By Darlene Bremer

Positive Mall Trends Help General Growth Properties Live Up to Its Name

It is easy for a company to include the word growth in its name as a way to attract investors seeking healthy returns. However, Chicago-based retail REIT General Growth Properties, Inc. (NYSE: GGP) has more than lived up to its name.

		A History of Growth Like many successful companies, General Growth Properties had humble beginnings.

"Our objective is to create value, profit and growth by acquiring, developing, renovating and managing regional malls in major and middle markets throughout the country," Chief Executive Officer John Bucksbaum says.

The company's formula seems to be working. In 1993, General Growth's total market capitalization, including debt and equity, was $1.2 billion and today it is almost $17 billion. To grow at that rate is considered, according to Bucksbaum, almost unheard of in the REIT industry.

GENERAL GROWTH PROPERTIES

HEADQUARTERS: 110 N. Wacker Drive, Chicago, IL 60606 PHONE: 312-960-5000 WEB SITE: www.generalgrowth.com CEO: John Bucksbaum PRESIDENT AND COO: Robert A. Michaels TICKER SYMBOL: GGP 52-WEEK HIGH: $80.80 (12/03/03) 52-WEEK LOW: $26.50 (12/12/03)* *note: 3:1 stock split on 12/8/03 CORE MARKETS: Dallas, Houston, Los Angeles, Chicago, Atlanta

General Growth specializes in developing, managing, leasing and marketing regional shopping malls throughout the U.S. At a total of 148 million square feet, the company's approximately 171 malls in 41 states are home to national, regional and local retailers. According to Bucksbaum, General Growth manages about 35 of its 171 malls for third-party owners. The company is organized as an umbrella partnership REIT (UPREIT), in which substantially all of its business is conducted through a limited partnership, General Growth Limited Partnership.

"General Growth's goal is to constantly improve and be as profitable as possible and provide shareholders with the best value, stock appreciation and dividend growth," Bucksbaum adds.

In the past decade, General Growth's per share earnings have grown 16 percent per year through consistent acquisition, redevelopment and the improvement of the merchandising mix in existing shopping centers. "In the last 10 years, our dividend has increased 12 times, and in the last three years, it has increased an average of 20 percent," Bucksbaum says.

Growing General Growth

Trends impacting the mall sector are among the most stable and robust in the REIT industry, providing General Growth and its peers ample room to continue their strong financial performances. The company's plans for future growth, according to President Bob Michaels, are to continue to do what the company does best, and that is to manage and develop properties to achieve the best results to satisfy its vision and mission. "Our properties are only as good as the consumer decides they are, so we must understand the customer and give them what they want," he says.

Bucksbaum adds that the most reliable growth comes from improving existing properties, whether through redevelopment, remerchandising, expansion or renovation. The company plans to continue to develop a limited number of new shopping centers, but will also focus on acquiring properties to grow its portfolio and provide increased profits for shareholders. Following $1.98 billion in retail acquisitions in 2003, Deutsche Bank Securities, Inc. Senior REIT Analyst Louis Taylor anticipates General Growth will acquire $500 million to $1.5 billion in retail assets in 2004.

Park Place in Tucson, Ariz.

How a company conducts business can have a great impact on its profitability, the development of its assets, and its future growth. In real estate, analysts tend to predict a company's worth in areas such as net asset value. Bucksbaum believes this can put a ceiling on what analysts believe a company is worth, because there are several other indicators, such as cash flow, dividend growth, and earnings per share.

"It's also very important to continually create a more efficient company and improve operational efficiencies," Bucksbaum says, adding that the company views its employees as a critical asset in its portfolio.

Along these lines, the company implemented its GGP University five years ago, with both online and instructor-led courses that include leadership and management training, technical classes, and courses that help employees become more proficient in their jobs. During the past four years, more than 80 percent of General Growth employees have participated in various courses, and in the past year, about 120 employees have completed the more advanced leadership classes.

"There is a 90 percent retention rate among those employees that have participated in the GGP University. Since 2000, 38 percent of employees that have taken classes have been promoted," Bucksbaum says.

General Growth is also focused on increasing value for its tenants and offers a variety of special programs aimed at providing retailers with ways to grow their companies. For example, the company's customized leasing program provides retailers with extensive analyses to help determine their retail space needs. The third-party management division provides mall owners with services focused on managing, marketing and redeveloping their properties, and, through the strategic partnerships formed by General Growth, the company provides a wide range of marketing tools to help its tenants increase sales.

Competitive Advantage

With a $7.2 billion equity market cap, General Growth is the second-largest, publicly traded regional mall REIT. Simon Property Group (NYSE: SPG), with an equity market cap of $14 billion, is the largest mall REIT and The Rouse Company (NYSE: RSE), with an equity market cap of $4.6 billion is the third-largest player.

Two major factors separate General Growth from its competition, according to Steve Sakwa, first vice president at Merrill Lynch. The first is the company's ability to acquire properties in different markets and purchase both high-profile malls with high sales figures in urban areas, as well as malls in smaller markets.

Mayfair in Wauwatasa, Wis.

"The company concentrates on diversification, while its competition tends to focus on either large or small markets," Sakwa says.

Sakwa's second point concerns the company's ability to finance projects with more leverage than most of its competition. "Because General Growth doesn't have an unsecured debt rating, it is better able to finance with more leverage on a particular asset or portfolio transaction," he says. Other REITs, such as Simon and Rouse, have unsecured debt ratings, but, according to Sakwa, General Growth is typically more aggressive in how it finances its acquisitions.

From the aspects of operations and financing, Carey Callaghan, Goldman Sachs vice president, agrees that General Growth has pursued an aggressive acquisition strategy financed heavily on floating rate debt, which has led to meaningful FFO growth. "However, variable rate exposure is a risk at 33 percent of total debt outstanding, which is well above the competition's average of 20 percent."

Michaels' view of what separates the company from its competition focuses on General Growth's understanding of its retail customers. "We really consider ourselves to be retail experts as well as real estate operators. We consider the retailer to be partners with us in our business and spend a lot more time with our retailers developing customized solutions to their needs than do most mall companies," Michaels says.

Financial Indicators and Market Position

An economy on the mend, strong demand from retailers, a dominant position in the mall industry and a strong financial position have all combined to boost the financial performance of General Growth, according to McDonald Investments.

General Growth posted a 24.5 percent increase in its diluted earnings per share (EPS) in 2003, and a 22.9 percent increase in fully diluted funds from operations (FFO) per share. For 2004, the company estimates that FFO per fully diluted share will be in the range of $2.56 to $2.66.

The company attributes the increases in earnings per share and FFO to the combination of its aggressive mall redevelopment and remerchandising, along with tax cuts, relatively stable unemployment, and the fact that consumers have kept spending.

Ala Moana Center in Honolulu

"General Growth's management has shown the ability to generate consistent FFO/share growth through a variety of economic cycles and even as the company's asset base has grown from $4 billion in 1998 to the current level of $10 billion," according to the most recent report filed by McDonald Investments. "Importantly, management indicated that growth is likely to continue. There are $300 million of redevelopments and $200 million of developments in the pipeline, and we expect $600 million of acquisition this year and next."

Real estate property net operating income (NOI) increased 23.5 percent to $1.11 billion, up from $898.8 million in 2002. Total portfolio revenues increased 24.2 percent to $1.72 billion in 2003. Total tenant sales increased 3 percent for 2003, and comparable tenant sales increase 0.4 percent versus the same period last year. In addition, total mall shop occupancy increased to 91.3 percent at the end of 2003, compared to 91.0 percent in 2002.

"Relative to size, General Growth is the number two mall developer and manager in the business in terms of any metric, including revenue, sales, square footage, number of properties, and market cap," Sakwa says. The company, he adds, has a strong presence in the industry, a tight grip on market share, and is one of the dominant players in what is becoming an increasingly consolidated segment of the REIT industry.

Bucksbaum says that 2003 was a "very good" year for performance at General Growth and an "exceptional" one from the point of view of stock market appreciation as evidenced by the company delivering a 66.1 percent total return versus 51.3 percent (47.4 percent excluding General Growth), for the NAREIT mall peer group.

"Our performance in 2003 compared even more favorably to broader indices such as the Morgan Stanley REIT Index, which appreciated 38.5 percent, the S&P 500, which increased 28.7 percent, and the NASDAQ, which appreciated 50 percent," Bucksbaum says.

According to Sakwa, General Growth remains an attractive investment for anyone looking for both income and capital appreciation of stock. "General Growth has grown its earnings at rates of 15 percent or higher over the last 10 years, which is substantially above the industry average. As a result, its stock has outperformed the REIT industry over any measurable time period," he says.

In addition, Sakwa believes that the company can generate these growth rates over at least the next three or more years. And with its older leases now becoming due for renewal, the company has the opportunity to increase rent amounts and cash flow.

Banc of America Securities rates General Growth a "buy," which is consistent with the company's overall bullish position on mall REITs. "General Growth Properties is an excellent investment based on the stock's attractive yield, likelihood of above average cash flow growth in 2004, and reasonable valuation," reports Lee Schalop, real estate analyst.

Michael Bilerman, vice president at Goldman Sachs, says that General Growth Properties is rated in-line within its cautious coverage view on the real estate sector.

"General Growth's strong expected growth in both FFO and dividends over the next five years, which we forecast at 6.5 percent and 8.5 percent, respectively, position the company as an attractive investment opportunity for total return investors," Bilerman says.

The second half of 2004, according to Bucksbaum, will be challenging because of an increased number of retailers declaring bankruptcies, such as Kay Bee Toys, Gadzooks, and Illuminations. The company's exposure to these companies is limited because, generally speaking, any single retailer accounts for less than one percent of its revenue. In addition, the company can re-lease the bankrupted retailer's space to financially stronger and more productive companies. "Even with the threat of some reductions in cash flow from this trend, we anticipate being able to maintain current levels of industry-leading, double-digit FFO per share growth," he states.

While Michaels hesitates to make any concrete predictions of performance, he believes that the retail environment in the second half of 2004 will experience consumer spending levels similar to last year. "Based on what happened during the previous holiday season, which was the best since 1999, the results in January, and sales levels during the first half of February, we will continue to see a strong retail year," Michaels says.

Although General Growth does not predict rising unemployment, that is a scenario that could threaten its current growth rates. "There is a direct correlation between employment and spending, as fewer people, naturally, spend when they are unemployed," Bucksbaum says.

According to Schalop, however, retailer bankruptcies have been low and are expected to remain that way. "In addition, while discount stores have gained market share, General Growth's mall sales continued to rise in 2003, which is a testament to both economic growth and the strength of the company's malls."

As is the case for most mall owners, repositioning department store space in the event of closures remains a potential challenge for the company, according to Bilerman. To date, he says, such closures have come at a measured pace and the company has been very imaginative in using the space for new types of tenants that can draw traffic to its centers, such as securing a Harley Davidson store to be the anchor tenant in a space that is visible from a nearby highway. "If there was, however a large number of simultaneous department store closures, the economic vitality of the effected centers could be damaged."

UPSIDE-DOWNSIDE Samplings of what analysts are saying about General Growth Properties, Inc. McDonald Investments Rating: AGGRESSIVE BUY (1/30/04) 12-Month Projected Target Price: $35 "General Growth's management has shown the ability to generate consistent FFO/share growth through a variety of economic cycles and even as the company's asset base has grown from $4 billion in 1998 to the current level of $10 billion. Importantly, management indicated that growth is likely to continue. There are $300 million of redevelopments and $200 million of developments in the pipeline, and we expect $600 million of acquisition this year and next." Deutsche Bank Securities Inc. Rating: BUY (1/28/04) 12-Month Projected Target Price: $32 "Among the REITs, GGP continues to be most adept in taking advantage of the current environment. In addition to posting solid internal growth, GGP continues to excel at the spread game, buying assets and leveraging them with attractively priced debt. We expect GGP to continue to employ this strategy to deliver sector-leading earnings growth in 2004." Credit Suisse First Boston Rating: OUTPERFORM (1/27/04) 12-month Projected Target Price: $29.50 "We are raising our 2004 FFO estimate by $0.02 to $2.60, reflecting growth of 12.6 percent. We believe this estimate is achievable given the sector's stable trends, low interest rates and modest retailer bankruptcies. In addition, we are putting forth our 2005 FFO per share estimate of $2.77 per share. This reflects per share growth of 6.5 percent." Citigroup Smith Barney Rating: HOLD, HIGH RISK (3/1/04) 12-month Projected Target Price: $32 "Our view is based on the company's above-average forecasted FFO and dividend growth rates driven by stable underlying mall industry fundamentals, a healthy acquisition appetite, and disciplined development/ redevelopment program. Although we would like to see a more conservative balance sheet, we acknowledge that the company's strategy has historically created shareholder value."

Editor's note: Merrill Lynch has no banking relationship with General Growth, does not own one percent or more of General Growth's common stock, no covering analyst or team member or any of their families owns any stock in the company, and no Merrill Lynch officer, director, or employee is an officer or director of the company.

General Growth Properties or an affiliate is an investment banking client of Goldman Sachs Group. Goldman Sachs has received compensation from General Growth Properties in the past 12 months.