General Growth Properties (GGP) Sandeep Lakhmi Mathrani on Q2 2016 Results - Earnings Call Transcript

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General Growth Properties, Inc. (NYSE:GGP) Q2 2016 Earnings Call August 2, 2016 9:00 AM ET

Executives

Kevin Berry - Vice President-Investor Relations

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

Michael Bruce Berman - Chief Financial Officer & Executive Vice President

Analysts

Vincent Chao - Deutsche Bank Securities, Inc.

Christy McElroy - Citigroup Global Markets, Inc. (Broker)

Samir Khanal - Evercore Group LLC

Robert Jeremy Metz - UBS Securities LLC

Ki Bin Kim - SunTrust Robinson Humphrey, Inc.

Alexander David Goldfarb - Sandler O'Neill & Partners LP

Haendel Emmanuel St. Juste - Mizuho Securities USA, Inc.

Caitlin Burrows - Goldman Sachs & Co.

Craig Richard Schmidt - Bank of America Merrill Lynch

Paul Edward Adornato - BMO Capital Markets (United States)

Floris van Dijkum - Boenning & Scattergood, Inc. (Broker)

Daniel Joseph Busch - Green Street Advisors, LLC

Michael Jason Bilerman - Citigroup Global Markets, Inc. (Broker)

Michael W. Mueller - JPMorgan Securities LLC

Operator

Good day, ladies and gentlemen, and welcome to the General Growth Properties Second Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer sessions with instructions following at that time. As a reminder, this conference is being recorded.

I will turn the conference over to your host, Kevin Berry. Please begin.

Kevin Berry - Vice President-Investor Relations

Thank you, Tyrone. Good morning, everyone, and welcome to General Growth Properties Second Quarter 2016 Earnings Call hosted by Sandeep Mathrani, our CEO; and Michael Berman, our CFO.

Certain statements made during this call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially due to a variety of risks, uncertainties, and other factors. Please reference our earnings press release and SEC filings for a detailed discussion.

Statements made during this call may include time-sensitive information, accurate only as of today, August 2, 2016. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the release and supplemental filed in Form 8-K with the SEC and also available on our website.

It's my pleasure to now turn the call over to Sandeep.

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

Thank you, Kevin. Good morning, everyone. Our latest sustainability report is available on our website. For the past several years, we have been identifying and executing on ways to improve our impact on the environment. I want to mention a few highlights from the report.

We have diverted 54,000 tons away from landfills which is enough to fill over 4,500 garbage trucks. Water consumption has been reduced by 64 million gallons which is enough water to fill almost 100 Olympic-sized swimming pools. We have completed lighting and HVAC upgrades which will save the equivalent energy of taking 4,600 homes off the electric grid. And we expect to be one of the largest generators of solar energy in the U.S. this year. We continue to explore new opportunities to implement sustainable operating practices throughout our portfolio.

Now let's return to our recent results. FFO per share was $0.35, up almost 7% from the same quarter last year. Year-to-date FFO per share was $0.75, up over 15% from last year. EBITDA was up 6.5% from the same quarter last year and over 13% year-to-date from last year.

Same-store NOI growth was up 4% for the quarter and 4.6% year-to-date. Results were driven primarily by continued strength from our high quality portfolio in terms of occupancy gains and expense management. We increased the quarterly dividend to $0.20, 11% increase over last year. The portfolio was over 96% leased at quarter end and permanent occupancy stood at about 91.5% where we expected -- which is what we expected at this time of the year.

Total sales excluding department stores in Christiana Mall were up about 3% and sales for tenants under 10,000 feet were flat excluding Christiana Mall. Categories that performed best were restaurants, home furnishings and health and personal care. We even had a positive comp in apparel. This is for total sales ex-department stores.

Lease spreads for leases commencing in the trailing 12 months are above 13% or a little over $8 per square foot. To calculate our lease spreads, we include base earned in CAM and compare them to the ending rent on the expiring lease to the beginning rent on the new lease on a suite-to-suite basis regardless of size.

Turning to property contract. In June, we sold our interest in One Stockton in San Francisco for approximately $50 million which values the asset at a sub 3% cap on a trailing 12-month basis. This is the highest price paid for an asset per square foot in Union Square, almost $5,800 per square foot. You may recall we acquired this asset in 2014, one of our initial investments in urban retail with a plan to release the space since the existing tenant was relocating to the Square. We successfully released the space to T-Mobile, stabilizing the asset and then sold our interest. On an IR basis, we realized about 40%.

In June, we sold Pioneer Place office building, a Class A asset, for approximately $122 million, which values the asset at a 5% cap. In July, we sold Newgate Mall located in Ogden, Utah for approximately $70 million which values the asset at a high single-digit cap rate. Yesterday we closed on the sale of Rogue Valley Mall located in Medford, Oregon for over $60 million which values the asset at a high single-digit cap rate.

So we're pleased to announce a new joint venture with TIAA Global Asset Management at Fashion Show in Las Vegas. GGP and TIAA are partners at other properties and we look forward to our new partnership with them. As you know, Fashion Show is a one-of-a-kind asset. Over the past several years, the GGP team has successfully re-tenanted several anchor boxes, bringing in Macy's Men's, Urban Outfitters and DICK'S Sporting Goods to the mall. We brought to life the boulevard entrance, bringing a number of new dining and leisure options. TIAA will now own approximately 50% of Fashion Show. The transaction values that asset at approximately $2.5 billion at sub 4% cap rate.

We closed on the previously announced acquisition of 218 West 57th Street in New York City. You may recall, we entered into a commitment to acquire this property located across the street from the new Nordstrom back in 2014. The asset was owner-occupied and offers us unique and rare opportunity for a retailer to have a prominent presence on West 57th Street across from the future Nordstrom, which will be the first full line Nordstrom in Manhattan.

Finally, I'd like to talk about our investment Aliansce, the Brazilian mall owner. As you may recall from our first quarter earnings call, we wrote down a note receivable to approximately $70 million which represented the market value of the underlying common shares which were collateral to the note. We also wrote off about $7.5 million of accrued interest income. During the second quarter, we agreed to take ownership of the shares, about 18.3 million, in exchange for cancelling the note. As you know, GGP's focus is owning retail real estate in the United States. We recently entered into an agreement to sell the shares to an institutional buyer for approximately $85 million. Upon close, later this quarter, we will have no remaining interest in Aliansce. In terms of how this transaction is treated for earnings, we are excluding the write-down and mark-up on company FFO but including both in NAREIT FFO in accordance with the definition.

Let me talk a little bit about our industry. GGP is in the retail real estate business. Historically, retail real estate has been segmented. There are malls, strip centers, lifestyle centers, power centers, and so on. Together, they equate to 24 square feet of retail GLA per capita. Based on our research, we believe that only about 4 square feet per capita of retail GLA is high quality. Approximately 8% of the high-quality retail real estate in the United States is in the GGP portfolio, from which 95% of our NOI is derived. Ladies and gentleman, we are in the retail real estate business.

Let me talk a little bit about our leasing. We are pleased to report we have no vacant anchor department stores left, no vacant anchor boxes in our portfolio. So let's start with the new inventory that's upon us.

As you all know, Sports Authority has shuttered as an operator. We had nine locations, six large-format stores and three elite stores. The three elite stores will go back into inline GLA and so we are focused on leasing the large-format stores. Three of them have already been leased. One with Target and the other two in Northridge and White Marsh Dave & Buster's. We are progressing with the remaining locations. There is strong demand.

I'd like to provide an update on our redevelopment plans for the Sears anchor boxes which we own with Seritage. We plan to commence redevelopment of four locations later this year. At Pembroke Lakes, we're bringing in a movie theater, AMC. At Staten Island Mall, we are bringing in Container Store and a new Primark. At Coronado Center in Albuquerque, New Mexico, we have several inline retailers, restaurants and a Container Store. And in Valley Plaza, we have inline tenants that are signed and restaurants. We're in active tenant negotiations on an additional 5. So we are making very good progress on 9 of the 12 locations.

Our properties are in demand by users like groceries, big box sporting goods, theaters, restaurants and other entertainment venues. These types of tenants further curate the mall. Being located in the mall is an opportunity for them to reach a large trade area and generate new customers from traffic already at the shopping center.

We have 460 full-service restaurants comprised of 3.6 million square feet in our portfolio. This is 7% of our total GLA and 13% of our sales. Just in the last five years, we have done 292 full service restaurant deals for 2.1 million square feet.

Further, 13% of our total GLA is big box, comprised of 195 big box tenants, 55 of those deals were made in the last five years. Those 55 deals are comprised of 12 Dave & Buster's, 4 Nordstrom Rack, 9 theaters, 9 ULTAs, 14 DICK'S Sporting Goods and 7 supermarkets, including the Wegmans that will open in the former JCPenney space at Natick in Boston.

At 200 Lafayette in Soho, New York City, PIRCH held its grand opening in May. PIRCH offers a unique experience when looking for kitchen and bath fixtures, and I encourage you to visit their flagship store. We acquired the asset in 2014 for about $150 million, released the office space and sold the office portion for approximately $125 million last year. So the retail portion now stabilized, we are generating yield in the mid to high teen.

At 730 Fifth Avenue, The Crown Building, we are pleased to welcome Zegna. We continue to see interest of e-tailers coming to the mall and demand from other retail concepts. For example, ModCloth recently opened at Pioneer Place in Portland and new concepts like Country Club Prep, Peloton, Aesop, e.l.f. Cosmetics and Essentia, just to name a few, either have opened stores or will be opening stores soon in our portfolio.

I'd like to update you on PacSun and Aeropostale. We have 71 PacSun locations in our portfolio. Of those 71, 6 will be vacating at the end of the year, 65 stores will be retained. We expect PacSun to emerge from bankruptcy by the end of September. Regarding Aeropostale, it is our expectation that the sale process will happen in the month of August. We believe Aeropostale will remain a viable entity going forward, although its footprint may be smaller than it is today.

As a final note, we have been talking a lot about improving the customer experience at the mall. Parking lots at our malls are at capacity. Our customers tell us that parking is a common pain point within the shopping experience. We are very excited that the recent introduction of our new parking app at Oakbrook Center, Ridgedale Center, Alderwood Mall and Stonestown Galleria is up and running. For those of you who live near those centers, we encourage you to try the new app and send us your feedback. We plan a broader rollout across the portfolio later this year.

Michael will now take you through our results for the quarter and outlook for the remainder of the year.

Michael Bruce Berman - Chief Financial Officer & Executive Vice President

Thank you, Sandeep, and good morning, everyone. I will start out with some brief comments on second quarter results, followed by details in the asset transaction and impact on our full year guidance. Finally, I will provide an update on our balance sheet activities before we open it up for questions.

Before I begin, I want to point out an error on page 16 of the supplement. The occupancy cost ratios for the same-store retail properties should be 13.9% for the June 2016 quarter and 13.2% for the June 2015 quarter. We apologize for the error.

Moving on to the second quarter. Same-store permanent revenues were up 4.3% compared to the prior year. And as we noted, same-store NOI came in at $555 million, up 4% to last year. Net G&A for the quarter was a minus $43 million compared to a minus $40 million in the prior year. The year-over-year change is due to some one-time financing fees that we received last year. The current quarter net G&A came in consistent with our expectations. EBITDA came in at $534 million and overall company FFO came in at a strong $0.35 per share in line with our guidance.

As noted in the press release, we closed on two asset sales during the quarter, three more asset sales subsequent to quarter end. These transactions totaled net proceeds of approximately $1 billion. We're using approximately $300 million of the proceeds to pay down mortgage debt. We noted both of those transactions in the press release. These two loans represent over half of our 2017 maturities, and we're also paying off $90 million outstanding of that (14:49).

At this point, we are retaining the remaining proceeds of approximately $600 million. Keep in mind there are taxable gains associated with the asset sales, and depending on where our taxable income comes in at year-end, we currently expect to use approximately $250 million of the proceeds to pay out a special dividend of approximately $0.25 per share, subject to board approval. The timing, as we think of it now, would be around the same as our regular fourth quarter dividend.

I want to go through the FFO dilution, the impact on 2016, and then the impact on an annualized basis. For 2016, we lose about $20 million in FFO from the asset sales. Based on paying down the debt, we get back $7 million in interest savings, and we generate about a $1 million dollar joint venture fee for the remainder of the year on the Fashion Show transaction. There is also a one-time expense for costs to prepay the two mortgages of $5.5 million that will impact the third quarter. The total impact for the year is $0.02 per share for 2016.

On annualized basis, looking forward, we lose approximately $52 million of FFO from the asset sales. We get back around $14 million in annualized interest expense savings from the debt paydown and we will generate around a full year $3 million fee on the newly formed Fashion Show joint venture. The full impact is approximately $0.035 per share.

Our full year guidance is now $1.51 to $1.55. Our previous midpoint was $1.54. We are adjusting our guidance up $0.01 due to a positive view on operations. We then adjust for the $0.02 of dilution from the asset sales and our midpoint becomes $1.53. I do want to make note that the Fashion Show transaction will impact the full year 2016 same-store NOI growth by about 20 basis points to 25 basis points, taking our midpoint to around $4.25.

Our outlook for second half core operations continues to be strong. We have some tougher comps due to some one-time items in termination income and recovery in the prior year that may not repeat. Our same-store NOI growth outlook for the second half is therefore a midpoint of 4%.

Moving down to EBITDA. Our full year outlook continues to be 8% to 9%. At the midpoint of our guidance, we now expect company FFO of around $1.465 billion and a share count of about 960 million.

I thought I'd lay out a little bit for the third quarter and the fourth quarter to help folks out in terms of what we're thinking. Guidance for third quarter is $325 million to $345 million of FFO or $0.34 to $0.36 per share. There is around $6 million of net dilution from the asset sales and the one-time prepayment penalty I noted in the third quarter for over $11 million impacting the third quarter. In the fourth quarter, we expect FFO per share of $0.42 to $0.44 which includes $8 million of net dilution from the transactions noted in the press release.

Moving on to the balance sheet. For some perspective, our total debt at the beginning of the year was almost $20 billion, and our net debt-to-EBITDA in 2015 was around 9 times. Given the transactions that have occurred this year and the planned debt paydown, we expect to be around $18.5 billion in total debt at the end of the year, a reduction of almost $1.5 billion. Based on our current plan, we expect to end the year with about $700 million to $800 million of cash excluding the $250 million special dividend in cash. That would get us to a 2016 end of year net debt-to-EBITDA just shy of 8 times, and we expect to be in the mid-7s by the end of 2017, assuming no other transactions.

And with that, let's open it up for questions.

Question-and-Answer Session

Operator

Thank you. Our first question is from Vincent Chao of Deutsche Bank. Your line is open.

Vincent Chao - Deutsche Bank Securities, Inc.

Hey. Good morning, everyone. So, just curious, you said quite a bit of disposition activity this quarter including some non-retail. Just curious what the outlook for additional non-retail sales is for the rest of the year? And then also just if we can get a sense of what's out in the market today? I guess there's some press about Riverchase that's in the market, just curious what else is being marketed currently?

Michael Bruce Berman - Chief Financial Officer & Executive Vice President

We are thinking about doing something at Riverchase. We've made no formal commitment yet. We have 685 office is still out there. And we're always looking at other things, but right now, I think that's the bulk of the pipeline unless I'm missing some.

Vincent Chao - Deutsche Bank Securities, Inc.

Okay. And I guess was there anything in particular that sparked sort of the additional sales here? I know you've been sort of just selling non-core as you go along, but I guess is there anything in the market today that's causing you to be maybe a little bit more aggressive?

Michael Bruce Berman - Chief Financial Officer & Executive Vice President

You cut out at the beginning of your question, Vin. If you could say it again, that'd be great.

Vincent Chao - Deutsche Bank Securities, Inc.

Oh, yeah. Just curious, I mean I know you've been selling non-core assets as we go along here, but just curious if there's anything in the market today that's maybe spurring some additional aggressiveness on the sales front?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

I mean the only one that we are, again, going to market with the Harborplace in Baltimore which is a mixed-use development. It's predominantly office and garage and has a small retail component.

Vincent Chao - Deutsche Bank Securities, Inc.

Okay.

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

And that may be our last really major non-core asset left in the portfolio.

Vincent Chao - Deutsche Bank Securities, Inc.

Okay. Thanks. And then just one other question on the e-commerce side of things, you mentioned a few e-tailers that you're working with. Just curious, at this point do you have a sense of how best to attract those kind of tenants relative to sort of traditional tenants in terms of lease structures and that kind of thing, lease term?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

Well, I mean the e-retailers are focused on the best assets. As we understand, 60% of all venture capital money being raised today is focused on opening bricks-and-mortar stores. They're signing traditional five-year leases for the most part, and they pay market rent. And so it all boils down to, from this point on, what market rents are in a market more than occupancy costs and sales production.

Vincent Chao - Deutsche Bank Securities, Inc.

Okay. Thanks a lot, guys.

Operator

And your next question is from Christy McElroy of Citi. Your line is open.

Christy McElroy - Citigroup Global Markets, Inc. (Broker)

Hi. Good morning, everyone. Just following up on Aero and PacSun; have you provided any rent adjustments to either retailer? And if so, to what extent did that have any impact on your forward releasing spread metrics? So just looking at the 2016 – or the 2017 commenced releasing spread?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

So the answer with both are – I mean of course the Aeropostale is still in process, and the sale process for those numbers are not finalized. In the case of PacSun, we expect them to emerge from bankruptcy. And it seems that the court has accepted Golden Gate to be the buyer. The adjustments in rents that we have given are in our spread calculations.

Christy McElroy - Citigroup Global Markets, Inc. (Broker)

They are not in your spread calculations?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

They are, A-R-E. They are included.

Christy McElroy - Citigroup Global Markets, Inc. (Broker)

Oh, they are. Okay. And then can you remind me on 218 West 57th Street, now that you've closed, what are the longer-term plans for that asset? Obviously re-tenanting it, but in terms of additional capital beyond that? And if you were looking at that deal today versus two years ago, would you still have done it? And do you think the economics would have looked the same?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

I actually think the economics of that asset can only get stronger as 2019 approaches and Nordstroms open. Nordstrom is going to be the first full line new department store in New York in I-don't-know-how-long, maybe a hundred years, I mean a really long period of time. They're building a tremendous flagship. It sits across the street from it. I actually think the market value has gone up already from the time we bought it new and vacant. I think there'll be minor investment in it, call it $20 million-ish. And on the contrary, for this asset, one has to be very patient and not rush to lease it, and that's why we haven't rushed so far because you want to wait closer to 2019. It's part of our inventory to hold. We might temp lease it, but we are not going to permanently lease it. We'll try to open it at the same time Nordstrom opens. That was always the intent. That was our business plan.

Christy McElroy - Citigroup Global Markets, Inc. (Broker)

Great. Thank you.

Operator

Next question is from Samir Khanal of Evercore. Your line is open.

Samir Khanal - Evercore Group LLC

Thank you. Good morning, guys. Sorry if you touched on this, but how should we think about the timing for the partial sale Ala Moana at this point? Is that kind of a, still a 2016 event? Or is that getting pushed out to 2017?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

Our view is we're sitting with, as Michael said, $700 million to $800 million of cash post the dividend, and so we – and our development pipeline is fully funded. We believe that it's important to continue to complete our leasing of the Nordstrom's box at Ala Moana. We think the value of the asset continues to rise. And at this moment in time, we will reevaluate whether it's a 2016 event or a 2017 event or an event at all. There's no necessity for us to take that to market. We'll evaluate where we stand towards the end of the year.

Samir Khanal - Evercore Group LLC

Okay. And I guess my second question is more on the department store anchor side. I know those guys, Nordstrom and Macy's, they report in a couple weeks here. Can you talk about maybe anecdotally what you're hearing from them in terms of sales, maybe after sort of 4th of July kind of in the July period?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

Samir, I will let them answer the question in a couple of weeks.

Samir Khanal - Evercore Group LLC

Okay. Thank you.

Operator

Our next question is from Jeremy Metz of UBS. Your line is open.

Robert Jeremy Metz - UBS Securities LLC

Hey. Good morning. Sandeep, in your opening remarks, you talked about Sports Authority and having released three of the nine leases there. I was just wondering with the other six, is there any potential to unlock larger redevelopment opportunities at those malls?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

I sort of lost it in my mind. No, there isn't. There – as I mentioned in my opening remarks, of the nine, three were really in line, basically going back into inline leasing. So there were only six theoretical big boxes, of which, we've leased three and we have three remaining. So they will all be filled with traditional big box retailers.

Robert Jeremy Metz - UBS Securities LLC

Okay. And sticking with development, can you give us just an update today on Norwalk?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

So we are fairly confident at this stage that we should break down end of the year 2016, early 2017. We seem to be making very good headway to our 50% threshold of inline leasing.

Robert Jeremy Metz - UBS Securities LLC

Okay, appreciate that. And just one other one. On 57th Street, if I was looking at the footnotes correctly, it looked like GGP provided the first loan on that asset. Is that correct? And if so, what was the rate there?

Michael Bruce Berman - Chief Financial Officer & Executive Vice President

I believe the rate was I'm going to say LIBOR-plus 3, LIBOR plus 2.75. I forget, Jeremy, we can get that for you. But it was a better rate than we were going to get from paying off some debt.

Robert Jeremy Metz - UBS Securities LLC

Okay. Thank you.

Operator

Thank you. Our Next question is from Ki Bin Kim of SunTrust. Your line is open.

Ki Bin Kim - SunTrust Robinson Humphrey, Inc.

Thanks. Sandeep, can you just provide a larger scale recap of the upside in your sort of retail assets? What the NOI looks like today versus what it'll be in a few years when it's stabilized?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

I think it's a very broad question. So, I think, we've given this to you asset by asset in the past. If my memory reads me right because we've sold a few assets, on a net basis, I think the NOI goes from $27 million to $75 million stabilized.

Ki Bin Kim - SunTrust Robinson Humphrey, Inc.

Okay.

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

And I think, at the end of the day, that includes The Crown Building, includes One Union Square, 830 North Michigan, 200 Lafayette, 685 Fifth and 530 – or it's all right, 530 Fifth I think it is. So I think that's total of six assets. We like the business. The business is performing. We are signing new leases at or above our pro forma rent. We harvested a couple of assets and took the profit on them. But – and we may or may not sell one more of those assets this year. But barring that we're going to continue to be in this three (29:01) retail business and continue to have firepower to opportunistically acquire in the future.

Ki Bin Kim - SunTrust Robinson Humphrey, Inc.

Okay. And second question on just Seritage, are the assets that you're redeveloping, is it still in the original scope of about 50% of the space? And curious as to – I think some of your peers have mentioned that they might be taking a pause, given that maybe you don't have to start working on 50% of the space if 100% comes back to you. So just curious to know what is driving you to start to – the redevelopment projects maybe a little bit ahead of your peers?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

I can't comment on my peers, but the way we look at it, we're designing it in a way that should we – should for some reason the assets come back, we will be in a position to re-lease the remaining asset accretively. So my view in life a little bit is that let's start knocking these things off. We have 60-plus Sears locations beyond that. Hopefully there'll be an opportunity to acquire some more once we're done leasing these 12. Should we get back the remaining half at some time in the future, as I mentioned, it's being designed in a way that it'll be usable space on an accretive basis.

Ki Bin Kim - SunTrust Robinson Humphrey, Inc.

And can you comment on the yields at all?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

I think we've basically said the yields are 7% to 8% on the Seritage portfolio.

Ki Bin Kim - SunTrust Robinson Humphrey, Inc.

Okay. Thanks, Sandeep.

Operator

Thank you. The next question is from Alexander Goldfarb of Sandler O'Neill. Your line is open.

Alexander David Goldfarb - Sandler O'Neill & Partners LP

Good morning. Just some quick questions here. On the debt side, so you guys are paying off about half of your 2017. So it leaves about another $300 million or so in 2017. And then, in 2018, there's only $520 million. Mike, sounds like you're going to have plenty of cash on hand after the special dividend at the end of the year, so can you guys just talk about, one, how much debt in the next two years can we think about being paid off in the absolute sense? And then two, if you were to think about a percent of the assets being unencumbered, how big could the unencumbered pool of assets be?

Michael Bruce Berman - Chief Financial Officer & Executive Vice President

We're – how big could the unencumbered pool assets be? I don't know. It's not – never going down this path of the unsecured bonds, Alex, which is always your favorite strategy. Just make sure (31:43)...

Alexander David Goldfarb - Sandler O'Neill & Partners LP

I know that, Mike. But it sounds like you're going to have some pool of...

Michael Bruce Berman - Chief Financial Officer & Executive Vice President

We're going to have a lot of capacity. And we're going to have $700 million or plus million of cash. We have over $1 billion of line. The net debt-to-EBITDA next year gets into the 7.5 range. Whether we pay further debt down or not, it's something that we need to discuss internally. I think we're very comfortable where we are right now. We've got strong coverage ratios. We've unencumbered some assets. We don't have a lot coming due in the next couple of years. So I guess I would say that's kind of where our heads at now. Sandeep, if you want to add something?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

So, Alex, look, I think it's good to have firepower. It's good to have liquidity. And it's good to be able to be opportunistic. I think GGP has come a long way from five years ago where we were – didn't have the ability to be opportunistic, didn't have the ability to have a liquidity and the flexibility. And we don't – we are okay with the sort of negative arbitrage, if you will, of holding cash in our balance sheet for a period of time to determine what the best action is. You can't grow in this world by continuously selling assets and becoming smaller. At times you need to have the opportunity to grow by growth. And so, if I was quoting Warren Buffett correctly, you grow by growth, not by selling assets.

And so I think we like the position of having the flexibility. We like the position of having an amount of cash in our balance sheet and we'll evaluate what to do with the cash as time moves on.

Alexander David Goldfarb - Sandler O'Neill & Partners LP

Okay. No, that's fine. It's just this year and next obviously very small compared to the outer years. So it seemed like an opportunity relative to your cash position that you described at year-end.

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

The other aspect, Alex, is obviously if the market dries up, we have the cash to pay off the debt.

Alexander David Goldfarb - Sandler O'Neill & Partners LP

Right. Perfect. So, separate question, Mike, understand that there was a slight tweak to the company FFO, but if you look at the NAREIT FFO, there's no change and yet you spoke about, in the third quarter, a write-down and a write-up on the Aliansce. So is the Aliansce impact a neutral event when you do the write-down or write-up or what's happening in there such that NAREIT FFO for the year doesn't change?

Michael Bruce Berman - Chief Financial Officer & Executive Vice President

Alex, as you know, since we've been doing this we've focused on the company FFO. We're providing the NAREIT FFO for everybody's benefit. We'll go back and look and have a sidebar to answer your question. I don't know that stuff off the top of my head. I think about it at the company FFO and the Aliansce transaction really was not in there.

Alexander David Goldfarb - Sandler O'Neill & Partners LP

Okay, appreciate it. Thank you, Mike.

Operator

Our next question is from Haendel St. Juste of Mizuho. Your line is open.

Haendel Emmanuel St. Juste - Mizuho Securities USA, Inc.

Yes, good morning. A question on the B mall sales environment. I know that the B Malls you're selling tend to have assumable mortgage debt attached which makes them easier to sell but I was hoping you could give some color on the environment, the pricing, the demand, what type of buyers are showing up, how many are showing up, what your perceived pricing power is?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

Again, both the assets we sold had assumable debt which made them viable. I think there is demand for those assets on a yield basis. I think cap rates have widened on the B malls but I do think you see more than two buyers showing up to the dance floor every time we take an asset out to the market.

Haendel Emmanuel St. Juste - Mizuho Securities USA, Inc.

The latest sales per square foot figures, can you share? I saw that Newgate acquired in 2011, sales were just around $400, Rogue Valley, you bought back in 2003 sales were about $290. Can you share what that was?

Michael Bruce Berman - Chief Financial Officer & Executive Vice President

I don't have those numbers off the top of my head.

Haendel Emmanuel St. Juste - Mizuho Securities USA, Inc.

That's fine I'll follow-up. The other question...

Michael Bruce Berman - Chief Financial Officer & Executive Vice President

It's the material assets.

Haendel Emmanuel St. Juste - Mizuho Securities USA, Inc.

Got you. Just curious for market color. Just on the back half of the year, the expectations. Some of your peers sounding a bit more conservative given still uncertain store closure environment and as you pointed out, Michael, in your comments, you're coming off on tough comps, second half NOI last year averaged about 6%. Your lease rates already in the 95%, 96% level, what are you seeing that gives you confidence that you can achieve a similar 4%, 4.5% number in the back half of the year than you did in the first half? Is there something that we're not seeing maybe in the bedded lease term fees? And then as part of that, was the nine Sports Authorities of vacancies a part of your previously contemplated guidance?

Michael Bruce Berman - Chief Financial Officer & Executive Vice President

Let's see. The first half was 4.6% and as I mentioned you got to adjust the whole year down with the Fashion Show, so that would have made it really 4.3% or 4.3% and change. The second half is 4%, so the total is about 4.25% which is the change. The second half, I think we feel given what's happened with PacSun and Aeropostale, we've kind of framed our risk and we feel comfortable saying that we don't see, unless something new arises, much change, much risk embedded in our plan. We do a nice job on the expenses which is obviously a big portion. So – and sometimes it's just the way the quarters roll. One quarter to the next. It is slowing slightly in the second half versus the first but it's de minimis. So I – there was no real big, light went on, boy this is what's happening. We were really just progressing along in our view of the second half of the year.

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

And you have to appreciate most of the leasing activity for 2016 is complete. To answer your question with Sports Authority, they were part of the reserve that we held, the $20 million reserve that we spoke about early in the year. So, effectively, the Sports Authority bankruptcy came out of that reserve. So, as Michael said, unless something happens on the Aeropostale front, we feel pretty comfortable actually taking up guidance by $0.01 from operations through the end of the year.

Haendel Emmanuel St. Juste - Mizuho Securities USA, Inc.

Great, guys. Thank you very much.

Operator

Our next question is from Caitlin Burrows of Goldman Sachs. Your line is open.

Caitlin Burrows - Goldman Sachs & Co.

Hi. Good morning. I just had a question on the 218 West 57th Street acquisition. I know we talked about it before. But could you just go over who exactly is in there now? And/or how occupied it is?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

It's vacant.

Caitlin Burrows - Goldman Sachs & Co.

Okay. Actually my other questions have been answered. Thank you.

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

Thanks.

Operator

Thank you. Our next question is from Craig Schmidt of Bank of America. Your line is open.

Craig Richard Schmidt - Bank of America Merrill Lynch

Thank you. In looking at the redevelopments, following the expansion of Staten Island Mall, are the future projects going to be smaller in scale and involve a number of different malls? And will you be able to maintain the pace of redevelopment going forward next couple years?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

Craig, we feel pretty comfortable that we've got about $1 billion pipeline. We feel pretty comfortable to do, as I've mentioned in the past, $300 million to $500 million a year. Again, that pace could actually get accelerated, depending on the department store acquisitions that we can continue to make. And if you rewind back to my comments, and I made an emphatic point about being in the retail real estate business, and then you expand on that a little bit, and what I was trying to say in the call was effectively previously, we used to give away these department stores at say $1.50, $2 a foot in our portfolio and didn't have the ability to add on retailers that traditionally don't go into the malls that have gone into strip centers and power centers. And today, we're able to attract those retailers into the department store boxes in an accretive fashion and are truly becoming very competitive to our strip center and power center brethren.

And we're able to do deals in a highly competitive (40:16). We're starting with all the infrastructure in place and a very low basis in rent. And the retailers are finding it attractive to come to the larger malls because we attract customers from an 8-mile to 10-mile radius whereby if you're in the strip shopping center business, you're attracting people from 1.5-mile to 2-mile radius. So my point being that all of a sudden we've gotten this new canvas. And this canvas allows us to sort of lay out our painting in an accretive fashion. And so I think that the pipeline could enhance itself with the quality of real estate we have as long as we continue to be able to have the opportunity to buy back department store box if that arises. If it doesn't arise, we still feel that we can do $300 million to $500 million with the pipeline we have from now until 2019.

And so we're happy either way. We're happy if the department stores start to perform incredibly well and do not sell their assets, still gives us enough pipeline for the next two years. And should they decide to lower their footprint, selectively in the quality of assets we have, we think that's accretive to us.

Craig Richard Schmidt - Bank of America Merrill Lynch

Great. And then just when I look at the $267 million of other projects in the pipeline, does that include some of the Seritage projects?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

Yes.

Craig Richard Schmidt - Bank of America Merrill Lynch

Okay. Thanks a lot.

Operator

Thank you. Our next question is from Paul Adornato of BMO Capital. Your line is open.

Paul Edward Adornato - BMO Capital Markets (United States)

Thanks. Good morning. Sandeep, you led off with a discussion of sustainability efforts at the company, was wondering beyond being a social good, was wondering if you could quantify the expense savings, or what's the benefit as a shareholder?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

So, obviously, we believe in conscious capitalism, okay, which is doing good for the environment by making a good return and the investments that we've made in sustainability have actually yielded to us double-digit returns.

Paul Edward Adornato - BMO Capital Markets (United States)

Okay. Great. And in terms of the Fashion Show Mall, was wondering if you could provide an update on the foreign luxury shopper? Did the strong dollar of the foreign luxury shopper figure into your desire to perhaps reduce exposure to that segment?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

No, we've been – well, we've said a couple of things. One, it's a tourist market. It does have ups and downs. Look, Fashion Show Mall is probably one of the ten best malls in the nation, so it's a fantastic asset. We see the asset even today being about $1,000 a square foot asset. We just felt it was a $2.5 billion asset, it was large percentage of GGP, and it was appropriate to be able to derisk from it by selling half of the asset. We think our partners will do very well and the asset will continue to perform because good things happen to good assets.

I might point out that from a sales productivity basis, Hawaii has completely stabilized, it's actually gone a little bit to the positive and so has Vegas. So both those markets, being tourist markets which were down substantially, almost 10% have actually fattened and started to tick back up. And so we're actually pleased to see that the strong yen is coming into play again and Hawaii is back, picking up on sales productivity.

Paul Edward Adornato - BMO Capital Markets (United States)

Great. Thank you.

Operator

The next question is from Floris van Dijkum of Boenning. Your line is open.

Floris van Dijkum - Boenning & Scattergood, Inc. (Broker)

Great. Thanks. Sandeep, could you maybe talk a little bit about the leasing environment and your ability to push rents and maybe talk about the further bifurcation between the top third and the bottom third and where you see the upside in your portfolio in order to push rents or to re-tenant?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

I think the demand is incredibly strong, okay, whether you look at demand from regular players, whether they be the jewelers, the ALEX AND ANIs, the PANDORAs, the Kendra Scotts of the world, whether you see them from entertainment users, whether it'd be Dave & Buster's or Crayola. The list is incredibly long of tenants that, Tesla, looking to continue to expand in the business. The list is incredibly long, and so that is incredibly good from players.

And so, in a funny way, if you look at, I'm not big into segmentation because it's an unfair way to look at the real estate because you've got 40-yard space, 50-yard space and 10-yard space. And so it's inappropriate to look at space, in my opinion, based upon just the top and the bottom third because you could have the same bottom and the top third in the same mall, depending on whether you're in the 10-yard line or you're in the 50-yard line. So more so the way we look at it is we have almost 40 assets that average over $800 a foot. That accounts for 46% of our NOI. So you look at our portfolio, we have a lot of breadth and scale. And so I've always maintained that spreads will be 8% to 10%. And one day I'll be right. It'll be 8% to 10%. So far I've been wrong, wrong and wrong. But one day, I will be right.

And when retail sales go up 3% to 4% a year over a five-year period. They're going up 15% to 20% and you've got 2% to 3% annual growth rate which is what we have in our leases, at some stage, you're spreads are going to be 8% to 10%. And that business will give you a 3% growth rate in the business and redevelopments give you 100 basis points. And so you're a 4% to 5% EBITDA growth company. And that's what we've said we are and that's the business. And I think we feel pretty comfortable between our redevelopments, developments, spreads, annual increases, we're going to be a 4% to 5% EBITDA growth company.

Floris van Dijkum - Boenning & Scattergood, Inc. (Broker)

Great. And maybe in terms of the redevelopments, you say you're looking to increase your redevelopment pipeline by $300 million to $500 million a year. Do you have a number of big redevelopments that you're thinking about or are you thinking more in terms of $20 million to $30 million in assets and...

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

Well, there could – Floris, there could be a couple of big developments. There could be a couple that we're looking at one on the East Coast, one on the West Coast which could be substantial. But I think excluding those two, the rest will be $30 million to $50 million redevelopments.

Floris van Dijkum - Boenning & Scattergood, Inc. (Broker)

Great. Thanks, Sandeep.

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

I might add those two are both in $800 plus malls.

Operator

Thank you. Our next question is from DJ Busch of Green Street Advisors. Your line is open.

Daniel Joseph Busch - Green Street Advisors, LLC

Thank you. Sandeep, you've touched on it a little bit in response to Craig's question earlier, but you mentioned in your prepared remarks that you got some demand coming from grocery, big box, theater, sporting goods, tenants really that have traditionally been in strip centers. How big is the opportunity, and is it even bigger than the demand you may get from e-tailers to bring some of these tenants that have tended to be in the strip centers across the street?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

I think the demand is very deep and very big and multiples of e-tailers demand, multiples. I mean these (48:31) appreciate at square footage of multiples, that's why I say it's multiples. I think if you appreciate, when you look at a supermarket retailer going into an $800 mall, they're building these massive food halls which would be a modern day food court, which could do $15 million to $20 million in sales for eating within the mall and of course over and above for take home. That business is not available in a traditional shopping center. And I think as these supermarkets find that they need to attract more Millennials which are people who would either come and eat in this food hall environment or are big into take home, and that business is a higher margin business or the supermarket business than selling toilet paper and bounty, they're going to – their demand for space is going to increase. More so, if they appreciate, they also want to modernize their facilities. And the easiest way to modernize their facilities and increase the trade area is move into a new location. So I actually believe that demand is going to be quite astronomical.

Daniel Joseph Busch - Green Street Advisors, LLC

Okay. And then what about off-price retail, is the demand there as well?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

Again, I would say the answer to that is also yes. Because if you actually look at the amount of off-price retailers within the mall space, it's a fragment. And if the off-price retailers truly need to satisfy their expansion goals, which they've said on their call, the only place to find that real estate will be in the mall there. And we actually see that today. We've actually put some – whether it be Nordstrom Racks or TJ Maxxes or Ross' in our malls and they don't impact in any way negatively or positively, but definitely not negatively to the inline space which is always the concern. There's been no negative impact. If anything, there will be more positive impact than negative impact.

Daniel Joseph Busch - Green Street Advisors, LLC

Okay. And then you've done a couple developments outside of the A mall space. I'm thinking in particular at Lynnhaven and Southwest Plaza trying to put money to work, in turn maybe what you'd call a B mall back into an A mall that's in a great trade area. Can you give us an update on those two assets? And then are there any other opportunities like a Southwest Plaza in the portfolio?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

So Lynnhaven has been a, I think, a real success story. Sales were like in the $300s. So, when we started there, $400, $500 a foot now. And so that's been at least to the Apples and the Michael Kors of the world and I think L.L.Bean. And so I think it's been a real success story. Southwest Plaza just opened last fall. So far, it's exceeding our operating fundamentals. I think it's crossed $400 a square foot in sales but I think it's still early for that because it takes 24 to 36 months. I don't want to sit there and say they've been a success yet, but the early indications are it's moving in the right direction. Do we see additional opportunities within our portfolio of those kind of assets? Our focus has been up to this point, over the next two to three years, to adopt 15 malls in our portfolio. And I don't see us making that kind of investment in any of the other B, B-plus assets in our portfolio at this moment in time.

Daniel Joseph Busch - Green Street Advisors, LLC

Okay. Great. Thanks.

Operator

Thank you. I have a follow-up from Christy McElroy of Citi. Your line is open.

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

Hi, Michael.

Michael Jason Bilerman - Citigroup Global Markets, Inc. (Broker)

Oh, wow. That's impressive.

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

Not really, Michael.

Michael Jason Bilerman - Citigroup Global Markets, Inc. (Broker)

I figured I'd just to that for anonymity. I guess we'll have to switch it up next quarter. So, in your opening remark, you talked about the retail real estate, and you guys said 24 square feet per capita. Four square feet that you deemed to be high quality across each of those classes upon which GGP owns 8%. I'm curious when you look at that four square feet, how much of that is malls, strips, lifestyle centers and power centers in terms of proportion?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

27% of the 4 square feet is malls. I don't know the rest. I just know the mall figure.

Michael Jason Bilerman - Citigroup Global Markets, Inc. (Broker)

Only a quarter of the four square feet is what you're deeming to be malls?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

One out of four square feet is malls. So please let me also explain that to you. 3.9 square feet of the 24% is malls. So, said differently, 25% of the mall square footage is high quality.

Michael Jason Bilerman - Citigroup Global Markets, Inc. (Broker)

Yeah. And you're including that's the entire mall, including the anchor boxes and the specialty inline space?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

For the most part. There are some free standers that are not included. But directionally, correct.

Michael Jason Bilerman - Citigroup Global Markets, Inc. (Broker)

Okay. And then just in terms of I think we all can appreciate the uplift and the accretiveness that you get from a rent perspective as you change from these department store boxes to junior anchors and more experience-oriented retail and being able to grab from the strips and the power centers and bring them to the mall environment. I'm curious as you think about the rents though on the specialty space, how do you think those will play off of each other when you have such high rents for the inline space? And granted, you have very low department store anchor rents today given the legacy of the business, but how do you think that dynamic starts to shift as you start to bring in people and the teams where people are in the $50, $60, $70 and $80 in the inline space? And how does that dynamic evolve?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

Because, Michael, the inline space is 3,000 square feet to 5,000 square feet, 8,000 square feet, 10,000 square feet space, this is 50,000 square feet, 60,000 square feet, 80,000 square feet space. So I don't think there's any correlationship. They're going into department store boxes, okay, they we're paying – they could have $1.50 a foot. All of you know what these other retailers pay in the strip, power center business. So you have a pretty good idea of what we can collect, okay. And they're just completely different. On the contrary, if they are truly accretive and they drive traffic, okay, you could actually see inline retailers have an uplift versus a down drift, okay. So I see this could be a complete win-win across the board.

Michael Jason Bilerman - Citigroup Global Markets, Inc. (Broker)

Okay. And you mentioned traffic. Is there anything that – I don't know if there's new testing that you're doing at all in the malls to measure traffic kind of head on (55:27)?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

Well, at least, the ones that we have the cameras installed in which we don't have a 12-month roll, we just have a monthly roll, traffic is pretty flat for the first six months of the year. Now, as you know, installing cameras in all our malls, and so patiently, we will start to give you more information on traffic. But as of this moment on the malls which are representative of our portfolio, they're not installed in all the malls, traffic is flat for the first six months.

Michael Jason Bilerman - Citigroup Global Markets, Inc. (Broker)

And then just lastly, just can you comment at all sort of relationship with Brookfield now that they've closed and privatized Rouse? I know they moved around their GGP holding a little bit structurally internally, I guess from a tax perspective. But I'm just curious the relationship, the sharing of information, has that changed at all now that Rouse is private? And I don't know what type of comments you can make overall?

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

There's been no change.

Michael Jason Bilerman - Citigroup Global Markets, Inc. (Broker)

Okay. Thank you.

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

Thanks, Michael. I should have said, thanks, Christy.

Operator

Thank you. Our next question is from Michael Mueller of JPMorgan. Your line is open.

Michael W. Mueller - JPMorgan Securities LLC

Yeah. Hi. Quick question. Mike, just given all the JV activity that's happened and is happening, can you give us a, like a rough annualized run rate for where you see management fee revenues and expenses?

Michael Bruce Berman - Chief Financial Officer & Executive Vice President

For 20...

Michael W. Mueller - JPMorgan Securities LLC

Just on an annualized go-forward basis after this other JV closes.

Michael Bruce Berman - Chief Financial Officer & Executive Vice President

(57:00) is one-time event, there's leasing fees, development fees, financing fees. So I would say, let me just give you, for 2016, it's around $90 million. And just for some perspective, last year it was north of $85 million. I think $90 million, $92 million was kind of a high number. I wouldn't expect it to be that high going forward. But that depends.

Michael W. Mueller - JPMorgan Securities LLC

Okay. And that factors in Fashion Show, do you think, on a go-forward basis as well?

Michael Bruce Berman - Chief Financial Officer & Executive Vice President

Yeah. Fashion Show for this year is a little is like, I said $1 million, it's technically like $1.2 million because we get it for five months. Next year, it'll be $3 million, but there might be some other things that drop off. So it's at the margin a little bit of an up and down number.

Michael W. Mueller - JPMorgan Securities LLC

Got it. Okay. And last question. Any changes in expectations for the condo sale income for either 2016 or what you're expecting in 2017?

Michael Bruce Berman - Chief Financial Officer & Executive Vice President

No. The sales have picked up in the last few months pretty dramatically. There was some noise resulting from Brexit as you would otherwise expect. The per dollar sales have picked up. We took a little bit of a hit in the quarter relative to what we said on the prior call. We made that up with other things. For the rest of the year we still expect, based on conversations with a partner, to be around what we said before, it may tick down a little bit. And then just appreciate all the math that goes into making that estimate, construction spending, sales trends, dollar prices, where we – every time we give a number on that, we hope that we stay a point on the range.

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

As a matter of fact, July was probably the best sales month over the last...

Michael Bruce Berman - Chief Financial Officer & Executive Vice President

Close to a year.

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

Close to a year.

Michael W. Mueller - JPMorgan Securities LLC

Okay. Good color. Thank you.

Operator

Thank you. This ends the Q&A portion of today's conference. I'd like to turn the call over to Sandeep for any closing remarks.

Sandeep Lakhmi Mathrani - Chief Executive Officer & Director

Thank you again for joining our call this morning. Once again if you have any questions please don't hesitate to contact Michael or Kevin. Have a great day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.

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