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Marley DelDuchetto/MEDILL

General Growth Properties Inc. owns malls such as Chicago staple, Water Tower Place.

General Growth Properties benefiting from portfolio rehab

by Marley DelDuchetto
Nov 01, 2012

General Growth Properties Inc., hurt by special charges, reported a hefty third-quarter net loss -- but underlying profitability at the big mall operator strengthened with the help of a portfolio streamlining.

The Chicago-based real estate investment trust had a net loss in the latest quarter of $207.9 million, or 23 cents per diluted share, due in part to a $98 million asset-impairment charge as well as an accounting adjustment that reduced earnings by $123.4 million; in the year-ago quarter, the REIT had a net income of $252.1 million.

Investors tend to look past REITS’ bottom-line results in favor of a more commonly accepted measure of operating performance known as funds from operations, or FFO, which removes the skewing effect of depreciation.

General Growth’s FFO rose 8.8 percent in the latest period to $231.1 million, or 23 cents per share, from $212.6 million, or 22 cents per share, in the year ago period. On that basis, GGP’s earnings matched Wall Street expectations.

A victim of high leverage and the real estate market’s collapse, General Growth filed for Chapter 11 bankruptcy protection in 2009. Since exiting bankruptcy in November 2010, the company has drastically pruned its portfolio of unprofitable malls and focused efforts on driving revenue and cash flow at its most productive and profitable properties. At the end of the third quarter, GGP operated 145 malls, down by more than 200 from its 2010 holdings.

The REIT’s operation team “has done a fantastic job all year long managing our budget,” Chief Financial Officer Michael Berman told analysts in a conference call.

Paring the portfolio is generating charges, but “Our focus is on high quality malls,” CEO Sandeep Mathrani told the analysts. “We want to own and operate high quality malls in the best markets. We will be disposing of non-core facilities that do not fit.”

Even though the REIT’s profits were in line with forecasts, GGP shares closed Thursday down 44 cents, or 2.2 percent, at $19.22.

"They continue to execute their plan to improve occupancy and their net operating income,” said Alexander Goldfarb, senior REIT analyst for Sandler O’Neill + Partners. “That continued to be evident” in the results GGP released after the market’s close Wednesday evening.

The owner of such malls as Water Tower Place and Oakbrook Center said its portfolio was 95.5 percent leased at the end of the quarter, a 1.3 percent improvement from last year. For properties owned for at least a year, tenant sales rose 8.2 percent to $541 per square foot, compared to its competitor Simon Property Group Inc.’s 9.3 percent increase to $562 per square foot, according to Simon Property’s latest earnings.

During the call’s question and answer segment, several analysts asked about “the Pershing Square situation.” Pershing Square, a majority shareholder (10.2 percent stake) in General Growth, and its CEO, activist investor William Ackman, has long been agitating for GGP to be sold to Simon Property, the nation’s No. 1 mall owner.

While the situation “certainly generates a lot of headlines,,” Sandler O’Neill’s Goldfarb said in an interview,“there’s no transaction to be had because Brookfield, the majority shareholder, is very happy with its investment and Simon said in its latest earnings call that it has no interest in buying General Growth. Therefore, we don’t see a deal happening.”

For the first nine months, GGP’s net loss was $513.4 million, or 55 cents per share, compared to net income of $54.7 million a year earlier.