeast, Southeast and the Midwest given the winter weather. And we have seen some of that with retailers. But we are – we have been seeing some improvement recently and we are hopeful given some recent traffic trends.

Andrew Silberfein

So Todd I think this is Andy. Let me just add for your own knowledge if we normalize January, our sales would have been about $306 to $307 per square foot. So given the slowest January there was in significant impact for where we would have been at the end of the quarter.

Todd Thomas - KeyBanc

Okay, that’s helpful. Alright, thank you guys.

Andrew Silberfein

Thank you.

Operator

Thank you. The next question is from Craig Schmidt of Bank of America. Please go ahead.

Craig Schmidt - Bank of America

Thank you. I am wondering when we look at the redevelopment pipeline and then think about it going forward will be majority of your redevelopment efforts be used to convert your malls into open air power centers?

Andrew Silberfein

That some of the capital, true, we have started the Knollwood project which is the completing the de-malling, remember on these two projects it’s sort of part of de-malling the rest of it goes in new malls. It’s not as big total spend as you may expect at first blush. I think the numbers are in our supplemental for Knollwood we are at $32 million and we can expect a similar type of number give or take a little bit on the Gateway project. So the other thing on those two projects which is we would like to point out we are gong to create a lot of value on those two assets. And let’s take look at the end of the day what we want to do with those two properties. Do we want to harvest some of that capital and redeploy it into acquisition. So when I mentioned earlier there are a number of liquidity levers, those are some of the ones that are available to us.

Craig Schmidt - Bank of America

So I mean from those comments it sounds like there could be a potential asset sale when you get completed with the redevelopment effort?

Andrew Silberfein

That’s correct we haven’t made that decision at this time and whether its maybe a partial sale or full sale, we will have to see what the pricing is like at that time. But it’s something that we would certainly consider.

Craig Schmidt - Bank of America

Okay, thanks. And then on the timing of the conversions from temporary to permanent occupancy, what do you think you will be at year end 2014 and year end 2015 in giving that conversion?

John Wain

We have – we haven’t given a specific target for this year. We have been clear in terms of our longer term targets with respect to occupancy and mix of permanent versus temporary. So our permanent target is 93% and our temporary component of that we are shooting for the 6% to 7% range.

Craig Schmidt - Bank of America

Great. Thank you.

Andrew Silberfein

Thank you.

Operator

Thank you. (Operator Instructions) And the next question comes from Paul Morgan of MLV. Please go ahead.

Paul Morgan - MLV

Hi, good afternoon. So on the $16.5 million assigned but not open kind of net revenue leases given number of what the cap – the TI for the capital spend is going to be or you mentioned that a lot of that is theatres, restaurants, things that are relatively capital intensive for new leases?

Andrew Silberfein

Thanks Paul. Hi. In general I would say that we still have two different camps. One is the properties that are good user to generate within the strategic capital spends and those are disclosed separately within the supplemental. For the remainder of the tenants, I would tell you that under 10,000 has been for this last quarter probably but $17, $18, $20 a foot somewhere in that range. And it has been hovering in that range for a quite a while now.

Paul Morgan - MLV

So the redevelopment spend did that – so basically what you are saying is that the capital is in that $200 million to $225 million total revenue long-term pipeline number or for the ones that are under construction now in your – what’s disclosed in the stuff – does that include?

Andrew Silberfein

Yes, so most of the larger spends are within – assume within that capital spend total that we gave you earlier.

Paul Morgan - MLV

Yes. So I guess more broadly just I mean has the– as you think about your cost of capital and where you are with respect to your asset value, I mean how are you weighing accelerating or capitalizing on redevelopments like in the Bay Area versus the acquisition opportunities I mean is it creating any kind of harder choices between the two options or you still feel like apart from incremental common equity you have other sources that you could actually work on both fronts?

Andrew Silberfein

I think where we have continued to try to come up with as much – many capital spend projects as we can up with as we can up with because we it’s a great return on the line. When we look at the two strategic capital spends that we have already completed, while we target 9% to (indiscernible) on the direct spend, those two that we have completed have actually been the total return including the multiplier effect has actually been between 15% and 20%. So we have looked at as many – to do as many as we can give. I think we have identified all that we can see out there. So we are not, surely not doing any projects that we could be doing. And I think what we are looking at is really incremental spend for acquisitions on top of it. So I think that it’s really a combination of both and one is not limiting the other.

Paul Morgan - MLV

So you think for the capital spend on redevelopments for the rest of the year you see that is being funded through what’s left of your cash after the Bel Air deal plus on the line?

Andrew Silberfein

That would be correct.

Paul Morgan - MLV

Okay, thanks.

Andrew Silberfein

Thanks.

Operator

Thank you. We have time for one more question. It comes from the line of D.J. Busch with Green Street Advisors. Please go ahead.

D.J. Busch - Green Street Advisors

Thank you. Andy you mentioned that you are more concerned with when you are looking at acquisitions and looking at the IRR versus the cap rate, can you share with us what the IRR was on Bel Air or kind of what your expectations of IRR with your underwriting properties at?

Andrew Silberfein

Yes. I am not going to give specific IRR for specific properties, but I will tell you in general we are looking for longer term IRR it’s above some have been 15% the upper teen type numbers. So depending on the assets, a bit on the upside and each one is different I would say not the leverage number, I want to tell you unleveraged we are looking more between 9% and 10.5%.

D.J. Busch - Green Street Advisors

Okay and you have made it well known that your acquisition target is somewhere in between that $300 to $400 a square foot with your portfolio at $303 portfolio you presumably have quite a bit of malls that still generate productivity less than that. But you also had success with malls redevelopment malls and retaining malls that are the lowest sales per square foot and moving them higher. At the right price, would you be willing to acquire a mall that has lower sales per square foot than that target, if you see the opportunities or are you sticking to that range?

Andrew Silberfein

I would never say never, but I will say it’s highly unlikely. At this point from where there seems to be enough opportunities for us to pursue within our band, what’s interesting is when we look at and look out across our portfolio some of the successes we have had which may not readily apparent, there has been a number of properties really seeing moved themselves by significant numbers between $50 and $100 a foot. That’s how we implement our programs and I think that people don’t yet having to get product is some of the sales numbers within our individual assets because it’s what we are doing. That takes time and that will flow through eventually.

D.J. Busch - Green Street Advisors

Okay. And I guess one final question and a little more clarification on the same store number. So there is about 150 to 200 basis point the impact due to the weather, the expected bankruptcies or the unexpected store closures, but you are only your guidance only was down 100 basis points does that imply that the SNOs to come on later in the year or better than expected?

Andrew Silberfein

Well I think if you look at the 1% on same store NOI is roughly $1.450 million or some number I guess. So that $600,000 was the higher winter expenses and the remainder really is the impact of the store closures due to bankruptcies and they are going to a drag in the first and second quarter.

D.J. Busch - Green Street Advisors

But your outlook for the balance of the year is pretty consistent from what it was last quarter?

Andrew Silberfein

Yes. It’s shaping up we are pretty excited about the second half of the year in third and fourth quarter and shaping up to be similar to what last year was and what we expected for this year. So we are right on target. There has always been a little bit of bumps and which are things here and there. But we are happy with where we are and where we are heading.

D.J. Busch - Green Street Advisors

Okay, great. Thanks.

Andrew Silberfein

You’re welcome.

Operator

Thank you. We have no further questions at this time. I would now like to turn floor back over to management for any additional remarks.

Andrew Silberfein

Thank you everybody for your time. And we look forward to seeing you all, many of you at the ICSC in May.

Operator

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

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Source: Rouse Properties' (RSE) CEO Andrew Silberfein on Q1 2014 Results - Earnings Call Transcript

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