Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Brookfield Property REIT Inc.Financial_Report.xls
EX-32.1 - EXHIBIT - Brookfield Property REIT Inc.ggp6302014ex-321.htm
EX-31.1 - EXHIBIT - Brookfield Property REIT Inc.ggp6302014ex-311.htm
EX-31.2 - EXHIBIT - Brookfield Property REIT Inc.ggp6302014ex-312.htm
EX-10.2 - EXHIBIT - Brookfield Property REIT Inc.ggp6302014ex-102.htm
EX-10.3 - EXHIBIT - Brookfield Property REIT Inc.ggp6302014ex-103.htm
EX-10.5 - EXHIBIT - Brookfield Property REIT Inc.ggp6302014ex-105.htm
EX-32.2 - EXHIBIT - Brookfield Property REIT Inc.ggp6302014ex-322.htm
EX-10.4 - EXHIBIT - Brookfield Property REIT Inc.ggp6302014ex-104.htm


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 quarterly period ended June 30, 2014
 
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 1-34948

GENERAL GROWTH PROPERTIES, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
27-2963337
(State or other jurisdiction of
 
(I.R.S. Employer
incorporating or organization)
 
Identification Number)
110 N. Wacker Dr., Chicago, IL
 
60606
(Address of principal executive offices)
 
(Zip Code)
 
(312) 960-5000
(Registrant’s telephone number, including area code)
 
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 “Exchange 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.  ýYes  o  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ýYes  o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o  Yes  ý No
 
Indicate by checkmark whether  the Registrant has filed all documents and reports required to be filed by Sections 12,13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  ýYes  o No

The number of shares of Common Stock, $.01 par value, outstanding on August 4, 2014 was 883,823,589.
 



GENERAL GROWTH PROPERTIES, INC.
INDEX
 
 
PAGE
NUMBER
 
 
 
Part I
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2




3


GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
June 30,
2014
 
December 31,
2013
 
(Dollars in thousands, except share and per share amounts)
Assets:
 
 
 
Investment in real estate:
 

 
 

Land
$
4,297,767

 
$
4,320,597

Buildings and equipment
18,237,236

 
18,270,748

Less accumulated depreciation
(2,099,755
)
 
(1,884,861
)
Construction in progress
471,791

 
406,930

Net property and equipment
20,907,039

 
21,113,414

Investment in and loans to/from Unconsolidated Real Estate Affiliates
2,580,966

 
2,407,698

Net investment in real estate
23,488,005

 
23,521,112

Cash and cash equivalents
242,007

 
577,271

Accounts and notes receivable, net
594,011

 
478,899

Deferred expenses, net
179,120

 
189,452

Prepaid expenses and other assets
873,416

 
995,569

Total assets
$
25,376,559

 
$
25,762,303

 
 
 
 
Liabilities:
 

 
 
Mortgages, notes and loans payable
$
15,909,223

 
$
15,672,437

Investment in Unconsolidated Real Estate Affiliates
18,416

 
17,405

Accounts payable and accrued expenses
839,386

 
970,995

Dividend payable
140,440

 
134,476

Deferred tax liabilities
28,367

 
24,667

Tax indemnification liability
321,958

 
321,958

Junior subordinated notes
206,200

 
206,200

Total liabilities
17,463,990

 
17,348,138

 
 
 
 
Redeemable noncontrolling interests:
 

 
 

Preferred
145,811

 
131,881

Common
113,892

 
97,021

Total redeemable noncontrolling interests
259,703

 
228,902

 
 
 
 
Commitments and Contingencies

 

 
 
 
 
Equity:
 

 
 

Common stock: 11,000,000,000 shares authorized, $0.01 par value, 967,222,315 issued, 883,793,730 outstanding as of June 30, 2014, and 966,998,908 issued, 911,194,605 outstanding as of December 31, 2013
9,398

 
9,395

Preferred stock:
 
 
 
500,000,000 shares authorized, $.01 par value, 10,000,000 shares issued and outstanding as of June 30, 2014 and December 31, 2013
242,042

 
242,042

Additional paid-in capital
11,362,069

 
11,372,443

Retained earnings (accumulated deficit)
(2,888,099
)
 
(2,915,723
)
Accumulated other comprehensive loss
(30,913
)
 
(38,173
)
Common stock in treasury, at cost, 55,969,390 shares as of June 30, 2014 and 28,345,108 shares as of December 31, 2013
(1,122,664
)
 
(566,863
)
Total stockholders’ equity
7,571,833

 
8,103,121

Noncontrolling interests in consolidated real estate affiliates
81,033

 
82,142

Total equity
7,652,866

 
8,185,263

Total liabilities and equity
$
25,376,559

 
$
25,762,303

 

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

4


GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands, except per share amounts)
Revenues:
 

 
 

 
 
 
 
Minimum rents
$
390,419

 
$
385,512

 
$
784,998

 
$
779,407

Tenant recoveries
185,382

 
173,782

 
367,201

 
357,856

Overage rents
5,388

 
6,372

 
15,209

 
17,721

Management fees and other corporate revenues
17,717

 
17,307

 
34,403

 
33,239

Other
18,717

 
16,570

 
44,380

 
35,573

Total revenues
617,623

 
599,543

 
1,246,191

 
1,223,796

Expenses:
 
 
 
 
 
 
 
Real estate taxes
58,816

 
52,372

 
116,173

 
119,538

Property maintenance costs
14,452

 
14,952

 
36,427

 
37,908

Marketing
4,961

 
5,764

 
10,765

 
12,268

Other property operating costs
82,980

 
84,469

 
169,882

 
170,244

Provision for doubtful accounts
2,732

 
629

 
4,973

 
2,383

Property management and other costs
40,107

 
41,558

 
85,071

 
81,897

General and administrative
28,232

 
13,124

 
39,831

 
24,057

Depreciation and amortization
177,430

 
188,038

 
351,201

 
379,745

Total expenses
409,710

 
400,906

 
814,323

 
828,040

Operating income
207,913

 
198,637

 
431,868

 
395,756

 
 
 
 
 
 
 
 
Interest and dividend income
4,856

 
298

 
11,147

 
889

Interest expense
(175,494
)
 
(186,902
)
 
(354,924
)
 
(377,417
)
Gain on foreign currency
3,772

 

 
8,955

 

Warrant liability adjustment

 

 

 
(40,546
)
Gains from changes in control of investment properties

 
219,784

 

 
219,784

Loss on extinguishment of debt

 
(27,159
)
 

 
(36,478
)
Income before income taxes, equity in income of Unconsolidated Real Estate Affiliates, discontinued operations and allocation to noncontrolling interests
41,047

 
204,658

 
97,046

 
161,988

Provision for income taxes
(3,944
)
 
(1,382
)
 
(7,636
)
 
(1,523
)
Equity in income of Unconsolidated Real Estate Affiliates
19,320

 
13,987

 
26,477

 
27,181

Equity in income of Unconsolidated Real Estate Affiliates - gain on investment

 

 

 
3,448

Income from continuing operations
56,423

 
217,263

 
115,887

 
191,094

Discontinued operations:
 
 
 
 
 
 
 
Income (loss) from discontinued operations, including gains (losses) on dispositions
120,666

 
(3,340
)
 
126,410

 
(11,803
)
Gain on extinguishment of debt

 

 
66,680

 
25,894

Discontinued operations, net
120,666


(3,340
)
 
193,090

 
14,091

Net income
177,089

 
213,923

 
308,977

 
205,185

Allocation to noncontrolling interests
(3,365
)
 
(4,548
)
 
(7,217
)
 
(7,336
)
Net income attributable to General Growth Properties, Inc.
173,724

 
209,375

 
301,760

 
197,849

Preferred stock dividends
(3,984
)
 
(3,984
)
 
(7,968
)
 
(6,109
)
Net income attributable to common stockholders
$
169,740

 
$
205,391

 
$
293,792

 
$
191,740

 
 
 
 
 
 
 
 
Basic Earnings Per Share:
 
 
 
 
 
 
 
Continuing operations
$
0.06

 
$
0.22

 
$
0.11

 
$
0.19

Discontinued operations
0.14

 

 
0.22

 
0.01

Total basic earnings per share
$
0.20

 
$
0.22

 
$
0.33

 
$
0.20

 
 
 
 
 
 
 

Diluted Earnings Per Share:
 
 
 
 
 
 
 
Continuing operations
$
0.05

 
$
0.21

 
$
0.11

 
$
0.19

Discontinued operations
0.13

 

 
0.20

 
0.01

Total diluted earnings per share
$
0.18

 
$
0.21

 
$
0.31

 
$
0.20

Dividends declared per share
$
0.15

 
$
0.12

 
$
0.30

 
$
0.24


5


GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)
 
 
 
 
 
 
 
 
Comprehensive Income, Net:
 

 
 

 
 
 
 
Net income
$
177,089

 
$
213,923

 
$
308,977

 
$
205,185

Other comprehensive income
 
 
 
 
 
 
 
Net unrealized gains on financial instruments
(33
)
 

 
(33
)
 

Foreign currency translation
3,194

 
(60,575
)
 
7,145

 
(50,927
)
Unrealized gains on available-for-sale securities

 
682

 

 
931

Other comprehensive income (loss)
3,161

 
(59,893
)
 
7,112

 
(49,996
)
Comprehensive income
180,250

 
154,030

 
316,089

 
155,189

Comprehensive income allocated to noncontrolling interests
(3,202
)
 
(4,154
)
 
(7,069
)
 
(6,996
)
Comprehensive income attributable to General Growth Properties, Inc.
177,048

 
149,876

 
309,020

 
148,193

Preferred stock dividends
(3,984
)
 
(3,984
)
 
(7,968
)
 
(6,109
)
Comprehensive income, net, attributable to common stockholders
$
173,064

 
$
145,892

 
$
301,052

 
$
142,084


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

6


GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
 
Common
Stock
 
Preferred
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
(Accumulated
Deficit)
 
Accumulated 
Other
Comprehensive
Income (Loss)
 
Common
Stock in
Treasury
 
Noncontrolling
Interests in
Consolidated 
Real Estate 
Affiliates
 
Total
Equity
 
(Dollars in thousands, except for share amounts)
Balance at January 1, 2013
$
9,392

 
$

 
$
10,432,447

 
$
(2,732,787
)
 
$
(87,354
)
 
$

 
$
83,322

 
$
7,705,020

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 


 


 
197,849

 


 


 
1,270

 
199,119

Issuance of Preferred Stock, net of issuance costs


 
242,042

 

 


 


 


 


 
242,042

Distributions to noncontrolling interests in consolidated Real Estate Affiliates


 


 


 


 


 


 
(1,646
)
 
(1,646
)
Restricted stock grants, net (11,818 common shares)

 

 
4,766

 


 


 


 


 
4,766

Employee stock purchase program (84,774 common shares)

 


 
1,670

 


 


 


 


 
1,670

Stock option grants, net of forfeitures (290,438 common shares)
3

 


 
27,162

 


 


 


 


 
27,165

Cash dividends reinvested (DRIP) in stock (14,050 common shares)

 

 
293

 


 


 


 


 
293

Other comprehensive loss


 


 


 


 
(49,656
)
 


 


 
(49,656
)
Cash distributions declared ($0.24 per share)


 


 


 
(225,504
)
 


 


 


 
(225,504
)
Cash distributions on Preferred Stock


 


 


 
(6,109
)
 


 


 


 
(6,109
)
Fair value adjustment for noncontrolling interest in GGPOP


 


 
(589
)
 


 


 


 


 
(589
)
Common stock warrants


 


 
895,513

 


 


 


 


 
895,513

 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2013
$
9,395

 
$
242,042

 
$
11,361,262

 
$
(2,766,551
)
 
$
(137,010
)
 
$

 
$
82,946

 
$
8,792,084

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
$
9,395

 
$
242,042

 
$
11,372,443

 
$
(2,915,723
)
 
$
(38,173
)
 
$
(566,863
)
 
$
82,142

 
$
8,185,263

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 


 


 
301,760

 


 


 
1,115

 
302,875

Distributions to noncontrolling interests in consolidated Real Estate Affiliates


 


 


 


 


 


 
(2,224
)
 
(2,224
)
Restricted stock grants, net (31,112 common shares)
1

 

 
1,397

 


 


 


 


 
1,398

Employee stock purchase program (96,781 common shares)
1

 


 
1,970

 


 


 


 


 
1,971

Stock option grants, net of forfeitures (83,724 common shares)
1

 


 
13,600

 


 


 


 


 
13,601

Treasury stock purchases (27,624,282 common shares)


 


 


 


 


 
(555,801
)
 


 
(555,801
)

7


GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
Cash dividends reinvested (DRIP) in stock (11,790 common shares)

 

 
252

 


 


 


 


 
252

Other comprehensive income


 


 


 


 
7,260

 


 


 
7,260

Cash distributions declared ($0.30 per share)


 


 


 
(266,168
)
 


 


 


 
(266,168
)
Cash distributions on Preferred stock


 


 


 
(7,968
)
 


 


 


 
(7,968
)
Fair value adjustment for noncontrolling interest in GGPOP and other


 


 
(27,593
)
 


 


 


 


 
(27,593
)
 
 
 
 
 
 
 
 
 
 
 


 
 
 
 
Balance at June 30, 2014
$
9,398

 
$
242,042

 
$
11,362,069

 
$
(2,888,099
)
 
$
(30,913
)
 
$
(1,122,664
)
 
$
81,033

 
$
7,652,866


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


8


GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Six Months Ended June 30,
 
2014
 
2013
 
(Dollars in thousands)
Cash Flows provided by Operating Activities:
 

 
 

Net income
$
308,977

 
$
205,185

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Equity in income of Unconsolidated Real Estate Affiliates
(26,477
)
 
(27,181
)
Equity in income of Unconsolidated Real Estate Affiliates - gain on investment, net

 
(3,448
)
Distributions received from Unconsolidated Real Estate Affiliates
19,224

 
30,238

Provision for doubtful accounts
4,910

 
2,587

Depreciation and amortization
352,454

 
387,230

Amortization/write-off of deferred finance costs
5,643

 
4,291

Accretion/write-off of debt market rate adjustments
12,648

 
5,445

Amortization of intangibles other than in-place leases
44,810

 
40,858

Straight-line rent amortization
(25,317
)
 
(25,207
)
Deferred income taxes
3,570

 
(1,682
)
Litigation loss
17,854

 

(Gain) loss on dispositions, net
(122,154
)
 
765

Gains from changes in control of investment properties

 
(219,784
)
Gain on extinguishment of debt
(66,680
)
 
(25,894
)
Provisions for impairment

 
4,975

Gain on foreign currency
(8,955
)
 

Warrant liability adjustment

 
40,546

Net changes:
 

 
 

Accounts and notes receivable
(618
)
 
14,122

Prepaid expenses and other assets
25,750

 
7,406

Deferred expenses
(4,206
)
 
(30,471
)
Restricted cash
(2,593
)
 
3,377

Accounts payable and accrued expenses
(8,203
)
 
(110,512
)
Other, net
13,627

 
11,046

Net cash provided by operating activities
544,264

 
313,892

 
 
 
 
Cash Flows (used in) provided by Investing Activities:
 

 
 

Acquisition of real estate and property additions
(247,586
)
 
(63,313
)
Development of real estate and property improvements
(272,719
)
 
(175,667
)
Proceeds from sales of investment properties
206,346

 
419,976

Contributions to Unconsolidated Real Estate Affiliates
(81,617
)
 
(58,607
)
Distributions received from Unconsolidated Real Estate Affiliates in excess of income
44,961

 
101,434

Decrease in restricted cash
2,635

 
4,632

Net cash (used in) provided by investing activities
(347,980
)

228,455

 
 
 
 
Cash Flows used in Financing Activities:
 

 
 

Proceeds from refinancing/issuance of mortgages, notes and loans payable
1,751,346

 
3,662,622

Principal payments on mortgages, notes and loans payable
(1,448,244
)
 
(3,532,036
)
Deferred finance costs
(10,176
)
 
(8,864
)
Net proceeds from issuance of Preferred stock

 
242,042

Purchase of Warrants

 
(633,229
)
Common stock purchases
(555,801
)
 

Cash distributions paid to common stockholders
(260,126
)
 
(216,004
)
Cash distributions paid to preferred stockholders
(7,968
)
 
(2,125
)
Cash redemptions paid to holders of common units

 
(4,756
)
Other, net
(579
)
 
30,106

Net cash used in financing activities
(531,548
)
 
(462,244
)
 
 
 
 
Net change in cash and cash equivalents
(335,264
)
 
80,103

Cash and cash equivalents at beginning of period
577,271

 
624,815


9


GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued
(UNAUDITED)
 
Six Months Ended June 30,
 
2014
 
2013
 
(Dollars in thousands)
Cash and cash equivalents at end of period
$
242,007

 
$
704,918

 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 

 
 

Interest paid
$
344,398

 
$
485,407

Interest capitalized
8,543

 
3,878

Income taxes paid
2,934

 
4,601

Accrued capital expenditures included in accounts payable and accrued expenses
63,178

 
68,627

Non-Cash Transactions:
 
 
 
Gain on investment in Unconsolidated Real Estate Affiliates

 
3,448

Amendment of warrant agreement

 
895,513

Non-Cash Sale of Property
 
 
 
Assets
21,426

 
71,881

Liabilities and equity
(21,426
)
 
(71,881
)
Non-Cash Sale of The Grand Canal Shoppes and The Shoppes at The Palazzo:
 
 
 
Assets

 
544,435

Liabilities and equity

 
(544,435
)

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


10

GENERAL GROWTH PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)



NOTE 1                                                 ORGANIZATION
 
Readers of this Quarterly Report should refer to the Company’s (as defined below) audited consolidated financial statements for the year ended December 31, 2013 which are included in the Company’s Annual Report on Form 10-K (the “Annual Report”) for the fiscal year ended December 31, 2013 (Commission File No. 1-34948), as certain footnote disclosures which would substantially duplicate those contained in our Annual Report have been omitted from this Quarterly Report.  In the opinion of management, all adjustments necessary for a fair presentation (which include only normal recurring adjustments) have been included in this Quarterly Report.  Capitalized terms used, but not defined in this Quarterly Report, have the same meanings as in our Annual Report.
 
General
 
General Growth Properties, Inc. (“GGP” or the “Company”), a Delaware corporation, was organized in July 2010 and is a self-administered and self-managed real estate investment trust, referred to as a “REIT”.  In these notes, the terms “we,” “us” and “our” refer to GGP and its subsidiaries.
 
GGP, through its subsidiaries and affiliates, is an owner and operator of retail properties. As of June 30, 2014, we are the owner, either entirely or with joint venture partners of 120 regional malls.  In addition to regional malls, as of June 30, 2014, we owned 12 strip/other retail properties, as well as six stand-alone office buildings.
 
Substantially all of our business is conducted through GGP Operating Partnership, LP (“GGPOP”), GGP Nimbus, LP (“GGPN”) and GGP Limited Partnership (“GGPLP”, and together with GGPN, the “Operating Partnerships"), subsidiaries of GGP.  The Operating Partnerships own an interest in the properties that are part of the consolidated financial statements of GGP.  As of June 30, 2014, GGP held approximately a 99% common equity ownership (without giving effect to the potential conversion of the Preferred Units, as defined below) of the Operating Partnerships, while the remaining 1% was held by limited partners and certain previous contributors of properties to the Operating Partnerships or their predecessors.
 
GGPOP is the general partner of, and owns a 1.5% equity interest in, each Operating Partnership. GGPOP has common units of limited partnership (“Common Units”), which are redeemable for cash or, at our option, shares of GGP common stock.  It also has preferred units of limited partnership interest (“Preferred Units”), of which, certain Preferred Units can be converted into Common Units and then redeemed for cash or, at our option, shares of GGP common stock (“Convertible Preferred Units”)
(Note 10).
 
In addition to holding ownership interests in various joint ventures, the Operating Partnerships generally conduct their operations through General Growth Management, Inc. (“GGMI”), General Growth Services, Inc. (“GGSI”), and GGP REIT Services, LLC (“GGPRS”).  GGMI and GGSI are taxable REIT subsidiaries (“TRS”s), which provide management, leasing, tenant coordination, business development, marketing, strategic partnership and other services for a majority of our Unconsolidated Real Estate Affiliates (defined below) and for substantially all of our Consolidated Properties, as defined below.  GGSI also serves as a contractor to GGMI for these services. GGPRS generally provides financial, accounting, tax, legal, development, and other services to our Consolidated Properties.

 We refer to our ownership interests in properties in which we own a majority or controlling interest and, as a result, are consolidated under accounting principles generally accepted in the United States of America (“GAAP”) as the “Consolidated Properties.”  We also own interests in certain properties through joint venture entities in which we own a noncontrolling interest (“Unconsolidated Real Estate Affiliates”) and we refer to those properties as the “Unconsolidated Properties.”
 
NOTE 2                         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Principles of Consolidation and Basis of Presentation
 
The accompanying consolidated financial statements include the accounts of GGP, our subsidiaries and joint ventures in which we have a controlling interest. For consolidated joint ventures, the noncontrolling partner’s share of the assets, liabilities and operations of the joint ventures (generally computed as the joint venture partner’s ownership percentage) is included in

11

GENERAL GROWTH PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


noncontrolling interests in consolidated real estate affiliates as permanent equity of the Company. Intercompany balances and transactions have been eliminated.
 
We operate in a single reportable segment which includes the operation, development and management of retail and other rental properties, primarily regional malls.  Our portfolio is targeted to a range of market sizes and consumer tastes.  Each of our operating properties is considered a separate operating segment, as each property earns revenues and incurs expenses, individual operating results are reviewed and discrete financial information is available.  We do not distinguish or group our consolidated operations based on geography, size or type. Our operating properties have similar economic characteristics and provide similar products and services to our tenants. Further, all material operations are within the United States and no customer or tenant comprises more than 10% of consolidated revenues.  As a result, the Company’s operating properties are aggregated into a single reportable segment.
 
Reclassifications
 
Certain prior period amounts included in the Consolidated Statements of Comprehensive Income and related footnotes associated with properties we have disposed of have been reclassified to discontinued operations for all periods presented. Additionally, $18.4 million of accrued interest related to the Tax indemnification liability (Note 16) was reclassified from Accounts payable and accrued expenses to Tax indemnification liability in our Consolidated Balance Sheets presented as of December 31, 2013, as presented herein.
 
Properties
 
Real estate assets are stated at cost less any provisions for impairments.  Expenditures for significant betterments and improvements are capitalized.  Maintenance and repairs are charged to expense when incurred.  Construction and improvement costs incurred in connection with the development of new properties or the redevelopment of existing properties are capitalized.  Real estate taxes, interest costs, and internal costs associated with leasing and development overhead incurred during construction periods are capitalized.  Capitalization is based on qualified expenditures and interest rates.  Capitalized real estate taxes, interest costs, and internal costs associated with leasing and development overhead are amortized over lives which are consistent with the related assets.
 
Pre-development costs, which generally include legal and professional fees and other third-party costs directly related to the construction assets, are capitalized as part of the property being developed.  In the event a development is no longer deemed to be probable of occurring, the capitalized costs are expensed (see also our impairment policies in this note below).
 
We periodically review the estimated useful lives of our properties, and may adjust them as necessary.  The estimated useful lives of our properties range from 10 - 45 years.
 
Depreciation or amortization expense is computed using the straight-line method based upon the following estimated useful lives:
 
Years
Buildings and improvements
10 - 45
Equipment and fixtures
3 - 20
Tenant improvements
Shorter of useful life or applicable lease term
 
Acquisitions of Operating Properties
 
Acquisitions of properties are accounted for utilizing the acquisition method of accounting and, accordingly, the results of operations of acquired properties have been included in the results of operations from the respective dates of acquisition.  Estimates of future cash flows and other valuation techniques are used to allocate the purchase price of acquired property between land, buildings and improvements, equipment, assumed debt liabilities and identifiable intangible assets and liabilities such as amounts related to in-place tenant leases, acquired above and below-market tenant and ground leases, and tenant relationships.
 

12

GENERAL GROWTH PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


Identifiable intangible assets and liabilities are calculated for above-market and below-market tenant and ground leases where we are either the lessor or the lessee. The difference between the contractual rental rates and our estimate of market rental rates is measured over a period equal to the remaining non-cancelable term of the leases, including significantly below-market renewal options for which exercise of the renewal option appears to be reasonably assured.  The remaining term of leases with renewal options at terms significantly below market reflect the assumed exercise of such below-market renewal options and assume the amortization period would coincide with the extended lease term.
 
The gross asset balances of the in-place value of tenant leases are included in buildings and equipment in our Consolidated Balance Sheets.
 
Gross Asset
 
Accumulated
Amortization
 
Net Carrying
Amount
 
 
 
 
 
 
As of June 30, 2014
 

 
 

 
 

Tenant leases:
 

 
 

 
 

In-place value
$
696,009

 
$
(384,689
)
 
$
311,320

 
 
 
 
 
 
As of December 31, 2013
 
 
 
 
 
Tenant leases:
 
 
 
 
 
In-place value
$
797,311

 
$
(420,370
)
 
$
376,941

 
The above-market tenant leases and below-market ground leases are included in Prepaid expenses and other assets (Note 14); the below-market tenant leases, above-market ground leases and above-market headquarters office lease are included in Accounts payable and accrued expenses (Note 15) in our Consolidated Balance Sheets.
 
Amortization/accretion of all intangibles, including the intangibles in Note 14 and Note 15, had the following effects on our Income (loss) from continuing operations:
 
Three Months Ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Amortization/accretion effect on continuing operations
$
(53,301
)
 
$
(57,538
)
 
$
(105,780
)
 
$
(125,520
)
 
Future amortization/accretion of all intangibles, including the intangibles in Note 14 and Note 15, is estimated to decrease results from continuing operations as follows:
Year
 
Amount
2014 Remaining
 
$
83,756

2015
 
141,551

2016
 
109,824

2017
 
82,224

2018
 
54,049

 
Management Fees and Other Corporate Revenues
 
Management fees and other corporate revenues primarily represent management and leasing fees, development fees, financing fees, and fees for other ancillary services performed for the benefit of certain of the Unconsolidated Real Estate Affiliates.  Management fees are reported at 100% of the revenue earned from the joint venture in Management fees and other corporate revenues on our Consolidated Statements of Comprehensive Income.  Our share of the management fee expense incurred by the Unconsolidated Real Estate Affiliates is reported within Equity in income of Unconsolidated Real Estate Affiliates on our Consolidated Statements of Comprehensive Income and in Property management and other costs in the Condensed Combined Statements of Income in Note 6.  The following table summarizes the management fees from affiliates and our share of the management fee expense:


13

GENERAL GROWTH PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Management fees from affiliates
$
17,717

 
$
17,281

 
$
34,403

 
$
33,139

Management fee expense
(6,571
)
 
(6,146
)
 
(13,248
)
 
(12,117
)
Net management fees from affiliates
$
11,146

 
$
11,135


$
21,155


$
21,022

 
Impairment
 
Operating properties
 
We regularly review our consolidated properties for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment indicators are assessed separately for each property and include, but are not limited to, significant decreases in real estate property net operating income, significant decreases in occupancy percentage, debt maturities, management’s intent with respect to the properties and prevailing market conditions.
 
If an indicator of potential impairment exists, the property is tested for recoverability by comparing its carrying amount to the estimated future undiscounted cash flows. Although the carrying amount may exceed the estimated fair value of certain properties, a real estate asset is only considered to be impaired when its carrying amount cannot be recovered through estimated future undiscounted cash flows.  To the extent an impairment provision is determined to be necessary, the excess of the carrying amount of the property over its estimated fair value is expensed to operations.  In addition, the impairment provision is allocated proportionately to adjust the carrying amount of the asset group.  The adjusted carrying amount, which represents the new cost basis of the property, is depreciated over the remaining useful life of the property.
 
Although we may market a property for sale, there can be no assurance that the transaction will be complete until the sale is finalized.  However, GAAP requires us to utilize the Company’s expected holding period of our properties when assessing recoverability.  If we cannot recover the carrying value of these properties within the planned holding period, we will estimate the fair values of the assets and record impairment charges for properties when the estimated fair value is less than their carrying value.
 
Impairment indicators for pre-development costs, which are typically costs incurred during the beginning stages of a potential development and construction in progress, are assessed by project and include, but are not limited to, significant changes in the Company’s plans with respect to the project, significant changes in projected completion dates, tenant demand, anticipated revenues or cash flows, development costs, market factors and sustainability of development projects.
 
Impairment charges are recorded in the Consolidated Statements of Comprehensive Income when the carrying value of a property is not recoverable and it exceeds the estimated fair value of the property, which can occur in accounting periods preceding disposition and / or in the period of disposition.
 
There were no provisions for impairment for the three and six months ended June 30, 2014 and 2013, included in continuing operations of our Consolidated Statements of Comprehensive Income. There was no provision for impairment for the three and six months ended June 30, 2014, in Discontinued operations in our Consolidated Statements of Comprehensive Income. During the six months ended June 30, 2013, we recorded $5.0 million of impairment charges in Discontinued operations, net in our Consolidated Statements of Comprehensive Income, which was incurred as a result of the sale of two operating properties. One of the operating properties was previously transferred to a special servicer, and was sold in a lender-directed sale in full satisfaction of the related debt. This resulted in the recognition of a gain on extinguishment of debt of $25.9 million (Note 4). The other operating property related to a regional mall where the sales price of the property was lower than its carrying value.
 
Investment in Unconsolidated Real Estate Affiliates
 
A series of operating losses of an investee or other factors may indicate that an other-than-temporary decline in value of our investment in an Unconsolidated Real Estate Affiliate has occurred. The investment in each of the Unconsolidated Real Estate Affiliates is evaluated for valuation declines below the carrying amount.  Accordingly, in addition to the property-specific

14

GENERAL GROWTH PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


impairment analysis that we perform for such joint ventures (as part of our operating property impairment process described above), we also considered whether there were other-than-temporary declines with respect to the carrying values of our Unconsolidated Real Estate Affiliates. No impairments related to our investments in Unconsolidated Real Estate Affiliates were recognized for the three and six months ended June 30, 2014, and 2013.
 
Fair Value Measurements (Note 5)
 
The accounting principles for fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers include:
 
Level 1 - defined as observable inputs such as quoted prices for identical assets or liabilities in active markets;
Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
The impairment section above includes a discussion of all impairments recognized during the three and six months ended June 30, 2014, and 2013, which were based on Level 2 inputs.  Note 5 includes a discussion of properties measured at fair value on a non-recurring basis using Level 2 and Level 3 inputs and the fair value of debt, which is estimated on a recurring basis using Level 2 and Level 3 inputs.  Note 9 includes a discussion of our outstanding Warrants, which were measured at fair value using Level 3 inputs until the Warrant agreement was amended on March 28, 2013.  Note 10 includes a discussion of certain redeemable noncontrolling interests that are measured at fair value using Level 1 inputs.
 
Recently Issued Accounting Pronouncements
 
Effective January 1, 2015 with early adoption permitted January 1, 2014 the definition of discontinued operations has been revised to limit what qualifies for this classification and presentation to disposals of components of a company that represent strategic shifts that have (or will have) a major effect on the company’s operations and financial results. Required expanded disclosures for disposals or disposal groups that qualify for discontinued operations are intended to provide users of financial statements with enhanced information about the assets, liabilities, revenues and expenses of such discontinued operations. In addition, in accordance with this pronouncement, companies are required to disclose the pretax profit or loss of an individually significant component that does not qualify for discontinued operations treatment. Pursuant to its terms, we have elected to adopt this pronouncement effective January 1, 2015. This definition will be applied prospectively after the adoption and is anticipated to substantially reduce the number of transactions, going forward, that qualify for discontinued operations as compared to historical results.

Effective January 1, 2017, companies will be required to apply a five-step model in accounting for revenue arising from contracts with customers. The core principle of the revenue model is that a company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Lease contracts will be excluded from this revenue recognition criteria; however, the sale of real estate will be required to follow the new model. Expanded quantitative and qualitative disclosures regarding revenue recognition will be required for contracts that are subject to this pronouncement. The Company is evaluating the potential impact of this pronouncement on its consolidated financial statements.
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP 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 periods. For example, estimates and assumptions have been made with respect to fair values of assets and liabilities for purposes of applying the acquisition method of accounting, the useful lives of assets, capitalization of development and leasing costs, provision for income taxes, recoverable amounts of receivables and deferred taxes, initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to acquisitions, impairment of long-lived assets, litigation related accruals and disclosures, and fair value of debt. Actual results could differ from these and other estimates.

15

GENERAL GROWTH PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


NOTE 3                       ACQUISITIONS AND JOINT VENTURE ACTIVITY

On June 27, 2014, we contributed $106.6 million to a joint venture that acquired acquired 685 5th Avenue in New York, New York for a gross purchase price of $521.4 million with $340.0 million in gross property-level financing. The property comprises approximately 25,000 square feet of retail space and 115,000 square feet of office space. We have a 50% interest in the joint venture and account for the joint venture under the equity method of accounting because we share control over major decisions with our joint venture partner. The property will be accounted for as an Unconsolidated Real Estate Affiliate, and is recorded within Investment in and loans to/from Unconsolidated Real Estate Affiliates on our Consolidated Balance Sheets (Note 6). In connection with the acquisition we provided an $85.3 million loan to our joint venture partner (Note 13).

On June 28, 2013, we acquired the remaining 50% interest in Quail Springs Mall in Oklahoma City, Oklahoma, from our joint venture partner, for total consideration of $90.5 million, which included $55.5 million of cash and the assumption of the remaining 50% of debt. The investment property was previously recorded under the equity method of accounting and is now consolidated. The acquisition resulted in a remeasurement of the net assets acquired to fair value and as such, we recorded Gains from changes in control of investment properties of $19.8 million for the three and six months ended June 30, 2013, as the fair value of the net assets acquired was greater than our investment in the Unconsolidated Real Estate Affiliate and the cash paid to acquire our joint venture partner’s interest. The table below summarizes the gain calculation:

Total fair value of net assets acquired
$
110,893

Previous investment in Quail Springs Mall
(35,610
)
Cash paid to acquire our joint venture partners' interest
(55,507
)
Gains from changes in control of investment properties
$
19,776


The following table summarizes the allocation of the purchase price to the net assets acquired at the date of acquisition. These allocations were based on the relative fair values of the assets acquired and liabilities assumed.

Investment in real estate, including intangible assets and liabilities
$
186,627

Fair value of debt
(77,204
)
Net working capital
1,470

Net assets acquired
$
110,893


On May 16, 2013, we formed a joint venture with TIAA-CREF Global Investments, LLC (‘‘TIAACREF’’) that holds 100% of The Grand Canal Shoppes and The Shoppes at The Palazzo in Las Vegas, Nevada. We received $411.5 million in cash, net of debt assumed of $311.9 million, and TIAACREF received a 49.9% economic interest in the joint venture. We recorded Gains from changes in control of investment properties of $200.0 million on our Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013, as a result of this transaction. We are the general partner, however we account for the joint venture under the equity method of accounting because we share control over major decisions with TIAACREF and TIAACREF has substantive participating rights. The table below summarizes the gain calculation:

Cash received from our joint venture partner
$
411,476

Proportionate share of previous investment in The Grand Canal Shoppes and The Shoppes at The Palazzo
(211,468
)
Gains from changes in control of investment properties
$
200,008





16

GENERAL GROWTH PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


NOTE 4                         DISCONTINUED OPERATIONS AND GAINS (LOSSES) ON DISPOSITIONS OF OPERATING PROPERTIES
 
All of our dispositions of consolidated operating properties for which there is no continuing involvement, for all periods presented, are included in discontinued operations in our Consolidated Statements of Comprehensive Income and are summarized in the table below.  Gains on disposition and gains on debt extinguishment are recorded in the Consolidated Statements of Comprehensive Income in the period the property is disposed.
 
During the six months ended June 30, 2014, one property, which was previously transferred to a special servicer, was sold in a lender-directed sale in full satisfaction of the debt. This resulted in a gain on extinguishment of debt of $66.7 million and a reduction of property-level debt of $79.0 million. Additionally, we sold one asset for $210.0 million, which resulted in a gain of $117.5 million. We used the net proceeds from this transaction to repay debt of $100.9 million.
 
During the six months ended June 30, 2013, we sold our interests in three assets totaling approximately 2 million square feet of gross leasable area (“GLA”), which reduced our property level debt by $121.2 million. One property, which was previously transferred to a servicer, was sold in a lender-directed sale in full satisfaction of the debt.  This resulted in a gain on extinguishment of debt of $25.9 million.
 
The following table summarizes the operations of the properties included in discontinued operations.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Retail and other revenue
$
2,707

 
$
14,176

 
$
7,075

 
$
28,928

Total revenues
2,707

 
14,176


7,075


28,928

Retail and other operating expenses
(507
)
 
10,817

 
1,835

 
22,475

Provisions for impairment

 

 

 
4,975

Total expenses
(507
)
 
10,817


1,835


27,450

Operating income
3,214


3,359


5,240


1,478

Interest expense, net
(9
)
 
(6,257
)
 
(984
)
 
(12,516
)
Gains (losses) on dispositions
117,461

 
(442
)
 
122,154

 
(765
)
Net income (loss) from operations
120,666

 
(3,340
)

126,410


(11,803
)
Gain on debt extinguishment

 

 
66,680

 
25,894

Net income from discontinued operations
$
120,666

 
$
(3,340
)

$
193,090


$
14,091


NOTE 5                         FAIR VALUE
 
Nonrecurring Fair Value of Operating Properties
 
We estimate fair value relating to impairment assessments based upon discounted cash flow and direct capitalization models that include all projected cash inflows and outflows over a specific holding period, or the negotiated sales price, if applicable.  Such projected cash flows are comprised of contractual rental revenues and forecasted rental revenues and expenses based upon market conditions and expectations for growth. Capitalization rates and discount rates utilized in these models are based on a reasonable range of current market rates for each property analyzed.  Based upon these inputs, we determined that our valuations of properties using a discounted cash flow or a direct capitalization model were classified within Level 3 of the fair value hierarchy.  For our properties for which the estimated fair value was based on negotiated sales prices, we determined that our valuation was classified within Level 2 of the fair value hierarchy.
 
Disclosure of Fair Value of Financial Instruments
 
The fair values of our financial instruments approximate their carrying amount in our consolidated financial statements except for debt.  Management’s estimates of fair value are presented below for our debt as of June 30, 2014 and December 31, 2013.


17

GENERAL GROWTH PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


 
 
June 30, 2014
 
December 31, 2013
 
 
Carrying Amount (1)
 
Estimated Fair
Value
 
Carrying Amount (1)
 
Estimated Fair
Value
Fixed-rate debt
 
$
13,711,131

 
$
14,388,366

 
$
13,919,820

 
$
13,957,952

Variable-rate debt
 
2,198,092

 
2,239,661

 
1,752,617

 
1,787,139

 
 
$
15,909,223

 
$
16,628,027

 
$
15,672,437

 
$
15,745,091

 
(1) Includes market rate adjustments of $19.1 million and $0.9 million as of June 30, 2014 and December 31, 2013, respectively.
 
The fair value of our Junior Subordinated Notes approximates their carrying amount as of June 30, 2014 and December 31, 2013.  We estimated the fair value of mortgages, notes and other loans payable using Level 2 and Level 3 inputs based on recent financing transactions, estimates of the fair value of the property that serves as collateral for such debt, historical risk premiums for loans of comparable quality, current London Interbank Offered Rate (“LIBOR”), U.S. treasury obligation interest rates and on the discounted estimated future cash payments to be made on such debt. The discount rates estimated reflect our judgment as to what the approximate current lending rates for loans or groups of loans with similar maturities and assume that the debt is outstanding through maturity. We have utilized market information as available or present value techniques to estimate the amounts required to be disclosed.  Since such amounts are estimates that are based on limited available market information for similar transactions and do not acknowledge transfer or other repayment restrictions that may exist in specific loans, it is unlikely that the estimated fair value of any such debt could be realized by immediate settlement of the obligation.


18

GENERAL GROWTH PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


NOTE 6                         UNCONSOLIDATED REAL ESTATE AFFILIATES

The following is summarized financial information for all of our Unconsolidated Real Estate Affiliates.
 
June 30, 2014
 
December 31, 2013
Condensed Combined Balance Sheets - Unconsolidated Real Estate Affiliates
 

 
 

Assets:
 

 
 

Land
$
1,055,127

 
$
1,046,354

Buildings and equipment
9,280,708

 
8,670,976

Less accumulated depreciation
(2,432,538
)
 
(2,301,054
)
Construction in progress
59,640

 
46,339

Net property and equipment
7,962,937

 
7,462,615

Cash and cash equivalents
298,870

 
260,405

Accounts and notes receivable, net
170,099

 
187,533

Deferred expenses, net
268,424

 
254,949

Prepaid expenses and other assets
203,975

 
147,182

Total assets
$
8,904,305

 
$
8,312,684

 
 
 
 
Liabilities and Owners’ Equity:
\

 
 

Mortgages, notes and loans payable
$
6,838,981

 
$
6,503,686

Accounts payable, accrued expenses and other liabilities
322,671

 
324,620

Cumulative effect of foreign currency translation (“CFCT”)
(17,036
)
 
(22,896
)
Owners’ equity, excluding CFCT
1,759,689

 
1,507,274

Total liabilities and owners’ equity
$
8,904,305

 
$
8,312,684

 
 
 
 
Investment In and Loans To/From Unconsolidated Real Estate Affiliates, Net:
 

 
 

Owners’ equity
$
1,742,653

 
$
1,484,378

Less: joint venture partners’ equity
(889,809
)
 
(760,804
)
Plus: excess investment/basis differences
1,709,706

 
1,666,719

Investment in and loans to/from Unconsolidated Real Estate Affiliates, net
$
2,562,550

 
$
2,390,293

 
 
 
 
Reconciliation - Investment In and Loans To/From Unconsolidated Real Estate Affiliates:
 

 
 

Asset - Investment in and loans to/from Unconsolidated Real Estate Affiliates
$
2,580,966

 
$
2,407,698

Liability - Investment in Unconsolidated Real Estate Affiliates
(18,416
)
 
(17,405
)
Investment in and loans to/from Unconsolidated Real Estate Affiliates, net
$
2,562,550

 
$
2,390,293


19

GENERAL GROWTH PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Condensed Combined Statements of Income - Unconsolidated Real Estate Affiliates
 
 

 
 

 
 
 
 
Revenues:
 
 

 
 

 
 
 
 
Minimum rents
 
$
212,735

 
$
186,713

 
$
398,543

 
$
367,398

Tenant recoveries
 
87,434

 
83,159

 
174,896

 
159,288

Overage rents
 
4,244

 
3,514

 
9,098

 
8,423

Other
 
7,341

 
7,982

 
19,076

 
14,872

Total revenues
 
311,754

 
281,368

 
601,613

 
549,981

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 
 
 
Real estate taxes
 
27,003

 
26,094

 
54,686

 
51,609

Property maintenance costs
 
8,304

 
7,638

 
20,006

 
16,261

Marketing
 
3,223

 
3,388

 
6,790

 
6,529

Other property operating costs
 
40,846

 
39,317

 
82,783

 
75,260

Provision for doubtful accounts
 
227

 
(159
)
 
1,043

 
1,262

Property management and other costs (1)
 
13,990

 
12,686

 
28,193

 
25,125

General and administrative
 
5,326

 
594

 
5,810

 
1,174

Depreciation and amortization
 
76,952

 
68,527

 
152,657

 
133,711

Total expenses
 
175,871

 
158,085

 
351,968

 
310,931

Operating income
 
135,883

 
123,283

 
249,645

 
239,050

 
 
 
 
 
 
 
 
 
Interest income
 
1,301

 
311

 
2,848

 
566

Interest expense
 
(73,523
)
 
(69,713
)
 
(146,395
)
 
(135,503
)
Provision for income taxes
 
(91
)
 
(132
)
 
(279
)
 
(288
)
Income from continuing operations
 
63,570

 
53,749

 
105,819

 
103,825

Net income from disposed investment
 

 
6,319

 

 
18,111

Allocation to noncontrolling interests
 
(13
)
 
(8
)
 
(17
)
 
33

Net income attributable to the ventures
 
$
63,557

 
$
60,060

 
$
105,802

 
$
121,969

 
 
 
 
 
 
 
 
 
Equity In Income of Unconsolidated Real Estate Affiliates:
 
 

 
 

 
 
 
 
Net income attributable to the ventures
 
$
63,557

 
$
60,060

 
$
105,802

 
$
121,969

Joint venture partners’ share of income
 
(34,011
)
 
(33,082
)
 
(58,224
)
 
(67,741
)
Amortization of capital or basis differences
 
(10,226
)
 
(12,991
)
 
(21,101
)
 
(27,047
)
Equity in income of Unconsolidated Real Estate Affiliates
 
$
19,320

 
$
13,987

 
$
26,477

 
$
27,181

 
(1) Includes management fees charged to the unconsolidated joint ventures by GGMI and GGSI.
 
The Unconsolidated Real Estate Affiliates represents our investments in real estate joint ventures that are not consolidated. We hold interests in 21 domestic joint ventures, comprising 31 regional malls and six strip/other retail centers, and one joint venture in Brazil. 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.  As we have joint control of these ventures with our venture partners, we account for these joint ventures under the equity method.

Unconsolidated Mortgages, Notes and Loans Payable, and Retained Debt
 
Our proportionate share of the mortgages, notes and loans payable of the unconsolidated joint ventures was $3.4 billion as of June 30, 2014 and $3.2 billion as of December 31, 2013, including Retained Debt (as defined below).  There can be no assurance that the Unconsolidated Properties will be able to refinance or restructure such debt on acceptable terms or otherwise, or that joint venture operations or contributions by us and/or our partners will be sufficient to repay such loans.

We have debt obligations in excess of our pro rata share of the debt for one of our Unconsolidated Real Estate Affiliates (“Retained Debt”). This Retained Debt represents distributed debt proceeds of the Unconsolidated Real Estate Affiliates in excess of our pro rata share of the non-recourse mortgage indebtedness.  The proceeds of the Retained Debt which were distributed to us are included as a reduction in our investment in Unconsolidated Real Estate Affiliates.  We had retained debt of $89.9 million at one property as of June 30, 2014, and $90.6 million as of December 31, 2013.  We are obligated to contribute

20

GENERAL GROWTH PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


funds on an ongoing basis, as needed, to our Unconsolidated Real Estate Affiliates in amounts sufficient to pay debt service on such Retained Debt.  If we do not contribute such funds, our distributions from such Unconsolidated Real Estate Affiliates, or our interest in, could be reduced to the extent of such deficiencies.  As of June 30, 2014, we do not anticipate an inability to perform on our obligations with respect to Retained Debt.

NOTE 7                         MORTGAGES, NOTES AND LOANS PAYABLE
 
Mortgages, notes and loans payable and the weighted-average interest rates are summarized as follows:
 
 
June 30, 2014 (1)
 
Weighted-Average
Interest Rate (2)
 
December 31, 2013 (3)
 
Weighted-Average
Interest Rate (2)
 
 
 
 
 
 
 
 
 
Fixed-rate debt:
 
 

 
 

 
 

 
 

Collateralized mortgages, notes and loans payable (4)
 
$
13,701,402

 
4.53
%
 
$
13,907,029

 
4.55
%
Corporate and other unsecured loans
 
9,729

 
4.41
%
 
12,791

 
4.41
%
Total fixed-rate debt
 
13,711,131

 
4.53
%
 
13,919,820

 
4.55
%
Variable-rate debt:
 
 

 
 

 
 

 
 

Collateralized mortgages, notes and loans payable (4)
 
2,116,292

 
2.46
%
 
1,700,817

 
2.61
%
Revolving credit facility
 
81,800

 
1.73
%
 
51,800

 
1.74
%
Total variable-rate debt
 
2,198,092

 
2.43
%
 
1,752,617

 
2.59
%
 
 
 
 
 
 
 
 
 
Total Mortgages, notes and loans payable
 
$
15,909,223

 
4.24
%
 
$
15,672,437

 
4.33
%
 
 
 
 
 
 
 
 
 
Junior Subordinated Notes
 
$
206,200

 
1.67
%
 
$
206,200

 
1.69
%
 
(1) Includes net $19.1 million of debt market rate adjustments.
(2) Represents the weighted-average interest rates on our contractual principal balances.
(3) Includes net $0.9 million of debt market rate adjustments.
(4) Properties provide mortgage collateral as guarantors.  $101.7 million of the fixed-rate balance and $1.4 billion of the variable-rate balance is cross-collateralized.
 
Collateralized Mortgages, Notes and Loans Payable
 
As of June 30, 2014, $21.4 billion of land, buildings and equipment (before accumulated depreciation) and construction in progress have been pledged as collateral for our mortgages, notes and loans payable. Certain of these consolidated secured loans, representing $1.5 billion of debt, are cross-collateralized with other properties.  Although a majority of the $15.8 billion of fixed and variable rate collateralized mortgages, notes and loans payable are non-recourse, $1.7 billion of such mortgages, notes and loans payable are recourse to the Company as guarantees on secured financings.  In addition, certain mortgage loans contain other credit enhancement provisions which have been provided by GGP.  Certain mortgages, notes and loans payable may be prepaid but are generally subject to a prepayment penalty equal to a yield-maintenance premium, defeasance or a percentage of the loan balance.
 
During the six months ended June 30, 2014, we refinanced consolidated mortgage notes totaling $1.0 billion related to six properties and generated net proceeds of $308.4 million.  The prior loans had a weighted-average term-to-maturity of 1.7 years, and a weighted-average interest rate of 4.8%.  The new loans have a weighted-average term-to-maturity of 7.3 years, and a weighted-average interest rate of 3.6%. In addition to these loans, we also obtained a $450.0 million construction loan at Ala Moana Center with an interest rate of LIBOR plus 1.9%. As of June 30, 2014, the Company has drawn $153.8 million under this loan.
 

21

GENERAL GROWTH PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


Corporate and Other Unsecured Loans
 
We have certain unsecured debt obligations, the terms of which are described below:
 
 
June 30, 2014 (2)
 
Weighted-Average
Interest Rate
 
December 31, 2013 (3)
 
Weighted-Average
Interest Rate
Unsecured debt: