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EX-32.2 - EXHIBIT 32.2 - Brookfield Property REIT Inc.ggp9302015ex-322.htm
EX-31.1 - EXHIBIT 31.1 - Brookfield Property REIT Inc.ggp9302015ex-311.htm
EX-32.1 - EXHIBIT 32.1 - Brookfield Property REIT Inc.ggp9302015ex-321.htm
EX-31.2 - EXHIBIT 31.2 - Brookfield Property REIT Inc.ggp9302015ex-312.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 September 30, 2015
 
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 November 2, 2015 was 882,494,813.
 



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


2




GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
September 30,
2015
 
December 31,
2014
 
(Dollars in thousands, except share and per share amounts)
Assets:
 
 
 
Investment in real estate:
 

 
 

Land
$
3,638,774

 
$
4,244,607

Buildings and equipment
16,318,055

 
18,028,844

Less accumulated depreciation
(2,375,762
)
 
(2,280,845
)
Construction in progress
497,181

 
703,859

Net property and equipment
18,078,248

 
20,696,465

Investment in and loans to/from Unconsolidated Real Estate Affiliates
3,490,157

 
2,604,762

Net investment in real estate
21,568,405

 
23,301,227

Cash and cash equivalents
160,670

 
372,471

Accounts and notes receivable, net
881,564

 
663,768

Deferred expenses, net
169,673

 
184,491

Prepaid expenses and other assets
1,009,483

 
813,777

Total assets
$
23,789,795

 
$
25,335,734

 
 
 
 
Liabilities:
 

 
 
Mortgages, notes and loans payable
$
14,015,550

 
$
15,998,289

Investment in Unconsolidated Real Estate Affiliates
37,610

 
35,598

Accounts payable and accrued expenses
800,248

 
934,897

Dividend payable
166,115

 
154,694

Deferred tax liabilities

 
21,240

Junior subordinated notes
206,200

 
206,200

Total liabilities
15,225,723

 
17,350,918

 
 
 
 
Redeemable noncontrolling interests:
 

 
 

Preferred
154,566

 
164,031

Common
123,812

 
135,265

Total redeemable noncontrolling interests
278,378

 
299,296

 
 
 
 
Commitments and Contingencies

 

 
 
 
 
Equity:
 

 
 

Common stock:
 
 
 
11,000,000,000 shares authorized, $0.01 par value, 965,951,483 issued, 882,432,953 outstanding as of September 30, 2015, and 968,340,597 issued, 884,912,012 outstanding as of December 31, 2014
9,385

 
9,409

Preferred Stock:
 
 
 
500,000,000 shares authorized, $.01 par value, 10,000,000 shares issued and outstanding as of September 30, 2015 and December 31, 2014
242,042

 
242,042

Additional paid-in capital
11,362,222

 
11,351,625

Retained earnings (accumulated deficit)
(2,162,995
)
 
(2,822,740
)
Accumulated other comprehensive loss
(77,437
)
 
(51,753
)
Common stock in treasury, at cost, 56,059,335 shares as of September 30, 2015 and 55,969,390 shares as of December 31, 2014
(1,124,862
)
 
(1,122,664
)
Total stockholders’ equity
8,248,355

 
7,605,919

Noncontrolling interests in consolidated real estate affiliates
26,935

 
79,601

Noncontrolling interests related to long-term incentive plan common units
10,404

 

Total equity
8,285,694

 
7,685,520

Total liabilities, redeemable noncontrolling interests and equity
$
23,789,795

 
$
25,335,734

 

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

3


GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands, except per share amounts)
Revenues:
 

 
 

 
 
 
 
Minimum rents
$
358,716

 
$
396,285

 
$
1,094,384

 
$
1,170,547

Tenant recoveries
172,515

 
186,066

 
518,040

 
552,596

Overage rents
6,455

 
9,277

 
18,755

 
24,486

Management fees and other corporate revenues
19,496

 
17,355

 
65,313

 
51,759

Other
28,142

 
18,775

 
62,956

 
63,149

Total revenues
585,324

 
627,758

 
1,759,448

 
1,862,537

Expenses:
 
 
 
 
 
 
 
Real estate taxes
57,942

 
57,430

 
170,425

 
172,686

Property maintenance costs
11,707

 
13,394

 
44,491

 
48,952

Marketing
4,273

 
4,624

 
12,849

 
15,926

Other property operating costs
79,265

 
84,581

 
227,874

 
251,646

Provision for doubtful accounts
1,622

 
355

 
6,199

 
5,211

Property management and other costs
38,685

 
34,428

 
121,847

 
119,391

General and administrative
12,627

 
12,778

 
37,395

 
52,609

Depreciation and amortization
154,228

 
182,237

 
483,026

 
528,928

Total expenses
360,349

 
389,827

 
1,104,106

 
1,195,349

Operating income
224,975

 
237,931

 
655,342

 
667,188

 
 
 
 
 
 
 
 
Interest and dividend income
13,232

 
8,536

 
34,896

 
19,801

Interest expense
(144,891
)
 
(174,109
)
 
(460,289
)
 
(528,273
)
Loss on foreign currency
(25,092
)
 
(15,972
)
 
(46,540
)
 
(7,017
)
Gain from changes in control of investment properties and other
13,399

 

 
622,412

 

Income before income taxes, equity in income of Unconsolidated Real Estate Affiliates, discontinued operations and allocation to noncontrolling interests
81,623

 
56,386

 
805,821

 
151,699

Benefit from (provision for) income taxes
17,996

 
4,800

 
29,082

 
(2,836
)
Equity in income of Unconsolidated Real Estate Affiliates
16,584

 
7,391

 
41,115

 
33,868

Unconsolidated Real Estate Affiliates - gain on investment
11,163

 

 
320,950

 

Income from continuing operations
127,366

 
68,577

 
1,196,968

 
182,731

Discontinued operations


8,822

 

 
203,649

Net income
127,366

 
77,399

 
1,196,968

 
386,380

Allocation to noncontrolling interests
(3,514
)
 
(2,791
)
 
(16,447
)
 
(10,008
)
Net income attributable to General Growth Properties, Inc.
123,852

 
74,608

 
1,180,521

 
376,372

Preferred Stock dividends
(3,984
)
 
(3,984
)
 
(11,952
)
 
(11,952
)
Net income attributable to common stockholders
$
119,868

 
$
70,624

 
$
1,168,569

 
$
364,420

 
 
 
 
 
 
 
 
Basic Earnings Per Share:
 
 
 
 
 
 
 
Continuing operations
$
0.14

 
$
0.07

 
$
1.32

 
$
0.18

Discontinued operations

 
0.01

 

 
0.23

Total basic earnings per share
$
0.14

 
$
0.08

 
$
1.32

 
$
0.41

 
 
 
 
 
 
 

Diluted Earnings Per Share:
 
 
 
 
 
 
 
Continuing operations
$
0.13

 
$
0.06

 
$
1.23

 
$
0.18

Discontinued operations

 
0.01

 

 
0.21

Total diluted earnings per share
$
0.13

 
$
0.07

 
$
1.23

 
$
0.39

Dividends declared per share
$
0.18

 
$
0.16

 
$
0.52

 
$
0.46

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

4


GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Continued)

(UNAUDITED)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands, except per share amounts)
Comprehensive Income, Net:
 

 
 

 
 
 
 
Net income
$
127,366

 
$
77,399

 
$
1,196,968

 
$
386,380

Other comprehensive loss
 
 
 
 
 
 
 
Net unrealized gains (losses) on financial instruments
16

 
6

 
16

 
(26
)
Foreign currency translation
(19,816
)
 
(12,270
)
 
(34,622
)
 
(5,124
)
Unrealized gains on available-for-sale securities
8,635

 

 
8,635

 

Other comprehensive loss
(11,165
)
 
(12,264
)
 
(25,971
)
 
(5,150
)
Comprehensive income
116,201

 
65,135

 
1,170,997

 
381,230

Comprehensive income allocated to noncontrolling interests
(3,434
)
 
(2,904
)
 
(16,160
)
 
(9,975
)
Comprehensive income attributable to General Growth Properties, Inc.
112,767

 
62,231

 
1,154,837

 
371,255

Preferred Stock dividends
(3,984
)
 
(3,984
)
 
(11,952
)
 
(11,952
)
Comprehensive income, net, attributable to common stockholders
$
108,783

 
$
58,247

 
$
1,142,885

 
$
359,303


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

5


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 and Long Term Incentive Plan Common Units
 
Total
Equity
 
(Dollars in thousands, except for share amounts)
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


 


 


 
376,372

 


 


 
1,262

 
377,634

Distributions to noncontrolling interests in consolidated Real Estate Affiliates


 


 


 


 


 


 
(3,454
)
 
(3,454
)
Restricted stock grants, net (24,744 common shares)
1

 


 
2,037

 


 


 


 


 
2,038

Employee stock purchase program (119,869 common shares)
1

 


 
2,497

 


 


 


 


 
2,498

Stock option grants, net of forfeitures (334,216 common shares)
3

 


 
22,574

 


 


 


 


 
22,577

Treasury stock purchases (27,624,282 common shares)
 
 
 
 
 
 
 
 
 
 
(555,801
)
 
 
 
(555,801
)
Cash dividends reinvested (DRIP) in stock (17,467 common shares)


 


 
384

 


 


 


 


 
384

Other comprehensive loss


 


 


 


 
(5,117
)
 


 


 
(5,117
)
Cash distributions declared ($0.46 per share)


 


 


 
(406,686
)
 


 


 


 
(406,686
)
Cash distributions on Preferred Stock


 


 


 
(11,952
)
 


 


 


 
(11,952
)
Fair value adjustment for noncontrolling interest in Operating Partnership


 


 
(27,751
)
 


 


 


 


 
(27,751
)
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2014
$
9,400

 
$
242,042

 
$
11,372,184

 
$
(2,957,989
)
 
$
(43,290
)
 
$
(1,122,664
)
 
$
79,950

 
$
7,579,633

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6


GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF EQUITY (Continued)
(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 and Long Term Incentive Plan Common Units
 
Total
Equity
 
(Dollars in thousands, except for share amounts)
Balance at January 1, 2015
$
9,409

 
$
242,042

 
$
11,351,625

 
$
(2,822,740
)
 
$
(51,753
)
 
$
(1,122,664
)
 
$
79,601

 
$
7,685,520

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 


 


 
1,180,521

 


 


 
3,340

 
1,183,861

Distributions to noncontrolling interests in consolidated Real Estate Affiliates


 


 


 


 


 


 
(53,888
)
 
(53,888
)
Long Term Incentive Plan Common Unit grants, net (1,655,576 LTIP Units)
 
 
 
 
 
 
 
 
 
 
 
 
8,286

 
8,286

Restricted stock grants, net (223,244 common shares)
2

 

 
2,769

 


 


 


 


 
2,771

Employee stock purchase program (116,936 common shares)
1

 


 
2,764

 


 


 


 


 
2,765

Stock option grants, net of forfeitures (1,216,723 common shares)
13

 


 
33,938

 


 


 


 


 
33,951

Cancellation of common shares (3,963,675 common shares)
(40
)
 
 
 
(51,700
)
 
(48,859
)
 
 
 
100,599

 
 
 

Treasury stock purchase (4,053,620 common shares)
 
 
 
 
 
 
 
 
 
 
(102,797
)
 
 
 
(102,797
)
Cash dividends reinvested (DRIP) in stock (17,658 common shares)

 

 
487

 


 


 


 


 
487

Other comprehensive loss


 


 


 


 
(25,684
)
 


 


 
(25,684
)
Cash distributions declared ($0.52 per share)


 


 


 
(459,965
)
 


 


 


 
(459,965
)
Cash distributions on Preferred Stock


 


 


 
(11,952
)
 


 


 


 
(11,952
)
Fair value adjustment for noncontrolling interest in Operating Partnership


 


 
22,339

 


 


 


 


 
22,339

 
 
 
 
 
 
 
 
 
 
 


 
 
 
 
Balance at September 30, 2015
$
9,385

 
$
242,042

 
$
11,362,222

 
$
(2,162,995
)
 
$
(77,437
)
 
$
(1,124,862
)
 
$
37,339

 
$
8,285,694


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


7


GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Nine Months Ended September 30,
 
2015
 
2014
 
(Dollars in thousands)
Cash Flows provided by Operating Activities:
 

 
 

Net income
$
1,196,968

 
$
386,380

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

 
 

Equity in income of Unconsolidated Real Estate Affiliates
(41,115
)
 
(33,868
)
Distributions received from Unconsolidated Real Estate Affiliates
47,763

 
28,041

Provision for doubtful accounts
6,199

 
5,328

Depreciation and amortization
483,026

 
536,938

Amortization/write-off of deferred finance costs
8,887

 
10,231

Accretion/write-off of debt market rate adjustments
13,305

 
13,040

Amortization of intangibles other than in-place leases
50,560

 
57,990

Straight-line rent amortization
(22,776
)
 
(37,530
)
Deferred income taxes
(36,244
)
 
(4,289
)
Litigation loss

 
17,854

Gain on dispositions, net
(13,635
)
 
(129,757
)
Unconsolidated Real Estate Affiliates - gain on investments
(320,950
)
 

Gain from changes in control of investment properties and other
(622,412
)
 

Gain on extinguishment of debt

 
(66,679
)
Loss on foreign currency
46,540

 
7,017

Net changes:
 

 
 

Accounts and notes receivable
(20,925
)
 
(1,365
)
Prepaid expenses and other assets
(11,287
)
 
(8,904
)
Deferred expenses
(29,503
)
 
(12,132
)
Restricted cash
1,185

 
(4,526
)
Accounts payable and accrued expenses
6,624

 
22,916

Other, net
24,782

 
19,713

Net cash provided by operating activities
766,992

 
806,398

 
 
 
 
Cash Flows used in Investing Activities:
 

 
 

Acquisition of real estate and property additions
(342,055
)
 
(407,067
)
Development of real estate and property improvements
(509,916
)
 
(453,718
)
Contributions to Unconsolidated Real Estate Affiliates
(134,552
)
 
(99,095
)
Proceeds from sales of investment properties
1,092,003

 
274,242

Distributions received from Unconsolidated Real Estate Affiliates in excess of income
120,981

 
364,966

Loans to joint venture partners
(271,219
)
 
(100,899
)
Acquisition of marketable securities
(33,300
)
 

Decrease in restricted cash
(27,238
)
 
3,727

Net cash used in investing activities
(105,296
)

(417,844
)
 
 
 
 
Cash Flows used in Financing Activities:
 

 
 

Proceeds from refinancing/issuance of mortgages, notes and loans payable
1,297,440

 
1,886,636

Principal payments on mortgages, notes and loans payable
(1,575,138
)
 
(1,595,058
)
Deferred finance costs
(2,138
)
 
(12,930
)
Treasury stock purchases
(100,599
)
 
(555,801
)
Distributions to noncontrolling interests in consolidated real estate affiliates
(53,888
)
 
(3,454
)
Cash distributions paid to common stockholders
(451,714
)
 
(392,699
)
Cash distributions paid to Preferred Stockholders
(11,952
)
 
(11,952
)
Cash redemptions paid to holders of common units
(1,471
)
 

Other, net
25,963

 
(991
)
Net cash used in financing activities
(873,497
)
 
(686,249
)
 
 
 
 
Net change in cash and cash equivalents
(211,801
)
 
(297,695
)
Cash and cash equivalents at beginning of period
372,471

 
577,271

Cash and cash equivalents at end of period
$
160,670

 
$
279,576


8


GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
 
Nine Months Ended September 30,
 
2015
 
2014
 
(Dollars in thousands)
 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 

 
 

Interest paid
$
456,196

 
$
518,773

Interest capitalized
10,270

 
12,718

Income taxes paid
9,323

 
8,486

Accrued capital expenditures included in accounts payable and accrued expenses
145,802

 
89,720

Non-Cash acquisition of Treasury Shares
 
 
 
Liabilities
(2,198
)
 

Equity
2,198

 

Non-Cash Sale of Property
 
 
 
Assets

 
21,426

Liabilities and equity

 
(21,426
)
Non-Cash Sale of Ala Moana (Refer to Note 3)
 
 
 

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


9

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, 2014 which are included in the Company’s Annual Report on Form 10-K (our “Annual Report”) for the fiscal year ended December 31, 2014 (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 September 30, 2015, we are the owner, either entirely or with joint venture partners, of 131 retail properties.
 
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 September 30, 2015, GGP held approximately a 99% common equity ownership (without giving effect to the potential conversion of the Preferred Units and LTIP Units as defined below) of the Operating Partnerships, while the remaining 1% is 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 (Note 10). GGPOP has full value long term incentive plan units and appreciation only long term incentive plan units (collectively “LTIP Units”), which are redeemable for cash or, at our option, shares of GGP common stock (Note 12).

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 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

10

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. The Company's chief operating decision maker is comprised of a team of several members of executive management who use Company NOI in assessing segment operating performance. 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.There are no individual operating segments that are greater than 10% of combined revenue, Company NOI, or combined assets. Company NOI excludes certain non-cash and non-comparable items such as straight-line rent and intangible asset and liability amortization, which are a result of our emergence, acquisition accounting and other capital contribution or restructuring events. 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 related to gains on extinguishment of debt that were previously presented as a distinct component of discontinued operations within the Consolidated Statements of Comprehensive Income have been collapsed within discontinued operations for all periods presented.

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 20 - 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.


11

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 September 30, 2015
 

 
 

 
 

Tenant leases:
 

 
 

 
 

In-place value
$
434,593

 
$
(271,572
)
 
$
163,021

 
 
 
 
 
 
As of December 31, 2014
 
 
 
 
 
Tenant leases:
 
 
 
 
 
In-place value
$
608,840

 
$
(362,531
)
 
$
246,309


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 from continuing operations:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Amortization/accretion effect on continuing operations
$
(33,336
)
 
$
(46,691
)
 
$
(111,224
)
 
$
(151,711
)

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
2015 Remaining
 
$
26,349

2016
 
90,716

2017
 
67,885

2018
 
43,558

2019
 
25,860


Marketable Securities

Marketable securities are comprised of equity securities that are classified as available-for-sale. Available-for-sale securities are presented in prepaid expenses and other assets on our Consolidated Balance Sheets at fair value. Unrealized gains and losses resulting from the mark-to-market of these securities are included in other comprehensive income (loss). Realized gains and losses are recognized in earnings only upon the sale of the securities and are recorded based on the weighted average cost of such securities.

Revenue Recognition and Related Matters

Minimum rents are recognized on a straight-line basis over the terms of the related operating leases, including the effect of any free rent periods. Minimum rents also include lease termination income collected from tenants to allow for the tenant to vacate

12

GENERAL GROWTH PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


their space prior to their scheduled termination dates, as well as, accretion related to above-market and below-market tenant leases on acquired properties and properties that were recorded at fair value at the Effective Date.
Overage rent is paid by a tenant when the tenant's sales exceed an agreed upon minimum amount and is recognized on an accrual basis once tenant sales exceed contractual tenant lease thresholds and is calculated by multiplying the sales in excess of the minimum amount by a percentage defined in the lease.
Tenant recoveries are established in the leases or computed based upon a formula related to real estate taxes, insurance and other property operating expenses and are generally recognized as revenues in the period the related costs are incurred.
Real estate sales are recognized whenever (1) a sale is consummated, (2) the buyer has demonstrated an adequate commitment to pay for the property, (3) the Company’s receivable is not subject to future subordination, and (4) the Company has transferred to the buyer the risks and rewards of ownership and does not have continuing involvement. Unless all conditions are met, recognition of all or a portion of the profit shall be postponed.
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.

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:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Management fees from affiliates
$
19,496

 
$
17,355

 
$
65,313

 
$
51,759

Management fee expense
(7,640
)
 
(6,555
)
 
(22,575
)
 
(19,805
)
Net management fees from affiliates
$
11,856

 
$
10,800


$
42,738


$
31,954

 
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 and 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 occur until the sale is finalized. However, GAAP requires us to utilize the Company’s expected holding period of our properties when assessing recoverability. If

13

GENERAL GROWTH PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


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.

No provisions for impairment were recognized for the three and nine months ended September 30, 2015 and 2014.

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 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. During the three and nine months ended September 30, 2015, we recorded a $3.2 million impairment charge in equity in income from Unconsolidated Real Estate Affiliates on our Consolidated Statements of Comprehensive Income. This impairment charge relates to our investment in a single property venture where we concluded that our investment was other-than-temporarily impaired due to the Company receiving a purchase offer for its investment at a price less than the carrying value. No impairments related to our investments in Unconsolidated Real Estate Affiliates were recognized for the three and nine months ended September 30, 2014.

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.

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 5 also includes a discussion of available-for-sale securities measured at fair value on a recurring basis using Level 1 inputs. 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 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 adopted this pronouncement effective January 1, 2015. This definition has been applied

14

GENERAL GROWTH PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


prospectively and is anticipated to substantially reduce the number of transactions, going forward, that qualify for discontinued operations as compared to historical results. (See Note 4).

Effective January 1, 2016, the FASB issued an update that will require us to evaluate whether we should consolidate certain legal entities.  Specifically, the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with VIEs, and (iv) provide a scope exception for certain entities. We are currently evaluating the impact of the adoption of this pronouncement on our consolidated financial statements. 

Effective January 1, 2016, companies will be required to present debt issuance costs related to a recognized debt liability (excluding revolving credit facility) as a direct deduction from the carrying amount of that debt liability on the balance sheet. The recognition and measurement guidance for debt issuance costs will not be affected. The adoption of this pronouncement will result in the reclassification of unamortized capitalized loan fees from other assets to a direct reduction of the Company’s indebtedness on the consolidated balance sheets.
Effective January 1, 2018, 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 new standard can be adopted either retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. 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.

NOTE 3        ACQUISITIONS, SALES AND JOINT VENTURE ACTIVITY

On July 7, 2015, we purchased 1,125,760 shares of Seritage Growth Properties common stock at $29.58 per share for a total of $33.3 million as part of the spinoff of Sears Holdings Corporation. This investment is classified as an available-for-sale security with changes in fair value recognized in accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. As of September 30, 2015, Seritage Growth Properties common stock traded at $37.25 per share resulting in unrealized gains of $8.6 million included in other comprehensive income (loss) in the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015.

On April 27, 2015, we sold the office portion of 200 Lafayette in New York, New York for a gross purchase price of approximately $124.5 million. This transaction resulted in a gain on sale of $11.9 million recognized in gain from changes in control of investment properties and other on our Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015.

On April 17, 2015, we and our joint venture partners acquired the Crown Building located at 730 Fifth Avenue in New York, New York for a purchase price of $1.78 billion, which was funded with $1.25 billion of secured debt. We have an effective 50% interest in the retail portion of the property. GGP and Jeff Sutton will own, redevelop, lease and manage the retail portion of the property which is $1.30 billion of the purchase price. Vladislav Doronin’s Capital Group and Michael Shvo will own, redevelop, lease and manage the office tower which is $475.0 million of the purchase price. The office tower will be redeveloped into luxury residential

15

GENERAL GROWTH PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


condominiums. Our share of the retail property purchase price is $650.0 million, and our share of the equity is $208.5 million. In connection with the acquisition, we provided $204.3 million in loans to our joint venture partners.

On April 1, 2015 we acquired a 50% interest in a joint venture to own 85 Fifth Avenue in New York, New York. The total purchase price was $86.0 million which was funded with $60.0 million of secured debt. GGP’s share of the equity is $14.0 million. In connection with the acquisition, we provided a $7.0 million loan to our joint venture partner.

On March 31, 2015, we acquired a 50% interest in a joint venture with Sears Holdings Corporation that owns anchor pads and in-place leases at 12 stores located at our properties for approximately $165.0 million. Subsequently, Sears Holdings Corporation sold its investment in the joint venture to Seritage Growth Properties. We recorded the investment in the joint venture for approximately $164.5 million ($165.0 million net of prorations and acquisition costs) to investment in and loans to/from Unconsolidated Real Estate Affiliates on our Consolidated Balance Sheet.

We account for the interests in the Crown, 85 Fifth, and Sears joint ventures under the equity method of accounting (Note 6) because we share control over major decisions with the joint venture partners which resulted in the partners obtaining substantive participating rights.

On February 27, 2015, we sold a 25% interest in Ala Moana Center in Honolulu, Hawaii for net proceeds of $907.0 million. We received $670.0 million at closing and will receive the remaining proceeds of $237.0 million in late 2016 upon completion of the redevelopment and expansion. Subsequently on April 10, 2015, we sold an additional 12.5% interest in Ala Moana Center for net proceeds of $453.5 million to another joint venture partner. We received $335.0 million at closing and will receive the remaining proceeds of $118.5 million in late 2016 upon completion of the redevelopment and expansion. As a result, our joint venture partners own a combined 37.5% economic interest in the joint venture.

Upon sale of the 25% interest in Ala Moana Center and in accordance with applicable accounting standards for real estate sales with future development required, we recognized a $584.4 million gain on change in control of investment properties and other as of the closing date calculated on the percentage of the basis (real estate asset carrying value of Ala Moana Center and development costs incurred to date) as compared to the total estimated costs expected to be incurred through completion of the development. During the nine months ended September 30, 2015, we recognized an additional $26.3 million gain on change of control of investment properties and other using the percentage of completion method for the construction completed from the closing date on February 27, 2015 through September 30, 2015. We will recognize an additional $38.0 million gain on change of control of investment properties and other through substantial completion of construction. In total, we recorded a gain from change in control of investment properties and other of $13.5 million and $610.7 million on our Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015, respectively, as a result of this transaction.

Upon sale of the 12.5% interest in Ala Moana Center and in accordance with applicable accounting standards for real estate sales with future development required, we recognized a $295.9 million gain in Unconsolidated Real Estate Affiliates - gain on investment as of the closing date calculated on the percentage of the basis (real estate asset carrying value of Ala Moana Center and development costs incurred to date) as compared to the total estimated costs expected to be incurred through completion of the development. During the nine months ended September 30, 2015, we recognized an additional $9.5 million gain in Unconsolidated Real Estate Affiliates - gain on investment using the percentage of completion method for the construction completed from the closing date on April 10, 2015 through September 30, 2015. We will recognize an additional $19.0 million gain in Unconsolidated Real Estate Affiliates - gain on investment through substantial completion of construction. In total, we recorded a gain in Unconsolidated Real Estate Affiliates - gain on investment of $6.6 million and $304.4 million on our Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015, respectively, as a result of this transaction.

We account for the 62.5% interest in the joint venture that owns Ala Moana Center under the equity method of accounting (Note 6) because we share control over major decisions with the joint venture partners which resulted in the partners obtaining substantive participating rights. Ala Moana Center was previously wholly owned by GGP and accounted for on a consolidated basis.

The table below summarizes the gain calculation ($ in millions) for the 25% and 12.5% interests sold:


16

GENERAL GROWTH PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


Gain on Sale of Interests in Ala Moana Center
25.0%
12.5%
Total proceeds (net of transaction costs of $6.8 million and $2.5 million, respectively)
$
900.2

$
451.0

Joint venture partner share of debt
462.5

231.3

Total consideration
1,362.7

682.3

Less: JV partner proportionate share of investment in Ala Moana Center and estimated development costs
(714.0
)
(357.9
)
Total gain from changes in control of investment properties and other
648.7


Total Unconsolidated Real Estate Affiliates - gain on investment

324.4

Gain attributable to JV partner proportionate share of investment in Ala Moana Center at closing
584.4

295.9

Gain attributable to post-sale development activities through September 30, 2015
26.3

9.5

Estimated future gain from changes in control of investment properties and other
38.0


Estimated future Unconsolidated Real Estate Affiliates - gain on investment
$

$
19.0


NOTE 4        DISCONTINUED OPERATIONS AND GAINS ON DISPOSITIONS OF OPERATING PROPERTIES
 
In the first quarter of 2015, the Company adopted Accounting Standards Update (ASU) No. 2014-08, "Reporting Discontinued operations and Disclosures of Disposals of Components of an Entity" issued by the Financial Accounting Standards Board. ASU No. 2014-08 changes the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity's operations and financial results (e.g., a disposal of a major geographical area, a major line of business, a major equity method investment or other major parts of an entity). The Company’s adoption of ASU No. 2014-08 resulted in a change in how the Company would record operating results and gains on sales of real estate. Any future sales would not be reflected within discontinued operations in the Company’s Consolidated Statements of Comprehensive Income.

The Company did not have any dispositions during the nine months ended September 30, 2015 that qualified for discontinued operations presentation subsequent to its adoption of ASU No. 2014-08. The following table summarizes the operations of the properties included in discontinued operations for the three and nine months ended September 30, 2014.

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2014
 
 
 
 
 
Retail and other revenue
 
$
5,519

 
$
24,004

Retail and other operating expenses
 
3,971

 
14,603

Operating income

1,548


9,401

Interest expense, net
 
(328
)
 
(2,188
)
Gains on dispositions
 
7,602

 
129,757

Net income from operations
 
8,822


136,970

Gain on debt extinguishment
 

 
66,679

Net income from discontinued operations
 
$
8,822


$
203,649


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

17

GENERAL GROWTH PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


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 September 30, 2015 and December 31, 2014.
 
 
September 30, 2015
 
December 31, 2014
 
 
Carrying Amount (1)
 
Estimated Fair
Value
 
Carrying Amount (1)
 
Estimated Fair
Value
Fixed-rate debt
 
$
11,770,104

 
$
12,343,645

 
$
13,606,936

 
$
14,211,247

Variable-rate debt
 
2,245,446

 
2,254,303

 
2,391,353

 
2,399,547

 
 
$
14,015,550

 
$
14,597,948

 
$
15,998,289

 
$
16,610,794

 
(1) Includes market rate adjustments of $33.2 million and $19.9 million as of September 30, 2015 and December 31, 2014, respectively.

The fair value of our Junior Subordinated Notes approximates their carrying amount as of September 30, 2015 and December 31, 2014. 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.

Recurring Fair Value of Marketable Securities

Marketable securities are measured at fair value on our Consolidated Balance Sheets using Level 1 inputs and included in Prepaid expenses and other assets. The fair values are shown below.
(Amounts in thousands)
 
September 30, 2015
 
December 31, 2014
 
 
Fair Value
 
Cost Basis
 
Unrealized Gain
 
Fair Value
 
Cost Basis
 
Unrealized Gain
Marketable securities:
 
 
 
 
 
 
 
 
 
 
 


     Seritage Growth Properties
 
$
41,935

 
$
33,300

 
$
8,635

 
$

 
$

 
$



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.
 
September 30, 2015
 
December 31, 2014
Condensed Combined Balance Sheets - Unconsolidated Real Estate Affiliates (1)
 

 
 

Assets:
 

 
 

Land
$
1,748,898

 
$
1,152,485

Buildings and equipment
12,145,655

 
10,009,490

Less accumulated depreciation
(3,035,579
)
 
(2,591,347
)
Construction in progress
991,755

 
125,931

Net property and equipment
11,850,729

 
8,696,559

Investment in unconsolidated joint ventures
416,989

 
16,462

Net investment in real estate
12,267,718


8,713,021

Cash and cash equivalents
403,150

 
308,621

Accounts and notes receivable, net
234,159

 
203,511

Deferred expenses, net
335,671

 
281,835

Prepaid expenses and other assets
670,233

 
594,257

Total assets
$
13,910,931

 
$
10,101,245

 
 
 
 
Liabilities and Owners’ Equity:
\

 
 

Mortgages, notes and loans payable
$
9,795,210

 
$
7,945,828

Accounts payable, accrued expenses and other liabilities
691,263

 
418,995

Cumulative effect of foreign currency translation (“CFCT”)
(68,858
)
 
(35,238
)
Owners’ equity, excluding CFCT
3,493,316

 
1,771,660

Total liabilities and owners’ equity
$
13,910,931

 
$
10,101,245

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

 
 

Owners’ equity
$
3,424,458

 
$
1,736,422

Less: joint venture partners’ equity
(1,785,634
)
 
(861,515
)
Plus: excess investment/basis differences
1,813,723

 
1,694,257

Investment in and loans to/from Unconsolidated Real Estate Affiliates, net
$
3,452,547

 
$
2,569,164

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

 
 

Asset - Investment in and loans to/from Unconsolidated Real Estate Affiliates
$
3,490,157

 
$
2,604,762

Liability - Investment in Unconsolidated Real Estate Affiliates
(37,610
)
 
(35,598
)
Investment in and loans to/from Unconsolidated Real Estate Affiliates, net
$
3,452,547

 
$
2,569,164

 
(1) The Condensed Combined Balance Sheets - Unconsolidated Real Estate Affiliates include Ala Moana Center as of September 30, 2015 as the property was contributed into a joint venture during the first quarter of 2015.


19

GENERAL GROWTH PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Condensed Combined Statements of Income - Unconsolidated Real Estate Affiliates (1)
 
 

 
 

 
 
 
 
Revenues:
 
 

 
 

 
 
 
 
Minimum rents
 
$
264,333

 
$
204,661

 
$
742,168

 
$
601,778

Tenant recoveries
 
113,624

 
90,087

 
321,755

 
264,679

Overage rents
 
7,602

 
6,303

 
19,270

 
15,401

Other
 
11,006

 
7,910

 
36,061

 
26,985

Total revenues
 
396,565

 
308,961

 
1,119,254

 
908,843

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 
 
 
Real estate taxes
 
33,080

 
27,468

 
93,754

 
82,060

Property maintenance costs
 
9,373

 
8,469

 
32,316

 
28,271

Marketing
 
4,477

 
2,873

 
12,518

 
9,663

Other property operating costs
 
53,961

 
45,532

 
152,290

 
128,250

Provision for doubtful accounts
 
172

 
1,119

 
4,436

 
2,162

Property management and other costs (2)
 
15,859

 
13,929

 
46,731

 
42,051

General and administrative
 
952

 
2,299

 
9,415

 
8,109

Depreciation and amortization
 
99,475

 
81,148

 
293,387

 
233,674

Total expenses
 
217,349

 
182,837

 
644,847

 
534,240

Operating income
 
179,216

 
126,124

 
474,407

 
374,603

 
 
 
 
 
 
 
 
 
Interest income
 
1,837

 
1,449

 
5,399

 
4,297

Interest expense
 
(100,766
)
 
(82,683
)
 
(294,132
)
 
(228,693
)
Provision for income taxes
 
(242
)
 
(341
)
 
(606
)
 
(619
)
Equity in loss of unconsolidated joint ventures
 
(13,252
)
 

 
(22,466
)
 

Income from continuing operations
 
66,793

 
44,549

 
162,602

 
149,588

Net income from disposed investment
 

 
485

 

 
1,263

Allocation to noncontrolling interests
 
(18
)
 
(14
)
 
(35
)
 
(31
)
Net income attributable to the ventures
 
$
66,775

 
$
45,020

 
$
162,567

 
$
150,820

 
 
 
 
 
 
 
 
 
Equity In Income of Unconsolidated Real Estate Affiliates:
 
 

 
 

 
 
 
 
Net income attributable to the ventures
 
$
66,775

 
$
45,020

 
$
162,567

 
$
150,820

Joint venture partners’ share of income
 
(31,676
)
 
(24,628
)
 
(78,240
)
 
(82,851
)
Amortization of capital or basis differences (3)
 
(18,515
)
 
(13,001
)
 
(43,212
)
 
(34,101
)
Equity in income of Unconsolidated Real Estate Affiliates
 
$
16,584

 
$
7,391

 
$
41,115

 
$
33,868

 
(1) The Condensed Combined Statements of Income - Unconsolidated Real Estate Affiliates include income from Ala Moana Center subsequent to the formation of the joint venture on February 27, 2015.
(2) Includes management fees charged to the unconsolidated joint ventures by GGMI and GGSI.
(3) Includes a $3.2 million impairment charge related to our investment in a single property venture (Note 2).
 
The Unconsolidated Real Estate Affiliates represents our investments in real estate joint ventures that are not consolidated. We hold interests in 26 domestic joint ventures, comprising 42 U.S. retail properties and one strip/other retail center, 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.

On March 7, 2014, we formed a joint venture, AMX Partners, LLC ("AMX"), with Kahikolu Partners, LLC (“MKB”) for the purpose of constructing a luxury residential condominium tower on a site located within the Ala Moana Shopping Center. In conjunction with the closing of AMX, GGP agreed to sell the air rights above the parking podium to AMX for $50 million. GGP received a $25 million payment in the third quarter of 2015 and will receive the remaining $25 million in the fourth quarter of 2015 once the reconstruction of the parking podium is completed and the space is ready for the condo building construction.


20

GENERAL GROWTH PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


On January 29, 2015, we sold our interest in a joint venture that owns Trails Village, which resulted in our recognition of a gain of $12.0 million. The $12.0 million is recognized within Unconsolidated Real Estate Affiliates - gain on investment on our Consolidated Statements of Comprehensive Income.
On April 10, 2015, we sold a 12.5% interest in Ala Moana Center, which resulted in our recognition of a gain of $305.4 million (Note 3). The $305.4 million is recognized within Unconsolidated Real Estate Affiliates - gain on investment on our Consolidated Statements of Comprehensive Income.
On September 24, 2015, we sold our interest in a joint venture that owns Lake Mead & Buffalo, which resulted in our recognition of a gain of $3.1 million. The $3.1 million is recognized within Unconsolidated Real Estate Affiliates - gain on investment on our Consolidated Statements of Comprehensive Income.

To the extent that the Company contributes assets to a joint venture accounted for using the equity method, the Company’s investment in the joint venture is recorded at the Company’s cost basis in the assets that were contributed to the joint venture. The Company will recognize gains and losses on the contribution of its real estate to joint ventures, relating solely to the outside partner’s interest, to the extent the buyer is independent of the Company, the collection of the sales price is reasonably assured, and the Company will not be required to support the operations of the property or its related obligations to an extent greater than its proportionate interest.

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 $5.0 billion as of September 30, 2015 and $3.9 billion as of December 31, 2014, 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 $88.3 million at one property as of September 30, 2015, and $89.3 million as of December 31, 2014. We are obligated to contribute 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 September 30, 2015, 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:
 
 
September 30, 2015 (1)
 
Weighted-Average
Interest Rate (2)
 
December 31, 2014 (3)
 
Weighted-Average
Interest Rate (2)
 
 
 
 
 
 
 
 
 
Fixed-rate debt:
 
 

 
 

 
 

 
 

Collateralized mortgages, notes and loans payable (4)
 
$
11,768,328

 
4.44
%
 
$
13,600,337

 
4.52
%
Corporate and other unsecured loans
 
1,776

 
4.41
%
 
6,599

 
4.41
%
Total fixed-rate debt
 
11,770,104

 
4.44
%
 
13,606,936

 
4.52
%
Variable-rate debt:
 
 

 
 

 
 

 
 

Collateralized mortgages, notes and loans payable (4)
 
1,995,446

 
2.02
%
 
2,291,353

 
2.00
%
Revolving credit facility
 
250,000

 
1.77
%
 
100,000

 
1.73
%
Total variable-rate debt
 
2,245,446

 
1.99
%
 
2,391,353

 
1.99
%