Right now GGP trades at a ~5.5% cap rate which, given the current market for prime Class A regional malls (and GGP’s >$450 sales sqft), is not excessive. It does mean that further price appreciation in shares will come from operational improvements, not “value catch up”. Now the question we need to ask is whether or not there is room for more improvement and is management delivering.
From the earnings release:
“With our strong liquidity, our focus now turns to strengthening our portfolio of assets. We own strong, high‐performing assets in major markets and highly‐desirable areas from coast to coast. We have begun to create customized business plans for each of our malls, with the ultimate goal of maximizing each property and its demographics to its highest potential,” said Sandeep Mathrani, chief executive officer of GGP.
QUARTERLY OPERATIONAL HIGHLIGHTS
Comparable Tenant Sales on a trailing 12 month basis increased to $457 per square foot, an increase of 7.3% compared to the same period last year.
Regional Mall Occupancy increased 40 basis points to 92.4% over the same period last year.
Leasing volume was strong during the first quarter. In the first quarter, GGP signed 2.2 million square feet of permanent leasing space, including new and renewal leases.QUARTERLY FINANCIAL HIGHLIGHTS
Core FFO is up 2% compared to the same period last year primarily attributed to interest savings from lowered debt
balances.
CORE NOI was up $9.9 million due to decreased property operating costs and decreased provision for doubtful accounts, off‐set by reduced lease termination income in the first quarter year over year.
Property Management and Other Costs were higher compared to the same period in 2010 due to severance costs and rent at the Chicago Corporate office.
A reduction in Warrant Liability expense of $76 million in the first quarter results from a mark‐to‐market adjustment.CAPITAL TRANSACTIONS AND LIQUIDITY
GGP recently announced the refinancing of seven shopping malls representing $1.7 billion of new mortgages ($1.4 billion is GGP’s share). The seven new fixed‐rate mortgages have a weighted average term of 10.3 years and generated cash proceeds in excess of in‐place financing of approximately $400 million to GGP. Since July 2010, GGP has closed in excess of $2.5 billion of new mortgage financing.
On February 25, 2011, GGP announced an amendment to its existing $300 million three‐year senior secured revolving credit facility (the “Revolver”). The amendment increased the Revolver commitment amount up to approximately $720 million and added a provision that, subject to satisfaction of certain conditions, allows the Company to further increase the commitment amounts up to $1 billion. In April 2011, the Company increased the capacity of its credit facility to $750 million, up from $720 million. The proceeds from the refinancings combined with cash‐on‐hand increases GGP’s liquidity position to more than $2 billion.
Also in the first quarter, GGP transferred four Special Consideration Properties to their respective lenders pursuant
to agreements negotiated in conjunction with our secured property debt restructuring.“Retailers are reporting increased sales as consumer confidence continues to return. With diminishing opportunities for new retail space, malls provide great opportunities to expand retailer offerings through both traditional and non‐traditional uses. We see shopping malls playing a tremendous role in the growth of retail moving forward,” said Mathrani.
If we assume operationally we stay level in Q1 (I don’t assume they will, this is just for comparison ), just due to this we’ll get better results:
Property Management and Other Costs were higher compared to the same period in 2010 due to severance costs and rent at the Chicago Corporate office.
GGP is now paying $HHC $19.5M a year for rent at the Wacker Dr. HQ in Chicago. We’ll assume equal quarterly payments of $5M and add that to last years #. That means ~$37M of additional expenses due to severances at Hq (think Nolan, Metz etc…) were in Q1’s report. That will come down materially and add to results for the remainder of the year.
GGP is going to save ~$500M annually in interest costs from recent debt move and having an occupancy rate of 92.4% means there is plenty of room for improvement there to be had. Note: there is no disappointment here that improvement is not coming faster. Leases expire when they expire and GGP leased over 2m sqft in Q1, it is happening. More space is being filled and it is being done so at increasing rents.
As for GGP’s debt, ~75% of it is non-recourse debt meaning if an individual property gets in trouble, just “put” it back to the lender. This gives GGP the huge leverage it has with debt refinancing and lowering existing interest rates. GGP’s avg. interest rate for fixed rate property debt is 5.5%. They still have a slew of properties in the 7.5% range. I would not be surprised to see these negotiated lower in the coming months and additional interest expense saving recognized (page 11 of supplement).
The company’s investment in Brazil is performing nicely and the 15 properties and 5.2M sqft are 97% occupied. I would expect more investments in Brazil
The company’s office space is 64% leased……does maybe Brookfield Properties ($BPO) want some? They are fresh off a billion dollar cash infusion after spinning off their residential real estate unit. They could both pick up some properties they would be better at running that GGP and give GGP some cash to focus on it core strength. Just a thought.
The point here is by no means are we done seeing significant changes to GPP’s portfolio and all the changes were are likely to see will be accretive to shareholders. What has happened up until this point has been the “low hanging fruit”, the easy and obvious stuff. That doesn’t mean the other items won’t make large contributions, they will, you just can’t do everything at once.
The largest tenant in terms of % of rents is Limited Brands (Victoria Secret, Bath and Body Works) ($LTD) at 3% followed by the Gap, Inc ($GPS) at 2.8%.
The company has ~9% of its GLA expiring each year. this will also help as new leases are being signed at increasing rates.
CEO Mathrani points to the largest bull scenario for the major regional mall companies, Simon ($SPG) and $GGP as we look down the road. In 2009 and 2010 there was essentially no regional mall space delivered in the US. There will not be any in 2011 either. We have not seen this scenario before. Even projects (were there any) that are started now are not going to be ready for at least 12-18 months meaning 2012 looks lean also. Yes, there was massive over-development in the 2000’s of mall space but that was not necessarily the case with regional malls (this is evident by the low numbers of them in trouble). The Class B/C strip malls, many of which are going dark or severely suffering were the main culprit. The US population is still growing and with it the number of people who need malls is also.
This means as the economy continues to recover, GGP is going to start having strong pricing power with retailers as the inhabited retail footage in the US vs the population is shrinking. That is a major macro trend that is not going to reverse anytime soon. Even if developers want to begin to add space in earnest, financing restraints are going to make large new projects very difficult to get off the ground (if at all). Additionally, bringing a darkened strip mall back from the dead is not going to be a lenders first choice for developers seeking funds. What is more likely is expansion of existing profitable properties making the incumbents there more valuable.
If we look at it just from a sqft view for the Regional Malls, barring another recession in the next years or so, the economics of being a regional mall owner are simply going to continue to improve for a number of years, dramatically so.
Here is the earnings release, pretty generic:
GGP Reports First Quarter Financial Results and Common Share Dividend for the Second Quarter (click to open pdf)
Here is the good stuff, the supplemental:
GGP Supplemental 1Q 2011 (click to open .pdf)