Brookfield Property Partners' (BPY) CEO Brian Kingston on Q3 2018 Results - Earnings Call Transcript

About: Brookfield Property Partners L.P. (BPY)
by: SA Transcripts

Brookfield Property Partners LP (NYSE:BPY) Q3 2018 Earnings Conference Call November 1, 2018 11:00 AM ET


Matt Cherry – Senior Vice President of Investor Relations and Communications

Brian Kingston – Chief Executive Officer

Bryan Davis – Chief Financial Officer

Sandeep Mathrani – Global Head of Retail Real Estate


Mark Rothschild – Canaccord

Sheila McGrath – Evercore

Mario Saric – Scotiabank

Sam Damiani – TD Securities


Good day, ladies and gentlemen. Welcome to the Brookfield Property Partners Third Quarter of 2018 Financial Results Conference Call. As a reminder, today’s call is being recorded.

It is now my pleasure to turn the call over to Mr. Matt Cherry, Senior Vice President of Investor Relations and Communications. Please go ahead, sir.

Matt Cherry

Thank you, Heather, and good morning. Before we begin our presentation, let me caution you that our discussion will include forward-looking statements. These statements that relate to future results and events are based on our current expectations. Our actual results in future periods may differ materially from those currently expected because of a number of risks, uncertainties and assumptions. The risks, uncertainties and assumptions that we believe are material are outlined in our press release issued this morning.

With that, I’ll turn the call over to Chief Executive Officer, Brian Kingston.

Brian Kingston

Thank you, Matt, and good morning, everyone. Thank you for joining our call this morning. With me on the call today are Ric Clark, Chairman of BPY; Bryan Davis, our CFO; and Sandeep Mathrani, our Global Head of Retail Real Estate.

In my prepared remarks, I’ll recap our operating performance as well as provide an update on our various strategic initiatives and accomplishments from the third quarter. Bryan will then go through the details of our quarterly financial results. And then following those comments, we’d be happy to take questions from our analysts on the call today.

So as you would have seen in our disclosure this morning, we recorded 6% year-over-year earnings growth. And although those results were influenced by the closing of the GGP transaction, higher interest rates and volatility in FX markets, overall, it was another strong quarter from an operating perspective. In summarizing the performance in our core business operations starting first with office, results were strong with 3% same-property growth. This performance was driven primarily by leasing activities in Downtown New York and Washington, D.C. and was bolstered by the benefit of higher development and joint venture income.

Growth was offset in part by asset sales from this portfolio as well as the negative impact of foreign exchange. Occupancy increased 20 basis points this quarter to 92.9% on 2.2 million square feet of total leasing. And occupancy is up 110 basis points over the same period last year. We continue to capture mark-to-market rental increases in both our new and renewal leasing with average rent signed this quarter at rates that were 11% higher than those expiring.

Moving to retail. Following the closing of the GGP transaction in late August, we have now fully integrated the GGP management team into BPY’s retail platform. Tenant demand for space in our U.S. small portfolio continues to be robust. Nearly 10 million square feet of leasing has been executed or committed to the first three quarters of 2018. The ongoing trend of non-traditional mall tenants taking space in our properties has not slowed. For example, we’ve seen in the grand opening this year of 3 Life Time fitness centers, The Shops at Bravern, Quail Springs Mall in Oklahoma City as well as Baybrook in Houston.

And we continue to receive interest from Internet only businesses seeking to open bricks-and-mortar locations. For example, at Natick Mall in Boston, we signed a new lease with Wafer, an online home furnishing retailer, and we’ll be partner with Oakbrook Center in Chicago. The legacy GGP portfolio, which in our disclosures is reflected as our Core Retail segment, finished the quarter at 95.6% leased with tenant sales trending positively over the past 12 months to $744 per square foot on an NOI weighted basis, which was up 5% increase over the prior period.

Demand for space within the portfolio is reflected in continued rent increases as leases expire and were either renewed or replaced. Suite-to-suite spreads were up 11.6% over the same period last year. We continue to reposition valuable space in – that was once occupied by department stores. We view this space as the most compelling opportunity to reinvest in our properties by replacing those stores with new and exciting uses that complement the in-line retail mall component. These includes sentiments, restaurants, entertainment venues, residential projects, flexible workspaces and hotels.

So with that, I’ll now turn the call over to Bryan Davis for the detailed financial report in the quarter. Bryan?

Bryan Davis

Thank you, Brian. During the quarter – third quarter of 2018 BPY earned company FFO of $249 million, compared with $236 million for the same period in 2017. Included in the current quarter was additional $37 million in income for the 34-day period of our increased ownership interest in GGP, which I will get to in a little more detail later. The prior year included $10 million in income at our share related to the sale of condominium units at Ala Moana.

On a per-unit basis, company FFO for the quarter was $0.31 per unit, compared with $0.34 per unit in the prior year. BPY’s average unit count during the quarter increased from 703.1 million to 803.5 million units to reflect the daily weighted average of an additional 272 million units that were issued. During the quarter, BPY earned $67 million in realized gains to reflect the earnings from the appreciation of 112 self-storage assets that we sold within our second Real Estate Opportunity Fund during the quarter.

In the prior period, we earned realized gains of $58 million from the sale of a number of office assets in a fund that has since wound down. Including these realized gains, company FFO was $316 million or $0.39 per unit compared with $294 million or $0.42 per unit in the prior period. BPY recorded net income attributable to unitholders for the quarter of $380 million or $0.47 per unit compared with the net income of $168 million or $0.24 per unit in the prior year.

Net income in the quarter benefited from fair value gains of $320 million, which were largely due to assets mark to anticipated selling price and gains recognized in a number of development assets as we near completion. Additionally, we had gains in our India office portfolio, where we continue to benefit from the strong leasing market. This benefit was offset in part by identified transaction costs in the quarter largely related to the GGP transaction.

Before reviewing BPY results by operating business, I did want to make a few high-level comments as our results for the third quarter on a per-unit basis were lower than the prior year and are off pace with our recent growth trends. A few things contributed to this when comparing to the prior year. First off, higher LIBOR rates has resulted in higher interest expense. That was about $0.03 for the quarter when comparing to the prior year. Second, the strength of the U.S. dollar has meant our foreign currencies have translated into lower earnings, about $0.01 for the quarter. Third, we did not benefit this quarter from transactional based earnings, whereas in the prior year, we benefited from income from the sale of condominium units. That’s about $0.01 per quarter – for the quarter.

And fourth, some of the recent investments we have made in our second and third opportunity funds are not at the stage where they are generating current earnings sufficient to cover their costs and as a result have been operating at a loss. Again, about $0.01 for the quarter, or where seasonality with Q3 being the weakest. Lastly, we did benefit, as I mentioned earlier, from increasing our exposure to core retail, which offset this slightly, but the timing of the close meant that it was only about $0.01 accretive to our third quarter earnings.

Looking out to the last quarter of this year, we have pushed a few merchant build projects that we had expected to close in December of this year into 2019 to achieve rental stabilization and best execution on exit. This will move a little over $50 million in company FFO. However, we continue to feel good about our ability to have a strong final quarter of the year and to generate per-unit company FFO growth on a year-over-year basis. And with these merchant builds and the expected income from condominium sales at projects in London, including Principal Place, Southbank and Wood Wharf, on average, which are about 75% presold, our 2019 is off to a good start.

Our core office business earned $136 million of company FFO compared with $126 million in the prior year. Contributing to the $10 million increase was strong same-property net operating income growth of 5% on a currency-neutral basis and 3% when considering the relative strength of the U.S. dollar. We had increase in our office same-property occupancy to 92.9%. More specifically, our same-property growth was most pronounced in Sydney, Australia, where growth was 18% as a result of rent commencements at 10 Shelley Street and an increase in same- occupancy in that market by 30 basis points to 98.6%; in midtown Manhattan, where same-property net operating income growth was 17% as a result of rent commencements at 5 Manhattan West, contributing to an increase in same-property occupancy in that market by 450 basis points to 96%.

In Washington, D.C., we had growth of 17% as a result of rent commencements at 2001 M Street, and that contributed to an increase in occupancy by 140 basis points to 90.1%. And lastly, in Downtown New York, we had 12% increase in same-property net operating income as a result of commencements at One Liberty Plaza and Brookfield Place New York. And this contributed to an increase in occupancy by 180 basis points to 95.6% in that market. Another driver of earnings growth for our core office business comes from our recently completed developments. In the quarter, we benefited from incremental FFO of $11 million from these developments, including Brookfield Place in Calgary, The Eugene at Manhattan West and London Wall in London.

During the quarter, we also completed the first phase of our Greenpoint multifamily development, One Blue Slip. This is a 359-unit for-rent apartment building on the Brooklyn waterfront. Once leasing is stabilized, which we expect by the end of 2019, this project will generate an incremental $12 million in net operating income. Secondly, in our Core Retail business, we earned $146 million of company FFO compared with $128 million in the prior year. The biggest impact on our core retail results was the increased ownership in GGP for approximately one month, which, as I mentioned, contributed $37 million of this increase.

Excluding the benefit of the acquisition, our retail results were $109 million for the quarter. We did have negative same-store growth largely due to a decline in occupancy, lower termination income and a slight increase in operating cost and taxes. In addition, in the prior year, we benefited from the sale of condominium units. Despite lower Q3 results, we remain positive about the fundamentals within our Core Retail business with overall occupancy remaining high, new leases being executed at higher initial rents and average sales per square foot increasing.

We expect these solid operating metrics, combined with healthy consumer spending drivers, to support strong earnings growth in the near-term, particularly as we enter into the fourth quarter, which is seasonally the best at our higher ownership interest in this business.

Lastly, our fund investments earned $74 million of company FFO compared with $88 million in the prior year. For the first time this quarter, we’ve allocated to the segment the management fees paid on our fund investments and the associated interest expense on our share of the fund subscription facilities, which are typically used to fund acquisitions prior to capital calls. We’ve also restated prior periods to reflect this reallocation.

Even with the significant amount of capital return to us late last year on the successful sale of our European logistics business, our investment in the first Real Estate Opportunity Fund earned $20 million of company FFO, slightly higher than the $19 million earned in the same period last year. We benefited from same-property growth in our hospitality assets and strong performance in our opportunistic office investments.

Our investment in the second Real Estate Opportunity Fund generated company FFO of $43 million or $5 million higher than the same period in the prior year. Much of this increase comes from additional investments made through this fund, which we highlight on Page 7 of the supplemental. But in addition to that, we continue to benefit from strong operating performance at Center Parcs and our mixed-use complex sold and our U.S. manufacturer housing investment.

Our recent investments in the third Real Estate Opportunity Fund generated a loss of $7 million in company FFO. Most of the seven investments made within this fund during 2018 are at the stage where earnings are not yet stabilized and operating enhancement initiatives are only just underway.

As a result, these investments are not yet contributing sufficient earnings to cover their costs, including the cost of capital associated with making the investments. Our other opportunistic investments generated $18 million of company FFO compared with $32 million in the prior year. The decline related to the sale of a hospitality asset in our finance fund, the wind down one of our value-added multifamily funds and the impact of weaker foreign currencies.

Almost 80% of the capital we have invested in our Opportunistic business is invested in Brookfield’s first and second Real Estate Opportunity Funds. These funds are currently tracking at an 18% net IRR and at 1.9 times net multiple of capital. In comparing our results to the second quarter of 2018, company FFO decreased by $0.04 per unit from $0.35 per unit earned in that period. This decrease in company FFO was primarily attributable to lower retail results as the prior period benefited from a higher termination income.

The impact of seasonality in our North American hospitality and student housing portfolios, where Q3 is typically the weakest quarter and the stronger U.S. dollar, which impacted our FFO earned in foreign currencies.

To finish off my prepared remarks, I did want to spend some time summarizing our recent acquisition of GGP as it does impact almost every line item in our financial statements. I will focus on two things. One, funding the transaction and two, at what value did we acquire GGP. As everyone is aware, prior to the acquisition, BPY accounted for its investment in GGP under the equity method. As mentioned earlier, the acquisition of the company closed on August 28, the date which we deem Brookfield to gain control and therefore consolidate.

To fund the transaction, alongside the close, GGP entered into various joint venture arrangements with a number of partners on 35 assets, resulting in $2.7 billion of net proceeds. On our consolidated IFRS books, these investments are now accounted for under the equity method. In addition, 10% of the whole company was sold to another investor for consideration of $1.5 billion. This interest is accounted for us to non-controlling interest on BPY’s IFRS financial statements.

Within our proportion of financial statements, all of these are adjusted for to reflect BPY’s ownership interest. In addition to the sale of these interests, we issued $4.9 billion of new acquisition debt with an average maturity of five years and an average interest rate of LIBOR plus 236 basis points, and issued $5.2 billion of new equity, 251 units at a $21 price per unit on the date of close.

This consideration at our share acquired for us $19 billion in malls. As part of determining our opening balance sheet, all of GGP malls were valued by a third-party. At a high level, the valuation came to an equivalent per GGP share value that fell between where we held our original investment at the end of Q2 of $25.20 net of our goodwill and the value we put on the transaction of $23.50. That midpoint value provided for a bargain purchase gain of slightly over $800 million, which allowed us to write off the goodwill from our original investments with minimal impact to our net income.

The main changes to mall values from Q2 relate to adjustments to future cash flow assumptions related to leasing commissions, reserves for bad debts and certain property tax adjustments, which reduced overall asset values by around 2%. As anticipated, the transaction resulted in a dilution to our IFRS value per share from $31.23 at the end of Q2 to $28.60 at the end of this current quarter.

The transaction did offer the opportunity to create a REIT security, which has now been trading alongside BPY units for a little over two months. And we are encouraged that they are trading at almost identical values. Although there have been some exchanges of the BPR shares largely to satisfy the needs to deliver BPY shares as part of the due bill process, there remain over 125 million BPR shares outstanding. BPR was included in a few new indexes, including FTSE Russell and MSCI.

Trading volumes in both BPY and BPR have been up significantly. The respective Board of Directors for each company declared a quarterly distribution of $0.315 per unit payable on December 31, 2018, for unitholders of record on November 30, 2018, for both BPY and Class A unitholders of BPR.

Lastly, our supplemental has been updated to include certain Core Retail information that would have previously been included in the former GGP supplemental, including more detail on debt by property. Our Core Retail disclosures are now on an IFRS basis. We’ve also included in our appendices a portfolio listing for all of our core segments. We will continue to evaluate the level of information provided for both our core and LP investments to ensure we are providing the right level and welcome any feedback that you may have.

So with that, I’ll end my prepared remarks and turn the call back over to you, Brian.

Brian Kingston

Thank you. So moving to capital recycling initiatives. As Bryan mentioned, concurrent with the closing of the GGP transaction in August, we sold approximately $4.2 billion of equity to our various joint venture partners. The proceeds of those sales were used to fund the portion of the cash that was paid out to GGP shareholders in the transaction. Our plan is to raise a further $2.5 billion from this portfolio over the next 18 to 24 months through additional partial and complete asset sales, with the proceeds being used to reduce the acquisition facility used to acquire GGP.

The balance of this facility will be retired as we refinance mortgages on the retail assets that have increased in value from where they were refinanced – where they were originally financed several years ago. In October, we also sold 2 100% leased Canadian office assets, Queen’s Quay Terminal in Toronto and Jean Edmonds Tower in Ottawa for a gross sale price of CAD 450 million, which was a 20% premium to their IFRS values.

And we remain on track to dispose of our U.S. logistics business that was created in 2013. Including the sale of our European logistics business last year, we will have returned over $1.3 billion on our original investment of approximately $400 million just five years ago.

Turning to new investments. In late July, we announced that we reached agreement with Forest City Realty Trust to acquire that company for $25.35 per share in cash. This acquisition will be made through a Brookfield-sponsored Real Estate Opportunity Fund in which BPY is a 25% investor.

Forest City has a 100-year track record of owning high-quality, diversified portfolio of operating and development assets, and we believe we can drive further value in this business by leveraging our unique mixed-use real estate and place-making expertise. Forest City shareholders will vote on the transaction on November 15. And assuming a positive outcome, we anticipate the transaction will close in early December.

Over the past several years, we’ve continued to work on building a multifamily portfolio as the third pillar of our core property business alongside office and retail. This portfolio has begun to take shape focused in New York specifically with the recent delivery of The Eugene at Manhattan West and One Blue Slip in Greenpoint on the Brooklyn waterfront.

Expanding into other growth areas within the city, we made two new investments recently, including the acquisition of an interest in Waterside Plaza, a four-tower 1,500-unit residential complex on the East Side of Manhattan, as well as a mixed-use development site in the Bronx, where we will develop a seven-tower 1,300-unit waterfront development.

In London, we also have over 2,500 residential apartments under development, including 1,100 for-rent units. The first of those buildings will deliver in 2019, establishing a modern urban multifamily portfolio on both sides of the Atlantic.

So before we move to questions, we wanted to thank those of you who attended our Annual Investor Day in September. We were pleased to host approximately 350 investors and analysts, making it our largest event to date. Following the closing of the GGP transaction, we welcome increased interaction with many new BPY unitholders and BPR shareholders. We hope we’ve been able to communicate our strategy going forward. As always, we would welcome any feedback you may have.

So with those as our planned remarks, operator, we’re pleased to open up the line for any questions.

Question-and-Answer Session


Thank you. [Operator Instructions] Your first question comes from Mark Rothschild with Canaccord. Your line is open.

Mark Rothschild

Thanks, and good morning, guys.

Brian Kingston

Good morning.

Mark Rothschild

In your comments, you said you’re overall happy with the performance of all the division, and you mentioned retail. I’m just trying to balance that with what clearly is a weakening retail environment, and the numbers appear to be worse than you guys had anticipated. Same-store NOI decline was a little surprising. So maybe you could just give us what your outlook is in the near term as far as what we should expect from that division. And then also, as far as further retail acquisition, such as in the U.K. that you’ve been reported to be involved in or you are involved in, if you can comment on to what extent you want to grow the retail portfolio.

Brian Kingston

So I’ll maybe just start with an overall comment into your second question first, and then I’m going to ask Sandeep to talk a little bit about the retail operating environment and our outlook. But I can’t comment specifically on the transaction you’re referencing in the U.K., but I do think our objective and certainly a big part of what Sandeep’s role is going to be going forward is to globalize our retail business much in the same way that we’ve globalized the office business over the last decade, moving into a number of the markets where we do have businesses around the world.

So while it is a challenging environment, I think, as we’ve mentioned in this call a few times, we view that as an opportunity to invest countercyclically. And Sandeep is going to talk a little bit about where – how we’re seeing that environment and specifically how we plan to address it.

Sandeep Mathrani

So thanks, Brian. As we look at Q2 versus Q3, in Q2 we booked a termination income from Teavana specifically of about $37 million, which took our growth rate up to 4% for Q2. We understood all along that, that one would actually create a drag when you look at Q3 because that $37 million of income could have been booked through the year, but it was booked in the second quarter prior to the closing. So if you look at the fundamentals of the business, it’s still very strong. We’ve leased almost 10 million square feet this year at spreads of about 11.6%.

And if you’ve ever followed my earnings calls, we thought they will moderate to 8% to 10%. Actually, we haven’t seen the moderation. 2018 has actually been a very good year in the retail business, its peak sales up, allowing us to continuously be strong in our spreads. We look at 2019, at this stage, we’ve leased about two-thirds of our requirements already, about 67%, and we’re looking to lease another 10.2 million square feet in 2019.

So we see tremendous tenant demand. We see term income being the only drag that created this fall in Q3, which is anticipated. When you look at GGP’s earnings for the whole year, we’ve guided exactly to where the numbers will work out for in Q3 and Q4. And actually, we see the demand increase, not decrease in our portfolio. As a matter of fact, if you look at NOI-weighted occupancy for Q3 2017 versus Q3 2018, it’s 95.6%, exactly the same. So actually, we’ve maintained occupancy even though bankruptcies have been higher going into 2017 to 2018, which means leasing up has been very strong.

So we actually see the environment – finally 2018 being a good year for our business. Retail sales are up 5%. When you look at national averages, they’re 5% up. Our portfolio is performing at national averages. And the national average number gain of 5% includes e-commerce sales. Our numbers obviously don’t include the e-commerce sales, which clearly means that the A assets are performing much better because as a whole, we’re performing with the same growth rates as you would have for e-commerce plus bricks-and-mortar. So there’s a – strength going into the fourth quarter plus going into 2019.

Mark Rothschild

Okay, thanks. Maybe just on the unit price. It’s been obviously extremely weak. The GGP transaction, now you have this new, which, while it might be attracting new interest, doesn’t seem to have helped the overall unit price. To what extent is this an issue? And how should we think about the potential for buybacks, which really hasn’t been that material over the past years, although it has been discussed a number of times?

Brian Kingston

Yes. So from an operating perspective, it’s not material. Our business is self-funding. And as you know, we – a lot of the new capital we’re deploying into these investment opportunities is being surfaced through recycling of – the sale of more mature properties. So having a – having the shares at a level where we can issue equity is not necessary for us to execute the business plan that we’ve laid out. That being said, obviously, it is an area of focus for us. I think as you would expect following a transaction of this size and the introduction of a lot of new shareholders, we anticipated there would be some period of volatility or weakness right after the GGP transaction.

We’ve only been closed for a couple of months. As Bryan said, we’re happy to see, A, that the shares are trading together; and B, that the trading liquidity of both securities is significantly higher than BPY was prior to closing the transaction, and those were two things that we were specifically trying to address as a way to get the share price stronger. As you mentioned, the third thing we often discuss on these calls is the potential for buybacks.

Given that we just closed the GGP transaction and we have a – there’s been a significant amount of transactional volume and capital required for that, you’ve got to give us a little while. But I’d say that we remain focused on that as a potential buyback. And I would note that Brookfield Asset Management has been active in buying shares since the closing of BPY, which – or the GGP transaction, which we look at the two as all part of the same potential as far as addressing the weakness.

Mark Rothschild

Okay. Thank you very much.

Brian Kingston

Okay. Thanks, Mark.


Thank you. Your next question comes from Sheila McGrath with Evercore. Your line is now open.

Sheila McGrath

Yes, good morning. My question is related to asset sales. You did sell a big interest in the Manhattan portfolio this quarter. I was wondering if you could give us some insight on the interest level in that transaction and when it happened in the quarter just for our models. That will be great. And then I have a follow-up.

Brian Kingston

Yes, Sheila, so the exact timing actually I don’t remember. July, okay. So it happened in July. We – I think as we mentioned on the last call, we’re working to syndicate an additional 7% of the equity here, just shy of $400 million. Activity level is strong. We hope to get that accomplished by the end of the year.

Sheila McGrath

Okay, great. And then on asset sales, I think, Brian, you mentioned more asset sales from – or raising more equity out of the mall portfolio and then also the industrial portfolio. Just if you could give us some insight on magnitude of potential asset sales and if they’re going to be mostly out of the LP or Opportunistic or on balance sheet asset sales.

Brian Kingston

Yes, it’s going to be a combination of all of the above. Our – starting first with the opportunistic funds. Our first fund, which was raised in 2012 and put capital to work in 2012, 2013 and a little bit in 2014, now that it’s four years to five years into the business plan, many of those investments are reaching just their natural evolution and it’s time to exit them. And so I mentioned the industrial portfolio. There’s a number of other assets that are in that first fund that we expect over the next 12 months we’ll likely be bringing to market, and that will return a significant amount of our original $1.5 billion commitment to that fund.

With respect to retail, we – I did outline that part of the plan to repay the acquisition facility is through additional asset sales. We’re engaged with a number of investors whose timing didn’t really line up with the transaction closing necessarily, but we would expect over the next 6 months to 12 months we’ll likely sell further interest in some of those malls. What we’re finding is there’s more demand for partial interest in malls, where we remain a 50% owner and manage the malls on their behalf.

And I think that’s because investors really recognize the value or the benefit that having the scale of our business has. So you’ll probably see more of those types of sales as opposed to outright 100% interest in malls getting sold. And then within the office business, it’s a continuous element of recycling capital out of these mature office buildings and putting it to work, in particular funding the development plan. So the short answer is sort of all of the above.

Sheila McGrath

Okay. And then on – I think Bryan mentioned little transactional income in the quarter. You do have a pipeline of condominium sales in London at Canary Wharf. As we look forward, they’re going to contribute probably 2019 and 2020. Is there any visibility you can give us on when we’ll start to see the impact of those condominium sales in the P&L?

Bryan Davis

Specific to the ones that are in our London portfolio, they will be towards the latter half of 2019 with, I believe, Principal Place and our Southbank condominium development being sort of the first out of the gates. And then within Wood Wharf, one of the developments will be towards the latter part of 2019, and then the other one will be into 2020. So I’d guide you just to sort of the last half of 2019 based on expected completion.

Sheila McGrath

Okay, perfect. And one other question. Just if you could update us, BPY’s rationale for buying GGP was based on the fact that if you owned the whole portfolio, you could bring other expertise that Brookfield has. I know you just closed in August, but I was wondering if you could tell us any of the – any more detail about some of the near-term opportunities that you’re working on that we could see benefit over the next 12 months to 18 months.

Sandeep Mathrani

Hi Sheila, it’s Sandeep. So prior to the acquisition, we had announced a project in Seattle with AvalonBay as at the time, we didn’t have the expertise in-house and – to build residential. Post the merger, we’re actively working on projects – two projects in the Atlanta market, Cumberland and North Point. We’re actually in design of – for residential units. And we’re working at The Streets at SouthPoint in North Carolina. We’re looking in putting about 1,000-or-so rental residential units in Ala Moana.

In addition to the 209 for-sale condos we completed, we plan another 300-or-so for-sale condos, Stonestown Galleria in San Francisco. We plan to do additional residential Stonebriar in Plano, Texas. We’re planning to do a mixed-use development of office and residential. We currently do have a hotel under construction. And then Otay Ranch in San Diego, we’re going to add residential. We had about 10 acres of vacant land that we plan to start the process. And lastly Paramus Park in New Jersey. So you can see the wheels are in motion on an additional 9 to 10 projects post the August 28 close.

Sheila McGrath

Okay, great. Thank you.


Thank you. [Operator Instructions] Your next question comes from Mario Saric with Scotia Bank. Your line is open.

Mario Saric

Thank you, and good morning. I wasn’t able to catch all of those individual projects, Sandeep, that you were referring to on – in relation to the previous question. But at a higher level, a big part of the rationale for the acquisition was the redevelopment of several of the malls. GGP previously was spending about $500 million per year in kind of that type of capital repositioning. How should we think about the pace of that activity over the next three years to four years would be kind of the first part of the question?

The second part of the question, which might relate to your comment on additional disclosure going forward, regarding the investment continuity, how do we get a sense of how you’re tracking relative to underwriting and expectation in terms of both the pace of deployment and the returns being generated over time?

Sandeep Mathrani

So we anticipate the pace of deployment to be about 2x. So as you know, it’s about $800 million to $1 billion a year. And next year, we’re going to trend at about $800-ish million. So we’ve already increased it from our $500 million number. And I think by 2020, we should definitely be at about $1 billion a year. Again, we’ve been pretty transparent on the returns of that project and our development pipeline. And I think we’ll continue to provide that sort of transparency to show you the returns. And we’ll debate if breaking them apart between residential and retail will sort of make sense to do, which we will do.

Brian Kingston

Yes, and I think in terms of benchmarking, a very simple metric that we do to try and spell it in the disclosure for all of our developments, not just the retail but also in our office business, is the yield on cost, which there’s obviously a lot of different ways to look at it. But Mario, I think your question is how do you sort of benchmark it or how do you keep track of it. I think I’d watch that number and, in particular, the difference between that number and where these assets would be valued on a realization event. And if we’re able to put capital to work in these redevelopments at 300, 400 basis point spreads to where the assets will trade for or where we can bring in investors post that, then that’s going to drive a pretty healthy return on that $800 million to $1 billion of capital that Sandeep was referring to.

Mario Saric

Right, okay. And then based on the historical GGP experience, when you’re putting capital into the malls, have you been seeing any impact on the private market cap rate of the mall? Also not just kind of the unlevered return on incremental CapEx, but did you typically see a re-rating of the mall valuation if that CapEx is sufficient enough until…

Sandeep Mathrani

I think we initiated, we see two things. One, we’re seeing that the tenant demand from the retailers has increased, which is they actually view the residential component or the hotel component to be incremental shoppers to the shopping center. And we’re also seeing the type of retailers that come into the shopping center will be an advantage. For example, if you’re building residential, we can attract a supermarket to go into the big box, which actually makes the shopping center more of an everyday convenience.

So we’re seeing the impact to the retailers. We’re seeing sales uplift where we are putting in the condominiums or the residential. Ala Moana has seen an incremental increase more than the rest of our portfolio as we’ve added 200 very high-net-worth individuals to our shopping patterns. And as you know in luxury, it doesn’t take that many people to move the needle, and they are moving the needle dramatically.

So we are seeing that as well. Second part, it is the traction of building shopping centers where you already have the infrastructure of retail in the base is actually increasing the sales value or the rental value of the residential projects. So we’re working it in both ways. And we’re definitely seeing an uptick on residential rental pricing, condo pricing because you have a base of highly successful retail. Now we’re seeing an uplift on the retail based upon the fact that they’re becoming mixed-use developments.

Mario Saric

Got it, okay. And then I think at Investor Day, Brian, you had put up a slide on – it was kind of a four-quadrant slide on what you can potentially do with the GGP portfolio, like a substantial repositioning, kind of curating the tenant base at the mall. So it was 152 malls roughly there in existence. How would you kind of break down the intensity of the repositioning potential within the malls relative to the 125 malls, are half candidates for mixed-use intensification, a quarter are replacing one type of retail tenant with another and then a quarter or perhaps malls that you found selling overtime. How should we think about kind of broadly speaking that maybe?

Brian Kingston

Yes, it’s a little hard to be terribly scientific about it, but I’ll try and give you broad strokes. If there’s 125 malls in GGP, we – ideally, where we’d like to be over some reasonable time period is down to maybe 100 of them that we think have the best long-term outlook to them. And in each case or all of those 100, we’ve think that some element of mixed use is in their future. And it’s really just a question of timing. But we do think within that 100-or-so core portfolio of assets on a longer-term base, introducing other uses and effectively turning them into mini-cities is really how to future-proof all of these assets.

So I think that the intensity will vary depending on which market they’re in and the size of the market and how much demand there may be locally for some of these other uses. But I think virtually all 100 of them will have that. And the other 25 may involve some repositioning in order to make them more marketable as an ultimate sale. And so you may see us do some development in that 25 bucket as well. But ideally, that’s sort of how the portfolio splits out and those 100 assets would be roughly 90% of the value of GGP.

Mario Saric

All right. My last question just relates to kind of the expected CFFO per unit growth going forward. I think at the Investor Day, you highlighted 7% to 9% kind of CAGR over the next five years. And granted it could be lumpy from quarter-to-quarter to having this new business to look out on a quarterly basis, one of the elements that Bryan Davis indicated resulted in year-over-year pressure in the reported FFO was the big uptick in LIBOR given your higher floating-rate debt exposure and higher, broader financial leverage. So in your kind of forecast, your four, five-year forecast, how do you think about kind of a rising fed funds rate, a rising U.S. 10-year Treasury, like in that 7% to 9% expected growth, what type of overnight rate in U.S. 10-year Treasury are you baking into those numbers?

Brian Kingston

Yes, so what I’d say is the – taking in isolation and only looking at the impact of interest rates, obviously that’s a negative headwind against future growth. But I really think when you step back and we recast our five-year business plans with the new rates in place, there’s a lot of offsets to it, including higher growth. And clearly, the reason we see LIBOR 100 basis points higher than it was at the start of the year is because we do have very strong GDP growth, particularly here in the U.S. And so the benefit of that will help to offset some of that.

So I think the short-term answer is we still feel that the 7% to 9% five-year target is intact. We will be – we’d continuously reassess the impact of interest rates and our strategy around that. And while we do have a significant amount of floating-rate debt, A, we’ve been reducing that over time, and in particular, some of the acquisition debt, et cetera, just naturally reduces; but two, we do have protection and insurance in place in the forms of caps and forward versus – or forward rate locks, et cetera, that does insulate us from continued movements from there. But obviously, the first 100 basis points is usually the biggest impact.

Mario Saric

Okay, I’ll turn it over. Thank you.

Brian Kingston

Okay, thank you.


Thank you. Your next question comes from Sam Damiani with TD Securities. Your line is open.

Sam Damiani

Thank you and good morning. Just on the outlook for the Core Retail and the redevelopment. Is there any potential for a disruption to the NOI as we look out into 2019 and 2020 given the extent of activity planned?

Sandeep Mathrani

Generally not. It’s usually – it’s really the anchor tenant income that sort of goes away, which has been about $2 a square foot on a 200,000 square feet box. So yes, if you do 10 of them, it’ll impact it by a couple of million dollars, yes, but not dramatically.

Sam Damiani

Okay. And just on the sale of the New York portfolio. Do you envision creating similar funds through other core assets that are held on a 100% basis in the near term?

Brian Kingston

We have – it is possible that we may do it in other jurisdictions. What we’ve found with LP investors in particular is on the opportunistic strategies, many of them prefer global strategy with multiple currencies involved. But really, when it comes to these core buyers or core-plus investors at these types of returns, currency becomes a lot more important for them. And so having vehicles like this in different countries with different currencies is potentially appealing. So you may see us do something similar to this in places like Australia or Canada or even the UK.

Sam Damiani

Right. Those were the areas I was expecting. And just it was mentioned earlier about the 5-year outlook that was given last month. Would it be fair to say that most of the currency impact that you experienced in Q3 was already reflected in your outlook that you provided? Or would there – could it be a little bit offside given the recent moves?

Brian Kingston

Yes. No, look, a lot of that was already building. And in fact, even the interest rate outlook, it’s – although it’s moved a little more dramatically in the last month or six weeks, it has been increasing over the course of the year, and I don’t think anybody should be surprised that rates are about where they were. So this was all known to us a month ago.


And you have a follow-up question from the line of Mario Saric with Scotiabank. Your line is open.

Mario Saric

I’m sorry, just one more quick one. To the extent that you can, the office performance was really strong during the quarter. Sandeep talked about some of the positives with respect to the retail environment. When we look out to 2019, are you able to give us a sense of what type of same-store NOI growth you’re expecting both in the core office and Core Retail platform?

Bryan Davis

Yes, Mario, look, what we’re trying to avoid doing is getting people too focused on near-term earnings. So we tend not to give out guidance as it relates specifically to 2019. What I did make in my comments at Investor Day is that looking out over the next five-year period, we’re focused on being able to achieve 2% to 3% same-store growth in our core businesses. Whether that means that we’re 4% next year and then 2% the following year, it’s hard for us to predict, but that’s what our focus has been on.

I would say in the office business, we’re continuing to look at increasing occupancy within our core portfolio. And as a result, we should expect to be able, at least in the near term, to achieve reasonably good same-store growth, and then, in the longer term, it balancing down as we’re just marking rents to market. So the long-winded way of not really answering your question, but look, we target 2% to 3% on an – over a period of time on an annual basis.


Thank you. And I’m showing no further questions at this time. I’d like to turn the call back over to Brian Kingston for closing remarks.

Brian Kingston

Okay. Thank you, everyone, for joining our call again this quarter, and we look forward to updating you with our year-end results. Thank you.


Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you all may disconnect. Everyone, have a wonderful day.