GGP
#Thank you, <UNK>, and good morning, everyone
First off, I would like to give you an update on our review of options to create long-term value in our business
Given the significant and inappropriate gap between private and public market values, we thought it was prudent to undergo a strategic analysis in our efforts to maximize shareholder value
The first thing to report is that we have concluded that this franchise has best in class retail
There is also a tremendous amount of embedded value within our portfolio residing in these incredibly well-located urban and suburban infill locations with the ability for greater amount of apartments, condominiums, office, hotels, data centers, co-working gyms, tailors and the like
In that regard, we looked at all options available to us and actively engaged our board in numerous discussions
Given the market conditions and results of our outstanding portfolio, we and the board believe proceeding with our current strategy under the direction of our deep and experienced team will produce the best long-term results for the shareholders
And should a larger opportunity arise, we will, of course, consider in light of our ongoing efforts to maximize shareholder value
We will continue to lease, lease, lease, redevelop our anchor boxes, densify our assets and prune the lower quality assets
It's very gratifying to see the results of our portfolio; scale has its ad<UNK>tages
Over time, our assets will be places to shop, entertain, discover, live, work, gather and also be hubs for the last mile
Over the last five years, the composition of our portfolio has evolved away from apparel
The non-traditional retail uses of entertainment, restaurants, car show rooms, fitness and grocery have increasingly become a large part of our business
For example, we currently have a number of them already in place or in process of opening, including the following: 58 movie theaters, 36 entertainment concepts, 14 fitness centers, 12 grocery stores
In addition, we have been adding non-retail uses at our properties
In fact, more than three-quarters of our properties already have some form of mixed use
To put that in perspective, we currently have the following; 15 hotels, 6 million square feet of office and 2,000 residential units
It's all about location, location, location
Our centers are within an hour's drive of 56% of the U.S
population
Brookfield in-the-money warrants expire in November and therefore, must be exercised prior to that date
While Brookfield could settle all of its warrants without paying any cash in what is referred to as net share settlement, Brookfield has advised us that they will exercise a portion of their warrants of approximately 55 million shares for a cash settlement of $460 million
As a result, Brookfield will own 34% ownership of our company
We believe that this additional investment demonstrates Brookfield's support for our company and our long-term plan
We will utilize the cash to support our enhanced redevelopment program, debt or preferred pay down and/or share repurchases opportunistically
Earlier today, we released our second quarter earnings and I'd like to highlight a few items
Company FFO per diluted share for the second quarter was a solid $0.35, consistent with our guidance and consensus
Company NOI increased 1.3% and was impacted primarily by store closures
Excluding $10 million of bankruptcy impact, growth would have been 3%, as we indicated in our last quarterly call
NOI weighted sales per square foot increased 1.7% to $705, demonstrating the quality of the portfolio, and total sales excluding apparel increased 3.1%
An interesting fact, NOI weighted sales without apparel was $906 per square foot
Lease spreads were up 10%, within our expectations, up over 13% when NOI weighted
And more so, when you look at lease spreads for new transactions or new leases, lease spreads were up over 18%, demonstrating the demand for the space
Our guidance for the year is $1.56 to $1.60 per share with NOI growth reaccelerating 3% to 4% in the second half, as tenants move into spaces vacated earlier this year
Our board declared a $0.22 quarterly dividend, a 10% increase from last year
If I just focus on the A-rated centers within our portfolio that drive the substantial amount of our business, they account for 75% of our NOI
NOI is expected to grow nearly 4% this year
NOI weighted sales per square foot increased 2.5% to $785 a square foot
Total sales excluding apparel increased 4.7%
Lease spreads are up 12%
NOI weighted lease spreads for the A portfolio is up 15% and occupancy is at 95%
Traffic to the centers is up 1.4% year-to-date compared to the same period 2016, as measured by cameras in our properties counting people as they enter the center
Parking lots are near capacity, so much so that we created an app to help find a parking space
Our leasing and developing teams look forward several years to line-up new tenants
To-date, we have leased 9.5 million square feet
Just to put that volume into perspective, it's equivalent to leasing 30 malls
More so, I would like to say that there was 1.8 million square feet of bankruptcies this year; 80% has been re-leased, i
, 1.4 million square feet
As I mentioned, there is strong demand for our real estate from a wide and growing area of tenants
We looked through the tenant list of new tenants this year and it's well over 100 new tenants, 317 new in count and the list is long
If you ask me the question, I will recite later on
In addition, there are numerous e-commerce retailers planning to open stores
These are companies that have been operating for five to seven years on the Internet and have sales of $25 million to $100 million
They are established brands seeking profitability and planning to achieve it with a brick-and-mortar presence
Turning to our investment activity, GGP has been acquiring, redeveloping and re-tenanting anchor boxes within the portfolio since early 2011. We view this capital allocation activity as a key component of our long-term earnings growth
We have been ahead of the curve in this activity and plan to continue
Strong demand exists for vacated department store boxes given the quality of the real estate
The recapture, redevelopment and re-tenanting of department store boxes is what we do
We've done over 115 to date
We have no vacant boxes
Each anchor box opportunity is different in its potential economics
What we found is that the tenants of all types want to be located in the best real estate, so when we recapture department store at one of our properties, we generally have it pre-leased prior to redevelopment
In July, we acquired an additional interest in 13 Sears boxes located in our portfolio from Seritage Growth Properties
In eight of these locations comprised of 1.5 million square feet, we now own and control 100% of the real estate, including the surrounding land, which may offer future densification opportunities
These locations are substantially leased to news tenant such as restaurants, fitness centers, entertainment venues, supermarket and other large format stores
Sears will continue to occupy 600,000 square feet of the 1.5 million square feet at rents that are $7 per square foot, well below market today of $30 per square foot
Future upside resides all with GGP
In addition, we acquired interest in five additional locations comprised of 1 million square feet, four at A-malls and one at a B+ mall
We look – we took no leasing or development risk to enhance our portfolio
Upon completion of the redevelopment, Sears will continue to occupy about 400,000 square feet of the 1 million square feet at a rent of $4 per square foot, well below market of $25 per square foot; again, providing future upside potential to GGP
We also acquired the Younkers anchor box at a Class-A mall, Jordan Creek in Des Moines, Iowa, from parent company, Bon-Ton
Younkers plans to continue operating from the location
We recently submitted plans for the redevelopment of Macy's at Stonestown Galleria
You may recall we acquired the box of Macy's late last year along with Tysons Galleria
We envision bringing new uses to Stonestown, such as entertainment, restaurants, large format stores and other new tenants
The center's sales productivity is over $800 a square foot
Our large developments are progressing as expected with the expansion of Staten Island Mall hitting its first milestone with steel topping in June
The expansion is set for completion next year, bringing new retail, entertainment and food options to the borough
We broke ground in Norwalk and increased the size of the development from 540,000 square feet to 717,000 square feet to accommodate demand
Escalations and project scope contributed to the increase in cost
All upsizing permits are approved and the appeal period expired on July 28, 2017. We're about 60% leased, with an additional 13% mutually approved for over 70% leased
Sales are expected to be north of $800 a square foot
As mentioned last quarter, we are in final negotiations with two institutional partners to own half the development
We acquired the remaining 50% interest in Neshaminy Mall located in Bensalem, Pennsyl<UNK>ia
There is a redevelopment opportunity with at least one of the existing anchor department stores, along with possible densification of the overall site
As you may know, Bensalem is a near suburb of Philadelphia
The property is well-located east of Philadelphia and houses a very successful AMC Theater and Boscov's
We increased our ownership of the Miami Design District
Phase III is expected to be complete in the spring of 2018. It is over 80% leased
We disposed of Red Cliffs Mall in St
George, Utah and Lakeside Mall located in Sterling Heights, Michigan, consistent with our strategy of continuously pruning the lower quality of our portfolio
Turning to some corporate matters, I would like to sincerely thank <UNK> Neithercut and Mark Patterson for their service to GGP shareholders over the past several years as members of the board
Each made a significant impact upon our Company through their leadership, intellect and guidance
I would also like to welcome Janice Fukakusa and Christina Lofgren to the GGP board
Janice was most recently served as the Chief Administrative Officer and Chief Financial Officer of Royal Bank of Canada, and Christina most recently served as Executive Vice President of Real Estate and Property Development of the TJX Companies
I believe each will make significant contributions to our company and shareholders
Finally, the board formalized the Lead Director role with Dan Herbert assuming this important responsibility
I thank Dan for expanding his participation on our board
And finally, early next year we will be relocating our Chicago headquarters from 110 North Wacker Drive to 350 North Orleans, just a few blocks from our current location
Before turning the call over to <UNK>, we will be hosting a property tour and reception at Stonebriar during the November NAREIT Conference
Stonebriar is the home of the new <UNK>dZania
You should be receiving a save-the-date notice shortly, but if you don't and wish to attend, please contact <UNK> <UNK>
<UNK> will now review our financial results and guidance
Good morning
Given the current climate and the gap between public and private market values, we felt it was worthwhile for the board and management to more formally review where we stand, as I mentioned in my comments
We're always here to maximize shareholder value and we want to stay focused on that
The board looked at numerous opportunities along with management, and we compared it to our current state
We believe that at this time that the highest and best use of our time and effort is to stay the course and continue doing what we're doing
We will stay focused on maximizing our existing operating platform on behalf of our shareholders
And as I said, again, in my comments, that should a bigger opportunity arise, we're here to maximize value for the shareholders, but we felt it was best interest in the company to stay the course
Again, as I said in my comments, we would think about using it for either our enhanced redevelopment program, our debt or preferred pay down
You know we have some preferreds that are callable in February of 2018 that have a coupon of 6.375%, that's $250 million, and/or share repurchases opportunistically
In the second quarter, we were not in a position to buy stock because we actually made a comment at the end of the first quarter about strategic alternatives, so we were restricted
Our restriction is lifted as of this Friday
And so we will opportunistically be in the repurchasing of stock business
We have a board authorization of almost $400 million to do share buybacks
Please repeat the question, again
The Class-A properties
I mean, again, a lot of them have been done in the past, and I would sort of sit back and say the A assets continued to drive traffic
The B+ assets are still positive, and the B assets are somewhat flat in our portfolio
But, yeah, we do see an uptick as we continue to change the uses
The overall exposure is still 50%
The new leasing for the year is 25%
So, it's trending down to 41%
In the A assets, it's already down into the low 40s
As I said to you in my comments, we will continue to prune the lower quality assets
We have sold over 60 lower quality assets over the last two years
Our trend has been to continue to sell three to five a year
We've already sold, I think, three this year
We're in the market with one this year more
We will not comment on how we try to bring in joint venture partners in our A assets; suffice to say, we're regularly looking at the portfolio to maximize shareholder value
We're not in the business of selling A assets that have the best growth profile to make a valuation point; however, as we have sold in the past, Ala Moana, Fashion Show and Grand Canal Shoppes, where we felt we had too much exposure to a single asset or a market
We're very happy to go it alone
If you can build an A-plus-plus asset at over $800 a square foot that's 70% preleased at an 8% – north of an 8% yield, you do it alone
It's prudent to bring in a partner, but you do it alone
We've had no conversations with the ascena group (sic) [ascena retail group] on their closure plans
<UNK>, we engaged with the board
We looked at numerous opportunities, options, compared to our current state
We looked at the quality of our retail portfolio
We looked at the ability to densify the assets, which has tremendous embedded value as you create live/work/play environments
We felt that the best use of our time was to stay the course, continue to lease, lease, lease, and run our business
We have a great business
We see our NOI growth re-accelerating in the second half of the year
And I think we need to be able to run our business to demonstrate the growth, and then the value will be built
So at this stage of the game, the board and management have decided to stay the course
We did a paper analysis
We did not start a marketing process
The inbound call from institutional investors was very high to buy the best quality assets for the cap rates we mentioned
Again, we did not feel it was appropriate to sell A assets with the highest growth just to print a value
So, the complete paper analysis – the board decided, where we trade today, we better stay the course
Again, Alex, we felt there was a tremendous disconnect between public and private markets
We felt it was good for us to go out and do a strategic analysis with the board
We did the analysis and we came to the conclusion of, where the stock price is trading today, the best course of action for us is to stay the course
We've also determined that the inherent embedded value in the real estate is so high that you actually do the best for the shareholders
This is not the right time
There is a bid for the B quality assets, and we continue to sell and prune the lower quality assets over time
So there are bids and we are entertaining the bids, and we have been selling assets on the lower quality
As I said, we've already sold three this year
We'll probably sell a couple of more
And so, the bids are two to five asset portfolio bids from different companies
<UNK>, as I said in my comments, it's about a 1.8 million square feet impacted with bankruptcies, and we have leased 1.4 million square feet to-date, about 80%
Oh, <UNK>, I don't have that breakdown, but I can sort of sit back and tell you that if I look through the top retailers that we've leased to, there have been – I'm just looking at my list – in the top 50 retailers that I've looked at, I'm looking at a list, only one, two – there are only three apparel retailers in the top 50 of my list
It has to be a small percentage
We had an option to exercise to increase our ownership by 7%, which we exercised
We feel very confident about the project
Phase III is near completion; should be done in spring of 2018. The project is 80% leased
The sales productivity is performing above our expectations, and the demand continues to be there for the space
So we had a option to exercise a right to increase, which we did at the valuation that we bought into the asset initially
We look to the total project to stabilize in 2019.
So when we bought the asset, we invested $10 million into the asset
We sold the asset for $14 million of cash plus a $9 million note, which was guaranteed by 10% ownership interest
So, ex the 10%, we got a 14% IRR on the property
So this was sort of, I call it, the icing on the cake, which was converted back to an ownership interest
We've been sort of a stuck record for the last, I think, two years, saying the leasing spread range should be 8% to 10%
Again, it's never sequential
As I pointed out, I think, in the last call or the call before that that in 2014 spreads were 8%, and then, 2015, they accelerated
So, we still feel pretty good that spreads should be in that 8% to 10% range
Well, I think we're all cautious in where sales are going to go
I think retailers have to start to rationalize their portfolio
And I think as they rationalize their portfolio, you will start to see over time the higher-quality assets being the beneficiary
But I think this is a 12 to 15-month process
I also see light at the end of the tunnel because I think the high-quality assets will be the beneficiary, as those are the locations where the retailers have shown their best – have put their best foot forward
But I do believe that you're starting to see sales starting to tick up, and you're starting to see some light at the end of the tunnel
Could you repeat the question? Sorry
So I would sort of sit back and say that if we were – I think I may have mentioned this on a previous call as well, but if we were to restart Norwalk again, I'm not sure whether we have the need to put two department stores
I think that it's important to have one, but not necessarily two
And I think the second one could easily have been an alternate use, such as a grocer or more entertainment
And as we evolve the plan – and the reason the size and the scope increased is we did bring in alternate uses into the property because we felt that was important to do to create a mall of the future
But at this stage, I would sort of sit back and say having one department store, either a Nordstrom or a Bloomingdale's, would have been a – would be an important element if you are planning to do a 500,000 square feet shopping center
The plan is to do it during construction
We are getting a benefit from where we are buying it
So, you – from where you're building it, so there is a premium built in; but obviously, they are taking a little bit of the construction and leasing risk as well
So it's not as if a fully stabilized asset will be sold, but it's also not a development deal
So we leased 9.5 million square feet
And the leasing cost, as you see it, that's been increased, is a function of the big box leasing that we've done to the entertainment user, the grocers
If you take out the 4 million square feet of restaurants and big box users and the CapEx that went along with redevelopment of those boxes where we got a fair incremental return, the leasing costs or the TA costs for the in-line tenants was exactly the same as it's been over the last couple of years; actually, no increase
Look, they have long – they have lease obligations, so the only way to pass the lease obligation is to do something dramatic with the courts
So we have leases and we don't anticipate for them not to honor their leases
And I might just add one aspect, which is, in 2016 the termination fees were about $20 million
We don't anticipate the termination fees in 2017 to be much more that what it was in 2016.
Again, when we did the paper exercise, we did the valuations and the valuations didn't really provide any surprises to us
Again, the inbound calls told us there was plenty of interest in the A assets at cap rates that we've seen deals being done, or the ones that we did
We decided that there's a lot of upside in these assets because one thing that we didn't fully appreciate was the embedded value to densify the assets and the value in these departments store boxes in the A assets
And we felt that to get the maximum value for the shareholders, we should continue down the path of continue to densify these assets and make them more live/work/play, as we've done in Ala Moana and are looking in various markets like Metro Chicago, Metro Denver, Metro New York
And so, there was – and Metro Seattle
And so, we felt that there was a lot of meat on the bone that the board didn't want to leave on the table
And I would just sort of add, you could see the strength of the portfolio because the lease spreads include the modifications
And I would also add that the average lease term is seven years, inclusive of the lease modifications
It actually should not be viewed as a acquisition based upon a cap rate
We view it as a development site
And so, effectively it was a land play for development to redevelop anchor boxes and to densify the asset as it is in, as I said, just outside the City of Philadelphia
So I don't view this to be a cap rate discussion
We brought on board a joint venture partner who's been with the asset for a long period of time, and they didn't want to proceed with doing a development asset
And we felt that at that price, we get a good current yield while we come up with our development program to densify the asset
Thank you for joining our call
As always, please contact <UNK> or <UNK> with any questions and have a great summer
