"I am sorry for our earnings miss, but I am pleased with our higher interest expense," said CEO John Bucksbaum during a quarterly earnings call Tuesday with investors. "While uneven timing of land sales and continued increases in short-term interest rates caused a year-over-year drop in earnings and funds from operations, our core operating property performance was very strong."
Consolidated interest expense in 2006 was $278.6 million or $1.15 per share versus $244.5 million or $1.02 per share in 2005. The company's share of interest expense for the unconsolidated properties was $45.9 million compared to $35.3 million for the equivalent period in 2005.
Despite some of the company's quarterly losses, Bucksbaum assured investors that there is a silver lining. Most notably, he said he was encouraged by leasing activity led by new concept stores, as well as GGP's recent union with Coach. "There has been a lot written about slowing occupancy," he told investors, "but this is one of the most robust leasing markets in our history."
Retail center occupancy was 91.2% at June 30, up from last year's 90.7%; and sales per sf were $448 versus $421 in the second quarter of 2005. In regard to lease rates, the company saw a decrease in rent per sf for new/renewal leases in its consolidated properties, which came in at $35.43 versus $36.75 for 2005.
For unconsolidated properties, rent was $39.10 versus $39.32 during the same period last year. As for leases expiring in 2006, the average rent for consolidated properties was $29.64 versus $29.63 last year; for unconsolidated properties, average rent was $36.64 compared to $32.31 in 2005.
Calling himself "bullish" on the market, Bucksbaum said he was looking forward to developments and redevelopments in the pipeline. By adding additional real estate components and mix of uses into existing properties, he says the company is hoping to enhance the image of several properties, which is good for long-term viability. "Most communities don't want to see sprawl; they want to see greater use of existing property."
He went on to say that much of the company's redevelopment has been inspired by the acquisition of department stores, with more than 20 under the company's belt and nine stores currently pending. Additionally, land sale revenues for the quarter were approximately $33 million for consolidated properties and approximately $20.3 million for unconsolidated properties, compared to $114.2 million and $28.7 million, respectively, in 2005.
BofA analysts Ross Nussbaum and Christy McElroy say GGP has significantly underperformed year-to-date, flat with its year-end 2005 level versus a 20% increase in the RMZ index. "While the stock is likely to trade lower Tuesday as investors wrestle with the reduced earnings outlook, we believe the relative underperformance already reflects concerns over the above-average interest rate exposure and the land business," they say. Following the company's quarterly announcement, GGP shares fell $1.39, or 3.05%, to $44.19.
FFO Guidance for 2006 is currently estimated to be in the range of $3.15 to $3.25 per share, which is approximately 3% to 6% higher than actual 2005 FFO of $3.06 per share.
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