Nov 9, 2011
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General Growth third-quarter earnings up slightly

Nov 9, 2011

General Growth Properties Inc , the No. 2 U.S. mall owner, said third-quarter earnings inched up, helped by higher revenue from its share of its tenants' stronger sales.

Core funds from operations rose to $224.2 million, or 23 cents per share, from $223.2 million, or 68 cents per share, a year earlier, when the company had fewer shares.

The results were slightly ahead of the analysts' average forecast of 22 cents per share, according to Thomson Reuters I/B/E/S.

Funds from operations, a performance measure used by real estate investment trusts, strips out the profit-reducing effect that depreciation has on earnings. Core FFO excludes noncash items and some noncomparable items.

Net operating income at the property level, excluding lower-quality malls the company plans to spin off, rose 2.4 percent but were flat from the prior quarter. Including those, third-quarter net operating income rose just 1.8 percent. That trailed the 3.8 percent rise that larger rival Simon Property Group posted for the quarter.

General Growth shares were down 0.8 percent at $14.71 on the New York Stock Exchange, outperforming the benchmark MSCI U.S. REIT Index which was was down 2.3 percent.

Sandeep Mathrani, who took over as chief executive officer in January, said in August that it would take about 18 to 24 months to reposition the Chicago-based company as an owner of top-performing U.S. malls and post strong growth.

"I don't think expectations were very high," Keefe, Bruyette & Woods analyst Benjamin Yang said. "After last quarter, it was clear it was going to take some time for the company to get up to speed."

To that end, General Growth has sold 14 properties this year for total proceeds of $662 million, eliminating $163 million of mortgage-related debt tied to them.

"We are starting to see a battleship turn," Mathrani said during a conference call with analysts.

For the full year, General Growth forecast core FFO of 93 cents to 95 cents per share, compared with analysts' estimates of 92 cents.

During the third quarter, sales at its tenants' stores rose 7.8 percent to $471 per square foot on a trailing 12-month basis. That compares with Simon's 9.3 percent rise to an average of $517 per square foot.

Most Americans are spending cautiously after the financial crisis, though the rich have been buying with vigor. Clothing retailer Gap Inc has said it expects to close about 20 percent of its stores. The leases of 35 Gap-owned stores are up in 2012 through 2014. Rents at those stores are about $20 a foot below market rent. If those stores are leased to new tenants, it could be positive for General Growth.

However, most of the stores that have closed recently are in lower-producing malls where reletting may be more difficult.

General Growth also said it has leased two-thirds of the locations formerly occupied by Borders Group Inc , the book retailer that went out of business, to tenants such as clothing retailer Forever21 and others including supermarkets.

General Growth plans to spin off its lower-end retail centers to shareholders in December, creating a new company called Rouse Properties. General Growth is expected to incur a cost of $10 million to $12 million for the spinoff process and has not yet named a CEO for the company.

At the Rouse malls, net operating income fell 5.3 percent.

"We believe Rouse will not be long-term hold for REIT investors, given low and declining quality and increasing likelihood that several of these malls could look like a field of dirt many years from now," Yang said.

General Growth also has an interest in malls in Brazil, which saw rent growth of 11 to 12 percent, with an occupancy of 98 percent.

At the end of the quarter, General Growth owned or had an interest in 167 U.S. malls. About 92.7 percent of the space was leased, up from 92.3 percent a year earlier.

Canada's Brookfield Asset Management Inc controls about 38 percent of General Growth, and hedge fund Pershing Square Capital, headed by William Ackman, has about a 14 percent stake.

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