Tenant lease expiry
In the property rental world, tenant lease expiry is a primary cause of rent erosion. In an over-rented market, new lease terms are generally fixed in favor of the tenants, and the cost of lease renewals, or new lease agreements, forms part of the company’s freeholder irrecoverable expenditure, which drives its NOI (net operating income) down.
This kind of decrease, in turn, causes a drop in cash flow and has a direct impact on yields, as well as on the total returns of properties.
In 2015, General Growth Properties (GGP) saw 12.3% of its total leases expire, while 10.4% and 10.6% of its leases are set to expire in 2016 and 2017, respectively. Around 53.5% of the company’s total leases will be expiring in the next five years.
Because of the short-term nature of many of GGP’s leases, lease renewals will be marked to market, which could be beneficial to GGP in this rising market. On the other hand, the short-term duration of leases also affects the regular cash flow of the company.
GGP makes up 2.90% of the holdings of the SPDR DJ Wilshire REIT ETF (RWR).
In 2014, GGP’s portfolio generated total comparable tenant sales (excluding anchors) of $20.5 billion, compared to $19.9 billion in 2013. Its tenant sales PSF (per square foot) reported a modest increase of 1.06% to $570 in 2014, compared to $564 in 2013 for all its retail properties.
In 2014, the company had 74 Class A retail properties that reported tenant sales totalling $16.5 billion and tenant sales (less than 10,000 square feet) of $665 square foot contributing to ~74% of its share of net operating income.
Development and redevelopment projects
GGP currently has $2.4 billion in income-producing development and redevelopment projects in its portfolio, over 80% of which is being invested into Class A malls. The company expects to achieve a 9–11% return on its investments for all these projects.
In the next part of this series, we’ll discuss GGP’s recent revenue growth.