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General Growth Properties, Inc. (NYSE:GGP)

Q3 2011 Earnings Call

November 09, 2011 11:00 am ET

Executives

David Keating - VP, Corporate Communications

Sandeep Mathrani - CEO

Steve Douglas - CFO

Shobi Khan - COO

Analysts

Jay Habermann - Goldman Sachs

Alexander Goldfarb - Sandler O'Neill

Michael Muller - JPMorgan

Paul Morgan - Morgan Stanley

Ben Yang - KBW

Rich Moore - RBC Capital

Steve Sakwa - ISI Group

Cedrik Lachance - Green Street Advisors

Gautam Garg - Credit Suisse

Operator

Good day ladies and gentlemen and welcome to the General Growth Properties Incorporated third quarter 2011 earnings call. At this time all participants are in a listen-only mode. Later we will have a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder today’s conference is being recorded. I would now like to turn the conference over to your host for today Mr. David Keating, Vice President of Corporate Communications. Sir, you may begin.

David Keating

Thank you, operator. Good morning everyone. Thank you for joining the General Growth Properties’ third quarter 2011 earnings conference call. This conference call will contain forward-looking statements about General Growth Properties. Such forward-looking statements are based upon the current beliefs and expectations of GGP’s management and are subject to risks and uncertainties in which actual results could differ from the forward-looking statements.

Such risks are more fully discussed in GGP’s filings with the Securities and Exchange Commission and the information set forth herein should be considered in light of such risk. Acknowledging the fact that this call maybe webcast, we would like to note that this call may include some time-sensitive information that maybe accurate only as of today's date, November 9, 2011.

During this conference we will discuss certain non-GAAP financial measures, a reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release or in GGP’s supplemental information package available on GGP’s website. GGP does not assume any obligation to update the information contained in this conference call. With that said, I would like to turn the call over to Chief Executive Officer, Sandeep Mathrani.

Sandeep Mathrani

Thank you David. Thank you and good morning everyone. We’re pleased to announce we reported core FFO of $0.23 a diluted share this morning. This FFO result was driven primarily by comparable property NOI growth in the GPP loan portfolio of 2.4%. Steve Douglas will provide more color on the financial results shortly.

We are starting to see a battle shift turn. The efforts upon leasing and development activity is starting to show and will accelerate in the coming quarters. We’re seeing rent spreads and occupancy gains. With regard to tenant sales in our malls for the third quarter, they stand at $471 per square foot, up nearly 8% over the prior year and now up seven quarters in a row.

With these sizeable increases in tenant sales during the past few quarters, total occupancy costs as a percentage has declined. So with occupancy costs in their GGP portfolio now at 13.6%, we continue to have the ability to increase rents. Some specific categories and brand of interest showing sales growth include the luxury sector, limited brands to include Victoria Secrets and Bath & Body and the Bath fashion retailers such as H&M, Forever 21 and Buckle.

Turning to rent spreads as reported with our third quarter disclosure release, they were relatively flat, however, the leases signed after January 1, 2011 rent spreads have increased over 6.7% or $4.03 per square foot on a cash-to-cash basis and over 16.5% or $9.82 per square foot on a cash-to-average basis. The average lease term is about 6.3 years.

Lease spreads in competence or inline space including spaces larger than 10,000 square feet. With more than 9.5 million square feet of leasing activity this year, we have effectively addressed our lease expirations for 2011. In fact, if you look at our total leasing activity there is an additional 4 million square feet addressing approximately 60% of 2012 expirations and have locked in uplift to NOI for 2012 and beyond. Also note emerging retailers include LEGO, Microsoft, Vera Bradley Michael Kors are expanding their footprint. As well as seeing international retailers expanding into the US including Joe Fresh, TopShop and (inaudible).

Further, of the retailers that are performing well, we haven’t seen much reduction in their growth plans for 2012. At quarter end, our retail mall portfolio was 92.7% leased, up 40 basis points from the same period last year. We would have been approximately 93% leased, if not for the impact of the Borders filing, Chapter 11 and liquidation. The growth exposure to Borders was 60 basis points of occupancy. To date, we had mitigated the exposure to 40 basis points and by yearend, that exposure will be reduced to 20 basis points.

Our year end target from all portfolio is 93.5%. In regards to occupancy impacts one focus of lead has been the announcement of GAAP of the closure of numerous locations. This was anticipated for a while as their footprint has been reducing over the last couple of years.

Generally, the quality of the existing GAAP locations and below-market rent helped eliminate any significant impact, and in fact represents an opportunity to achieve increased rents. Briefly on organizational updates, we continue our focus on streamlining the organization and creating efficiency. To date we have incurred approximately $25 million in costs, as a result annual savings were approximately $40 million to the NOI line and a net annual savings of $30 million to FFO.

Our stated savings goal was $50 million annually. We have addressed a head count portion of the equation and the work ahead will focus on the other costs in streamlining the organization. The final and most important point on this initiative is with a flatter structure the speed and efficiency of our decision making is enhanced.

Turning to our development activity, one of the areas of focus is the disciplined capital investment in the existing malls with a focus on anchored department store development. We see this as a positive attribute that will drive traffic and sales growth to our in-line sales.

Year-to-date, our company has opened 17 new anchor Big Boxes across a nation wide regional mall portfolio. In total, GGB expects to open 28 anchor big boxes in 2011 totaling more than 920,000 square feet.

We’re currently scheduled to open 10 additional anchor big boxes totaling 430,000 square feet in 2012. In addition, the company has opened 3 department stores totaling 400,000 square feet, two Nordstroms and a Von Maur.

GGP added an additional two department stores totaling 375,000 square feet scheduled to open in 2012 and 2013, including a Von Maur and a Bloomingdale’s.

We’ve identified more than 1.6 billion in development projects within our portfolio with exceptional returns. This is a total of 6.2 million square feet at a cost of about $260 per square foot. The returns will be double-digit, unlevered cash yields.

In September, we announced the acquisition of Plaza Fontenac in a joint venture partnership with Canada Pension Plan Investment Board for $136 million. Under this joint venture, GGP owns a 55% interest and CPP owns a 45% interest in Plaza Frontenac. The joint venture also provides a 26% interest in Saint Louis Galleria to CPP. The acquisition of Plaza Frontenac represents the addition of a strong luxury brand asset with inline sales of more than $500 per square foot.

Plaza Frontenac provides synergies with the Galleria enhancing our ability to generate greater returns on our invested capital which remains unchanged following this transaction.

On the disposition front, during the third quarter GGP sold the office and garage components of Westlake Center in Seattle for $119 million. We sold Riverside Plaza, a retail strip center in Provo, Utah for $21 million.

Subsequent to quarter end the company sold Faneuil Hall Marketplace in Boston for $140 million. As a result, the company has sold 14 assets totaling $662 million to date in 2011. With these transactions, GGP eliminated from its balance sheet approximately $163 million of mortgage debt.

In addition, we reduced an additional $539 million of debt from our balance sheet related to resolving special consideration assets. One of the underlying propositions in GGP is to unlock the inherent value of the above-market rate embedded in the company's debt profile taking advantage of the current low interest rate environment. This year alone we have refinanced 20 centers completing $4.2 billion in refinancing, $3.2 billion in our share of new property level non- recourse financing.

With these financings, we have reduced the average weighted interest rate by more than 77 basis points, and extended maturities by 7.9 years. The theme is completed on 2011 financing calls, and is now focused on opportunities that present themselves for 2012. Lastly, today GGP declared a common share all-cash dividend of $0.10 per share. In regards to the dividend payment and as disclosed in 8-K filings on October 14, the sponsor investors were released from their commitments to participate in GGP’s Dividend Reinvestment Program or DRIP. The DRIP program will remain intact for all stock holders including the sponsor investors, if desired.

To conclude, we have met both of our objectives that we stated at the beginning of the year and are now focused by taking those every same objectives to the next level for 2012. These include, driving occupancy and lease spreads to maximize long-term cash flows, taking advantage of the low interest environment, further strengthening the balance sheet and executing on high return development projects in our existing portfolio.

We provided financial guidance for the remaining of 2011 with our news release this morning. We expect Core FFO per diluted share to be in the range of $0.93 to $0.95.

One last point, we are scheduled to hold an investor and analyst conference on December 8th. That will give GGP management an opportunity to provide a detailed presentation of our leasing and operations initiatives, investment in development activities and our financing goals. In addition, we will provide 2012 guidance on that day.

I would like to turn the call over to Steve Douglas, but prior to that, Shobi Khan is on the call and will answer some of the questions that may arise later with reference to the Rouse spin-off. Steve?

Steve Douglas

Thank you, Sandeep and good morning everybody. For those of you who have not already done so, I encourage you to download or supplemental information package from our website to review our detailed financial information on both the quarter and year-to-date basis.

As Sandeep has mentioned, we continue to see positive momentum in our core operating and financial results as the business plan we devised beginning of the year set the stage for increasing cash flows and for further growth in quarters to come.

For the three months ended December 30, 2011 Core was $549 million compared to $536 million for the same period last year and negative results from the 2010 and leasing installation in ‘11 were offset by contractual rent increases and accretive leasing subsequent.

On a year-to-date basis, Core NOI totaled $1.62 billion compared to $1.61 billion last year; excluding lease termination income which was down $13 million compared to the prior year which we have highlighted in our supplemental information package. Core NOI was up 2.4%. Core FFO for the third quarter was $224 million or $0.23 per fully diluted share.

Looking at our Core NOI margins, it was flat relatively year-over-year characterized by the positive margins in our Core portfolio offset by the Rouse and the non-core office assets while expenses remained relatively flat in general excluding one-time items.

Turning to the balance sheet and refinancing activity. The team continues to be very active in the third quarter. In the end of June to-date, we closed approximately $1.7 billion or $1 billion of GGP shares of new fixed rate mortgages on seven malls at an average rate of 4.66%.

The new financings resulted in a reduction of interest rates by over 170 basis points and an extension of the term loan by over nine years to an average of 10. The 10 year average includes $635 million for the eight-year term and $832 million for 12-year term. These staggered maturities continue to help de-risk our balance sheet by smoothing out our ladder in the future years.

Since January this year, including the five we completed after quarter end, we re-financed 20 malls totaling $4.2 billion or $3.2 billion at our share which generated $619 million of proceeds in excess of the in place financing of the bond. These results continue to demonstrate our objective to lower GGP’s greater average stock to capital, increasing duration optimizing the maturity ladder. As of today GGP has $20.1 billion [of share] an average rate of 5.23% contrast that with $20.6 billion of debt at 5.37% at year-end of 2010.

Going forward, if you combine the reduction to-date of the estimated $1.1 billion of debt reduction as related to the spin-off of Rouse properties, GGP will have reduced debt by approximately $1.7 billion. While we’ve had a successful 2011, we are not very still and are now focused on our 2012 opportunities; specifically, we have $349 million of (inaudible) maturing in 2012 and currently at 7.2%.

One of our largest maturity next year which is $1.6 billion and a share of $400 million and that is represented by the mall in Columbia with the current rate of 5.83% (inaudible) $100 million of share which matures in October 2012 at the rate of 6.5%.

In addition we have select assets including both [Staten Island and Oakwood] that we think we will be in a position to finance and hopefully hold or reduce rate on those assets as well both being very high quality.

In total we have $6.8 million and that we’ll be able to prepay without penalty of which $1.6 million we’re modeling to optimistically refinance 2012 in addition to track the maturities. Liquidity remains strong; available reserves stand approximately at $1.2 billion cash and undrawn line more than pursue our business plans as currently contemplated.

Turning to guidance briefly, as Sandeep mentioned, we are looking to the balance 2011, it is our expectation that Core FFO excluding the results of after sales classified existing field operations is expected to be between $0.93 and $0.95 per share subject to percentage rent driven by sales levels in temporary holiday leasing.

We estimate achieving an increase in occupancy of approximately 130 to 150 basis points by yearend as compared to the end of Q3, but relatively flat to the end of 2010. Percentage lease should increase in Q4 as well by 60 bps from Q3 and 50 bps from Q4 of 2010.

Yearend 2011 percentage lease will include approximately 200 basis points (inaudible).

Percentage rent temporary leasing is expected to drive this increase in Q4 versus Q3 and we anticipate an equal amount of (inaudible) each totaling approximately $25 million to $35 million or $0.025 to $0.035 a share again a little over the third quarter on a runrate basis.

Collectively this should make up $0.05 to $0.07 per share in the fourth quarter. With the (inaudible) great deal in reducing our total costs, as Sandeep had mentioned associated with property management and G&A costs and the net savings should have full force and effect in 2012.

And I spoke of from discontinued operations, expected to total approximately $0.03 per share, which is obviously excluded from that guidance number. We look forward to giving you 2012 full-year guidance at our upcoming Investor Day in December of 2011.

With that, I’ll turn it back to Sandeep.

Sandeep Mathrani

Thanks Steve. As many of you know Rouse Properties, Inc recently filed documents with the SEC. These documents set forward the important business factors for Rouse. We’re on target to complete the spin-off by yearend. We kindly ask participants lined up for Q&A to pull it off on questions concerning the Rouse spin-off until we complete all relative questions to GGP and our third quarter results.

We’re currently in a quiet period during which our ability to disclose and discuss Rouse is limited. We will try to answer your questions as best we can, but we apologize in advance for these limitations. I would like now to open the line for questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Jay Habermann of Goldman Sachs. Your line is open.

Jay Habermann - Goldman Sachs

Sandeep just a question, I know you are going to provide guidance in December, but as you think about the run rate or the same-store NOI, the third quarter pace versus the year-to-date pace, can you help us think about the next sort of 12 months in terms of the direction going forward or rather we should think about the most recent quarter or the year-to-date pace because as I see it, your leasing trends thus far this year have improved, but you still have some of the leasing from prior periods that obviously act as a drag in the near term, but maybe give us some sense of the level that you think going forward.

Sandeep Mathrani

Again I am going to ask you to be patient for another few weeks. We will be giving in depth guidance in 2012 and I would like to hold off questions for 2012 guidance or run rate until December 8.

Jay Habermann - Goldman Sachs

I guess maybe just switching gears a bit, in terms of post Rouse, can you help us think about the pace of asset sales going forward, I mean is Brazil on the table, help us think about the strips in office as well for 2012.

Sandeep Mathrani

As we said previously Brazil, we like Brazil. We don't anticipate that there to be an asset that we will sell. We are actually quite bullish on Brazil. We've also said in the past that over the next 18 to 24 months our goal is to try to sell the remaining strips and office building. Obviously it has to be done opportunistically as the market permits us to sell those assets. And so we again that accounts for a very, very small part today of our NOIs, but our goal is to again to sell those assets over the next 18 to 24 months.

Jay Habermann - Goldman Sachs

And I guess just my last question. As you think about some of the capital investment that you could do over the next say 2 to 3 years, as you focused on the sort of tier 1, tier 2 portfolio, your top 120 or so assets. Can you give us some sense of how you much you are prepared to invest in these assets over the next say couple of years to drive the higher returns?

Sandeep Mathrani

Again you know when I give you 2012 guidance, we will provide that, but at share it’s in the range of $250 million to $300 million.

Jay Habermann - Goldman Sachs

And that’s for next year alone?

Sandeep Mathrani

No, it’s for our 2012 and 2013.

Operator

Our next question comes from the line of Alex Goldfarb from Sandler O'Neill. Your line is open.

Alexander Goldfarb - Sandler O'Neill

Just a few questions here. First on the FFO guidance, Steve can you provide us with just you know if you were to give guidance for recorded FFO, but not for your definition of core. But what reported FFO guidance will be, can you just give that to us?

Steve Douglas

I guess you’re basically saying in accordance without leaving the one times that we isolated on page 7 of the supplemental.

Alexander Goldfarb - Sandler O'Neill

I mean it just seems increasingly a number of REITs, you guys are in the loan, but a number of REITs seem to be sort of just [dialing] out the card if you will I mean everyone sort of redefining FFOs, so comparability, it’s not a pure metric, but comparability gets more difficult. You know, so for those of us who are still using reported FFO, it’s helpful to have just the guidance -- what your guidance range should be under that metric?

Steve Douglas

Well, you could imagine given the emergence from what we discussed at length the emergence of bankruptcy lending various anomalies as it relates to our numbers, and if I were to characterize the numbers that we specifically isolate, I think we have anticipated incurring $25 to 30 odd million dollars of non-core adjustments, which would be those things that we had isolated as non-recurring being severance Rouse costs, those are the items that we’ve excluded from the calculation.

And in fact, if you refer to our press release, we talked about other non-core adjustments of above $0.05 per share. So, that -- those would be the numbers that if you were to identify to that and if you take the $0.05 at face value, the 95 to 93 mathematically which simply indicates 88 to 90. So, that would be the number that we’ve isolated, but again I must stress, we haven’t taken the isolation of these number lightly and they are not simply incidentals that we would prefer not to have people contemplate. They are specifically related to initiatives and transactions. That’s why going forward will not recur and it’s not simply a selective attempt to try to isolate numbers that we don’t like.

Alexander Goldfarb - Sandler O'Neill

Okay. So in fourth quarter, what amount of items are in there that you would define as non-core?

Steve Douglas

For example, we’re anticipating on the Rouse spin, we are going to incur fees associated with the assumption of debt, which would total $10 million to $12 million and obviously you have additional professional fees and other transactional that may be cost related to Rouse spin-off which could drove further $2 million to $3 million than what we’ve incurred today and we do anticipate finalizing in terms of the destruction of our operations, additional service costs that have already been identified and just under (inaudible) and getting new after that $0.05 number.

So, again, I just want to reinforce that those numbers are truly transactional and isolated to the repositioning of business as opposed to selectively (inaudible)

Alexander Goldfarb - Sandler O'Neill

Okay. So, the point is for next year’s guidance that number should be a sort of a pure reported number, it won’t be this core number, correct?

Steve Douglas

Well, obviously the further we move away from the restructuring and the like, that will be the case, and we may have some trailers and stranglers on Rouse cost, but we should continue to refine that number -- or should continue to decrease the number of exception which is applicable.

Alexander Goldfarb - Sandler O'Neill

Okay. And then next question is on the stock buyback, was that one seller to you guys or was that genuine sort of day- to-day open market purchases?

Steve Douglas

Those were market based purchases.

Alexander Goldfarb - Sandler O'Neill

Okay. Final thing is and this is from a GDP perspective with regards to Rouse, would you guys be willing to offer investors who don’t want shares in Rouse to buy it back at the price that you are going to spin it out of?

Steve Douglas

It’s not currently contemplated, and it wouldn’t be our intention.

Operator

Thank you. Our next question comes from the line of Michael Muller from JPMorgan. Your line is open.

Michael Muller - JPMorgan

Hi. Just have a question on the supplement on the least spread calculations. It looks like it’s including all leases at this point, and we are looking at cash spreads – you know they look like for the leases commencing in 2011 or it’s down 1.4% and 2012 over 3.8% blended, what if those numbers look like if you do it, just looking at small shop space and it excludes square footage north of 10,000 square feet.

Steve Douglas

So, if you look at a net 10,000 square feet, and which we don’t break out because the industry wanted us to (inaudible) including 10,000 square feet, but if you look at it less than 10,000 square feet it spreads comparably jumped. You know, we show that $4.03 totaling with a 6.7% increase, so that number jumps to $6.04 or 9.7%.

Michael Muller - JPMorgan

Okay. Got it. And then secondly, is there any sense from the sponsor investors, whether or not they plan to still use the DRIP or not?

Steve Douglas

As of the third -- for the third quarter, it’s my understanding that they’re all not going to address generic safety -- cash dividend.

Operator

Thank you. Our next question comes from the line of Paul Morgan from Morgan Stanley. Your line is open.

Paul Morgan - Morgan Stanley

Hi, good morning. If I look at that page 20 of the supplemental which was helpful, you -- if I look at the pre ’11 deals done for 2011 commencement, that was like 4.2 million square feet, and if I compare that to the deals that have been done so far for 12 commencement, that’s 1.3 million square feet. I know we’re no quite at the end of the year, but that’s a big difference in kind of the volume of leasing.

I think Sandeep alluded to something about 4 million square feet of activity, I mean is that just we have a lot of activities towards the end of the year or is there something else going on why the number of leases on a four-year basis are at much lower than they were before?

Sandeep Mathrani

Well, two things, one is at the end of the third quarter information, okay and then the second aspect is we have leases that are in negotiation or in the process of getting time where the deals have been approved by tenant and landlord. So our 4 million square feet number incorporates those leases that have been approved by both parties and that are in the process of getting executed.

Paul Morgan - Morgan Stanley

And are the spreads on those comparable to what you’ve done year-to-date?

Sandeep Mathrani

I think it’s safe to say that these spreads are actually better, heading in the right direction.

Paul Morgan - Morgan Stanley

And then do you have any operating metrics for the Brazil portfolio, like same store NOI or anything?

Sandeep Mathrani

We actually do have them. As a matter of fact the Allianz which is public company reports them publicly, they did report them I believe a couple of weeks ago. So it’s readily available and Shobi who is spearheads Brazil could answer or even give you a couple of metrics.

Shobi Khan

Yeah Allianz actually reported earnings yesterday with a call and there is a webcast available, but their same store NOI numbers are north of 11% to 12% range consistently in their occupancy to 98% portfolio wide.

Paul Morgan - Morgan Stanley

And last question on the Borders. It sounds like you've done maybe two-thirds of the deals for the Borders that you lost, how about who might be taking that space and kind of those all kind of permanent deals or any of them temp?

Sandeep Mathrani

No actually the two thirds that have been taken care of by all permanent leases. They range from whether it’s Forever 21 to in other words or to a supermarket in Pinnacle Hills to Dave & Buster's and Mall of Louisiana so they are all permanently leases; what I think is the interesting part is that the tenant allowances that landlord work for the deal that has been consummated is about $13 million and we actually got an uptick in rent of about $1.3 million. So this also was accretive to us, because we were able to get a double digit return on our invested capital over and above what Borders is paying.

Operator

Our next question comes from the line of [Thomas Hill] from Bank of America-Merrill lynch. Your line is open.

Unidentified Analyst

You guys have done a lot of work on refinancing your balance sheet in a secured way. You mentioned the Rouse notes that are maturing next year; any thoughts on how you are going to refi those notes so you are going to put actually tabs on unsecured market or you find pay those off or use strictly as secured debt?

Steve Douglas

It’s a broader questions obviously, because the Rouse notes are non-recourse to the corporate entity, but they are re-course to not to be confused but the Rouse spin-off with the Rouse prosperities, and with the Rouse company and all but GGP actually acquired it and the maturities are staggered between next year of $349 million a year after, just over $600 million and then long dated that are notes of $615 million due in 2015 which are actually loss going from being until 2013.

And so our thought process is really the internal cash resources in order to retire those notes next year, but in terms of the boarder strategy for the Rouse Corporation and we’ve made this clear when the notes actually come due is we don’t consider that structure under levered at this point in time, but we’ll ultimately the de-filtration of that debt will replaced to up financing the assets to sit within the Rouse Company Limited.

And as we said today, which remained levered in the 35% to 40% region. So ultimately, we’ll redeem those notes through cash resource and the financing will be replaced over as bad time as we out finance the assets in the Rouse Company. It’s nearly a bridging strategy we’ll have to adopt in order to get there and we have the financial planning to be able do that.

Unidentified Analyst

Any plans for unsecured debt at GGP level?

Steve Douglas

At the current given the such subordination and the process we’ve been undertaking and the ability to execute on our plan from a re-financing perspective are I think pretty good interest rates. There is no intent at this point of time, if you are unsecured, I’ll never say never, but our strategy I think is anchored in de-risking the portfolio through financing at the asset level and again I think it’s clear from the results that we’ve been relatively successful in doing so. And so that’s the focus for that.

Operator

Our next question comes from the line of Ben Yang from KBW. Your line is open.

Ben Yang - KBW

Sandeep, just another question on the rent spread. You sliced and diced the data in many different ways in the supplemental but since you changed the way you disclose it’s kind of hard to do the trend. So just if you can tell us what the cash leasing spreads have been every quarter this year basis on deal signed during the quarter and not based on lease commencement dates?

Sandeep Mathrani

Signed during just this quarter?

Ben Yang - KBW

First, second and third quarter just to kind of see where those are and how that’s been trending for the year?

Sandeep Mathrani

We’ll have to get back to you with the detail; I don’t have that breakdown with me.

Ben Yang - KBW

Is it fair to say that they’re trending up, are they trending lower or kind of flat throughout the year?

Sandeep Mathrani

They’ve been trending up throughout the year. You know again, as we have shown quarter-by-quarter and again as evidenced by what I am seeing over the last thirty days, they have been trending up from the time we stated in 2011.

Ben Yang - KBW

Okay and then also when you look at may be some of your more recent renewal leases that comes in about $54 to $55 per square foot based on commencements and then when you compare that with the expiration schedule, it looks like you could possibly have negative rent growth potentially over the 10 years and I know that the space is not entirely comparable or may be the picture looks better after the Rouse spin off, but give any thoughts on where rents are within the portfolio, if you could mark the entire portfolio that’s marketed today, I mean is there anyway to quantify that because I think you had commented that you do have a business plan for every malls. So I just wonder in totality how much upside there might be based on what looks like a negative rent spread over the next two years?

Sandeep Mathrani

Ben I don’t really understand the negative rent spread that you see. If I look into 2012 and again we are sort of like to stay away from a guidance call for 2012 today, but the rents are expiring at about $55 and the renewals as I’ve shown even on the page 20 of the supplemental albeit a small subset. Okay you have got leases expiring at $55 and initial new leases at a positive 6.8% spread.

So I don’t see the rental growth being in negative actually. As a matter of fact if I look at 2012, 2013 and 2014, they have all seem, the expiring rent around the mid 50’s and the renewals as long as the macroeconomic environment is stable, we should see profit on rental spread.

In addition, occupancy costs have actually gone down. If you look at the end of 2010 it was almost 14.4% and 13.6% today and so may be Steve can talk to you afterwards so we can better understand how you see the negative rent spread.

Ben Yang - KBW

Well, I guess, you know, what I am looking at is like 54.83 on initial rent leases and then 55, going up to $70 plus over the next, say, eight years or so. And maybe look flat over the next two to three years, but beyond that it just looks like, unless sales increase materially, it could, maybe be an issue at that point. But I guess, your message is to focus more on the occupancy cost at this point rather than the numbers that you’ve shown in the lease expiration schedule.

Sandeep Mathrani

Well I think the message is that you know, it’s two things. One is the occupancy costs are in line with the peers and again for us this quality of loans very reasonable. But over the next three years, again, the expirations are in the mid-50s. So, there should be substantial growth. If you look at the outer years, yes if the macroeconomic environment changes and sales go negative, they would have to go negative substantially for there not to be some sort of positive spreads. Also, you know, they are built in contractual bonds in almost all the leases and so you should be able to not go into negative territory even if the macroeconomic trends reverse itself. So, one, it’s hard to predict 2015 output, if sales continue to grow at 2% to 3% a year I think we will continue to see positive spreads.

Ben Yang - KBW

Okay, that’s helpful. And just final question. What’s the average ramp up bump on in place leases currently?

Sandeep Mathrani

Well I think I tried to give you that indication by showing you that the leases that are assigned, it think it’s a 16.5% of growth or $9.82, so if you did the math over a 6.3 year term, I think it comes to close to a 2%.

Operator

Thank you. Our next question comes from the line of Rich Moore from RBC Capital. Your line is open.

Rich Moore - RBC Capital

My question is on the stock buy backs that you chatted a bit about. Why are you buying back stock exactly, was there any particular reason? You said it was open market purchases, but why the program and how much more should we expect that you be doing?

Steve Douglas

Obviously, when we brought back stock earlier in the year and when we did do a buy back stock at a lower price, so we brought that stock at that point in time. We approach stock buybacks as we do to any capital allocation decision and we balance it at a month, deleveraging, making sure we can pursue our business plan and in fact and being in a position to be able to take advantage of opportunities within that market that present in our view a dislocation of core value versus what it is trading in the range today.

I think if you look at the size of our balance sheet, $55 million is not a lot and then again as I can commit to you, we've measured in the context of being able to purse all of our business plan including deleveraging and other aspects of our plan. So your question is and I'm fond of the expression, you never know what somebody is selling, you always know what somebody is buying and in our view it represented an authentic value play that was a great opportunity given the dislocation of the market at the time.

Rich Moore - RBC Capital

Okay, so we should assume, Steve, that you would have other purchases like this, maybe of this magnitude if you see other opportunities, stock price falls et cetera, you would make some other purchases like this, is that right?

Steve Douglas

I think Rich this is a dynamic business and we're constantly looking at ways to deploy our capital in effect that's accretive and most advantageous for all shareholders and that's exactly what we did and we'll continue to do. So we won't predict how it is, we'll allocate our capital to the future that’s all subject to in our view, risk return ratings and other things we want to pursue. But I think we should bear in mind that on many occasions buying back your own assets through stock buybacks is in fact represents a very judicious and accretive use of capital over the longer term.

Rich Moore - RBC Capital

And then, on the pad buybacks, I thought those were very interesting. Is there more of that to be done you think across the portfolio? Or if you have kind of tapped those opportunities at this point?

Sandeep Mathrani

Again, we've always felt that was important to own our real estate because very often the pads are vacant and the motivation is different for a third party than us and the answer to that question is yes. The opportunities present themselves or that definitely we will be aggressive, specifically in buying back the vacant assets more than the occupied anchors. Do note that we did buy back an occupied anchor at Fashion Show Mall, the new end markets there, that's been an exception because it is the critical part of our real estate. It's on Las Vegas Boulevard. It is a front entrance to the mall that we felt it was best in our hands than in third party’s hands.

Rich Moore - RBC Capital

I don't know if we are at the point where we can ask the Rouse questions, but my only question there is how confident you guys feel that you will complete that by yearend?

Sandeep Mathrani

I think we'll hold off to the Rouse questions till the end and we will answer that questions, but we feel very comfortable, we can answer it more specifically.

Operator

Thank you. Our next question comes from the line of Steve Sakwa from ISI Group. Your line is open.

Steve Sakwa - ISI Group

Thanks. Good morning. If you look at page 90 of the supplemental, there’s a pretty big spread between percentage lease, percentage occupied, Sandeep, I am just wondering kind of all else being equal, which you expect that that GAAP 260 basis points which is probably something like $80 to $90 million of that would that all kind of come in and hit the P&L by the end of 2012 or just some other things take a longer time to kind of get into the run rate of the company?

Sandeep Mathrani

There are two aspects, one is at the end of the second quarter, we show that spread to be about still going 1%; it’s gone down to 2.6%. So some of it has come into play. Two is, I think you will continue to see -- as we continue our lease our vacant space that there will be a spread between percentage occupied by the percentage leased, okay.

And we don’t see all of that,-- you always have a spread but you don’t see all of it coming into play on a run rate basis till actually 2013. We’ve to depreciate all these things done this year, okay. We’ll start to roll in by back-to-school for holiday 2012.

And I want to emphasize that there will always be spreads between the two, you know, principally because you have -- your vacancy, you’ve got build-out time, you’ve got lease expirations that needs to be balanced. And until we get us portfolio into a stabilized form which means occupancy reaches the level of stability, you might see 200 basis points or so delta right into 2013.

Steve Sakwa - ISI Group

Do you think it could stay as wide as 200 basis points throughout next year, maybe?

Sandeep Mathrani

Correct. With the occupancy number may rise, if you are saying the 93.5% will go up, but there will always be a spread.

Steve Sakwa - ISI Group

Okay. Thanks and I guess I just want come back to Richard’s question on the share buybacks, and you know I think you mentioned something like $1.6 billion of potential development projects. And just kind of weighing in the Cap, I realized $50 million isn’t a lot, but you know how do you think about that in terms of IRR and kind of near-term leads against these development projects?

And I guess when do you think it may be some of that development capital really starts to be spent? Is that more of a 2013 and 2015 period or can some of that happen sooner?

Sandeep Mathrani

I think a question was asked earlier which is how much development capital do I anticipate spending? And I -- it will be a lot more details in our December 8 Investor Day. However I did also say that about $250 to $300 million as we allocated for development in 2012 and 2013, combine that with a 250 to 300 shares as Steve said, you know, share buyback and development, and we analyzed these capital allocation to get the best return for our shareholders, but at this moment (inaudible) albeit we have $1.6 billion identified. It is a five-year program due to investor capital and we anticipate spending, as I said, $250 to $300 million at share between 2012 and 2013.

Steve Sakwa - ISI Group

Okay. And then last think, maybe I will just throw it out there and you can put it in Rouse pocket, but will you be able to address the CEO position when you get to Rouse’s questions?

Sandeep Mathrani

The answer is, when we get to last question we’ll make sure we answer that question.

Steve Douglas

Operator, we’ll have – after two more questions, and then we will open the floor to a couple of Rouse question.

Operator

Thank you. Our next question comes from the line of Cedrik Lachance from Green Street Advisors. Your line is open.

Cedrik Lachance - Green Street Advisors

Hi. Thank you. And looking at your main store, your main tenants -- limited in the GAAP, and you have had a pretty sizable decrease in the number of stores, lease which (inaudible) from 2 Q to 3Q. You were able to quantify and what type of quality of malls these stores have been closed?

Steve Douglas

The GAP stores are closing in the lower productivity markets. There are instances where there is a very high productivity location where there is a dislocation between the rent --the market rent and they are at times locations. So it’s a source for them mainly in the lower productivity markets.

You know I can almost address the gap, if I want to (inaudible) and time to address the gap question, which comes up. We have analyzed our 2012 and 2013, actually all exploration till 2014, and we actually identified maybe 35 locations that could potentially -- they could close.

And then looking at a mark-to-market rent, those stores are almost $20 or so below market, which is almost 50% below market. So, we actually view that to be a tremendous opportunity, albeit the gap trends would like to stay. We will continue to have them as part of law to go within their important -- however, I don’t want anyone to take us away that there is the negativity, just like the border situation, we view that to be highly positive and accretive to us.

Cedrik Lachance - Green Street Advisors

How about for limited brands, the number of closures were a lot larger, and can you give us a sense again of rents in those stores and what kind of malls are being most expective?

Sandeep Mathrani

Again, the number of locations, I would have to go back and do some more research on the limited because I would -- I need to go back and understand your question, so that I can get back to you on that.

Cedrik Lachance - Green Street Advisors

Okay.

Sandeep Mathrani

I actually think that the footprints of the stores have actually gotten bigger, but the numbers have actually (inaudible) deals. Can you get some research on that and I will get back to you.

Cedrik Lachance - Green Street Advisors

Okay. And just going back to, actually share buyback, Again -- and you bought about $500 million back for your shares back in the spring at about in the high $15 range. Now you have the chance to buy it, I guess in the $12 range and you only bought back $50 million to $55 million, and why not take more advantage of that price at the time the $12 or so price?

Steve Douglas

Cedrik, it’s a very good question, but again I will go back to our commentary. At the time we brought -- 1595 we had full conviction that the -- it was a great use of capital at the time and it was at that point in time measured against the other cash needs of the rest of the organization. You obviously have to pay attention that I think the dislocation of the share price, if that allowed us to buy back in the $12 range really came on the heels of a bit more uncertainty in the economy, which we again, have to work our way against.

The other uses of our cash, and we obviously want to be judicious allocators of capital, again, balancing all the needs of the organization. So, if you are measuring it in different point of time, you really have to contemplate what else is going on in the business at the time, and as we continue to get a handle of development opportunities, we need to handle on acquisition opportunities and other things.

We wanted to leave ourselves in a position to be able to take advantage of those as well. So taking advantage of the dislocation of the share price, I think it’s important to remember that we measure it against the needs of the business in totality and not simply saying that we will jump in with another $500 million without paying heed to really the uses, the rest of the requirement in the organization.

Operator

Our next question comes from the line of Gautam Garg from Credit Suisse. Your line is open.

Gautam Garg - Credit Suisse

And my first question is on the Core FFO. The reported Core FFO for third quarter is it calculated the same way as the second quarter; like what are the main differences in the line items?

Steve Douglas

We commented how we presented the second quarter; yes, for all intents and purposes we have isolated the same item because of the same drivers. So the answer is yes, but I guess the big difference in the second quarter and I am going to visit those number, we had some anomalies within the confine to the operating line adjustments and alike that frankly with an operating nature versus the kind of investing nature that we -- investing and repositioning nature the Rose properties cost than other things that we’ve incurred in more earnest in this third quarter.

Gautam Garg - Credit Suisse

And the last question is regards to you fourth quarter guidance what same store NOI growth does it tie to?

Steve Douglas

The same store NOI growth is roughly in the 1.5% to 2% range.

Sandeep Mathrani

Okay. That’s would be our last question on GGP. I would like to open it up for a few questions on Rouse, but let me address the two items that I think we would, when we open it up for Rouse, one was the timing of the spin-off; we do anticipate that it will get respond by the end of the year. So we think we are on-track to accomplish that. The second question is the CEO timing; we have narrowed the candidates and we hope to make an in a very near-term. So I would like to open it up to a couple of questions on Rouse and Shobi would answer those questions.

Operator

Once again if you have a question for Rouse (Operator Instructions) Our first question comes from Alex Goldfarb from Sandler O'Neill. Your line is open.

Alex Goldfarb - Sandler O'Neill

Actually it was a follow-up on GGP if you’re still taking those?

Sandeep Mathrani

For you Alex, of course.

Alex Goldfarb - Sandler O'Neill

Okay, just two quick follow-ups. Steve just going back to the share buybacks, if you think about just market psychology there is the most confidence in the stock when everything’s good and the stock prices are high and the least confidence when the market did what it did late summer when the stock price was low. Given the leverage of the company, given the capital needs of the company, why not just sit on the cash sort of as rainy day cash even if they may be short-term dilutive, but just to have that access cash on the balance sheet?

Steve Douglas

I wouldn't portray myself as a stock trader and someone who takes advantage of the vagaries in the market in the short-term for simply you know buying and selling. Again, we did with a conviction over the long-term value of the organization and we waited in the context of being able to pursue all those other items you talked about.

I think with the loss sometimes, is that we have paid off $350 million of fully recourse corporate debt associated with the Homart and Ivanhoe notes during the course of the year, we paid off or will pay off over $300 million of debt through simple amortization over the course of the year as mentioned, about $1.1 billion of debt will be shared upon the spin-off of the Rouse properties. So you're looking at almost over $1.7 billion of debt reduction associated with GGP by doing those things isolated.

The answer that I would provide you is exactly what I said before; we weigh all these things in the context of balancing our needs in the organization. We have to bear in mind that this course of the year, not only just the headline amount of debt that we refinanced, we de-risked the portfolio by reducing the cost of capital by tremendous amounts, by extending maturities and focusing judiciously on our ladder as well as enhancing and repairing a lot of relationships with very high quality lenders for us.

And I think we just have to look at it in totality when we look at what we are doing versus sitting there with – and look we’re not sitting with diluted cash. We sit with $500 million on the books to-date then we could be perceived as dilutive but we do that again with the full measured effect that we’re looking how it is; we view the business, the business plan and still being able to pursue a balanced approach I think we talked about.

Alex Goldfarb - Sandler O'Neill

And the second question is on the Nouvelle lawsuit, is that purely borne by GGP or is Howard Hughes also responsible; I mean responsible as far as liability or is this just totally is GGP fully responsible for this?

Sandeep Mathrani

There is no responsibility of GGP. We have complete indemnification with Howard Hughes of course when someone is filing a lawsuit they are going to file it with every person involved, so we don't believe there is any liability on GGP.

Operator

Our next question comes from Jay Habermann from Goldman Sachs.

Jay Habermann - Goldman Sachs

Just specific to Rouse; can you just comment I guess on the trends for the most recent quarter and I guess year-to-date. I am just comparing the results may be versus some of the other the mall companies have reported? And has the impact been more so due to occupancy or are you still seeing the rent declines and may be talk about CapEx as well you know is it really a function of spending less on the properties?

Shobi Khan

Sure Jay, its Shobi. Sales were up 3.6% but the drop in NOI is primarily attributable to the acceleration of the redevelopment efforts of the properties that’s taken tenants online. So as you know the Rouse plan has begun asset-by-asset and repositioning these assets the team has undertaken these initiatives.

Jay Habermann - Goldman Sachs

And how many assets are being repositioned at this time?

Shobi Khan

Each asset has got a (inaudible) plan depending on you know minor refurbishments and major redevelopments. So all of them have some form.

Jay Habermann - Goldman Sachs

And roughly how much in dollar spent was that?

Shobi Khan

I think you have to wait on the Form 10 for the final disclosure is I think in the Form 10 we’ve on initial we declared roughly about over $200 million of CapEx.

Operator

Our next question comes from Ben Yang from KBW. Your line is open.

Ben Yang - KBW

It looks like we could see some B&C malls straight hands before the IRSA versus specifically some of the Westfield assets. Based on comments they made earlier this week and I recall your original strategy was to wait for some price discovery before figuring out what to do with your lower tier assets. So is it possible the Rouse spin-off just doesn't happen or are you kind of too far along in the process to turn back at this point?

Sandeep Mathrani

I think Shobi have indicated initially on the last call, we’re open to all explorations. We have gone through this process of looking at what the best possible maximization of value for GGP and I think our current trends right now is that, to be on track and close by year end.

Ben Yang - KBW

Westfield mentioned that they had four to five bidders interested in their malls; have you had any conversations with potential bidders that might take those assets out for you to do the spin-off?

Sandeep Mathrani

No we have not.

Sandeep Mathrani

Thank you everyone for joining us this morning for the earnings call and we look forward to seeing most of you if not all, at the Investor Day on December 8th. Have a great day.

Operator

Thank you for joining us today. That concludes the GGP third quarter call. You may now disconnect and have a wonderful day.

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