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General Growth Properties Inc. (NYSE:GGP)

Q1 2012 Results Earnings Call

May 2, 2012 10:00 AM ET

Executives

Kevin Berry – Investor Relations

Sandy Mathrani – Chief Executive Officer

Michael Berman – Chief Financial Officer

Analysts

Nathan Isbee – Stifel Nicolaus

Samit Parikh – ISI Group

Ross Nussbaum – UBS

Quentin Velleley – Citi

Ki Bin Kim – Macquarie

Cedrik Lachance – Green Street Advisors

Rich Moore – RBC Capital

Ben Yang – KBW

Michael Mueller – JPMorgan

Operator

Good day, ladies and gentlemen. And welcome to the General Growth Properties’ First Quarter 2012 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, this conference is being recorded. I would now like to turn the conference over to Mr. Kevin Berry. Please go ahead.

Kevin Berry

Thank you, [Tunisia]. Good morning. Welcome to General Growth Properties’ first quarter 2012 earnings conference call. Please be aware that statements made during this call may be deemed forward-looking statements and actual results may differ materially from those indicated by forward-looking statements due to 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 may be webcast, we believe it is important to note that our call includes time sensitive information that may be accurate only as of today’s date, May 2, 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 filed by us tonight. This information is also available on our website in the Investors section.

Participating in today’s call are Sandy Mathrani, Chief Executive Officer; and Michael Berman, Chief Financial Officer.

I will now turn the call over to Sandy.

Sandy Mathrani

Thank you, Kevin. Good morning. I will provide an overview of our operating results for the quarter and then turn the call over to Michael. Yesterday we reported core FFO of $0.22 per diluted share. Core FFO was $222.1 million for the quarter, an increase of 6.7% from the same period last year. It should be noted that the core NOI for the U.S. regional mall portfolio increased 4.1% to $503.8 million from the same period last year.

Before moving on to my review of our operating results, I’d like to recap the refinancing of Ala Moana Center which closed in early April. The original loan was due to mature in 2018 and was pre-payable at par as part of the $8.8 billion of property level debt with such an option. We decided to take advantage of the low interest rate environment, coupled with a demand for high quality real estate.

The new loan is $1.4 billion and bears an interest rate of 4.23% per year, interest only due 2022. The 4.26% interest rate was set at approximately 182 basis points above the 10-year treasury yield.

The transaction further latters our debt maturities and results in annual cash flow savings of approximately $40 million. At this debt level, we believe the center is less than 50% levered. Michael will discuss our financing plans for 2012 later in the call.

Moving on the operating performance for regional mall portfolio continued to strengthen during the first quarter, extending the growth and experience since the beginning of 2011. To recap, our U.S. regional mall portfolio consists of 135 malls encompassing 57.4 million square feet of in-line mall space.

In addition, in Brazil, we owned 15 shopping malls comprising approximately 5.3 million square feet. On a trailing 12 month basis, tenant sales for the U.S. portfolio were $525 per square foot, an increase of 9.5% from a year ago.

Within our Brazilian portfolio, same-store sales of approximately $575 per square foot, an increase of 12.8% from the previous year. The categories where sales have been exceptional include department stores, jewelry, home electronics, Medicare and soft fashion. Needless to say, luxury continues to excel.

The U.S. retail mall portfolio was 93% leased as of the end of the quarter. Our Brazilian mall portfolio is 98.6% leased. Our goal for year end 2012 is to be 95% leased, representing an increase of 80 basis points of year end 2011. We expect to achieve this with permanent occupancy of 88%, temporary occupancy of 5% and signed/not occupied of approximately 2%.

We continue to actively lease space across the portfolio, excluding anchors and percentage of new approximately 4.5 million square feet will commence occupancy at initial rents of $55.30 per square foot. On a suite-to-suite basis, 2.9 million square feet will commence occupancy at initial rent of $62.12 per square foot, this is a gross number.

Netting out cash and taxes, base rent is approximately $46 a square foot. The spread of $4.29 is about a 10% increase on a net basis or 7.4% on a gross basis.

I would like to highlight that we converted approximately 250,000 square feet of temp-to-perm during the quarter. The rent grew from about $20 per square foot gross to about $50 per square foot gross. This spread is not in any of our spread calculations.

In our supplement, you will note that we now present total leasing activity and suite-to-suite activity regardless of when the lease was signed. In past quarters, we showed you a breakdown between leases signed to year end 2010 and then subsequent. Beginning with this quarter, we now report this activity as one since the majority of the leases taking occupancy in 2012 was signed subsequent to 2010.

Turning to our big box and anchor portfolio, we signed nine leases during the quarter for 234,000 square feet. During April, we signed an additional five leases encompassing 239,000 square feet.

Total openings for 2012 are projected to be 34 stores comprising approximately 1.150 million square feet. The typical big box tenants include Dick’s Sporting Goods, Theatres, DSW, H&M and Forever 21 to name a few.

We continue to benefit from the continued resurgence of the department store. During 2012, we signed five leases encompassing 740,000 square feet with anchors such as Von Maur, Herbergers, [Sears], and Lord & Taylor.

Within the portfolio, there are 78 Class A malls encompassing approximately 37 million square feet of in-line mall space. Our Class A mall portfolio accounted for approximately 75% of total core NOI. Tenant sales at our Class A malls were approximately $600 per square foot, an increase of 10% from the prior year.

Including our stake in Aliansce, which is our Brazilian company, the regional malls accounted for 98% of total core NOI. We continue to pursue opportunities to divest our non-core assets.

As you know, we completed the spinoff in January of 30 malls comprising 21 million square feet into a newly formed public company. In addition, we disposed off three properties comprising over 1 million square feet this quarter.

We will continue to monetize non-core assets prudently and with discipline. We disclosed our intent to acquire 11 anchors pads from Sears. This transaction closed in mid-April representing a win-win for both GGP and Sears.

We now own and control the future use of these sites, including those at some of our Class A malls such as Ala Moana, The Woodlands in Houston, Fashion Place in Salt Lake City, just to name a few.

Our specific plans for each site vary, but generally consist of the development of additional in-line mall space, retailing at the anchor pads and converting this space to a different use.

On the acquisition front, we recently acquired our partner’s interest in the Oaks Mall in Gainesville, Florida and Westroads in Omaha, Nebraska for approximately $98 million, which is after assuming a share of properties debt and now own 100%. So going in cap rate was 7.8% and the lever about 10%. Together, the properties generate approximately $415 per square foot.

Separately from the acquisition of the Sears pads, we acquired four other anchor pads comprising 497,000 square feet in the aggregate within our portfolio for about $23 million.

As some of you have seen during site visits over the past several months, we have a very attractive pipeline of redevelopment opportunities within our portfolio, several of which are underway.

To recap, we’ve identified $1.6 billion, about $1.5 billion a share of redevelopment over the next five years and are moving forward on several projects now. Our required minimum rate of return unlevered on such investments is high single digits to double digits stabilized.

I’d like to update you on the status of some of these redevelopments. Glendale Galleria, we recently commenced $115 million redevelopment of this iconic mall located in Glendale, California, and expect to be finished by the fourth quarter of 2013.

The redevelopment encompasses the entire interior of the mall, as well as the addition of an anchor department store Bloomingdale’s. Tenant sales at Glendale are currently the high 600 per square foot and the mall is currently 92% leased. We estimate our return on this investment to be about 10%.

Northridge Fashion Center is a 1.5 million square feet mall located in Northridge, California, we’re in the midst of clipping on a streetscape consisting of approximately 168,000 square feet that has been leased as Port Authority, Yacht House and Elephant Bar along with others.

The cost for the (inaudible) is about $10 million with a return in the double digits. In addition, we’re renovating the outer areas, interiors and installing an energy management system at a cost of about $15 million for the upgrade.

Ala Moana, we’ve started with the design to add about 270,000 square feet of in-line space, similar space at the mall is leased today at about $200 a square foot. The demand for this space exceeds the supply and we expect to invest an additional $250 million with the cost of acquisition and the cost of development of about $500 million, our returns should exceed 10%.

These malls represent just a few of the compelling opportunities within our portfolio. As we begin executing on other opportunities, we will share details with you.

In conclusion, the continued positive sales trends within our own portfolio, high quality regional malls continue to represent must have definition -- destinations for the world’s leading retailers and up and coming fashion retailers.

With very little new supply coming to the market, we are able to push rents as seen in our positive leasing spreads and drive occupancy, and expect to meet our occupancy targets by year-end.

GDP portfolio offers a unique and valuable avenue for retailers and customers to meet and for investors that seek exposure to pure play high-quality regional mall company. The growth opportunities within our portfolio are tangible, some short-term, some longer term, including permanent occupancy increases, re-developments, balance sheet management and operational efficiencies.

The team at GGP is executing on these opportunities now and we look forward to reporting our results in the quarters to come. I want to thank all my colleagues at GGP for their energy, teamwork and dedication.

I will now turn the call over to Michael.

Michael Berman

Thanks, Sandy. Just a few comments on first quarter results, second quarter guidance and updating full year guidance, then some commentary on our balance sheet before we open it up for questions. All of my numbers will be in the core format as previously described by the company in comparison to 2011 exclude the Rouse Properties spinoff.

First, the first quarter of 2012 compared to the first quarter of 2011 and our first quarter guidance. Our mall revenues came in at $710 million, revenues were basically on our target.

Mall core NOI essentially same-store with this set of properties came in at $504 million, up over 4% to last year, as Sandy just mentioned, and about $8.5 million ahead of our expectations. Generally, we benefited from expense controls and we did benefit to some extent by the warmer than expected weather.

Total Core NOI, which includes the malls plus, our office strips and international investments came in at $523 million, about 3.3% better than last year and about $10 million better than expected. Compared for our expectations, the strips were up a little bit, Brazil was up a little bit and the office was down a little bit.

All other income and expense items, excluding financing costs came in at a minus $43 million, compared to a minus $42 million in our guidance, and compares to minus $39 million in last year’s first quarter.

Financing costs were about $258 million, compared to $257 million in our guidance and down from almost $260 million last year. We did have a one-time fee of about $2 million relating to a refinancing that went through the interest expense.

Overall, Core FFO came in at $222 million, about $8 million better than guidance and about $14 million better than last year. As a side note, discontinued operations basically the Rouse portfolio that we signed earlier in January, we did carry on our books for a few weeks. It’s not counted in our core number and it added a penny to our overall results this quarter.

Moving on to second quarter 2012 guidance, we anticipate Core FFO per share of between $0.20 and $0.22. We anticipate Core NOI from the malls will come in around $485 million at the midpoint, up from $477 million in last year’s second quarter.

Total core NOI is expected to be around $508 million for the second quarter, up from $492 million last year for a total core NOI growth expected of 3.2%. Our second quarter does follow the seasonal patterns of our past few years.

We expect all other income and expense items excluding financing costs to be minus $46 million, financing costs are anticipated at $256 million, which will be down from $265 million last year. The Ala Moana transaction reduces interest expense in the quarter around $3.5 million.

Overall, core FFO at the midpoint of guidance is expected to be around $205 million, up from $184 million or over 11% from last year.

Just a couple of comments on updating -- on our guidance update to 2012, our core NOI from our malls portfolio is now expected to be around $2.065 billion, compared to prior guidance of $2.050 billion, primarily comes from the one (inaudible) first quarter beat and it’s primarily on the expense side. This increases the expected core NOI growth in the malls to be around 3% to 3.5% for the year, up from our prior expectation of 2.7%.

The other significant change to our prior guidance model involves the refinancing of Ala Moana, which reduces our interest expense assumption for 2012 approximately $10 million as Ala Moana closed in the first week of April.

As a result of these changes, we are updating our guidance model for 2012 to be $0.92 to $0.96 core FFO per share.

Moving on to the balance sheet and our financing plans, as noted in our press release, we closed on one loan in the first quarter and three in April, including the one at Ala Moana. Two of these loans were opportunistic financings in particular Ala Moana was very opportunistic, three with CMBS, one with life company.

The coupons averaged less than 4.4% and the combined new loan balance at 100%, adding roughly at share for the full loan is approximately $1.9 billion. Very important to keep in mind that we have excluded the redevelopment of the Sears parcel from the Ala Moana financing, by acquiring the Sears package with cash, we have added over $200 million to the equity base at Ala Moana.

We are currently in the market with three transactions, which we expect to close in the next month or so. Current total maturities are around $195 million or about $140 million at share. The existing average coupon is approximately 5.4%.

Past those three deals, we are moving into the market with an additional four transactions, total maturities around $700 million, around 50% of that is our share and those assets -- those loans have an existing average coupon a little over 5%.

For the rest of the year, we have six loans to complete our 2012 financing plan. These loans have a total of $1.1 billion at 100% around $9.50 at share and have an existing average rate of 5.5%.

To sum that all up, by the end of the year we will have refinanced almost $3.8 billion of mortgages, $3.2 billion in share which had an average rate of 5.45%, of this amount around $2.1 billion, $1.45 at share or the 2012 maturities and we opportunistically will have financed $1.7 billion of maturities.

Remaining in the capital stack is approximately $7 billion to $7.5 billion of maturing debt pre-payable at our options and we’re looking at additional opportunities to finance some of these early above and beyond the activity I’ve already noted.

The mortgage market continues to be an attractive source of capital for us whether with life companies or with the CMBS market. We have financed and expect to finance a mix of quality of properties, excluding Ala Moana, the 17 transactions noted have an average sale per square foot over $550.

We’re generally looking to finance at a loan-to-value ratio in the 50% to 60% range, could be more depending on the assets with a tenure around 2%, we currently expect all in rates to generally be in a range of 4% to 5%.

With respect to our Rouse bonds as previously noted, we plan on using some of our opportunistic financings, which are part of the Rouse pool to prepare for taking out the $350 million due this year. We have other avenues of capital as well, including asset sales, potential joint ventures and even capital market transactions.

We have completed our revolver negotiation and are very pleased with the support we have received from the financial community. Our new facility has a $1 billion commitment with four-year maturity and a more flexible covenant package than our previous facility

And, with that, I’ll turn it over for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Nathan Isbee of Stifel Nicolaus. Your question, please.

Nathan Isbee – Stifel Nicolaus

Hi. Good morning. Really, it’s still early, but can you give us a little bit of sense in terms of the 11 Sears boxes, I know you laid out to Ala Moana, but what else in terms of scope, timing, returns, you might -- you figured you might be able to realize from that?

And I guess, you talked about primarily adding new small shop space. Would that be the case in Woodlands? Are you thinking about putting another department store in there?

Sandy Mathrani

Sure. Good morning, Nathan. So of the 11 pads, when we made the acquisition, we had a plan for nine out of the 11, which are the ones we actually valued and so the uses were to either replace them with department stores or and we will use our big box tenants that we had in mind. In the case of Woodlands to be specific, our anticipation is to replace it with a fashion department store and add a little bit about 30,000 square feet of in-line G&A.

Nathan Isbee – Stifel Nicolaus

Okay. And what is the timing of that?

Sandy Mathrani

We anticipate these projects to start -- at least in the case of Woodlands we anticipate to start in the spring, summer of 2013 with the stabilization and by Christmas 2014.

Nathan Isbee – Stifel Nicolaus

Okay. And then just focusing on the conversion of the short-term leases to the longer term leases, I know it’s relatively small sample 250,000. Can you just give a little bit of idea in terms of which tenant went out and which came in, and where those were located and what else is in the pipeline for that?

Sandy Mathrani

So, our goal is to do about 100 basis points this year, which I think we will achieve. We’ve obviously got about 35 to 40 basis points done up till this point and it’s across the portfolio.

As a matter of fact it’s mainly, if you will in the, the A malls always had a very high occupancy level, so this sits almost in the $400 to $600 per square foot malls and the tenants are of all categories.

We do see though, for the first time its mature retailers are expanding their footprint like Limited. They are also coming up with new concepts, Limited has come up with Henri Bendel which is an accessory concept and they are rolling out Pink as a separate store.

We’re seeing Forever 21 expand their footprint. We’re seeing H&M growing the number of stores that they want to have in this country. So for the first time we’re actually seeing new concepts and expansion that we haven’t seen before. And obviously, the first place they seek to go is to malls that do got it over $400 a square foot, which is predominantly our portfolio.

Nathan Isbee – Stifel Nicolaus

Thanks.

Operator

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

Samit Parikh – ISI Group

Hey. Good morning. My question was, compared to your peers, you had fairly flat NOI margins, I think, year-over-year and some of your peers, Simon and Thalman gained basically. They were helped by lower snow removal and lower utilities. Maybe could you explain why you didn’t gain as much margin this quarter as some of your other peers did?

Sandy Mathrani

I can really comment -- comment on how the peers numbers went. We certainly did better on the expense side, not all of it came from out of weather, roughly half of our $8.5 million of expense savings came from utilities and snow removal.

Samit Parikh – ISI Group

Okay. And then also going forward, I was curious on sort of how you think you’re going to grow your relationships with some of your JV partners. I think it’s no secret that CPP is out there and wants to grow their portfolio pretty materially and cap rates are pretty low for A quality assets. Do you see yourself maybe doing some sort of materially sized JV of some of your wholly owned assets as a method of de-levering considering where the market is today?

Sandy Mathrani

We’ve maintained one of the avenues to do to raise capital -- to do joint ventures. We have identified the malls that got potential to do joint ventures, but we don’t anticipate doing anything of a very large scale at this time. We may opportunistically do one or two, but not on some aggressive fashion.

Samit Parikh – ISI Group

Okay. And last question for me, you said you are going to get your signed/not occupied to about 2% by the end of the year versus where it is today? Is there any sense on timing of when that might switch over? Is there sort of -- should we expect closer to the holiday season, a lot of this might come on and leases commencing?

Sandy Mathrani

So the way we, I mean, if you actually look at our profile for the year, Q1 is usually when leases, when tenants start to move out, most leases in the retail business on Jan 31, you have the percentage rent in January. Q2 is when we start to sort of build out the space and we’ve indicated to all of you before. Almost half of our leasing is new tenants for replacement. So there’s a little bit of down time. So we will start to see a pick up in Q3 and Q4. That’s when we see occupancy going up.

Obviously, we feel very comfortable at 88% occupancy. We’re sitting at about call it 84.5% today, about 3.3% or so signed not occupied. So we feel very comfortable with the leases that are actually signed today. We’re going to occupancy by call it back-to-school and Thanksgiving. The 2% you’re referring to actually I view that to be in addition to the leases that I have signed today. So that will be new leasing activity between now and the end of the year.

Samit Parikh – ISI Group

Okay. Thank you.

Operator

Thank you. Our next question is from Ross Nussbaum of UBS. Your question please.

Ross Nussbaum – UBS

Hi. Good morning everyone. Sandeep, obviously Vornado has announced that they’re looking to sell their regional malls. You know those assets better than anyone. I’m curious if you’ve spoken to Steve and/or Mike yet about that possibility?

Sandy Mathrani

Ross, I don’t comment on Vornado’s malls. I like the malls. And I’m sure if they come to market, we hope to be able to participate in attempting to buy the malls.

Ross Nussbaum – UBS

If a transaction of that magnitude came up hypothetically, how do you think about financing a transaction like that given the current balance sheet strategy?

Sandy Mathrani

I think we will look to adopt a similar strategy as we did when we bought Plaza Frontenac. At that time, we got CPPIB as a partner. And we sold a 26% interest in Saint Louis Galleria to acquire a 51% interest in Plaza Frontenac whereby GGP owned 49%. So this would be something that would allow us to maybe bring in a joint venture partner on a couple of our A malls so that we would increase the amount of assets under management without actually use any of our cash.

Ross Nussbaum – UBS

Okay. Can you talk a little bit about Glendale in terms of how the economics work? I know you stated about a 10% yields there. I’m trying to figure out, are all of the incremental revenues in that calculation coming off of the Bloomingdale’s lease or are there other revenues being directly generated by that renovation redevelopment?

Sandy Mathrani

No. It’s actually -- most of it actually is coming out of the in line space. I don’t know if you’ve been to Glendale, but the space between Macy’s and the new Bloomingdale’s, that wing if you will has a high amount of vacancy that’s been there as a result of the Mervin’s leaving actually. So, two-fold, one leasing up the vacancy and of course, being able to get a higher rent per square foot in that wing allows us to increase the NOI substantially.

Ross Nussbaum – UBS

Okay. So implicitly, there’s higher occupancy and you’re thinking you’re going to be able to boost rents in that wing when the leases that are there roll?

Sandy Mathrani

Most of them actually roll in the next 24 months because they are all done with the ability that we can actually do a Bloomingdale’s type transaction.

Ross Nussbaum – UBS

Okay. Final question from me and this is -- this might be an odd one, but with respect to the warrants that are out there, the warrant holders at least on paper have about doubled their money at this point. Have you guys thought about sitting down with the warrant holders and talking to them about perhaps exercising and injecting some more capital into the company that could be used opportunistically or for debt pay down?

Michael Berman

The warrants as we mentioned on previous calls is an equity offering some time down the road. Not all the warrants are -- some of the warrants are just cash settle, some of them have an option. It’s something that we have had discussions internally about as to whether or not it makes sense to do or not to do. But the warrant holders struck those deals at the time of the bankruptcy. They got a very good transaction and you might have to pay them to take it out. I don’t know if you want to do that or not, but at the end of the day at some point in time those will have to be addressed.

Ross Nussbaum – UBS

Do you have a sense of whether you think that’s near-term or we’re going to have to wait until, what is it, I guess, 2017?

Michael Berman

We’ll let you know how the story goes as we read it ourselves.

Ross Nussbaum – UBS

Sounds good. Appreciate it.

Operator

Thank you. Our next question is from Quentin Velleley of Citi. Your questions, please.

Quentin Velleley – Citi

Hi. Good morning. Just in terms of the two mall assets that you purchased from your partner. Could you maybe just talk through what drove this sale? Was it the debt that was maturing this year and whether or not the assets were marketed?

Sandy Mathrani,

It drove -- that drove has been a long term relationship with Ivanhoe Cambridge and they were seeking to exit the assets they had a long-term hold. And obviously, they presented us an opportunity to buy at an attractive price which we took advantage of.

Quentin Velleley – Citi

And so the assets they weren’t marketed widely. Just with the sales productivity occupancy numbers on the assets, were they similar to both assets or was one substantially higher than the other?

Sandy Mathrani

About the same.

Quentin Velleley – Citi

Okay. And then sort of as you’re looking at the pretty attractive yield on those assets with that productivity, how do you, sort of, balance buying assets that do have an attractive yield, however average productivity and the markets that they are in is weaker than your portfolio average.

Sandy Mathrani

So, obviously it’s an interesting juggling act because we have to balance between opportunities that arise such as this. Had this been a freestanding sale of an asset where we didn’t have an ownership interest, I don’t think we would have played.

We know these two markets incredibly well. As a matter of fact, Westroads which is in Omaha, Nebraska has 5% unemployment rate. It’s actually a very strong market. It is the mall in the market. So we understand it incredibly well. We see the growth potential.

Oaks in Gainesville, Florida again is a sole mall in a radius of almost 30 to 40 miles with no other development in place. Oaks has an ability to have a redevelopment plan which we’re pursuing aggressively.

I think again our ability to understand these two assets in these two markets and being owners for a long period of time, we saw the growth in them. And obviously if you can get a current yield at the levels we got them at without really taking a risk of development, it makes it a viable good investment.

Quentin Velleley – Citi

Thanks. And then just lastly, maybe one for Michael. I know it’s still early days in the job, but if you look at the cost structure in terms of management expenses and G&A, it’s still somewhat higher than the peer group. Do you sort of think that you have opportunity for further savings on that front or is it just a matter of how you are classifying expenses and G&A versus net operating income and what your peers are doing?

Michael Berman

I’m impressed that you’re able to look at everybody’s numbers and come up with comparables because we struggle with it. So just to speak for ourselves, on a net basis, after taking into account the fees and all of the overhead costs, we think our base is pretty good at $185 million this year with $184 million last year. It is something that we have constant dialogue about with respect to getting more efficient, getting better. And hopefully, we’ll be able to improve our results. But right now our guidance is flat through last year.

Quentin Velleley – Citi

Okay. Thank you.

Kevin Berry

Thanks Quentin.

Operator

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

Ki Bin Kim – Macquarie

Thanks. Just a couple of quick follow-ups. On that question about your attempt to permanent leasing opportunities, what is the actual split out between, I guess, what would you consider your higher productive malls. So let’s say, over $500 a square foot versus lower productivity malls?

Sandy Mathrani

Could you just repeat the question again, please?

Ki Bin Kim – Macquarie

So where would most of the opportunity lie from the attempt to permanent leasing? Is all the leasing opportunity is most of it in your Class A malls or your Class B malls?

Sandy Mathrani

Well, they sort of straddle in the $400 to $600 per square foot malls for the most part, the conversion opportunities.

Ki Bin Kim – Macquarie

Okay. And your special consideration properties, I was wondering if you could provide an update. Originally, I thought you guys were going to sell it quicker rather than later, but if you could provide a quick update on that?

Sandy Mathrani

I think this quarter, we think of Grand Traverse was one of the special consideration properties. And I refer to the three assets being disposed of. That’s one of them. And 70 Columbia is in the works as we speak which would be another special consideration asset. We also agree we wish it would have happened faster.

Ki Bin Kim – Macquarie

And how about the office property in your portfolio?

Sandy Mathrani

So about 2% of our income today is derive from non-core assets pretty evenly 1% from the strips and 1% from the office. It is our desire to sell the office properties and opportune time. We aren’t going to have a buyer sale. So we’re going to be disciplined about that. Our office properties that are essentially in two markets, Columbia, Maryland and Las Vegas.

It is interesting to note though, in both markets leasing activity is up and up substantially. Las Vegas occupancy will be up 25% from where we ended the year. So we are seeing positive momentum. And if the momentum continues, it may be appropriate to start to market those assets for sale.

Ki Bin Kim – Macquarie

Okay. Thank you, guys.

Operator

Thank you. Our next question is from Cedrik Lachance of Green Street Advisors. Your question, please?

Cedrik Lachance – Green Street Advisors

Thank you. Just in regards to the secured line of credit, I’m curious as to why you decided to go the secured route instead of unsecured?

Sandy Mathrani

It really is just the equity pledges that we described as secured its equity pledges. We do not have a large pool of unencumbered assets. So in my mind, I would call it unsecured just kind of the description that we had.

Cedrik Lachance – Green Street Advisors

Okay. So there aren’t specific properties that are pledged to the lenders there?

Sandy Mathrani

No. Nothing is as specific in that revolver.

Cedrik Lachance – Green Street Advisors

Okay. And then in terms of Brazil, Sandeep, you spent a little bit of time during the call outlining some of the results there. What is the long-term strategy for your ownership of the Brazilian stake?

Sandy Mathrani

Cedrik, we’re a long term holder of our stake in Aliansce. It is today about 3% of our income. And we believe we have a first mover advantage. The Aliansce has done a great job. Today, they’re the third largest owner of shopping centers in Brazil. And we expect that to continue to grow.

So, it’s almost like getting the sale at Ala Moana because it has got X percentage of our sales. And so we view it as a platform. And we would like to continue to grow that platform.

Cedrik Lachance – Green Street Advisors

Is it your intention to provide additional capital to the company to grow or will you just maintain your stake passively for the long-term?

Sandy Mathrani

As of this moment in time, the company has done an excellent job of growing aggressively through acquisitions without requiring additional capital for the shareholders. And so we will continue to maintain our 31% ownership interest of Aliansce.

Cedrik Lachance – Green Street Advisors

Okay. Thank you.

Operator

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

Rich Moore – RBC Capital

Hi. Good morning, guys. Follow-up on Cedrik’s question for a second, do you have, you think any access to unsecured debt either bonds or term loans going forward?

Michael Berman

I think there’s an opportunity for us in all of the markets. We are in constant dialogue here internally about our options with respect to financing, capital market raises. I think there is some capacity. There might be some capacity if you wanted to do unsecured bonds and take out some of the mortgages.

We do tend to like the individual mortgage secured financing strategy. We think that it’s a lower risk profile than having lots of unsecured bonds in this particular pool. And keep in mind, we’ve done a nice job over the last few years of de-risking the balance sheet with how we have organized the laddering of the maturity. So yes, your short answer is, I think yes, but whether or not would want to do that is open to debate.

Rich Moore – RBC Capital

Okay. Thanks, Michael. So any interest from your lending group in a term-loan type structure?

Michael Berman

The banks are flush with capital and looking to put out loans. The issue for us in that particular case would be maturity. Generally, they are five years, sometimes its seven, but not really. And we’re generally looking for -- generally longer term maturities.

Rich Moore – RBC Capital

Okay. Good. Thanks. And then on Rouse, do you guys have any connection at all at this point to the newly formed company?

Michael Berman

The only connection we have is we provide some back office services to them as they are ramping up.

Rich Moore – RBC Capital

Okay. And then last thing that I have is Sandeep, the outlet center businesses is on fire and I’m curious if you’ve had a change of heart at all about looking at outlets yourself?

Sandy Mathrani

I’m very focused on the Class A mall business, you realize we have a deep pipeline to really enter into the outlet business. It really would have to move our needle. And I can’t imagine one, two, three projects moving our needle. So, I’m staying away watching my peers perform well in that space.

Rich Moore – RBC Capital

Okay. Great. Thank you, guys.

Operator

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

Ben Yang – KBW

Yeah. Hi. Thanks. Just a follow-up question on the two acquisitions. Sandeep, you mentioned you got an attractive price since the assets were not marketed for sale. I’m just curious how attractive that price was? Do you have any thoughts on what the cap rate would have been on a formally marketed sale for those two assets?

Sandy Mathrani

Yeah. The best I can do is provide you comps. So we’ve had some comps with Starwood buying some assets that have a slightly lower sales per square foot, but comparable. KKR brought an asset, which I think is again in the suburban Chicago market. So, I think we’re seeing sales now happen in that sort of foot price range. And I’d say, we would so forward call it 25 to 50 basis points better I think so.

Ben Yang – KBW

Okay. But how did you come to an agreement on price? Was that something negotiated when the partnership started or just plain negotiation, when they decided to sell out?

Michael Berman

It was just a negotiation, when they decided it was time to exit the investment.

Ben Yang – KBW

Okay. Fair enough. And then also you mentioned at Ala Moana that demand for space is exceeding supply. It’s obviously, a huge asset already. Just curious, can you talk about where that demand is coming from and if it’s possible you could possibly cannibalize sales at other parts of the mall?

Sandy Mathrani

Not really. I mean the mall is about a 2 million square feet mall. To add 300,000 square feet of in line GLA, there’s a slue of tenants that don’t even exist in the mall today whether it would be luxury to bridge everyone from an H&M, for example, not in the mall, [Uniflow] is not in the mall. So those users would be the watch guys are not at the mall. So there’s a whole slue of retailers that are not in the mall.

The existing luxury retailers are all looking to expand their footprint in the malls. Right now there’s no way for us to expand them because of constraints of space. So, we actually believe that they won’t cannibalize. And the comp rate will make it much more important shopping center, 50% of our traffic comes from local and 50% from tourists.

And so I think we’ll be able to better serve the customer by providing all the uses on the contract, even slightly differently. If we don’t have a space to put some of these uses in, they will go to other locations. That would have a negative impact.

Ben Yang – KBW

So, this is one of those weird markets where you could have the same retailer like a mile away from each other and they could both do well. I mean I guess that’s kind of your view on what you’re doing there or your expectation?

Sandy Mathrani

Well, we’re actually seeing that today, right. So, when they are duplicated uses between Waikiki and Ala Moana, we had gone to both locations doing incredibly well. Victoria’s Secrets is in both locations doing incredibly well. And some of these where Waikiki is open second from Ala Moana, Ala Moana did not see a dip in sales.

So the answer is, yes. You could have duplicate of retailers between Waikiki and Ala Moana. And let’s see if they can survive.

Ben Yang – KBW

Is there any competitive threat?

Sandy Mathrani

Beyond survive, we try would be the better word.

Ben Yang – KBW

Okay. Is there any competitive threat to what Taubman is trying to do own Waikiki Beach building some retail space there or is that far enough away that you think both projects can survive?

Sandy Mathrani

I think they both -- like I said, they both absolutely can survive because Taubman’s project is in Waikiki, a lot of the retailers already exist in both markets. So they absolutely can co-exist.

Ben Yang – KBW

Okay. And then just final question. Just curious how far along the line getting entitlements to build that in line space there?

Sandy Mathrani

Okay. Once again, we do not require any zoning changes. And we have additional FAR, so it’s purely getting a building permit to build. So we are in the process of doing designs. So there’s no entitlement issues.

Ben Yang – KBW

Okay. Got it. Thank you.

Operator

Thank you. Our next question is from Michael Mueller of JPMorgan. Your question, please?

Michael Mueller – JPMorgan

Yeah. Hi. Two questions. First of all I think the year-end goal you mentioned, Sandeep, was for about 500 basis points of temporary occupancy. Where do you think the normalized sustainable level of temporary occupancy is?

And then secondly, on the 7% to 8% leasing spreads for the spaces that are commencing this year and early into 2013, we -- as you progress throughout 2012 into 2013, where do you see those spreads improving to or moving to?

Sandy Mathrani

So, on answer to the first question is that we think stabilized will be about 300 to 350 basis points of tenants. Okay. And total occupancy about 96%. So it’s slight differently permanent occupancy will be about 92% to 93%.

The answer to the second question is, I think spreads should continue to hold through the year. Again, the spreads and I sort of gave this sort of definition a little earlier, but we base our spreads on our gross rents, but if you look at the $4.29 spread, it will continue to hold because what you have to appreciate here is the increases based upon this netted out CAM tax number because CAM have a fixed increase on an annual basis.

So even when we give you our GAAP numbers, it doesn’t take into account the fixed CAM increases which are anywhere from 3% to 5% a year. So the spread, I think should continue to hold. Of course, we all hope it gets better as sales maintain, but I think they will hold until the end of the year.

Michael Mueller – JPMorgan

Okay. Thank you.

Operator

Thank you. I am currently showing no further questions at this time. I would now like to turn the conference back over to Sandeep Mathrani for any further remarks.

Sandy Mathrani

Thank you all for joining us this morning. If there are any further questions, please call or write Michael Berman at michael.berman@ggp.com Thanks everyone so much.

Operator

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

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