UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
		OF THE SECURITIES EXCHANGE ACT OF 1934
		For the period ended March 31, 2005
		or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
		OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from                        to

 

COMMISSION FILE NUMBER 001-11543

 

THE ROUSE COMPANY LP

(Exact name of registrant as specified in its charter)

 

 

          Registrant’s telephone number, including area code:  (410) 992-6000

 

N / A

(Former name, former address and former fiscal year, if changed since last report)

 

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the “Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    ý    No    o

 

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

          Yes    o    No    ý

 

 

 

THE ROUSE COMPANY LP

 

INDEX

 

					PAGE NUMBER
PART I.		Financial Information
		Item 1.		Financial Statements (Unaudited)
				Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004	3
				Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2005 and 2004	4
				Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004	5
				Notes to Consolidated Financial Statements	6
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
		Item 3.		Quantitative and Qualitative Disclosures about Market Risk	24
		Item 4.		Controls and Procedures	24
PART II.		Other Information
		Item 1.		Legal Proceedings	25
		Item 2.		Unregistered Sales of Securities and Use of Proceeds	25
		Item 3.		Defaults Upon Senior Securities	25
		Item 4.		Submission of Matters to a Vote of Security Holders	25
		Item 5.		Other Information	25
		Item 6.		Exhibits	25
		Signatures			26

 

 

 

PART I.                FINANCIAL INFORMATION

 

Item 1.           Financial Statements

 

The Rouse Company LP and Subsidiaries

A Subsidiary of General Growth Properties, Inc.

CONSOLIDATED BALANCE SHEETS

March 31, 2005 and December 31, 2004

(Unaudited)

(Dollars in thousands)

 

					December 31, 2004
		March 31, 2005			(as adjusted- See Note 3)
Assets:
Investment in real estate:
Land		$	1,315,296		$	1,311,721
Buildings and equipment		8,240,199			8,211,285
Less accumulated depreciation		(113,545		)	(36,083		)
Developments in progress		387,051			388,953
Net property and equipment		9,829,001			9,875,876
Investment in and loans to Unconsolidated Real Estate Affiliates		1,182,483			1,177,311
Investment land and land held for development and sale		1,664,298			1,638,013
Net investment in real estate		12,675,782			12,691,200
Advances to General Growth Properties, Inc.		1,047,418			650,876
Cash and cash equivalents		35,653			30,196
Accounts and notes receivable, net		66,725			49,648
Deferred expenses, net		5,776			1,220
Prepaid expenses and other assets		1,398,969			1,408,466
Total assets		$	15,230,323		$	14,831,606
Liabilities and Partners’ Capital:
Mortgage notes and other debt payable		$	6,108,581		$	5,744,317
Deferred tax liabilities		1,414,565			1,406,136
Accounts payable, accrued expenses and other liabilities		543,620			531,163
		$	8,066,766		$	7,681,616
Commitments and contingencies		—			—
Partners’ capital:
Partners’ capital		7,163,315			7,149,901
Accumulated other comprehensive income:
Unrealized net gains on available-for-sale securities		242			89
Total partners’ capital		7,163,557			7,149,990
Total liabilities and partners’ capital		$	15,230,323		$	14,831,606

 

The accompanying notes are an integral part of these consolidated statements.

 

 

3

 

The Rouse Company LP and Subsidiaries

A Subsidiary of General Growth Properties, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

For the Three Months Ended March 31, 2005 and 2004

(Unaudited)

(Dollars in thousands)

 

		Three months
		ended March 31,
		2005			2004
Revenues:
Minimum rents		$	151,098		$	136,919
Tenant recoveries		65,237			60,708
Overage rents		3,090			2,262
Land sales		61,406			108,985
Management and other fees		3,759			3,556
Other		10,708			9,274
Total revenues		295,298			321,704
Expenses:
Real estate taxes		19,897			17,752
Repairs and maintenance		24,753			26,384
Marketing		1,567			1,523
Other property operating costs		41,582			42,748
Land sales operations		54,105			68,068
Provision for doubtful accounts		1,675			2,668
Property management and other costs		5,900			7,579
Other provisions		—			2,960
Depreciation and amortization		77,489			47,825
Total expenses		226,968			217,507
Operating income		68,330			104,197
Interest income		1,459			2,074
Interest expense		(58,959		)	(59,529		)
Income taxes		(4,714		)	(18,616		)
Income allocated to minority interests		(1,140		)	(866		)
Equity in income of unconsolidated affiliates		1,656			3,298
Net gains (losses) on dispositions of interests in operating properties		—			(208		)
Income from continuing operations		6,632			30,350
Income from discontinued operations, net of income taxes:
Income from operations		—			328
Gain on dispositions		—			36,436
		—			36,764
Net income		6,632			67,114
Other comprehensive income:
Net unrealized gains on available-for-sale securities		153			586
Minimum pension liability adjustments		—			(1,866		)
Net unrealized losses on derivatives designated as cash flow hedges		—			(2,756		)
Comprehensive income, net		$	6,785		$	63,078

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

4

 

The Rouse Company LP and Subsidiaries

A Subsidiary of General Growth Properties, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2005 and 2004

(Unaudited)

(Dollars in thousands)

 

				Three months
				ended March 31,
				2005					2004
Cash flows from operating activities:
Net income				$		6,632			$		67,114
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in income of unconsolidated affiliates				(1,656			)		(3,298				)
Provision for doubtful accounts, including discontinued operations				1,675					2,694
Depreciation, including discontinued operations				77,394					44,263
Amortization, including discontinued operations				95					4,457
Net gains on dispositions of interests in operating properties, including discontinued operations				—					(36,228				)
Losses on extinguishment of debt				238					3,312
Participation expense pursuant to Contingent Stock Agreement				20,214					11,545
Land development and acquisition expenditures, net of cost of land sales				3,160					(10,578				)
Debt assumed by purchasers of land				(1,118			)		(2,036				)
Deferred income taxes				3,929					9,869
Net changes:
Accounts and notes receivable				(11,672			)		(13,227				)
Prepaid expenses and other assets				34,794					13,715
Accounts payable, accrued expenses and other liabilities				(46,569			)		(33,844				)
Other				959					4,104
Net cash provided by operating activities				88,075					61,862
Cash flows from investing activities:
Acquisition/development of real estate and improvements and additions to properties				(41,621			)		(327,958				)
Proceeds from dispositions of interest in properties				—					65,848
Increase in investments in unconsolidated affiliates				(498			)		(4,633				)
Distributions received from unconsolidated affiliates				13,594					16,614
Other				7,746					128
Net cash used by investing activities				(20,779			)		(250,001				)
Cash flows from financing activities:
Proceeds from issuance of mortgage notes and other debt payable			959,147					505,864
Principal payments on mortgage notes and other debt payable			(605,261				)	(499,399				)
Advances to General Growth Properties, Inc., net			(414,640				)	—
Repayments of Rouse Company-obligated mandatorily redeemable preferred securities			—					(79,751				)
Purchases of common stock			—					(5,646				)
Proceeds from issuance of common stock			—					221,917
Proceeds from exercise of stock options			—					22,189
Dividends paid			—					(48,253				)
Deferred financing costs			(1,478				)	(7,441				)
Other			393					(84				)
Net cash provided (used) by financing activities			(61,839				)	109,396
Net change in cash and cash equivalents			5,457					(78,743				)
Cash and cash equivalents at beginning of period			30,196					117,230
Cash and cash equivalents at end of period			$		35,653			$		38,487
Supplemental disclosure of cash flow information:
Interest paid			$		59,586			$		52,844
Interest capitalized			12,884					9,823
Non-cash investing and financing activities:
Debt assumed by purchasers of land			$		1,118			$		2,036
Purchase price partners’ capital adjustment			6,782					—
Relief of liability related to Contingent Stock Agreement :
Advances from GGP			18,098					—
Common stock issued			—					13,177
Capital lease obligations incurred			—					91
Lapses of restrictions on common stock awards and grants of common stock			—					3,465
Debt assumed by purchasers of operating properties			—					127,337
Debt and other liabilities assumed or issued in acquisition of assets			—					316,113

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

5

 

The Rouse Company LP and Subsidiaries

A Subsidiary of General Growth Properties, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 1                ORGANIZATION

 

Readers of this quarterly report should refer to the Company’s (as defined below) audited financial statements for the year ended December 31, 2004 which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (Commission File No. 001-11543), as certain footnote disclosures which would substantially duplicate those contained in the 2004 annual audited financial statements have been omitted from this report. Capitalized terms used, but not defined, in this quarterly report have the same meanings as in the Company’s 2004 Annual Report on Form 10-K.

 

The Rouse Company LP (“we,” “TRCLP,” “us,” or the “Company”) is the successor company (by merger as described below) to The Rouse Company (“TRC”). TRCLP’s primary business is the development and management of retail centers, office buildings, mixed-use projects and other commercial properties across the United States. We are also the developer of master-planned communities in and around Columbia, Maryland; Summerlin, Nevada; and Houston, Texas.

 

On August 19, 2004, TRC executed a definitive merger agreement, which was approved by TRC’s Board of Directors, with General Growth Properties, Inc. (“GGP”). On November 9, 2004, TRC’s shareholders approved the merger (the “Merger”). On November 12, 2004, the Merger was completed and TRC was merged with and into us. A subsidiary of GGP was then merged with and into us and through a series of transactions, we were converted to a limited partnership and a subsidiary of GGP. Our general partner (Rouse LLC) owns a 1% interest in us and is a wholly-owned subsidiary of GGP. Our remaining interests are owned by our limited partner, GGP Limited Partnership, which is owned approximately 81% by GGP.

 

Typically, the effects of a merger transaction are reflected on the date of the transaction in the financial statements of the acquired company by adjusting its basis of assets and liabilities to their fair values in order to reflect the purchase price paid in the acquisition. However, there are certain exceptions (related to the presence of public debt that is qualitatively or quantitatively significant) to this requirement that would allow a company to elect to not apply this general practice. Accordingly, we elected to not reflect these purchase accounting adjustments in our consolidated financial statements that were originally prepared and filed with the Securities and Exchange Commission (“SEC”) for 2004.

 

However, in 2005, we are reflecting these adjustments in our consolidated financial statements and the consolidated balance sheet for December 31, 2004 has been adjusted. In this report and all subsequent reports for 2005, the adjustments will be reflected in our consolidated statements in 2004 from the date of the Merger. As a result, a single underlying set of information can be used for both ours and GGP’s consolidated statements (see Note 3).

 

NOTE 2                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated financial statements include the accounts of The Rouse Company LP, our subsidiaries and joint ventures in which we have a controlling interest.  We also consolidate the accounts of certain variable interest entities that are considered special purpose entities where we are the primary beneficiary.  Income allocated to minority interests in these joint ventures includes the share of such properties’ operations (generally computed as the respective joint venture partner ownership percentage) applicable to such non-controlling venturers.  All significant intercompany balances and transactions have been eliminated.

 

In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods have been included.  The results for the interim periods ended March 31, 2005 and 2004 are not necessarily indicative of the results to be obtained for the full fiscal year.

 

 

6

 

Properties

 

Real estate assets are stated at cost.  For redevelopment of existing operating properties, the net carrying value of the existing property under redevelopment plus the cost for the construction and improvements incurred in connection with the redevelopment are capitalized to the extent the capitalized costs of the property do not exceed the estimated fair value of the redeveloped property when complete.  Real estate taxes incurred during construction periods are capitalized and amortized on the same basis as the related assets.  Interest costs are capitalized during periods of active construction for qualified expenditures based upon interest rates in place during the construction period until construction is substantially complete.  Capitalized interest costs are amortized over lives which are consistent with the constructed assets.

 

Pre-development costs, which generally include legal and professional fees and other third-party costs related directly to the acquisition of a property, are capitalized as part of the property being developed.  In the event a development is no longer deemed to be probable, the costs previously capitalized are written off as a component of operating expenses.

 

Construction allowances granted to tenants are capitalized and depreciated over the related lease term.  Maintenance and repairs are charged to expense when incurred.  Expenditures for significant betterments and improvements are capitalized.

 

Our real estate assets, including developments in progress, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  A real estate asset is considered to be impaired when the estimated future undiscounted operating cash flow is less than its carrying value.  To the extent an impairment has occurred, the excess of carrying value of the asset over its estimated fair value will be charged to operations.

 

Depreciation or amortization expense is computed using the straight-line method, generally based upon the following estimated useful lives:

 

 

Purchased intangibles are amortized using the straight-line method over the terms of the related leases or agreements.

 

Acquisitions of Operating Properties—Purchase Accounting due to the Merger

 

The Merger has been accounted for utilizing the purchase method and, accordingly, our properties’ results of operations subsequent to the Merger reflect a new basis of accounting from the date of acquisition. Therefore, our operating results for the three months ended March 31, 2005 reflect this new basis of our assets and liabilities. However, the 2004 results for the comparable period continue to reflect the prior TRC historical generally accepted accounting principles (“GAAP”) carrying amounts. Estimates of future cash flows and other valuation techniques were used to allocate the purchase price to our properties between land, buildings and improvements, equipment and identifiable intangible assets and liabilities such as amounts related to in-place at-market leases, acquired above- and below-market leases and tenant relationships. The initial valuations used are subject to change until such information is finalized, which is expected to be no later than 12 months from the Merger date. The fair values of tangible assets have been determined on an “if vacant” basis.  The “if-vacant” fair value was allocated to land, where applicable, buildings, tenant improvements and equipment based on comparable sales and other relevant information that existed on the Merger date.

 

The estimated fair value of acquired in-place at-market leases is the cost that would have been incurred to lease the property to the occupancy level of the property at the date of the Merger. Such estimate included the fair value of leasing commissions, legal costs and tenant coordination costs that would be incurred to lease the property to this occupancy level. Additionally, we evaluated the time period over which such occupancy level would be achieved and included an estimate of the net operating costs (primarily real estate taxes, insurance and utilities) incurred during the lease-up period, which generally ranges up to one year.  Acquired in-place at-market leases are amortized over the average lease term.

 

Above-market and below-market in-place lease values were recorded based on the present value (using an interest rate which reflected the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and our estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease.  The capitalized above- and below-market lease values are amortized as adjustments to minimum rent revenue over the remaining non-cancelable terms of the respective leases (approximately five years).

 

 

7

 

The excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed has been recorded as goodwill.  Goodwill is not amortized but is tested for impairment at a level of reporting referred to as a reporting unit on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired.  An impairment loss for an asset group is allocated to the long-lived assets of the group on a pro-rata basis using the relative carrying amounts of those assets, unless the fair value of specific components of the reporting group are determinable without undue cost and effort.

 

Investments in Unconsolidated Real Estate Affiliates

 

We account for investments in joint ventures where we own a non-controlling joint interest using the equity method.  Under the equity method, the carrying value of our investment is adjusted for our share of the equity in earnings of such Unconsolidated Real Estate Affiliates from the date of acquisition and reduced by distributions received.  Generally, the operating agreements with respect to our Unconsolidated Real Estate Affiliates provide that assets, liabilities and funding obligations are shared in accordance with our ownership percentages.  Therefore, we generally also share in the profit and losses, cash flows and other matters relating to our Unconsolidated Real Estate Affiliates in accordance with our respective ownership percentages.  Differences between the carrying value of our investment in the Unconsolidated Real Estate Affiliates and our share of the underlying equity of such Unconsolidated Real Estate Affiliates are generally amortized over lives ranging from five to forty-five years.

 

For those joint ventures where we own less than a 5% interest and have virtually no influence on the joint venture’s operating and financial policies, we account for our investments using the cost method.

 

Cash and Cash Equivalents

 

Highly-liquid investments with maturities at dates of purchase of three months or less are classified as cash equivalents.

 

Leases

 

Leases which transfer substantially all the risks and benefits of ownership to tenants are considered finance leases and the present values of the minimum lease payments and the estimated residual values of the leased properties, if any, are accounted for as receivables.  Leases which transfer substantially all the risks and benefits of ownership to us are considered capital leases and the present values of the minimum lease payments are accounted for as assets and liabilities.

 

Deferred Expenses

 

Deferred expenses consist principally of financing fees and leasing costs and commissions.  Deferred financing fees are amortized to interest expense using the effective interest method (or other methods which approximate the effective interest method) over the terms of the respective agreements.  Deferred leasing costs and commissions are amortized using the straight-line method over the average life of the tenant leases.  Deferred expenses in the accompanying consolidated balance sheets are shown at cost, net of accumulated amortization of $0.2 million as of March 31, 2005.

 

Revenue Recognition and Related Matters

 

Minimum rent revenues are recognized on a straight-line basis over the terms of the related leases.  Minimum rent revenues also include amounts collected from tenants to allow the termination of their leases prior to their scheduled termination dates and accretion related to above- and below-market leases on properties acquired as provided by FASB Statements No. 141, “Business Combinations” (“SFAS 141”) and No. 142, “Goodwill and Intangible Assets” (“SFAS 142”) as follows:

 

 

As of March 31, 2005, straight-line rents receivable, which represent the current net cumulative rents recognized prior to when billed and collectible as provided by the terms of the leases, of approximately $7.4 million are included in accounts and notes receivable, net in the accompanying consolidated balance sheet.

 

We provide an allowance for doubtful accounts against the portion of accounts receivable, including straight-line rents, which is estimated to be uncollectible.  Such allowances are reviewed periodically based upon our recovery experience.  We also evaluate the probability of collecting future rent which is recognized currently under a straight-line methodology.  This analysis considers the long-term nature of our leases, as a certain portion of the straight-line rent currently recognizable will not be billed to the tenant until many years into the future.  Our experience relative to unbilled deferred rent receivable is that a certain portion of the amounts straight-lined into revenue are never collected from (or billed to) the tenant due to early lease terminations.  For that portion of the otherwise recognizable deferred rent that is not deemed to be probable of collection, no revenue is recognized.

 

 

8

 

Accounts and notes receivable in the accompanying consolidated balance sheets are shown net of an allowance for doubtful accounts of $30.8 million at March 31, 2005 and $30.5 million at December 31, 2004.

 

Overage rents are recognized on an accrual basis once tenant sales revenues exceed contractual tenant lease thresholds.  Recoveries from tenants are computed as a formula related to real estate taxes, insurance and other operating expenses and are generally recognized as revenues in the period the related costs are incurred.

 

Management and other fees primarily represent management and leasing fees, financing fees and fees for other ancillary services performed by taxable REIT subsidiaries (“TRS”) entities owned by TRCLP for the benefit of the Unconsolidated Real Estate Affiliates.  Such fees are recognized as revenue as the services are rendered.

 

Revenues from land sales are recognized using the full accrual method provided that various criteria relating to the terms of the transactions and our subsequent involvement with the land sold are met.  Revenues relating to transactions that do not meet the established criteria are deferred and recognized when the criteria are met or using the installment or cost recovery methods, as appropriate in the circumstances.  For land sale transactions in which we are required to perform additional services and incur significant costs after title has passed, revenues and cost of sales are recognized on a percentage of completion basis.

 

Cost of land sales is determined as a specified percentage of land sales revenues recognized for each community development project.  The cost ratios used are based on actual costs incurred and estimates of development costs and sales revenues to completion of each project.  The ratios are reviewed regularly and revised for changes in sales and cost estimates or development plans.  Significant changes in these estimates or development plans, whether due to changes in market conditions or other factors, could result in changes to the cost ratio used for a specific project. The increase in the bases of the land due to purchase price accounting adjustments has resulted in a significant increase in the cost ratios of our projects. The specific identification method is used to determine cost of sales for certain parcels of land, including acquired parcels we do not intend to develop or for which development is complete at the date of acquisition.

 

Income Taxes

 

Deferred income taxes are accounted for using the asset and liability method, which reflects the impact of the temporary differences between the amounts of assets and liabilities for financial reporting purposes and the bases of such assets and liabilities as measured for tax purposes.  Deferred income taxes also reflect the impact of operating loss and tax credit carry forwards based on enacted tax rates expected to be in effect when such amounts are realized or settled.  Deferred tax assets are reduced by a valuation allowance to the amount where realization is more likely than not assured after considering all available evidence, including tax planning strategies and other factors.

 

Fair Value of Financial Instruments

 

FASB Statement No. 107, “Disclosure about the Fair Value of Financial Instruments” (“SFAS 107”) requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value.  SFAS 107 does not apply to all balance sheet items. Fair values of financial instruments approximate their carrying value in our financial statements except for debt for which fair value information is provided in Note 7.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  For example, significant estimates and assumptions have been made with respect to useful lives of assets, capitalization of development and leasing costs, recoverable amounts of receivables and deferred taxes, initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to acquisitions, and cost ratios and completion percentages used for land sales.  Actual results could differ from these and other estimates.

 

Reclassifications

 

Certain amounts in the 2004 consolidated financial statements, including discontinued operations (Note 5), have been reclassified to conform to the current year presentation.

 

 

9

 

NOTE 3                PURCHASE PRICE ADJUSTMENTS

 

As described in Note 1, the Merger occurred on November 12, 2004 and the carrying values of all our assets and liabilities were adjusted as of such date to reflect the GGP purchase price of approximately $14.4 billion (including assumed debt and other liabilities of $7.3 billion).

 

The following table summarizes the estimated fair values of our assets at the date of the Merger with GGP.  These fair values were based, in part, on preliminary third-party market valuations. Although these fair values were based on currently available information and assumptions and estimates that we believe are reasonable at this time, they are subject to reallocation as additional information becomes available.

 

 

 

10

 

As discussed in Note 1, the following table reflects the impact of purchase accounting on the December 31, 2004 balance sheet by adding the purchase accounting adjustments to the amounts originally reported to yield the December 31, 2004 as adjusted amounts (certain amounts originally reported have been reclassified to conform to the current year presentation):

 

					Effect of
					applying			December 31,
		As originally			purchase			2004 as
(In Thousands)		reported			accounting			adjusted
Assets:
Investment in real estate:
Land		$	641,688		$	670,033		$	1,311,721
Buildings and equipment		5,243,467			2,967,818			8,211,285
Less accumulated depreciation		(1,005,502		)	969,419			(36,083		)
Developments in progress		255,597			133,356			388,953
Net property and equipment		5,135,250			4,740,626			9,875,876
Investment in and loans to Unconsolidated Real Estate Affiliates		528,899			648,412			1,177,311
Investment land and land held for development and sale		512,450			1,125,563			1,638,013
Net investment in real estate		6,176,599			6,514,601			12,691,200
Advances to General Growth Properties, Inc.		650,876			—			650,876
Cash and cash equivalents		30,196			—			30,196
Accounts and notes receivable, net		49,648			—			49,648
Deferred expenses, net		170,970			(169,750		)	1,220
Prepaid expenses and other assets		545,926			862,540			1,408,466
Total assets		$	7,624,215		$	7,207,391		$	14,831,606
Liabilities and Partners’ Capital:
Mortgage notes and other debt payable		$	5,629,010		$	115,307		$	5,744,317
Deferred tax liabilities		94,526			1,168,887			1,406,136
Accounts payable, accrued expenses and other liabilities		687,725			(13,839		)	531,163
		$	6,411,261		$	1,270,355		$	7,681,616
Commitments and contingencies
Partners’ capital:
Partners’ capital		1,217,244			5,932,657			7,149,901
Accumulated other comprehensive income (loss):
Minimum pension liability adjustment		(312		)	312			—
Unrealized net gains (losses) on available-for-sale securities		(126		)	215			89
Unrealized net gains (losses) on derivatives designated as cash flow hedges		(3,852		)	3,852			—
Total partners’ capital		1,212,954			5,937,036			7,149,990
Total liabilities and partners’ capital		$	7,624,215		$	7,207,391		$	14,831,606

 

NOTE 4                ACQUISITION AND DEVELOPMENT ACTIVITIES

 

Acquisition and development activities included the following:

 

•                  In March 2004, we acquired Providence Place, a regional retail center in Providence, Rhode Island for $581.6 million, including assumed debt of $306.9 million).

 

•                  In November 2004, we purchased Oxmoor Center, a regional center in Louisville, Kentucky for $130.0 million, including $66.5 million of assumed debt.

 

•                  We are an investor in a consolidated joint venture that is developing The Shops at La Cantera, a regional retail center in San Antonio, Texas, expected to open in September 2005.

 

 

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NOTE 5                DISCONTINUED OPERATIONS

 

In October 2004, we sold our interests in two office buildings in Hunt Valley, Maryland for $8.4 million.

 

In May 2004, we sold our interest in one office building in Hughes Center, a master-planned business park in Las Vegas, Nevada, as part of the 2003 agreements under which we acquired interests in entities developing The Woodlands, a master-planned community in the Houston, Texas metropolitan area, for cash of $7.0 million and the assumption by the buyer of $3.5 million of mortgage debt. We recorded a gain on this sale of $5.5 million. In January and February 2004, we sold interests in five office buildings and seven parcels subject to ground leases in Hughes Center as part of the same 2003 agreement, for cash of $64.3 million and the assumption by the buyer of $107.3 million of mortgage debt. We recorded aggregate gains on these sales in the first quarter of 2004 of approximately $35.3 million (net of deferred income taxes of $2.7 million).

 

In March 2004, we sold our interests in Westdale Mall, a retail center in Cedar Rapids, Iowa, for cash of $1.3 million and the assumption by the buyer of $20.0 million of mortgage debt. We recognized a gain of $0.8 million relating to this sale. The operating results of the properties included in discontinued operations are summarized as follows (in thousands) for the three months ended March 31, 2004:

 

 

As all of the above-mentioned dispositions occurred in 2004 and, as no additional operating assets held as of March 31, 2005 or December 31, 2004 have been designated as held for sale, no amounts have been categorized as discontinued operations in 2005.

 

NOTE 6                INVESTMENTS IN UNCONSOLIDATED AFFILIATES

 

As of March 31, 2005 and December 31, 2004, we held ownership interests in various unconsolidated joint ventures, collectively, the “Unconsolidated Real Estate Affiliates.”  Generally, we share in the profits and losses, cash flows and other matters relating to our investments in Unconsolidated Real Estate Affiliates in accordance with our respective ownership percentages.  We manage most of the properties owned by these joint ventures.  Some of the joint ventures have elected to be treated as REITs for income tax purposes.

 

The significant accounting policies used by the Unconsolidated Real Estate Affiliates are the same as ours.

 

 

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Condensed Combined Financial Information of Unconsolidated Real Estate Affiliates

 

The following is condensed combined financial information for our Unconsolidated Real Estate Affiliates as of March 31, 2005 and December 31, 2004 and for the three months ended March 31, 2005 and 2004 (in thousands):

 

 

 

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NOTE 7                MORTGAGE NOTES AND OTHER DEBT PAYABLE

 

Debt is summarized as follows (in thousands):

 

 

During the first quarter of 2005, we refinanced approximately $536 million of mortgage debt with $941 million of new mortgage loans on the related properties. The excess proceeds from the refinancings were used to repay $38.7 million of non-collateralized debt and the remaining proceeds were advanced to GGP.

 

The agreements relating to various loans impose limitations on us. The most restrictive of these limit the levels and types of debt we and our affiliates may incur and require us and our affiliates to maintain specified minimum levels of debt service coverage and net worth. The agreements also impose restrictions on sale, lease and certain other transactions, subject to various exclusions and limitations. These restrictions have not and are not expected to limit our normal business activities as we expect to be able to access additional funds as necessary from GGP.

 

We estimated the fair value of our debt based on quoted market prices for publicly-traded debt and on the discounted estimated future cash payments to be made for other debt.  The discount rates used approximate current lending rates for loans or groups of loans with similar maturities and credit quality, assume the debt is outstanding through maturity and consider the debt’s collateral.  We have utilized market information as available or present value techniques to estimate the amounts required to be disclosed.  Since such amounts are estimates, there can be no assurance that the disclosed value of any financial instrument could be realized by immediate settlement of the instrument.  The carrying amount and estimated fair value of our debt at March 31, 2005 and December 31, 2004 are summarized as follows (in thousands):

 

 

NOTE 8                TAX MATTERS

 

Prior to the Merger, TRC was a REIT and generally was not subject to corporate level Federal income tax on taxable income we distributed currently to our stockholders, but were liable for Federal and state income taxes with respect to our TRS.

 

Subsequent to the Merger, we are an entity disregarded for Federal income tax purposes and we are not liable for Federal income taxes, except with respect to our TRS.

 

As a subsidiary of GGP (which operates as a REIT) we own and operate several TRS that are principally engaged in the development and sale of land for residential, commercial and other uses, primarily in and around Columbia, Maryland; Summerlin, Nevada and Houston, Texas.  The TRS also operate and/or own several retail centers and office and other properties.  Except with respect to the TRS, management does not believe that we will be liable for significant income taxes at the Federal level or in most of the states in which we operate in 2005 and future years. Current Federal income taxes of the TRS are likely to increase significantly in future years as we exhaust the net loss carryforwards of certain TRS and complete certain land development projects.

 

 

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Each TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities.  At March 31, 2005 and December 31, 2004, our net deferred tax assets were $145.1 million and $145.2 million, respectively, and our net deferred tax liabilities were $1.415 billion and $1.406 billion, respectively.

 

Due to the uncertainty of the realization of certain tax carryforwards, we established valuation allowances. The majority of the valuation allowances related to net operating loss carryforwards, where there is uncertainty regarding their realizability, will more likely than not expire unused. These valuation allowances totaled $25.4 million and $24.9 million at March 31, 2005 and December 31, 2004, respectively.

 

NOTE 9                OTHER PROVISIONS

 

Other provisions and losses, net for the three months ended March 31, 2004 consisted of the following (in thousands):

 

 

NOTE 10         COMMITMENTS AND CONTINGENCIES

 

In the normal course of business, from time to time, we are involved in legal actions relating to the ownership and operations of our properties.  In management’s opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a material adverse effect on our consolidated financial position, results of operations or liquidity.

 

We lease land or buildings at certain properties from third parties.  The leases generally provide us with a right of first refusal in the event of a proposed sale of the property by the landlord.  All of our ground leases are classified as operating leases. Accordingly, rental payments are expensed as incurred and have, to the extent applicable, been straight-lined over the term of the lease.  Rental expense for the three months ended March 31, 2005 and 2004, including participation rent related to these leases and applicable amortization of above- and below-market lease valuation amounts due to purchase accounting adjustments, was $3.4 million and $1.4 million, respectively.

 

TRC acquired various assets, including Summerlin, a master-planned community in suburban Las Vegas, Nevada, in the acquisition of The Hughes Corporation (“Hughes”) in 1996.  In connection with the acquisition of Hughes, TRC entered into a Contingent Stock Agreement (“CSA”) for the benefit of the former Hughes owners or their successors (“beneficiaries”).  Under the terms of the CSA, shares of TRC common stock were issuable to the beneficiaries based on the appraised values of defined asset groups, including Summerlin, at specified termination dates through 2009 and/or cash flows from the development and/or sale of those assets prior to the termination dates.

 

On October 19, 2004, GGP delivered to the beneficiaries an executed assumption agreement whereby GGP agreed, for the benefit of the beneficiaries under the CSA, to perform the CSA as successor to TRC, in the same manner and to the same extent that TRC would be required to perform the CSA if no succession had taken place.  Under the assumption agreement, GGP assumed TRC’s obligation under the CSA to issue shares of common stock twice a year to beneficiaries under the CSA.  The amount of shares is based upon a formula set forth under the CSA and upon GGP’s stock price. In addition, under the assumption agreement, GGP agreed that following the effective time of the TRC Merger there will not be a prejudicial effect on the beneficiaries under the CSA and the representatives with respect to their receipt of securities pursuant to the CSA as a result of the TRC Merger.  GGP further agreed to indemnify and hold harmless the beneficiaries against losses arising out of any breach by GGP or us of the foregoing covenants.

 

We account for the beneficiaries’ share of earnings from the assets as an operating expense.  We account for any distributions to the beneficiaries as of the termination dates related to assets we own as of the termination date as additional investments in the related assets (that is, contingent consideration).  A total of 519,164 shares of GGP common stock, with a value of $18.1 million, were issued in February 2005 pursuant to the CSA.

 

 

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NOTE 11       SEGMENTS

 

Prior to the Merger, management of The Rouse Company had elected to present five operating segments, including retail centers, office and other properties, community development, commercial development, and corporate. Consistent with management practices of GGP, we have changed our reportable segments as follows:

 

•                  Retail and Other - includes the operation and management of regional shopping centers, office and industrial properties, downtown specialty marketplaces, the retail and non-retail rental components of mixed-use projects and community retail centers

 

•                  Community Development - includes the development and sale of land, primarily in large-scale, long-term community development projects in and around Columbia, Maryland; Summerlin, Nevada; and Houston, Texas

 

Our two business segments offer different products or services and are managed separately because each requires different operating strategies or management expertise.  We do not distinguish or group our consolidated operations on a geographic basis.  Further, all material operations are within the United States and no customer or tenant comprises more than 2% of consolidated revenues. We have recategorized the 2004 segment results to reflect the two reportable segments described above.

 

The operating measure used to assess operating results for the business segments is Real Estate Property Net Operating Income (“NOI”).  Management believes that NOI provides useful information about a property’s operating performance.

 

The accounting policies of the segments are the same as those described in Note 2, except that we account for real estate ventures in which we have joint interest and control and certain other minority interest ventures using the proportionate share method rather than the equity method.  This difference affects only the reported revenues and operating expenses of the segments and has no effect on our reported net earnings. In addition, the 2005 operations listed below reflect the application of purchase accounting as described in Notes 1 and 3.

 

 

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Operating results for the segments and reconciliations of real estate property net operating income to income from continuing operations in the consolidated financial statements are as follows (in thousands):

 

		Three Months Ended March 31,
		2005										2004
		Retail and			Community							Retail and			Community
		Other			Development			Total				Other			Development			Total
Property revenues:
Minimum rents		$	174,260		$	—		$	174,260			$	163,041		$	—		$	163,041
Tenant recoveries		76,610			—			76,610				70,433			—			70,433
Overage rents		3,421			—			3,421				2,581			—			2,581
Land sales		—			69,974			69,974				—			120,702			120,702
Other		23,554			—			23,554				26,397			—			26,397
Total property revenues		277,845			69,974			347,819				262,452			120,702			383,154
Property operating expenses:
Real estate taxes		23,906			—			23,906				20,116			—			20,116
Repairs and maintenance		27,764			—			27,764				30,371			—			30,371
Marketing		1,876			—			1,876				1,826			—			1,826
Other property and operating costs		60,248			—			60,248				64,690			—			64,690
Land sales operations		—			59,507			59,507				—			79,305			79,305
Provisions for doubtful accounts		2,100			—			2,100				3,165			—			3,165
Total property operating expenses		115,894			59,507			175,401				120,168			79,305			199,473
Real estate property net operating income		$	161,951		$	10,467		172,418				$	142,284		$	41,397		183,681
Real estate property net operating income of:
Unconsolidated Real Estate Affiliates								(24,458		)								(22,521			)
Discontinued operations								—										(2,155			)
Management and other fees								3,759										3,556
Property management and other costs								(5,900		)								(7,579			)
Other provisions								—										(2,960			)
Depreciation and amortization								(77,489		)								(47,825			)
Operating income								68,330										104,197
Interest income								1,459										2,074
Interest expense								(58,959		)								(59,529			)
Income allocated to minority interest								(1,140		)								(866			)
Income taxes								(4,714		)								(18,616			)
Equity in income of unconsolidated affiliates								1,656										3,298
Net gains (losses) on dispositions of interests in operating properties								—										(208			)
Income from continuing operations								$	6,632									$		30,350

 

The assets by segment and the reconciliation of total segment assets to the total assets in the consolidated financial statements at March 31, 2005 and December 31, 2004 are summarized as follows (in thousands):

 

 

 

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