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General Growth Properties Inc. (NYSE:GGP)

Q2 2012 Results Earnings Call

August 2, 2012 10:00 AM ET

Executives

Kevin Berry – Investor Relations

Sandy Mathrani – Chief Executive Officer

Michael Berman – Chief Financial Officer

Analysts

Alexander Goldfarb – Sandler O’Neill

Quentin Velleley – Citi

Ki Bin Kim – Macquarie

Christy McElroy – UBS

Jeffrey Donnelly – Wells Fargo

Rich Moore – RBC Capital Markets

Cedrick Lachance – Green Street Advisors

Michael Mueller – JPMorgan

Michael Bilerman – Citi

Nathan Isbee – Stifel Nicolaus

Operator

Good day, ladies and gentlemen. Welcome to the General Growth Properties Second Quarter 2012 Earnings Conference Call. At this time, all participants are in 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 call is being recorded. I would now like to turn the conference over to Kevin Berry. Sir, you may begin.

Kevin Berry

Thank you, Shannon. Good morning. And welcome to General Growth Properties’ second quarter of 2012 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 will be webcast, it is important to note that our call includes time sensitive information that maybe accurate only as of today’s date, August 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. This information is also available on our website in the Investors section.

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

I will now turn the call over to Sandy.

Sandy Mathrani

Thanks, Kevin. Good morning. I’ll provide an overview of our results for the quarter, our growth strategy, some perspectives on the retail landscape and then turn the call over to Michael to review our financial results and guidance for the reminder of the year.

Yesterday, we reported FFO of $0.23 per diluted share. Our total FFO increased about 24% from the same period last year. NOI for the U.S. mall portfolio increased 4.9% from the same period last year and on a same store basis a little over 4%.

If you include our stake in Brazil, our total NOI for the mall business increased 6.4% from the same period last year. Based on our year-to-date results and expectations for the remainder of 2012, we’ve increased our full year FFO guidance to $0.95 to $0.97 per diluted share, a little over 2%.

I’d like to make a special mention of our internal capital markets themes, as I use like, so the stellar performance and commitment to derisking our balance sheet and lowering our cost of debt.

As you know, during the second quarter we financed over $3 billion, 2.74 billion share and reduced the average interest rate on these loans to 4.2% from 5.24%.

Equally important, we also eliminated $640 million of recourse to GGP and the cross-collateralization between Fashion Show Mall and The Grand Canal Shoppes, Palazzo.

As some of you’ve heard me say most recently at the NAREIT conference. There are basically three drivers of GGP’s growth over the next three to five years, increasing occupancy, increasing rents and executing our redevelopment plan.

We’re focused on these three drivers and if we are successful, we should see annual growth of 3% to 5% over the next three to five years. We’ll also continue to grow our Brazilian platform which now comprises of 16 malls, growing to 19 as developments become operational.

Our growth driver number one, increasing occupancy, our focus has been simple, lease, lease, lease. The biggest part of our growth comes from increasing occupancy. Our goal for permanent occupancy by the end of this year is over 88% with the total leased of 95%.

At quarter end, the U.S. mall portfolio was about 85% occupied with permanent leases, 6% temporary and 3% signed and occupied for a grand total of 94.3%. Based on our leasing progress to date, we feel very comfortable achieving the permanent occupancy target we’ve set for 2012.

I’d like to take a moment to focus on temporary occupancy. Temp occupancy is currently about 6% of our portfolio. As we increased the total occupancy level of the portfolio, we’re not only converting temporary leases to permanent leases but we are also leasing some of our vacant space on a temporary basis. So far this year, we’ve converted approximately 430,000-square feet of previously leased on a temporary basis to permanent.

We have also leased approximately 450,000-square feet on a temporary basis space that was previously vacant. Therefore, we are realizing incremental NOI from the ongoing conversion of temp to perm and also leasing of vacant space to temp space.

Looking beyond 2012, we anticipate reaching -- achieving 95% total leased level by year end 2013 and expect it to be comprised of 90% to 91% on occupancy, 3% to 4% temp and about 1% signed not opened.

For the second quarter, approximately one-third of our 2013 leasing goal has been accomplished. By 2014, we expect to be stabilized at 95% to 96% total occupancy of which 92% to 93% will be permanent.

Turning to our big box and anchor portfolio. We executed 14 leases during the quarter, for 408,000 square feet. These deals are scheduled to open in 2012 and 2013. Total leasing activity for the big box and anchors to date this year comprises of 36 leasing -- 36 leases encompassing about 1.2 million square feet.

Department stores are expanding within our portfolio, Von Maur, Boscov’s and Herberger’s are expected to open new stores this year, Perimeter Mall, White Marsh Mall and Pine Ridge. Looking at 2013, Boscov’s will open at Woodbridge center and Lord & Taylor will open at Meisner Park.

Growth driver number two, increasing rents. As of June 30th, on a suite-to-suite basis over 4-million square feet has been executed to commence this year at initial rents of $60.69 per square foot, representing a 9.6% increase over expiring rents.

The momentum in rent spreads continues into 2013 with a suite-to-suite spread for deals consummated to date to commence in 2013 is $6.94 per square foot. I want to emphasize that the figures just provided reflect gross rents.

As I mentioned in the last quarterly call, if I take out rent -- if I take out CAM and taxes and view this on a net to net basis, we’re experiencing almost a 14% growth or expiring rents on a suite-to-suite basis for leases taking occupancy this year.

We continue to see a steady improvement in the operating performance of the regional mall portfolio as evidenced by another quarter of increasing tenant sales.

Sales reached $533 per square foot, an increase of about 9% from a year ago. We expect tenant sales to continue growing in 2012, but expect a percent increase over prior periods to moderate. At these sales levels we’ve essentially passed the peak a five years ago. At these numbers, occupancy cost is about 13% leaving room for continued growth.

Our growth driver number three, executing our redevelopment plan. As you know, we’ve identified approximately $1.6 billion of redevelopment opportunities across more than 60 malls within our portfolio.

We invested to date a little over $400 million and invest -- and we anticipate investing an additional $400 million in 2013. About half our total development pipeline will be invested by 2013. The positive financial impact on these investments will become visible in our results in 2014 and beyond.

Earlier in the quarter, we closed on the acquisition of 11 Sears occupied pads. Pads comprised approximately 1.8 million square feet and range in size of 80,000 square feet to 340,000 square feet.

We have specific redevelopment and reinventing strategies for each location, including but not limited to have a in line space, retenanting the pads with other anchors or breaking the pad up with multiple big box users. We’ve identified specific retailers for 10 of the 11 spaces and anticipate re-openings to start in 2013 and continue for the next couple of years.

Total project cost, including the $270 million to acquire the pads will be approximately $550 to $600 million once complete. We anticipate this investment to generate stabilized returns of 9% to 10%. Please note, these total project costs are included in the total develop -- redevelopment pipeline that is the $1.6 billion.

Turning my focus now to the retail landscape. We see tremendous demand by retailers of all types and a continued growth in sales generally broad based. Some are mature U.S. retailers looking to increase their footprint or size of their store or increase the number of stores.

There is little or no development expected over the next decade in the regional mall space. Therefore, for those retailers looking to grow sales, they need to increase productivity within their stores, increase the size of their stores, or introduce new concepts to the marketplace.

As an example, Limited has introduced successful new concepts including Pink and Henri Bendel, even Foot Locker has three new concepts.

European retailers are looking to increase their presence or come to the United States. H&M currently has about 240 stores in United States and is looking to expand to 4 to 500 stores and become a national retailer.

Zara is following an expansion plan. Topshop has opened a mall location with us in Fashion Show mall, has agreed to open shop-in-shops in Nordstrom, hence they are too stepping into the United States. UNIQLO has opened a few flagship stores in New York City. They’ve announced their first mall store and they’re looking to open 150 stores by 2015.

We see a lot of influx whether from Japanese, European retailers coming to the United States mall space to further their growth. The slowdown in Europe is having a positive impact to growing store base in the United States of the international retailers and the American retailers that have thought expansion abroad previously.

Some of the other notable trends, I mentioned H&M and Zara, cannot complete a call without talking about Forever 21’s continued growth. The other in-line retailers expanding are Lilly Pulitzer, Sperry Top-Sider, Tesla Motors, Vera Bradley, list goes on.

Our women’s apparel, Lululemon continues, Lady Foot Locker is the newer concept of Foot Locker.

On the luxury side, we see growth by Tory Burch, Carolina Herrera, Porsche Design, Emporio Armani. I’m just naming a few. Restaurants are in expansion mode as well, with Season’s 52, Red Robin and Yard House.

On the electronics side, we see Microsoft continuing to open new stores. We’ve opened one of their newer stores at Bridgewater Commons in New Jersey, truly a lovely store. Apple is selectively expanding their footprint. We’ve actually just done a flagship deal with Apple in Portland for almost 16,000 square feet.

We also continue to see big box retailers such as the sporting goods stores looking to come into the malls, as malls have always been for the traffic hits. Before it was pricing that kept them away from the malls, today pricing is less relevant. Retailer would rather go where the traffic exists, even Best Buy is looking to down size their stores, come into malls in 10,000 square feet locations.

Before I conclude my prepared remarks, I’d like to talk about online retailing and the Main Street Fairness Act, which we support first. To put things in perspective, online retail today accounts for about 5% of total retail sales according to the U.S. Census Bureau.

There used to be this belief that online retail would impact the bricks and mortar format. It hasn’t worked out that way. On the contrary, if we take a look at online retail and take that out of the equation, bricks and mortar sales have continued to grow. The retailers who have been the most successful have been those that have embraced both the bricks and mortar store and the online retail sales platform.

What is important to understand is that the retailers are determined that Omni channel is the best way to go. That means all types of distribution methods are important. A great example is the Gap, Atlanta brand, which was incubated online. They needed physical space at the mall to achieve scale. Again, I will reemphasize, we very much support the advancement and approval of the Main Street Fairness Act, which will level the retail landscape.

The strength and high quality of our portfolio continues to show as evidenced by the continued improvement in our operating metrics and financial results. Just to make a little comparison. If we look at the top 63 malls in our portfolio, they account for about 65% of our NOI. Sales averaged $672 for those 63 malls and the sales increase has actually been 11%.

We’re very excited about the organic growth embedded within the GGP portfolio and we’re also very cognizant and aware of the macro economic headwinds, facing not only in our business but the global economy. We are very focused on pursuing the three drivers of our growth, increasing occupancy, increasing rents, executing our redevelopment plans.

Our mantra will continue, lease, lease, lease. The future growth of this company is very real and you are now seeing proof of what we’ve been talking about for some time. The growth in occupancy, positive rent spreads, our new leases and the progress we’ve made towards our 2013 targets will continue to be very visible within our financial and operating results.

GGP’s portfolio offers a unique and valuable avenue for retailers and customers we meet and for investors that seek exposure to a pure play, high quality, regional mall company. We are focused on our customers, success of our retailers, the well-being of our employees, the communities we serve and the shareholders. I want to thank all my colleagues at GGP for their energy, teamwork and dedication.

I will now turn the call over to Michael to cover our financial results and outlook for 2012. Michael?

Michael Berman

Thank you, Sandy. I will make some comments on second quarter results, discuss our updated guidance for the year, before moving on to our balance sheet and then open it up for questions.

All of my numbers will be in the core format as previously described by the company. Comparisons to 2011 exclude Rouse properties, Inc. At times I may sound very precise with respect to my numbers. However, please appreciate my numbers are intended to be points on a range.

First, let’s look at the second quarter of ‘12 versus ‘11 and our second quarter guidance. Same-store mall revenues came in at $705 million and were on target to our guidance, up almost 3% to last year.

Same-store mall NOI came in at $496 million, up over 4% from last year. These numbers include about $3 million of termination fees, compares to $2 million in the second quarter of 2011.

Moving on to total company NOI, we are up 6% to $521 million. Outside of same-store malls, we were generally on our plan and benefited from our joint venture interest acquisitions and favorable comparisons to last year on our international investments.

All other income and expense items excluding financing costs, essentially our net overhead number, came in at minus $35 million compared to minus $46 million in our guidance and compared to minus $43 million in last year’s second quarter. At the margin, we benefited from some better-than-expected fee revenues and a little bit in interest income.

Keep in mind, our 2012 full year other income and expense expectation was previously minus $185 million. Now, we anticipate the full year to be closer to $172 million. Much of this variance has already occurred in the second quarter. Our number for all of 2011 was minus $178 million.

Staying with the quarter, financing costs were about $258 million compared to $257 million in our guidance and down from $265 million last year. Overall, core FFO came in at $228 million, about $23 million better than guidance and about $44 million better than last year.

Some comments on our upcoming third quarter guidance. We anticipate core FFO of between $0.22 and $0.24 per share. We anticipate same-store NOI growth from the malls of around 2.5%, or a little over $500 million, up from $489 million in last year’s third quarter.

Total company core NOI is expected to be around $527 million for the third quarter, up from $511 million or 3% for last year and we expect all other income and expense items excluding financing costs to be minus $45 million.

For the third quarter, we expect financing costs of around $250 million, down from $276 million last year. Overall, core FFO at the midpoint of guidance is expected to be around $232 million, up from $202 million last year, up around 14%.

For 2012 full year guidance, as noted in our press release, we are taking our guidance up to $0.95 to $0.97 per share, or about a 2% increase at the midpoint. Essentially, the two pennies come from the second quarter beat and from anticipated interest expense savings for the second half of the year.

Our same-store NOI expectation from our mall portfolio for the year continues to be a little over $2 billion -- $2.065 billion. Our same-store growth expectation continues to be 3.5% to 4%.

Total company NOI is expected to be about $100 million more -- $2.165 billion to $2.17 billion compared to last year of $2.08 billion or growth of better than 4%.

We anticipate growth in international and acquisitions and no growth in office and strips. As noted, all other income and expense items excluding financing costs are around $172 million and financing costs are expected to be around $1.150 billion. We anticipate core FFO for the year to be $960 million to $980 million, to a midpoint of guidance range of $0.96 FFO per share.

Moving on to our balance sheet, the mortgage markets continue to be an attractive source of capital for our properties and we have closed and expect to close with a range of life companies and CMBS dealers. We continue to look to finance at loan-to-value ratio, generally in the 50% to 60% range.

Total loan spreads have widened a bit in the past few months. Borrowing coupons for 10-year deals are generally less than 4.5%. We had a very busy second quarter and I would add my congratulations to our internal capital market team as well. With about $3 billion of property level financing, about $2.74 billion in share, most of my numbers that I’m going to go through here are going to be at share.

We closed nine deals in the second quarter with highlights including the $1.4 billion financing of Ala Moana, $625 million financing of Grand Canal, Palazzo, and the $425 million financing of Oak Brook here in the suburbs of Chicago.

Most of the financing were 10-year maturities, with an average coupon of 4.2% and an average spread to treasury of less than 225 basis points. We have also closed two deals thus far in the third quarter for $440 million in proceeds, both wholly-owned malls, with an average blended rate of about 4%.

We have an additional six deals for over $1.3 billion in proceeds in documentation. I’m sorry, that’s 1 billion at share and expect an average coupon of less than 4%, with an average spread to treasury of less than 250 basis points. Three of the transactions of 10-year maturities, one 12, one 8 and one 5, as we continue to manage our maturity schedule.

We’re in the market with our last remaining 2012 maturing loans and are also preparing for another financing with a maturity date of early 2013. We anticipate achieving similar terms for what we have closed on so far.

We will have generated sufficient proceeds to repay the $350 million of unsecured Rouse bonds coming due in September. And in addition, we are closed to closing on a seven property portfolio loan with a major life insurance company.

By the end of this year, we will have refinanced approximately $5.3 billion of mortgages at share, taking the average rate from a little over 5.6% to an average rate of less than 4.5% on the refinanced mortgages. Approximately, $1.8 billion for our 2012 maturities and the remainder were opportunistic financings.

We expect to have generated approximately $730 million in excess proceeds this year, of which $500 million is for the Rouse bonds, $350 million this year, we are setting aside $150 million for next year so far.

Looking ahead to 2013, we have $1.1 billion to refinance, of which $690 million are unsecured Rouse bonds. As noted, we are already on our way to generating the proceeds to take out those bonds.

For additional perspective, the maturing amounts for 2014 and 2015 are $1.6 billion and $1.5 billion respectively. Two years ago, the total needed for refinancing in those years was a combined over $5.5 billion.

Remaining in the capital stack is approximately $6 billion of maturing debt, pre-payable at our option and we anticipate looking at financing $1 billion to $2 billion of this in the next 12 to 24 months.

Finally, we have increased our quarterly dividend by 10%, which is the first dividend increase since the new management team arrived and we are indicating our optimism about our future.

And now let’s open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Alexander Goldfarb with Sandler O’Neill. You may begin.

Alexander Goldfarb – Sandler O’Neill

Good morning. Sandy, just going to the occupancy for a minute, what do you ultimately expect the spread to be between occupied and leased? I would imagine that there’s probably always going to be some structural gap between leases that are signed versus space occupied. But just trying to get a sense for where the portfolio is now, where you ultimately envision that spread to be.

Sandy Mathrani

I’m running out. So as we’ve said, the leasing activity is done in 2011 and 2012. You’re going to start seeing the ramp-up in permanent occupancy over the next 6 to 18 months. And so, on a stabilized basis which I view to be 2014, we should see 1% to 2% [SNO] which is today about 3%. So over the next 6 to 12 months, you’ll start to see that gap narrow and the [SNO] will be about 1% to 2% on a stabilized basis ongoing.

Alexander Goldfarb – Sandler O’Neill

Okay. So that would be in 2014?

Sandy Mathrani

Correct.

Alexander Goldfarb

Okay. And then next question Sandy. Going to the retailers at large, clearly it sounds in your call as well as the other retailer calls, sounds like everyone’s still going full steam ahead with store expansions, new store openings, et cetera. What are you seeing on the renovation side? Are you seeing retailers pull back in any way from renovating and updating existing stores, or they’re remaining full speed on both opening new stores as well as renovating older existing stores?

Sandy Mathrani

As a matter of fact, Alex, the retailers, if you actually look at our pipeline, about a little more than half are new leases and the existing leases that we’re renewing, which is about 40% to 50% of our leases, the tenants are much higher productivity tenants.

And they’re actually investing in their physical plans to either renovate the stores, so they can increase productivity, expand the footprint, which also requires renovation of the store. So we’re actually seeing capital investment by all the retailers that are renewing in order to create a fresh landscape.

Alexander Goldfarb – Sandler O’Neill

Okay. Then just finally, following up the Omaha and the Gainesville buyouts, do you expect other JV buyouts? Is this a trend we should expect more or is this sort of a unique circumstance?

Sandy Mathrani

One, if you actually look at our portfolio, the JV assets are actually of very high quality, the best quality part of our portfolio in many ways. And so if the opportunity arises to acquire our JV interest, we would be very interested, although I do believe this was unique.

Alexander Goldfarb – Sandler O’Neill

Okay. Thank you.

Operator

Thank you. Your next question is from Quentin Velleley with Citi. You may begin.

Quentin Velleley – Citi

Hi. Good morning. I know the performance of the A malls is particularly strong. Just in terms of the B malls, could you talk a little bit more about the performance across the B mall assets you still own? And in particular, I know you changed some of the leasing executive bonus structure and whether or not that’s been having an impact on B mall leasing?

Sandy Mathrani

Good morning, Quentin. First, I’ll just give you that the sales productivity actually has been across the entire portfolio. So obviously the higher productive malls, it is much greater.

I don’t want to segment but if the -- over $1,000 of square foot malls, there have been 20% increase in sales. Over $600 mall, have been over 12% increase in sales. So all you can go all the way down, that the $300 malls had almost a 3% increase in sales.

So, I found interesting is that the sales increases were across all build product -- whatever the productivity of the mall was. The leasing activity is actually quite strong at even the B malls.

One, because they are, as I said before, certain retailers that are getting out-priced of the A mall market that have to create their business in the B mall sector. You’ve got big boxes looking to come into the B mall sector.

I think not to quote one of my peers or my colleagues is but CBL is a classic example of a B mall company that’s’-- that has phenomenal leasing activity and that same leasing activity we see in our B mall, that we’ve compared our B mall portfolio to theirs. And its, I would say it’s very comparable for me for the leasing productivity, sales productivity perspective. So we see it in that sector as well.

And obviously, as you referred to your compensation structure, we’ve compensated based upon EBITDA growth and occupancy, which means it’s an even playing field and the B malls get as much attention as the A malls do.

Quentin Velleley – Citi

That’s great. And then you’ve sold one recently. When we saw you most recently, I think you said you had three under contract. Could you just talk a little bit more about the progress on some of those B mall sales?

Sandy Mathrani

Yes. We know we sold one. The one we sold was a development play, albeit it was a $250 a square foot mall that was sold at sub six gap. I don’t really view that to be how those malls get priced, because it was truly a redevelopment play. And we looked at redeveloping it ourselves.

And we felt that the opportunities that we have on our plate which the $1.6 billion of development pipeline at 9% to 10% returns was a better investment of our time and money trying to redevelop Foothills. On the other two, we -- they’re under contract and we anticipate them to close in a bit in the next 60 days.

Quentin Velleley – Citi

Okay. And then just lastly, just on Brazil, only a small piece of your NOI. You’re so focused on the U.S. portfolio and leasing. You’ve got growth slowing in Brazil, internal rates of return look like they’re coming down on new developments. Have you had thoughts of potentially selling your stake in Aliansce and selling your stake in the Shopping Leblon asset or you really committed to staying in Brazil and increasing that as a proportion of your asset base long-term?

Sandy Mathrani

We are committed to increasing that as the asset base in our portfolio. The growth of Aliansce continues at an accelerated pace. I mean if you actually look at some of their numbers, the NOI growth has been 36% year-over-year. They’re about to announce their own earnings but I’m referring just to the last quarter. And I think their earnings are next week. The FFO growth has been 25%.

The asset base is growing at almost 25% a year. Occupancy is almost 98%, 99%. So albeit, the economy may be slowing but to date the Brazilian landscape is under retail. And the sales productivity is very high.

So we view that we have a first mover advantage in Brazil today. And we think it’s long-term fantastic market for us to continue to grow.

Quentin Velleley – Citi

Thank you.

Operator

Thank you. Our next question is from Ki Bin Kim with Macquarie. You may begin.

Ki Bin Kim – Macquarie

Thanks. So you guys have definitely been able to take advantage of the very attractive financing markets. Just thought, we can get a sense of how much more accretion there is left in your portfolio or your balance sheet, I should say. How much of your debt has been refinanced or another way to ask, its how much more of your debt is eligible for refinancing without paying prepayment penalties and what would the average cost of that debt be?

Michael Berman

As I said, there’s about $6 billion that’s pre-payable and we think inside that pool from an opportunistic perspective, it’s probably $1 billion to $2 billion of opportunity over the next 12 to 24 months. A lot of the opportunity, when you have an $18 billion balance sheet and you’ve refinanced $11 billion, $12 billion over the last couple of years. You’ve taken out a lot of the opportunity. There is some left but it’s not going to be as much as we’ve already done.

Ki Bin Kim – Macquarie

And what is the average cost of that, $6 billion?

Michael Berman

I don’t have that off the top of my head.

Ki Bin Kim – Macquarie

Okay. And just going back to your leasing spreads, obviously they are improving a bit. And it looks like from what leases are going to commence in 2012 and ‘13, there’s about $24 million of additional revenue just from square footage times the increasing spread.

How does that compare to what you’ve done already in terms of bankruptcy phase leasing. And also how does that compare to your initial projections for how much upside there was and converting temporary leases to permanent?

Sandy Mathrani

As I mentioned on the temp to perm, when we presented our original estimates to guidance, we said by the year end, we would take -- I should say it was differently. We would convert about 1% of temp to perm. And we are well on our way of converting that 1% of temp to perm almost we have 80 basis points there at the end of the second quarter. So we fully expect to be over 1%.

As I’ve said in my projections, in 2013 and 2014, we expect to convert one percentage and two percentages every year and you’ll be at a stability of 2% to 3% temp by 2014, which is where I think the business ends up. So, we think we’re well on our way on doing that. And that’s assuming a 95%, 96% occupancy.

It is entirely possible, you could get 97%, 98% occupancy in your leasing, what I would call truly wing space to temp tenants. So that would just mean, obviously you’re better off getting some income than none. Anything above 96 is great, right. So, it will be a very positive thing.

So, the rent spreads that you see. I’ve given you some sort of an indication, at least the leading indicator we’ve leased about a third of our goal for 2013. And as I told you, that these spreads were almost $7 a square foot, which means they were slightly wider than the spreads we’ve seen in 2012. So the spreads have actually gotten better. And that’s predominantly because you’re leasing into a rising sales environment.

So again, at 13% occupancy, even if sales start to moderate or even go down. We don’t anticipate it going down in 2012 at all. On the contrary, the projections are for it to actually go up 3% from this point on to the latter half of the year. So, we think there’s plenty of upside to continue to grow rents.

You might also sort of -- if you look at the numbers we’ve given. The renewals are 40% to 50% of our turnover, so that just means that we’re doing a lot more new leases at very high spreads. And so that’s sort of answering your call in the bankruptcy related question, which is we are reducing the amount of leasing as our intent leasing as one aspect short-term leasing is the second aspect.

So we are able to roll those leases. Replace the lower productivity tenants and increase spreads by doing new leases. The renewals are those tenants that actually have high productivity. And actually, if you look at the rents of the renewal tenants they’re actually high, which means that those leases have continued over the last few years to have increases. And therefore, the spreads are not as high as the new leases.

So, I’m not sure. I’m answering your question but I view that the spreads will continue and we continue to make headway into replacing the lower productivity tenants with high productivity tenants. And therefore, now in case we would have a larger share of new tenants versus renewals.

Once again, that should stabilized, a stabilized basis about two thirds to three quarters of the tenants will be on the renewal side versus new. And by 2014 we should be much more stabilized in our business plan. We’re well on our way.

Ki Bin Kim – Macquarie

Let me see if I can ask a follow-up on that really quickly. You said 2%, 3% of occupancy is left to convert from, I guess lower productivity tenants to higher. Those lower productivity tenants on average, what is their all in rent today?

Michael Berman

It’s about $20 to $24 a square foot.

Ki Bin Kim – Macquarie

All right. Thank you very much.

Operator

Thank you. Our next question is from Ross Nussbaum with UBS. You may begin.

Christy McElroy – UBS

Good morning. Here is Christy McElroy. Sandy, in the past you talked about when you’re converting your temporary to permanent leases getting as much as 2 to 3X uplift in the rents. Can you quantify what the rent has been on the 430,000 square feet that you’ve converted year-to-date?

Sandy Mathrani

It’s been about a between 2 to 2.5 times.

Christy McElroy – UBS

Okay. So it’s still tracking along those lines.

Sandy Mathrani

Correct. It’s been about $20 to $24, the new leases about $50 to $55.

Christy McElroy – UBS

Are you confident that as you look ahead to 2013 and ‘14 as you reduce that temp space further, you’ll be able to continue to achieve that?

Michael Berman

I think the answer to that question is, yes. It may actually get a little stronger. But I don’t anticipate it getting any weaker.

Christy McElroy – UBS

As we look at your permanent occupancy goals for 2013 and ‘14. By 2014, we’re talking about nearly a 700 basis point increase in your full permanent occupancy. Some might argue that that’s a pretty aggressive ramp. Do you think under the current economic environment that we’re operating under that, that’s achievable or do we need to have a strengthening in the U.S. consumer and the U.S. economy to achieve that 2014 goal?

Michael Berman

I actually think by the end of 2012, we will be a little over 88%. So to go from 88% to 92% is 400 basis points. I think maybe you’re looking at it from where we are today which is 85%. But we have obviously done the leasing for 2012. So, if I look at year end 2012 numbers we’ll be close -- we’ll be above 88%. And so, we feel pretty good that that -- that to go from 88% to 92% is achievable which is about 2% a year.

And as I mentioned, it does -- it’s not necessary that we need to see a strengthening of the U.S. economy. And the reason is we’re seeing an inflow of tenants looking to grow here and the people are looking to grow here for long-term growth. So they’re looking to have a 10, 20 year horizon. So I expect that the leasing activity will continue even in the phase of headwinds that will come our way. So I think it’s achievable.

Christy McElroy – UBS

Do you still see some of this as being low hanging fruit from the bankruptcy or do you just think this is your capturing your fair share of the market.

Michael Berman

I think it’s a little bit of both. I think you have a little bit of low hanging fruit, because you still have a little bit of -- a few tenants that are -- percentage of tenants that are the lower productivity tenants, which while we were in bankruptcy we didn’t have the financial wherewithal to replace them, which we do today. So, you do see a little bit of that. And I think that will be absorbed in 2013.

And I think the second aspect is, once again GGP getting its fair share of the tenant growth, which we were not able to capitalize while we were in bankruptcy, because we were capital constrained to provide tenant allowances to those tenants. And so again, we own 70 A Malls in our portfolio. So we will get our fair share. We’re seeing the witness of us getting our fair share.

Christy McElroy – UBS

Okay. And then one quick balance sheet question. I don’t know, Mike, if you want to take this one or Sandy. Probably the biggest question I still get, when I talk to the investment community is on the balance sheet, which is why doesn’t the company issue some equity here, particularly to pre-fund the Rouse bonds for next year or just put a little more comfort if you will into the leverage, given the uncertainties in the world?

Michael Berman

Well, there’s obviously lots of ways to look at that, as we have indicated to a lot of people, solving the overall debt to leverage problem in our view is really more growing the cash flow rather than erratically changing the overall balance sheet.

The amount of debt that we have coming due in the next three years, I think is $1.1 billion in ‘13, $1.4 billion so in ‘14 and $1.5 billion or so in ‘15. It’s really relatively small compared to the activity that we had and then the absolute size of our overall activities. $300 million equity offering to payoff a little bit of debt is not going to put a debt in the one leverage ratio that everybody is concerned about.

The ones that we focus on in addition to that one are interest coverage, which is growing fairly dramatically. Our overall loan to value, which we think is fairly conservative. We are paying down $300 million a year in debt. There is some timing related to the overall balances given we are accelerating some of the financing related to having the cash available for the Rouse bonds. We’ve never said no, we won’t do it. But to me, I think we’re prudently managing our way through the issue.

Operator

Thank you. Our next question is from Jeffrey Donnelly with Wells Fargo. You may begin.

Jeffrey Donnelly – Wells Fargo

Good morning, guys. I guess just a question on refinancing. I’m assuming that if you have sort of limited capacity or resources just for how many refinancing you can tackle. Can you talk about how you prioritize your refinancing activity, is there a preference for instances where we can pull out capital or is it just more focused on cutting ongoing interest costs?

Michael Berman

We have really an excellent team. And we don’t -- they’re not sitting there going well. We don’t have time to do property X, because we have to go to property Y. They’re addressing all of our needs, all of the time. They’re constantly thinking about how to do things better. We are going to close north of order of magnitude 20 deals, 25 deals in 2012. So there is no stone left unturned which is the sense I got from your question.

Jeffrey Donnelly – Wells Fargo

And then -- and I’m curious, have you seen a shift in how lenders are willing to lend on B malls? We’ve seen the 10 year compress a lot. Do you think that might -- I would presume that might cause them to push out on the yield spectrum, maybe increase advanced rates to maybe loans that would give on B malls? Have you seen that transpire yet?

Sandy Mathrani

We have seen at least since I’ve been here the market plan again. It’s for our product particularly. I think because that’s what we see. But we’ve really seen flexibility with respect to lending at the highest quality and then at the middle quality.

Obviously, at the very bottom of the spectrum you’re wondering what you’re going to do with the assets, so put those aside. But the criteria that we’re getting are consistent with the sales productivity of the mall, the mall’s position in the marketplace. We’re not refinancing low quality assets at 7.5%.

They’re all -- all of our coupons are generally in the 4% to 5%. I think this quarter’s activity is going to be below 4%, which includes a couple of B malls in that portfolio.

Jeffrey Donnelly – Wells Fargo

But have LTVs kicked out as well or are they still holding pretty constant at the lower tier malls.

Sandy Mathrani

I mean again the higher -- the better quality property. You could get more dollars at a given loan to value than a lower quality property. But it’s not like we’re sitting here worried about the financing markets vis-à-vis anything other than our top quality assets.

We’ve consistently gotten excellent execution. We’re getting -- there’s no guarantee that’s we’re being asked to give. We’re not sitting here going -- boy that spread just doesn’t seem consistent with the last four deals that we did.

So, we’re not really seeing what I -- and I can appreciate why you were asking the question. We’re not really seeing a discrimination out of line with respect to quality.

Jeffrey Donnelly – Wells Fargo

And then, and just Sandy, can you talk about traffic trends at your malls over the course of Q2. Because there have been some anecdotes out there that foot traffic slowed and I was wondering if that’s something you’ve observed or might have continued into Q3 if it did exist?

Sandy Mathrani

Even, I really -- I haven’t really seen that yet. We haven’t seen a slowdown of the traffic count as I said in the -- if you look at it almost in every category of sales productivity, we seen -- as we’ve seen growth in sales in the month of June.

Now, as I said in my comments, you might see a moderation of the growth. Again, I’ll give you the moderation not as a result today of the economic headwinds but more as a factor that we past peak of 2007 across the entire portfolio. And after a while, you’re not going to see, 10% growth when the economy’s growing at 1% to 2% and sales productivity is achieved as time passes for the peak. So we’re not seeing less foot traffic in the malls across the country.

We’d also appreciate, a lot of our assets, to be a national company and have a fairly good presence in markets like Texas and Idaho -- Iowa and Nebraska, unemployment rates there are actually quite low. In addition, we service as a company as a whole the educated consumer whose unemployment rate is less than 4%.

So up to this point, we haven’t seen anecdotally even a slowdown in the foot traffic.

And I think the sales productivity continues to grow.

Jeffrey Donnelly – Wells Fargo

Just one last question, just concerning the dividend increase. Your FAD payout’s toward the lower end, I think of your peers, was there any consideration given by the Board to a larger increase or is there any support maybe for holding firm at this point?

Michael Berman

Again, we don’t necessarily look at those particular metrics. We look at how much CapEx we have, how much debt amortization that we have, raising the dividend is more statement about the future than the current state of our actual cash flow. It’s an incremental $10 million, $20 million this year.

To us, it was very symbolic of the movement past the bankruptcy and the success that the new management team has been having operationally.

Jeffrey Donnelly – Wells Fargo

Okay. Thanks, guys.

Operator

Thank you. Our next question is from Rich Moore with RBC Capital Markets. You may begin.

Rich Moore – RBC Capital Markets

Yeah. Hi. Good morning, guys. Given your comments about where you are with capital and where you are with the balance sheet and the fact that you have $1.6 billion of expansions and redevelopments that you want to do. Should we think in terms of you guys being a net zero acquirer, I guess, that is, if you acquire something you have to kind of sell something in order to make acquisitions work?

Sandy Mathrani

I would say generally as a model that we’re using, if we wanted to buy something we probably wouldn’t get, probably not everything would be exactly this. But at the margin we’d engage in a joint venture transaction and look to have proceeds from a joint venture transactions.

We have very little in the way of asset sales in our cash flow to the extent that that market picks up, there might be opportunities to do 1031s. But our business plan is primarily focused on our internal growth including our development pipeline. And we’re not really pounding the bushes for tons of acquisitions.

Michael Berman

I’ll just add to that that, as you know, I’m very focused on keeping GGP laser-focused on our embedded growth in our existing assets. And I sort of have this belief that every time you buy a new toy you get distracted. So, I think for the next 12 to 24 months, we’re going to stick with the toys we have.

Rich Moore – RBC Capital Markets

Okay. Good. I like that, Sandy. And then Michael, on the exclusion that you guys have or the ability to prepay this big chunk of debt still. Is there a time limit on that? Does that ever expire or can you just take your time at approaching those various mortgages?

Michael Berman

My guess is whenever there has been natural maturity is when they otherwise expire. I don’t remember the specific loans but call it over the next three to five years, that ability to prepay would go away.

Rich Moore – RBC Capital Markets

Okay. All right. Good. I got you. Thank you. And then last thing, I noticed you guys bought a couple of anchors -- anchor boxes in Iowa and Albuquerque. And I’m curious how those come about and if you have more of those kind of opportunities in the portfolio to pick up the vacant anchor boxes?

Sandy Mathrani

We’re obviously in constant communication with the vacant anchor box owners and where we see opportunity to re-lease it. We get aggressive in trying to acquire it from the owner of the anchor boxes. Should you see more of that? As we’ve always maintained that it is our goal to own as many vacant anchor boxes. I’ll even say as many occupied anchor boxes as we can and so to be in charge of our own future.

Rich Moore – RBC Capital Markets

Okay. So you think there’s more that kind of thing out there?

Sandy Mathrani

I think so.

Rich Moore – RBC Capital Markets

Okay. Great. Thanks, guys.

Operator

Thank you. Our next question is from Cedrick Lachance with Green Street Advisors. You may begin.

Cedrick Lachance – Green Street Advisors

Thank you. Just to stay on the theme of anchor boxes, you have a new development for an anchor at Fashion Show in the supplemental. Can you give us a little bit of details on that and how you expect to fill up the space?

Sandy Mathrani

Okay. So Fashion Show, there was a vacant anchor, Robinsons-May anchor which is actually owned by Macy’s. We have acquired the anchor space. We have re-let half of it back to Macy’s for Macy’s bed and home.

The other half is being converted into in-line retail space. As you can appreciate, Fashion Show mall is over $1,000 a square foot mall. It has -- I don’t know, high 90s in occupancy. So, there’s obviously tremendous demand. So there’s, again, a unique opportunity for us to acquire it.

Rents, if you can do the math, it’s over $150, $170 a square foot. So we took advantage of it and we’re already in development to put the in-line space in and put the Macy’s bed and home.

Cedrick Lachance – Green Street Advisors

Okay. And in terms of TI packages, you used to have a disclosure page. That’s no longer there. Can you give us a sense of the current TI packages you’re providing to tenants versus what you did let’s say a year ago?

Sandy Mathrani

I’m not sure I can answer the question from a year ago, because I don’t have that on my finger tips. But currently a good way to look at it is 50% of our leases up to this point are renewals, where the TA is of course virtually zero. Of the remaining 50%, about half TA is virtually zero and about half we get TA and the TA for that half is about $50 to $60 a square foot.

Cedrick Lachance – Green Street Advisors

Okay. And that’s relatively unchanged from the past based on your recollection?

Sandy Mathrani

I think so. I’m pretty sure that was about that range.

Cedrick Lachance – Green Street Advisors

Okay. Thank you.

Operator

Thank you. Our next question is from Michael Mueller with JPMorgan. You may begin.

Michael Mueller – JPMorgan

Thanks. Hi. I was curious the occupancy cost you mentioned is about 13%. On the new leases that you’re signing, what sort of occupancy cost target are you hitting?

Sandy Mathrani

Again, it’s depending on the mall, the productivity of the mall but on average, 15% to 17%.

Michael Mueller – JPMorgan

Okay. And going back to asset sales for a second, it sounds like not a lot in the current plans for the next 12 to 18 months but what’s the dollar size of the pool of properties that over the next, I don’t know, three years, five years, you’d ultimately like to cut loose?

Michael Berman

From our perspective, we think about it in terms of net proceeds. I forget all the individual deals that added up -- a lot of little deals in there. We call it net proceeds after that or a magnitude of $100 million to $150 million.

Michael Mueller – JPMorgan

Got it. Okay great. Thank you.

Operator

Thank you. We have a follow-up question from Quentin Velleley with Citi. You may begin.

Michael Bilerman – Citi

Yeah. It’s Michael Bilerman. Sandy, just quickly I think you talked about NAREIT 8 to 10 malls, B malls that you sort of wanted to sell. I think you mentioned three were under contract. Is there -- what’s sort of the timing on the remaining liquidations?

Sandy Mathrani

Michael, again, we want to see how the markets react to bringing B malls in the market to sell to see what the depth of the market is. And I would assume that over the next 12 to 24 months, we will slowly start to improve our portfolio.

Michael Bilerman – Citi

And the three that are under contract, what’s the sort of gross value and the debt associated with those assets?

Michael Berman

One sold of the three Foothills sold, two left that are under contract. I think let’s call it half of the $150 to $150 million net proceeds, Michael, that I mentioned before. One of those assets is 50 to 70, something like that.

Michael Bilerman – Citi

And then Sandy you were mentioning, you were talking a little about your B mall portfolio. And you were talking about comparing it with CBL and remarkably consistent in terms of trends. I guess in saying that is that a portfolio you want to hold on to that you like the trends or that you feel like if you didn’t own it, that the company would be a stronger a more focused company?

Sandy Mathrani

You know what happens is, Michael, there is a portion of those malls that we actually anticipate the sales productivity will continue to increase and will go from B mall to A malls. So will there be a handful of those malls that you don’t mind not owning?

Yeah. But most of them I like the business, you’ve owned for strategic reasons to be -- to have good market representation, because you see sales growth whether it can go from a $400 mall to a $500 a square foot mall, leasing activity is strong. We like the national footprint. So at this moment in time I think we like the portfolio, we like the growth rate, we like the stability.

Michael Bilerman – Citi

Okay. Thank you.

Operator

Thank you. Our next question is from Nathan Isbee with Stifel Nicolaus. You may begin.

Nathan Isbee – Stifel Nicolaus

Hi. Good morning. I’m just focusing quickly on Village of Merrick Park. You’re coming on the tenth anniversary. When the property first opened, it clearly had some difficulty, especially getting traffic to the upper levels. Where do sales and occupancy costs stand on that property today? And do you foresee as the leases roll there that being an opportunity, perhaps would you see some roll-downs there?

Sandy Mathrani

All I can -- I’ll give you this from memory. I can’t tell you I have all 135 malls memorized but the anchor stores there, Neiman Marcus and Nordstrom, sales productivity is very, very, very strong. Sales of the mall are approaching or maybe just past $700 a square foot, okay.

And occupancy costs, I don’t know exactly, okay. The occupancy cost, just looking it up, is about 11% to 12%, so we see obviously at the 10-year role tremendous growth opportunity to take a, call it, near $700 a square foot mall up to 15% occupancy.

Nathan Isbee – Stifel Nicolaus

All right. Thanks.

Operator

Thank you. I’m showing no further questions at this time. I would now like to turn the conference back over to Sandy for closing remarks.

Sandy Mathrani

We thank you all for participating this morning in the earnings call. And I’m sure we’ll see most of you at the next story. So have a great day.

Operator

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day.

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