August 2, 2011 / 12:42 PM / 6 years ago

REFILE-UPDATE 3-General Growth results, spin-off, see shares off

(Refiles to correct to "expected" in first paragraph)

* Q2 core FFO 20 cents/share vs Wall Street view 23 cents

* To spin off malls that generate lower sales

* Shares drop 8.6 percent (Rewrites first sentence, adds mall acquisition, analyst comment, updates share price)

By Ilaina Jonas

NEW YORK, Aug 2 (Reuters) - General Growth Properties Inc (GGP.N), the No. 2 U.S. mall owner, posted lower-than-expected earnings and said it would spin off some weaker malls, disappointing investors who sent its shares tumbling more than 8.6 percent.

The results posted on Tuesday followed a late Monday announcement that the company would put 30 lower-performing malls into a separate real estate investment trust called Rouse Properties.

Shareholders will receive shares of the new REIT in the form of a special dividend but some analysts expect little value to accrue to investors.

"It's kind of a double whammy of a weak second quarter and a spinoff which was not well received by shareholders," Keefe, Bruyette & Woods analyst Benjamin Yang said of the shares which fell $1.45 to close at $15.32.

General Growth said second-quarter core funds from operations fell 3.2 percent to $199.6 million, or 20 cents per share, from $206.1 million, or 63 cents per share, a year earlier.

The results fell short of analysts' average forecast of 23 cents per share, according to Thomson Reuters I/B/E/S.

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

Lease cancellation fees and rents linked to tenant sales fell in the second quarter at the Chicago-based company which emerged from bankruptcy in November.

Net operating income from its core properties -- the net cash from operations at the property level -- fell 2.6 percent from a year earlier.

Its chief executive officer, Sandeep Mathrani, who took over as CEO in January, defended General Growth's performance, saying he had said earlier that it would take 18 months to 24 months for the company show strong growth.

"We're going to do what's right for the business," Mathrani said in a conference call with analysts. "Our peers started this 12 months ago."

Mathrani said the second half of the year will be better than the first, as tenant sales improve and tenants who signed leases begin to occupy their stores and pay rent, adding about $25 million more a quarter.

FOCUS ON HIGH-END LOCATIONS

During the second quarter, sales at its tenants' stores rose 8.4 percent to $465 per square foot on a trailing 12-month basis, but not enough to yield rent increases. That compares with $513 per square foot for General Growth's chief rival, No.1 U.S. mall-owner Simon Property Group Inc (SPG.N).

Most Americans are spending cautiously after the financial crisis, though the rich have been buying with vigor. Retailers have focused on locating their stores in malls that generate the most revenue and bring in the most shoppers.

General Growth's top 20 malls generated $775 in sales per square foot.

Part of getting to its goal of having only high quality malls that produce at least $500 per square foot, is to shed lower-end retail centers with between $200 to $350 of sales per square foot. General Growth will not have a stake nor fund Rouse Properties.

"It's a quality asset market at the moment, and as such I would not anticipate much value to accrue to shareholders of the spin-off as such the core GGP platform is better positioned without the Rouse assets," said Richard Imperiale, president of Uniplan Investment Counsel Inc.

Meanwhile, General growth is bulking up on high-quality malls, saying it had agreed to buy Plaza Frontenac, one of two trophy malls in St. Louis. It already owns the Saint Louis Galleria Mall.

Under the proposed deal, General Growth will sell 26 percent of the Galleria to pay for 55 percent of Frontenac Plaza. An unnamed institutional partner will own the other 45 percent.

At the end of the quarter, General Growth malls owned or had an interest in 166 malls. About 92.5 percent of the space was leased, up from 91.6 percent a year earlier.

Canada's Brookfield Asset Management Inc (BAMa.TO) owns or controls about 38 percent of General Growth. Hedge fund Pershing Square Capital, headed by William Ackman, has about a 14 percent stake. Brookfield and Pershing helped recapitalize General Growth, enabling it to emerge from bankruptcy as an independent company. (Reporting by Ilaina Jonas, editing by Gerald E. McCormick, John Wallace and Tim Dobbyn)

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