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Does General Growth Have A Rouse Problem?

General Growth’s surprise miss on its fourth-quarter FFO stemmed, in part, from problems with the community development business it inherited as part of its $12.6 billion acquisition of the Rouse Co., completed in late 2004. During the fourth quarter, General Growth posted FFO were $0.91 per share, about 10 percent off what it had projected.

Its FFO from master-planned communities was 3 cents per share less than projected. Seasonal income at the properties was also 3 cents per share less than expected.

GGP CFO Bernie Friebaum said the company’s wrong projections partly stemmed from 2005 being the first full holiday season during which it was operating properties from the Rouse Co. portfolio.

Higher headquarter costs and other capital expenses accounted for 15 cents per share each and interest expense accounted for the other $0.01. Meanwhile, the company’s core operations posted strong results. Its portfolio stands 92.5 percent occupied, it posted $437 in sales per square foot and its same-store sales were 3.5 percent higher than last year.

Most analysts called the results disappointing, but only one, Prudential Equity Group, lowered its guidance on the company. But some thought the results pointed to a need for General Growth to provide more detail on how it has absorbed Rouse’s assets, particularly its master-planned communities. General Growth has been selling land out of this portfolio, and there has been some volatility in that business. Specifically, General Growth’s projections were impacted by the fact that some sales that were slated for completion in the fourth quarter were not completed until January 2006.

“We believe management should provide more tangible detail on how the Rouse assets are performing relative to interest expense on the debt incurred from the acquisition,” wrote Citigroup analyst Jonathan Litt in a research report. “It is difficult to quantify the dollar amount of benefits Rouse brings. However, General Growth can clearly add value to areas such as core leasing, sponsorship, karts and kiosks, CAM recovers and corporate savings.”

After the acquisition, General Growth mulled its options for the community development business. General Growth owns several master-planned communities including: The Woodlands and Bridgelands outside of Houston; Summerlin, in suburban Las Vegas; and Columbia, Md. It did not originally commit to retaining the portfolio. But in mid-2005, the company hired Thomas J. D'Alesandro IV to oversee the portfolio. Specifically, he focuses on evaluating redevelopment potential when there is an opportunity to transform a General Growth retail center into a mixed-use property. D'Alesandro joined General Growth from The Woodlands, a 27,000-acre master-planned community, where he spent two years as CEO of The Woodlands Development Co.

The main value in the community developments stems from the land holdings. General Growth posted total land sale revenues for the fourth quarter of $155.2 million. For the year, revenues were $468.3 million. Citigroup estimates that the land business netted about $145 million in cash in 2005.

General Growth’s stock is at about $50.50 a share. It dropped 4.2 percent from $52.10 after its earning announcement. It’s 52-week high is $52.32 per share.

In a call with investors, management was frank about the miss, but stressed the strength of its core operations. “This result is disappointing,” said CEO John Bucksbaum. “I acknowledge we made mistakes in our expectations and assumptions, but I must emphasize that none of FFO shortfall relates to core operations.”

Moreover, the company continues to be active in development and redevelopment. It has 20 projects in its redevelopment pipeline, which amounts to $725 million and has six new projects on the board with a value of $730 million. That comes off a year where it completed 14 redevelopments and opened one new project.

-- David Bodamer

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