Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

General Growth Properties, Inc (NYSE:GGP)

Q4 2011 Earnings Call

February 09, 2012 9:00 AM ET

Executives

Michael Berman - Executive Vice President and Chief Financial Officer

Sandeep Mathrani – Chief Executive Officer

Kevin Berry – Vice President of Investor Relations

Analysts

Christy McElroy – UBS

Jay Habermann – Goldman Sachs

Samit Parikh – ISI Group

Alexander Goldfarb – Sandler O'Neill & Partners

Michael Bilerman – Citigroup

Richard Moore – RBC Capital Markets

Ben Yang – Keefe, Bruyette & Woods

Cedric Lachance – Green Street Advisors

Ki Bin Kim - Macquarie Research Equities

Operator

Good day, ladies and gentlemen, and welcome to the General Growth Properties Fourth Quarter 2011 Earnings Conference Call. At this time all participant lines are in a listen-only-mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder today’s conference is being recorded. I would now like to turn the conference over to Mr. Kevin Berry, Vice President of Investor Relations. Please go ahead.

Kevin Berry

Thank you. Good morning, and welcome to General Growth Properties’ fourth quarter 2011 earnings conference call. Please be aware that statements made during this call maybe deemed forward-looking statements and actual results may differ materially from those indicated by forward-looking statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the SEC for a detailed discussion.

Acknowledging the fact that this call maybe webcast for some time to come, we believe that it is important to note that our call includes time sensitive information that maybe accurate only as of today’s date February 9, 2012.

During today’s call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included within the earnings release and the supplemental information package included in the Form 8-K. This information is also available on our website in the investor’s section.

Participating in today’s call, will be Sandeep Mathrani, Chief Executive Officer, and Michael Berman, Chief Financial Officer.

I will now turn the call over to Sandeep.

Sandeep Mathrani

Thank you, Kevin. Good morning. Yesterday, we reported core FFO of $0.29 per diluted share for the quarter compared to $0.23 for the fourth quarter 2010, an increase of 26%. The results came in at the high end of our guidance for 2011 and above consensus by a $0.01 a share. The terms of core net operating income, our portfolio generated over $612 million during the quarter representing an increase of 7% for the same quarter last year.

And finally, core EBITDA increased 9.4% in the quarter to approximately $554 million. Michael will cover our results in more detail and discuss our views for 2012.

It has been just over a year since the new management team came to GGP. If there was one word to describe our activities in 2011, it would be active. We’ve assembled a very talented and dedicated senior management team comprised of the following individuals, some new to GGP and some veterans. Alan Barocas, Head of Mall Leasing, Cathie Hollowell, Human Resources, Shobi Khan, Chief Operating Officer, Marvin Levine, Chief Legal Officer, Chuck Lhotka, Head of Asset Management, Scott Morey, Head of Information Technology, Richard Pesin, Our R&D man, Jim Thurston, Chief Accounting Officer, Hugh Zwieg, Capital Market guru, and my newest partner Michael Berman, our Chief Financial Officer.

We had an excellent new year of leasing activity accomplishing for the eleventh million square feet, taking occupancy in 2011 and 2012. We made significant progress in de-risking the balance sheet, refinancing $3.6 billion of debt, $2.6 billion net share, lowering the interest rate by 77-basis points to just over 5% and lengthen the term to maturity of two years to ten.

We identified $1.6 billion of redevelopment and expansion opportunities within the portfolio. $408 million or $285 million net share of which we are moving forward on this year and next.

We reinforced our asset management activities with a clear focus on operational efficiencies, promoting sustainability initiatives and investing capital in refreshed projects.

Selectively, we pursued acquisitions such as Plaza Frontenac and Anchor [fads] at numerous malls including the Neiman Marcus at Fashion Show and Oakbrook.

And finally, we stored 11.5 million square feet at share of non-core assets. And successfully spun off 30 Class C malls, comprising of 9 million square feet of inline GLA into a new public company called Rouse Properties, resulting in a stock dividend of approximately $0.43 per share.

The combinations of these transactions not only strengthened our balance sheet, but helped to establish GGP as the owner of high quality regional malls with sales of over $500 per square foot.

Our portfolio of 136 regional malls accounts for 96% of our core net operating income in 2011. 78 of these malls are considered class A, and accounted for 75% of our net operating income in 2011. And has approximately $575 per square foot in sales.

Turning to our leasing activity. We have 5.6 million square feet expiring in 2012. To date, approximately 3.7 million square feet of leases has been executed and scheduled to take occupancy in 2012. On suite to suite basis, the average initial rent of $59 per square foot representing an increase over expiring rent of $3.73 or 6.8%. In addition to the 3.7 million taking occupancy, an additional 1.7 million square feet has been approved but not yet signed, which has added together, totals 5.4 million square feet. On a suite to suite basis, the average initial rent will be a blended $61per square foot representing an increase over expiring rent of $4.50 or 7.9%, a positive step.

At year end, we were 94.6% leased comprising of 85.9% permanent, 6.2% temporary, 2.5% signed up occupied. You will note that there has been a certain amount of temp to perm conversion at the end of 2011.

At our investor day in December, we presented our 2012 goals of reaching 95% total occupancy comprising of 88% permanent, 5% temporary and 2% signed up occupied.

I’d like to take a few more minutes to provide our perspective on our retail landscape. We believe the quality of GGP’s portfolio positions it very well as retailers continue their flight to quality. In addition, there is virtually no new space coming to market. Consumers seem to recapturing a level of comfort and confidence not felt for a few years.

Retailers are expanding current and new retail concepts. Some of the more successful new concepts are Victoria's Secrets' Pink, J. Crew's Madewell, Gap's Athleta, Anthropologie's Free People, Henri Bendel, Art of Shaving, West Elm, Sports Authority Elite' and Kate Spade. They are established retailers that continue to expand. Apple expanding existing stores and selectively opening new stores, micro cores. Victoria Secrets, expanding existing stores, Forever 21, True Religion and Tommy.

Several international brands are expanding their presence into the US market and relying on high quality retail malls, have been integral catalyst for their growth. Names include Sweden's H&M, Japan's UNIQLO, Finland's LEGO, UK’s Topshop. Topshop will be opening their first mall location in the United States at Fashion Show mall on March 8. As for the luxury guys Armani and Louis Vuitton.

Department stores are the anchors that differentiate the malls from all the other retail formats. They have stronger and have shown more sales increase over the year. The baby boomer has the most disposable income and they predominantly shop at the department stores.

At national and regional players have repositioned and are in growth mode. Macy's, who have developed their My Macy's Service align store GMs to more closely cater and service their customers. In addition, Macy's has rolled out nationwide their in-store growth strategy called magic, meet and make a connection, ask questions and listen, give options and give advice, inspire to buy and sell more and celebrate the purchase.

Nordstrom differentiates based on customer service. Neiman Marcus is focused on the luxury segment, Sacs with its old private label and shoes.

Regional players that are selectively growing include, Dillards, Von Maur (inaudible), Shopko and even (inaudible) to just name a few. And late last month, JCPenney unveiled its reinvention of the in-store experience to include its new main street concept from which the entire store will be merchandised in a series of 80 to 100 band shops. The new format will also feature a town square where customers will enjoy a variety of service.

One goal of this reinvention is to keep the consumer in the store longer leading to additional sales. Although JCPenney has kept details of their service bar under wrap, I would expect it to salons, cafes, tailors and the like.

The resurgence of the department stores resulted in three openings this year in our portfolio, two Nordstrom's, one in Cristiana Mall in Newark, Delaware and the other in Saint Louis. We actually had two of the three Nordstrom's openings last year. A Von Maur in North Point mall in Atlanta.

In 2012 and 2013 we’ve opened four more including A Von Maur at Riverchase Galleria in Birmingham, Alabama, a Lord & Taylor at Mizner Park in Boca Raton, Florida, a Herberger's at Pine Ridge Mall in Pocatello, Idaho and Bloomingdale's at Glendale Galleria in California.

The positives of e-commerce have on traditional brick and mortar retailing far outweighs any perceived negative impact. Retailers that had a brick and mortar presence get online purchases are primarily derived from customers in their respective trade areas. That is, within a 25 to 50 radius of the store.

Merchandise, when returned, is usually taken back to the store which often time lead to additional purchases at the mall, it is akin to providing a coupon.

Retailers have caught on that the internet is one of the best way to build brand and customer loyalty, not just to be used as a direct outlet. Retailers of all segments are creating Omni channel approaches to drive store traffic, increase sales conversions and create a little bit of fun in the process. Victoria Secret, Macy’s, Burberry's are retailers innovatively using facebook, youtube, foursquare and other social media variables.

Retailers have parlayed their online concepts into successful and expanding brick and mortar locations. Gap Athleta has been an online concept for over a decade. American eagle 77 kids is another concept that was incubated on the net and has now became major brick and mortar growth vehicles for their respective companies.

We anticipate there will be many other mortar and brick success stories. In fact, just reported this week, Amazon is contemplating its own bricks and mortar store in Seattle.

The business model of a third party reseller in its current form is essentially a breakeven model. Pending the passage of new legislations that would minimize the no sales tax advantage commonly known Main Street Fairness, the operating environment for exclusive online beginners where they got much more challenges.

Within GGP up club portal, email database reach 4.7 million shoppers nationwide in the fourth quarter. This innovative program allows shoppers to receive monthly retailer discounts and price. Based on our research, the club shopper visits our malls 13 times more than the average shopper and spends $1,200 additional year.

One final thought, our retailers have significant capital and human investments in their stores and continue to develop new formats in designs to keep their brands fresh and valuable. The brick and mortar stores are an integral part of their sales especially so in the high productivity malls as evidenced by the positive sales trends in the sector.

Needless to say, we are not immune to the weakness within the retail industry. During the first year, several well known retailers have announced store closing namely Sears, K-Mart, Borders and the Gap, to name a few. We’ve been proactive in managing store closings within our portfolio, I get to find solutions that can and have included a right sizing of the tenant stay and of course re-tenanting.

I know there are a lot of question about how some of the announced store closing affect us. So I will summarize the impact its earnings to GGP.

Sears, in 20 sales send the annual sale for over $40 billion. Just for comparison, Macy’s was $25 million, JCPenney and Kohls, both about $18 billion.

The American consumer shops at Sears. Within our malls, Sears on average had sales exceeding $20 million with the highest location reported over say $75 million. Sears is an anchor tenant in 87 of our regional malls occupying about 13.7 million square feet. Of the announced closings, none was within our portfolio. However, in the event Sears does close some of their locations within our portfolio, we feel pretty good about recapturing the value. As a matter of fact increasing the values.

Borders, the closure of these stores were actually resulted in a success for GGP. Of the 20 stores that were closed, 13 have been leased at rents that far exceed the rent that we received on the entire portfolio. The stores were re-leased to Sports Authorities, Fresh Markets, Total Wine and Forever 21.

The Gap, one of our major tenants occupying 225 location s in almost 2.6 million square feet. Some of the closures will probably affect us. We’ve previously identified 20 stores that could be at risk of closing. In the event of store closures, we feel very confident that we can re-lease the same at rates above those currently paid.

I think I said 20 stores earlier, I meant that they are 29 stores. 29 stores reported annual sales of $44 million and an occupancy cost of 11%. We believe the leases are over $20 per square foot in our market.

As I mentioned earlier, Richard Pesin runs our R&D cheek. What does that mean? He basically runs anchors, big boxes, development and construction. We were clear to meet a year ago that our EBITDA growth in 2012 and 2013 would come from leasing vacant space, converting them to perm and increasing occupancy costs.

Our R&D group seeks opportunities to mine our portfolio, looking for growth to continue our drive to increase EBITDA in 2014 and 2015.

The reinvestment in Glendale leading to the future opening of Bloomingdale's which has one example of our commitment to create value from our existing portfolio. Including Glendale, we’ve identified several projects to immediately move forward, representing the most attractive; risk adjusted returns and totally approximately $400 million over the next 24 months. We expect to begin realizing the income in late 2013 as the space becomes occupied. We seek to achieve double-digit returns from these investments.

Big boxes are an important driver of traffic to our malls and promote the mall as a place for one-stop shopping. We anticipate adding various types of stores including grocery stores, sporting goods, health clubs and movie theatres. In 2011, we opened 20 big boxes comprising of over 900,000 square feet and generating about $9 million of annual rent. In 2012, we’ll open 22 stores comprising of 800,000 square feet and generating $12 million of annual income. The big boxes include names such as Crate & Barrel, Nordstrom Rack, Bed Bath & Beyond, Cabelas and many others.

To recap, 2011 was a very productive year, we made exceptional progress calling the portfolio of non per assets, improved the occupancy and quality of the leasing activity within the portfolio, made significant progress on deleveraging and derisking the balance sheet and I am very proud to say that GGP’s management team is now complete and focused on GGP’s business.

Lastly, I take this opportunity to thank all the GGP colleagues for their hard work and dedication. Michael, I will turn it over to you.

Michael Berman

Thanks Sandeep. It’s a pleasure to be here. I want to take a few moments to outline my agenda for today’s call. I will make a few comments on our fourth quarter and year-to-date results, followed by a review of our 2012 earnings guidance and finally I will provide guidance for the first quarter of 2012. After the numbers review, I will make some comments on our financial flexibility and then we will open it up for questions.

I am going to do my best to simply our numbers into the primary factors driving our results. I will be using averages and rounding to help the simplification process. All of my numbers have points on a range, and for the sake brevity I will not be providing the range of each of the numbers I give.

Given the mid-January spinout of Rouse Properties Inc. , I think it is helpful to my comments to exclude Rouse for the quarter and year end 2011 periods.

Although our published financial results, aggregate revenues, expenses and net operating incomes from our malls, strips, office and international activities, the primary driver of our results is the net operating income we receive from our mall portfolio. I will break out detail concerning the mall results and provide some flavor for the other parts of our business.

Finally, all of my numbers will be in the core format as previously described by the company. The adjustments are generally emergency related GAAP items, such the above and below adjustment made to our balance sheet and transaction costs related to the Rouse spinoffs. Most importantly, these adjustments are intended to make comparability among periods easier.

Reconciliations back to NAREIT, FFO and GAAP are included in the supplement. My numbers are also based on our actual calculations, which is currently approximately 85% of our overall related property cash flows.

Starting with the fourth quarter. Overall revenues from the malls were approximately $772 million in the quarter, up over 4% to the fourth quarter of 2010.Minimum rent and recoveries from the malls hold over $611 million in the quarter, up over 2.5%. In total an increase of about $15 million. Other revenues from the malls were approximately $160.5 million, up over 10% or $15 million. These include revenues from our over age rents and our business development activities.

Operating expenses at the malls were about $227 million in the quarter, down about 3% or $8 million quarter-over-quarter.

Overall, core net operating income at the malls was approximately $545 million, an increase of $38 million or 7.6% quarter-over-quarter.

Our remaining businesses, strips, office and international contributed core NOI of about $24 million, up about $2 million till last year. Overall, core NOI was $569 million, up about $40 million or 7.6%.

Other income and expense including interest income, management income, other corporate revenues, corporate depreciation, other non-controlling interest contributed $18 million in the quarter down from $19 last year.

Corporate S&A and property management costs combined were approximately $71 million in the quarter, down $4 million from last year.

Financing costs which include the preferred unit distribution were about $261.3 million, down from $265 million last year.

In sum, core FFO was approximately $255 million, up from $208 million last year, an increase of about $47 million or 23%.

The share count declined from $994 million for almost $975 million. Core FFO per share excluding the Rouse property was $0.26 in the quarter, up over 25% to the fourth quarter of last year. Rouse contributed about $0.03 this quarter and the fourth quarter of last year. In total, we earned $0.29 of core FFO per share in the quarter compared to $0.23 core FFO per share in last year’s fourth quarter, an increase of almost 23%.

Moving on to the full year of ‘11 versus ’10, similar structure of comments. Overall revenues from the malls were almost $2.9 billion, up about 2% or $57 million. Minimum rent and recoveries from the malls totaled almost $2.45 billion to the year, up over 2% or almost $50 million.

Contractual increases from inline permanent tenants and an occupancy gain was offset by negative rent spread activity in the year.

Other revenues from the malls were $420 million, up $8 million for the year.

Operating expenses for at the malls were about $873 million, down less than 1% for last year.

Overall, core net operating income at the malls was almost an increase of $654 million or 3.3% for last year. Total amount was almost $2 billion.

Our remaining businesses contributed core NOI of about $81 million compared to $87 million last year. Overall core NOI was up about $2.08 billion, up $58 million for last year or about 2.85%.

Other income and expense contributed $73 million, up from $71 million last year.

Corporate G&A and property management costs were approximately $250 million, up from last year primarily as a result of additional leasing costs, some professional services fees and an investment in our IT. To jump ahead, we are forecasting no growth in G&A in 2012.

Financing costs were about $1.053 billion, down from $1.073 billion last year.

In sum, core FFO excluding Rouse was almost $848 million, up $63 million last year, an increase of over 8% and a per share increase over 9% ending at $0.86 core FFO per share in 2011. Rouse contribute about $0.09 each year.

In sum, we earned $0.95 core FFO per share in 2011.

Moving on to 2012 guidance. Our guidance assumes no acquisition or disposition activity. Of course that may change throughout the year and we will update you as we go.

Overall revenues from the malls are expected to be almost $2.95 billion, up about $80 million or 2.75%.

Minimum rent and recoveries from the malls are expected to almost $2.6 billion, up over 4.5% or approximately $115 million.

Contractual increases are approximately $70 million, about $115 million increase. The remainder comes from an increase in occupancy and we expect rent spread to be approximately neutral if slightly negative in 2012.

Other revenues from the malls are expected to be $385 million, down $35 million for year, part of that is the move from temporary to permanent occupancy.

Operating expenses at the malls are expected to be $898 million, up $25 million for last year.

Outside of an investment in marketing programs and real estate tax increase our overall expense increase is less than 2%.

Overall core NOI at the mall is expected to be $20.05 billion, an increase of approximately $50 million or 2.7% for last year.

Our remaining businesses, strips, office and international will contribute core NOI of about $78 million compared to $81 million last year. Overall core NOI at the midpoint of our guidance is expected to be $2.12 billion, up $51 million or about 2.44%.

Other income and expense contribute almost $72 million in 2012, down from $73 million last year.

As I mentioned, corporate G&A and property management costs are expected to be approximately $251 million flat for last year.

Financing costs are estimated at $1.026 billion, down from $1.053 billion last year. A big portion of that is the amortization of that that’s going to occur.

In sum, core FFO is about $925 million at the midpoint of our guidance, up $75 million, an increase of almost 9%.

For our share account, we are assuming an average for the year of 996 million diluted shares outstanding. Our base share count, common units and stock options total about 947 million shares and the warrants based on a share price of $15 as of the end of December 2011, adds approximately 47 million shares to the total count. The warrants are assumed to increase the diluted share count by approximately 900,000 shares each subsequent quarter as a result of our current quarterly dividend payments, again it’s all done at a $15 stock price.

Moving on to first quarter 2012 guidance. Just a few comments. Overall revenues from the malls are expected to be $712 million, up about $14 million or 2%.

Overall core NOI at the mall is expected to be $495 million, an increase of approximately $19 million or almost 4% to the fourth quarter of 2011.

Expenses in the quarter are expected to be down.

Overall core NOI at the midpoint of our guidance is expected to be $513 million, up $15 million or about 3%. Other income expense contribute almost $20 million up from $19 million last year.

Corporate G&A and property management costs are expected to be approximately $61 million in line with our run rate for the year. As noted full year corporate G&A and property management is expected to be flat to last year.

Financing costs are estimated at $257 million, down from $260 million last year. In some core FFO, it’s about $214 million at the midpoint of our guidance, up $10 million. We’re assuming a share count of 995 million in the quarter. Core FFO for share is expected to be $0.20 per share in the midpoint of guidance.

Moving on to financial flexibility. We have approximately 1.5 billion of secured debt maturing in 2012 at an average coupon of 5.5%. We are currently in the market with four of our 12 mortgage loans, with closings anticipated in the second quarter. These maturities are approximately $500 million with an expiring rate of 5.4%. We are receiving a broad range of interest from wide companies and CMBF lenders.

Our current expectation is 10 year terms, 30 year amortizations, 10% debt yields and spread above 10 year treasuries generally ranging from 225 to 275 over depending on the transaction. We are focused on 10 year maturities as we have no debt maturing in 2022, continuing our laddering strategy that was done in 2011.

We also expect to launch another four mortgage financings in the next few months that have maturing proceeds of $400 million and an average rate of 5% with terms similar to those noted above. We have approximately $9 billion of debt that is pre payable at an option at an average coupon of slightly less than 5% and we are reviewing our opportunities for refinancing some of this debt early.

We have $50 million of unsecured debt due this year and we are in the process of pursuing our options. We have a $750 million line of credit at LIBOR plus 450 at a 401% percent with no outstanding and we are currently discussing this facility with our banking relationships and are seeking to improve our terms. Our overall cash balance at year-end was about $750 million.

And with that I’d like to open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Our first question is from Christy McElroy with UBS. Your question please?

Christy McElroy – UBS

Hi. Good morning. Michael, you mentioned just in your comments just now about $1.5 billion maturing this year secured debt. It sounds like you’re currently working on about $900 million of that. In your guidance, how much do you assume refinancing in total in 2012 at what kind of spreads?

Michael Berman

Our guidance assumes that we refinance our assets at par and I believe order magnitude it around 4.75%, 5% rate.

Christy McElroy – UBS

And how much in total? Just the 1.5 or do you expect to do more than that?

Michael Berman

We make more than that, but the guidance doesn’t assume that.

Christy McElroy – UBS

Okay. And then now that you’ve had a chance to settle into your role, I’m just wondering if you could give us your broader views on weight leverage levels? What are the most important metrics that you look at? At what levels are you most comfortable operating in the public space and where do you see GDP a year or two years from now?

Michael Berman

My view is that’s what most important is do you have the financial flexibility to accomplish what it is that you want to do? I know that the company has articulated certain debt targets in the past that I wouldn’t necessarily disagree with those. My own philosophy is having a chance to take a look at what’s going on. We’ve got sufficient cash resources. There’s a very substantial cash flow coming out of the company. $925 million of FFO. We have resources to do projects. We’re paying down $325 million a year in amortization. If we did nothing to the company other than pay down that debt over the next five years and kept EBITDA flat, which I think is a low probability, we would turn the leverage ratios down from 9.5 to 8 just on that alone. The investments that we’re making are fairly significant. We have a lot of capital sources that are available to us. So I think big tissue we would be in a deleveraging mode relative to where we are now. The how we do it, the when we do it, we will keep you informed as we go along.

Christy McElroy – UBS

Okay. And then just lastly, Sandeep, regarding the 1.7 million square feet that you mentioned that's approved but not yet signed for 2012 commencement. What’s the average spread on that space and is that included in the 7.9% you mentioned?

Sandeep Mathrani

In the 7.9% it is included. That’s what creates the difference between what sign. I think I said when it was signed it was 6.8%. You include what is the additional 1.7 million it lends to 7.9% which actually means the 1.7 million square feet has a much better positive trend because you’re averaging off.

Christy McElroy – UBS

Great. Thank you.

Operator

Thank you. Our next question is from Jay Habermann of Goldman Sachs. Your question please?

Jay Habermann – Goldman Sachs

Thanks. Good morning. Following up on Christy’s comment on leverage, if you look at stock price performance I guess since emergence and compare it versus some of your peers which have been more proactive on deleveraging, does that in any way change your time frame? I know you’ve talked about deleveraging over say a five or year time frame, but I think just given the changes you’ve made, whether it’s management changes and changes with the spin out of Rouse, would leverage be the next lever you could pull?

Michael Berman

I think you’re just going to have to watch what we do, see how we do it. It’s difficult to change leverage drastically quickly. In my previous experience I started at almost 75% leverage. By the time I left it was in the 40s. Most of that was done through just operational improvements, reinvestment of cash flow, acquisition of properties. The leverage needle I appreciate is a very sensitive topic. As the CFO, it’s something that I wake up first thing in the morning thinking about. I think general direction is in the right direction. You have to keep in mind and you probably know better than me having covered the company for a while, this is an extremely stable asset class with long term leases. Less than 10% of our portfolio rolls every year.

The retailing environment is very dynamic. You’re able to replace tenants rather quickly. We have an unbelievable portfolio, high quality malls. They’re not building any more malls now. So operationally you have to feel pretty about what’s going on and the ability to pay down debt, generate free cash flow. You’re also paying a dividend because that’s part of what the market demands. So I think right now we’ll take it quarter to quarter, see how we do and just keep you apprised of our progress.

Jay Habermann – Goldman Sachs

Okay. And then maybe for Sandeep on the leasing front. What’s your target on occupancy costs for new leases signed over the next year or so?

Sandeep Mathrani

We’ve been signing leases depending on the quality of the mall. Anywhere from 14% to 16% and as you can appreciate, we’re also leasing into appreciatively a rising sales environment. So the good news is as we keep signing leases, it appears that the occupancy cost is actually lower than at the time we actually negotiated the leases. But between 14% to 16% depending on the mall or the classification of the mall.

Jay Habermann – Goldman Sachs

Okay. And just lastly in terms of the non-core dispositions. I don’t think you have anything in your guidance. Can you talk about the strips for the office segment in terms of plans for the year or what you’re thinking about it in terms of timing?

Michael Berman

We are looking at those portfolios, determining whether or not we have properties that are ready to go into the market. Some properties we’re thinking about putting into the market now. Again it’s not a big part of our business. It will generate proceeds for us. We have some internal target net proceeds that we’ll be looking for. But given that we’re not specifically right now fully launched on something we felt it inappropriate to include it in our guidance.

Jay Habermann – Goldman Sachs

Okay. Thank you.

Operator

Thank you. Our next question is from Samit Parikh of ISI Group. Your question please.

Samit Parikh – ISI Group

Hi. Good morning everyone. My question was based on the information on your lease activity page. If I back into what I think the non suite to suite spreads would be versus the suite to suite spreads, on new leases that were signed after January 1, 2011, it looks like they were around down 20%. Could you just give us any more clarity into what’s causing that negative spread next year which is causing a drag on your leasing spreads overall?

Sandeep Mathrani

I think the answer to the question you’re asking is twofold. One, it depends on the quality of the base that’s being leased. If I'm leasing space at a goalpost, I’m leasing vacant space, it goes into total numbers and so you will actually see the blend being lower. But that’s why suite to suite is probably the most appropriate because the increase in annualized cost as you know from suite factors one is the occupancy cost which is suite to suite. Analysis, which actually is a positive trend. Two is attempt to put a conversion on leasing vacant space which usually is not in the middle of the mall. It’s usually at the goal post next to the anchor terrace whose price per square foot is lower. So actually leased up space because depending on the quality of the space and that total number also includes big boxes. And big boxes generally is ahead $15, $20 a square foot, not $50 a square foot, bringing the averages down.

Samit Parikh – ISI Group

Okay. And then I guess on your guidance for next year. You have guided towards minimum rental recoveries in the mall, up about 4.5%. Of that, how much of that 4.5% is related to the conversion of the temp to perm?

Michael Berman

There was an increase in overall permanent occupancy of about on average I’d say 850,000 square feet. Call it a million and a half. Most of that comes from the temp to perm conversion. Not all of it, but most of it.

Samit Parikh – ISI Group

Okay. Thanks. And then I guess lastly, there was reports out there you’re shopping the Al Moana loan potentially looking for a single asset securitization in the CMBS market. So I don’t know if you had any comments on the market and how healthy you think it is based on your actions that you’ve been doing lately?

Michael Berman

It appears that the CMBS market is continuing its improvements. We are as you mentioned in the marketplace with that. That transaction is not part of our guidance as part of that opportunistic bucket that we are looking at our options on. We have had strong preliminary interest given the quality of that property from a variety of sources. So we’re quite excited that we’ll be able to show very good results if we end up doing the transaction. So it does appear that for our product, a very healthy marketplace right now and hopefully that continues.

Samit Parikh – ISI Group

Okay. Thank you.

Operator

Thank you. Our next question is from Alex Goldfarb from Sandler O'Neill. Your question please?

Alexander Goldfarb – Sandler O'Neill & Partners

Good morning. First, just want to thank you guys for moving up the call an hour. It helps with the number of retail companies today. Just Mike, going to the free cash flow in your guidance for ’12, the first part is, the non-tenant CapEx is $76 million and the $112 million for TAs and leasing. Is that a good run rate for ’12?

Michael Berman

No. I think we’ll be doing more next year, Alex. I think our plans right now overall CapEx, including some refresh properties that we have are in the $100 million to $120 million range. In terms of the TAs, given the impact of the new occupancy, given some of the things that we’re trying to accomplish this year to move the permanent needle from 86% to 88%. We’re moving up that TA number to order magnitude, $175 million. So we are putting a lot of money into the properties this year.

Alexander Goldfarb – Sandler O'Neill & Partners

Okay. So then continuing on from there. if you look at your AFFO or your free cash flow after you pay the common dividend, you’re somewhere around –and I didn’t update my numbers for what you just said, but somewhere probably around, let’s call it 350 for simplicity.

Michael Berman

How about I make it easy for you? I give everybody the same number.

Alexander Goldfarb – Sandler O'Neill & Partners

Okay. But...

Michael Berman

So why don’t I just walk through the free cash flow for everybody and they can all just understand it from the company’s perspective.

Alexander Goldfarb – Sandler O'Neill & Partners

That’s actually good because where I’m going then is then when you take out the 275 of principle amortization, just want to walk through what cash the company is churning out at the end of the day versus financing the redevelopment plans?

Michael Berman

So we have big picture 925 million of FFO. Call it 120 million, 100 million of CapEx, 175 million of TA. This means about 630 million of what I would call free cash flow. 380 million in dividends, cash dividends. 325 million in amortization right now. It’s about 705 million. Leases shy about $75 million. We have about $750 million cash in the bank. So we feel comfortable investing this year. We anticipate – again we have a lot of development projects, but the timing of the spend and the amount of the spend can fluctuate from week to week almost. But assume we spend between $100 million and $200 million of development capital this year, we would anticipate philosophically at the margin that that would be covered by asset sale.

Alexander Goldfarb – Sandler O'Neill & Partners

Okay, that’s helpful. And then just final question is, on the warrant, they obviously bring a lot of volatility to the numbers. We saw DDR where Auto exercised early the warrants to eliminate that noise. Is there any sense from the recap sponsors that they would do something similar exercise early? Certainly they’re in the money. Exercise earlier and just help eliminate a good chunk of the noise on the quarterly earnings?

Michael Berman

Well, there’s only noise in the quarterly earnings if you include the warrants. We take them out because it’s based on the stock price and the stock price goes up and down and so we take them out to see comparability. We had no discussions with the sponsor. We understand what you’re saying and if appropriate, we’ll have discussions with them. They made an investment in the bankruptcy that gave them this position and whether or not they were open to making any changes I can’t honestly tell you I know that.

Alexander Goldfarb – Sandler O'Neill & Partners

Okay. Thank you.

Operator

Thank you. Our next question is from Michael Bilerman of Citi. Your question please.

Michael Bilerman – Citigroup

Hey. Good morning. Sandeep, you talked about 78 assets at the beginning of the call representing about 75% of NOI which you deemed to be class A. how many of those 75 are within 100 of your consolidated malls versus 35 of the unconsolidated? My sense was more on the unconsolidated just because they have higher sales productivity and higher occupancy.

Sandeep Mathrani

Michael, I’ll have to get back to you on that breakdown. But I think your leading is about right. Most of them are in the joint venture. But I’ll get back to you on that. We can all get back to you.

Michael Bilerman – Citigroup

And then 75%, that is you’re using that on a gross percentage or is that your pro rata share when you talk about 75% of NOI?

Michael Berman

Our pro rata share.

Michael Bilerman – Citigroup

Your pro rata share. And how do you think – Michael, you just mentioned a little bit of asset sales funding the gap in terms of capital needs and Sandeep, at investor day you talked a little bit about the joint venture capital is abundant. You obviously have a lot of high quality assets that would service that both from a financing perspective, but also from raising capital perspective. How do you weigh selling off interest in what are high quality assets that arguably have the better growth prospects versus the capital needs versus selling what I imagine is the low rung of the portfolio, even though you’ve done a fantastic job at pruning the portfolio through the route spin off and also handing back assets to servicers. You still have probably a bottom rung that’s probably around $700 a foot. So how do you think about selling bottom versus top?

Michael Berman

Part of that is price. You can sell a really top one at 3.5% cap rate. You might sell a piece of that one. Part of it is the distraction of so many assets create operationally. Some of it is the tax position of the individual assets. There is a number of factors that go on. Some of it is leveraged at a particular property. So it’s hard to give you a straight answer other than each one has got to be looked at on an individual basis. I would say overall we feel very good about the assets that we have and our ability to raise cash from them.

Michael Bilerman – Citigroup

3.5 Cap. That’s the first three handle I’ve heard in a little while. Are you guys progressing down the road on…

Michael Berman

Mike, I was just making a philosophical point.

Michael Bilerman – Citigroup

Okay. Lastly on the redevelopments. In the schedule you obviously have the details on North Point and Glendale, which is almost a quarter of the three development spend that you have for the next 24 months. How do you think about potential disruption as you spend this capital? Should we be mindful of potential lost NOI in the interim and will you be detailing out all of that 400 million or 500 million of gross spend within the subs so that we get a sense of returns and timing of things?

Sandeep Mathrani

So I’ll answer your question first. There’s at least another 10 projects and as we embark upon them, as they start to break ground, we’ll identify them and up the mantle. I think it’s premature to do it today because there could be timing delays. There could be approval delays. But we will identify them as they come about. Respect to your first question which is disruption. Depending on the malls, in the case of Glendale, the disruption will be minimal because the wing which is the area where Bloomingdale is going has a large amount of vacancy currently. And so the disruption will be minimal. In the case of North Point, it’s really an addition of the movie theatre. Again that’s outside of the core mall if you would. It will touch the mall, but it sits outside the mall in a vacant box.

Michael Bilerman – Citigroup

And just one last quick one. Mike, where are you in terms of the Rouse company structure and bonds and how much of that is near term focus or priority to clean that up from a corporate bond perspective and trying to release the assets out of that structure to get some additional proceeds?

Michael Berman

We have overall in that portfolio as we mentioned on the investor day, we think refinancing – if refinancing was just the strategy, we have an ability to refinance all the unsecured debt within the existing pool. We are focused on the 350. Choices include refinancing, additional asset sales above and beyond what we might have otherwise bought, potentially capital markets transactions that are available for us. So we think we have a lot of options. We could use some of the cash to pay some of it down. We think we’ve got a lot of flexibility to deal with the 350.

Michael Bilerman – Citigroup

Okay. Thank you.

Operator

Thank you. Our next question is from Rich Moore of RBC Capital Markets. Your question please.

Richard Moore – RBC Capital Markets

Hi. Good morning guys. First I’d say I would echo Alex’s comments about the warrants. I think they’re a complicating factor and would be a good thing to encourage the investors to get rid of it if you can. That said, I wanted to turn to your use of cash and I’m curious if you would use any of that to unencumber any assets or would you just continue to get cheap debt on anything coming due?

Michael Berman

I’ve had the opportunity to be here for a short period of time. I haven’t studied every asset and every loan, but generally speaking, the hand we were dealt with was a loan on every asset and given the size of the assets, the loans themselves are just large. So unencumbering individual assets at the margin is going to take some time if that’s what we pursue.

Richard Moore – RBC Capital Markets

Okay. Do you have any unencumbered assets? I can’t remember. What’s the size of the pool unencumbered? Is it zero?

Michael Berman

Somewhere between 5 and 10.

Richard Moore – RBC Capital Markets

Okay, great. Thanks. And then would you guys look at the preferred equity market? Have you looked at that and can you tell us about pricing in that if you’ve taken a look?

Michael Berman

Fortunately for me the buyer hose got turned off this morning so I was able to participate in the call. I haven’t had much opportunity to pursue what’s going on in the marketplace. Generally speaking what I’m hearing is the market for income producing securities is extremely strong and I think given our stable cash flow stream, that might be an option for us, straight preferred for example. I don’t know rates. I don’t know terms. I’m just talking concepts there.

Richard Moore – RBC Capital Markets

Okay, great. Thank you. And then the last thing is, we’re at the five year anniversary of when rents were at their peak and I’m curious, Sandeep, if you guys are seeing any particular pressure as a result of the anniversary of the good times?

Sandeep Mathrani

Again the sales are continuing to rise as evidenced by all the mall rates have shown, the sales going up and I think rents are a function of sales. And so we’re not seeing at this moment in time. Obviously if you were a retailer, their goal is to get rent as cheaply as possible. If you’re a landlord, you try to get the most as possible and I think this is an equilibrium there. But I think if falls out to like the quality of real estate. There are only so many great malls and I think the better malls will continue to get a higher rate.

Richard Moore – RBC Capital Markets

Okay, great. Thank you guys.

Operator

Thank you. Our next question is from Ben Yang of KBW. Your question please.

Ben Yang – Keefe, Bruyette & Woods

Yeah, hi. Good morning. Going back to Samit’s question on the Al Moana refi and maybe for other refi plans generally. Is it fair to assume that the new ones will be fully non-recourse to GGP versus you have some existing loans that you have partial recourse for the company? Or maybe for a trophy like Al Moana, is it just better to get the recourse option on together? On along that size to get better terms? Where are your thoughts on that part of the refi plan?

Michael Berman

I just want to be very clear. When we do non-recourse mortgage loans, it’s our intention for them to be non-recourse.

Ben Yang – Keefe, Bruyette & Woods

I’m sorry. You said that your intention is to do non-recourse on all refi plans?

Michael Berman

No reco – if we do an unsecured deal that’s a different thing, but on the mortgage loan non-recourse

Ben Yang – Keefe, Bruyette & Woods

Okay, great. And then also can you just talk about any further obligations that GGP has to Rouse Property at this point, maybe quantify taxes, liabilities or other costs that you guys might be responsible for?

Michael Berman

As far as I know we have no obligation to them. We do have a back office sharing arrangement where potentially as they use some of our resources, as they get set up, they will have to make a payment on. But it’s not a material element of our numbers.

Ben Yang – Keefe, Bruyette & Woods

Okay, perfect. And then just final question, I’m just curious as you did on the Rouse assets up until a few weeks ago. Can you tell us what the potential NOI was for the Rouse portfolio during the fourth quarter?

Michael Berman

What I would say is they are reporting results in a few weeks. Be really reluctant to steal their thunder or whatever it is is going to happen. I do believe there are some numbers inside the supplement. But they are going to be a public company down the road and we feel reluctant to comment on their results.

Ben Yang – Keefe, Bruyette & Woods

Okay. Thank you.

Operator

Thank you. Our next question is from Cedric Lachance of Green Street Advisors. Your question please.

Cedric Lachance – Green Street Advisors

Thank you. Just looking on page 2, the income statement. Could you remind me what is the difference between the cost you put in other property operating costs versus the costs that are in other costs? I know that the first one impacts same-store NOI. The second does and I’m just curious to see what kind of operating expenses going along versus the other.

Michael Berman

I’m sorry. You’re looking at property maintenance costs versus other property operating costs?

Cedric Lachance – Green Street Advisors

No. other property operating costs and then property management and other costs to land.

Michael Berman

Property management and other costs and G&A are the overhead of the company. So the mall manager is in other property operating costs. The regional structure of oversight would be in the property management cost. The executive would be in the overall G&A.

Cedric Lachance – Green Street Advisors

Okay. And so what’s causing the decrease in one versus the pretty sharp increase in the other in terms of the costs you’ve experienced in 2011?

Michael Berman

The reason why I combined them is because there’s timing, there’s geography moves that were made one versus another. And my sense going forward is I’m going to be providing both those numbers in combination rather than worrying about the individual differences because a lot of times companies change what they book in one line item versus another and the geography numbers are just not really relevant to how we do it.

Cedric Lachance – Green Street Advisors

So property management and other costs would then be part of your NOI calculation?

Michael Berman

Property management and other costs in this company are not part of the NOI calculation. They come afterwards. That’s just how it’s been done historically. Whether or not it should be up in the NOI, different question. But this is how we’ve been reporting years and I think we’re likely to continue doing so.

Cedric Lachance – Green Street Advisors

Okay. Finally, just in regards to the impairment this quarter, can you remind me on which assets that was taken?

Michael Berman

There were two assets. One was called West Oaks, the other one I believe was 70 Columbia and they’re listed in the property table somewhere.

Cedric Lachance – Green Street Advisors

Okay, great. Thank you.

Operator

Thank you. Our next question is from Ki Bin Kim of Macquarie. Your question please.

Ki Bin Kim - Macquarie Research Equities

Thanks. Actually was going to have the same type of question Cedric did on your expense policies. So were there any items that were actually rebooked from one line item to property management costs this quarter that caused the swing?

Michael Berman

Again in the short term I was here I was more focused on the total overhead numbers and trying to understand those rather than worrying the accounting adjustments from one line item to another. Frankly I think the most important message that we’re sending is with respect to operating expenses outside of a modest increase for 2012 versus ’11 at the properties, I think we’ve got the expenses under control. I’d make the statement that a flat overhead G&A property management is an indication that we have our expenses under control. Whether or not those are the right expense levels is something we’re about to explore this year. But I think we’ve got a handle on the overall expense base of the company.

Ki Bin Kim - Macquarie Research Equities

Okay. And I might have missed this because I jumped on the call a little bit late. What is your comparable same store – what is the same store NOI for the quarter year-over-year?

Michael Berman

The numbers that we’ve reported are effectively the same. We didn’t get into the nuance of there was front numbers in one period and not another, but replacing income of property that we already had. So we just focused our core NOI number just – once the property is sold it goes into disc ops. So for all practical purposes what we’re showing you is a same store comparison.

Ki Bin Kim - Macquarie Research Equities

Yeah. I don’t mean the assets. It makes it a little more difficult to compare you guys to your peers and it seems like the mix of properties is different from your core NOI number from this quarter versus last year.

Michael Berman

I don’t think so actually. I think it’s the same properties basically were in there, the comparable results.

Ki Bin Kim - Macquarie Research Equities

Okay. Thank you.

Operator

Thank you. I’m showing no further questions in queue at this time.

Sandeep Mathrani

Thank you all. Good luck on your next call. We have to leave it in a few minutes. So until next quarter.

Operator

Ladies and gentlemen, thank you for your participation. That concludes the presentation. You may disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: General Growth Properties' CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts