Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - Brookfield Property REIT Inc.ggp3312017ex-322.htm
EX-32.1 - EXHIBIT 32.1 - Brookfield Property REIT Inc.ggp3312017ex-321.htm
EX-31.2 - EXHIBIT 31.2 - Brookfield Property REIT Inc.ggp3312017ex-312.htm
EX-31.1 - EXHIBIT 31.1 - Brookfield Property REIT Inc.ggp3312017ex-311.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 March 31, 2017
 
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

GGP INC.
(Exact name of registrant as specified in its charter)
Delaware
 
27-2963337
(State or other jurisdiction of incorporating or organization)
 
(I.R.S. Employer 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.  
ý Yes      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).  
ý Yes      o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.
ý
Large accelerated filer
 o
Accelerated filer
o
Non-accelerated filer
(Do not check if a smaller reporting company)
 o
Smaller reporting company
 
 
o
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 check mark 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.  
ý Yes      o No

The number of shares of Common Stock, $.01 par value, outstanding on May 2, 2017 was 882,610,436.
 



GGP INC.
INDEX
 
 
PAGE
NUMBER
 
 
 
Part I
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2




GGP INC.

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
March 31,
2017
 
December 31,
2016
 
(Dollars in thousands, except share and per share amounts)
Assets:
 
 
 
Investment in real estate:
 

 
 

Land
$
3,057,183

 
$
3,066,019

Buildings and equipment
16,108,953

 
16,091,582

Less accumulated depreciation
(2,827,336
)
 
(2,737,286
)
Construction in progress
260,025

 
251,616

Net property and equipment
16,598,825

 
16,671,931

Investment in Unconsolidated Real Estate Affiliates
3,871,240

 
3,868,993

Net investment in real estate
20,470,065

 
20,540,924

Cash and cash equivalents
252,718

 
474,757

Accounts receivable, net
318,259

 
322,196

Notes receivable
691,791

 
678,496

Deferred expenses, net
248,624

 
209,852

Prepaid expenses and other assets
485,997

 
506,521

Total assets
$
22,467,454

 
$
22,732,746

Liabilities:
 

 
 
Mortgages, notes and loans payable
$
12,567,659

 
$
12,430,418

Investment in Unconsolidated Real Estate Affiliates
45,733

 
39,506

Accounts payable and accrued expenses
611,119

 
655,362

Dividend payable
202,007

 
433,961

Deferred tax liabilities
3,719

 
3,843

Junior subordinated notes
206,200

 
206,200

Total liabilities
13,636,437

 
13,769,290

Redeemable noncontrolling interests:
 

 
 

Preferred
137,410

 
144,060

Common
110,116

 
118,667

Total redeemable noncontrolling interests
247,526

 
262,727

Commitments and Contingencies

 

Equity:
 

 
 

Common stock:
 
 
 
11,000,000,000 shares authorized, $0.01 par value, 968,603,883 issued, 882,605,693 outstanding as of March 31, 2017, and 968,153,526 issued, 884,097,680 outstanding as of December 31, 2016
9,412

 
9,407

Preferred Stock:
 
 
 
500,000,000 shares authorized, $0.01 par value, 10,000,000 shares issued and outstanding as of March 31, 2017 and December 31, 2016
242,042

 
242,042

Additional paid-in capital
11,439,599

 
11,417,597

Retained earnings (accumulated deficit)
(1,927,067
)
 
(1,824,866
)
Accumulated other comprehensive loss
(67,881
)
 
(70,456
)
Common stock in treasury, at cost, 58,538,995 shares as of March 31, 2017 and 56,596,651 shares as of December 31, 2016
(1,182,216
)
 
(1,137,960
)
Total stockholders' equity
8,513,889

 
8,635,764

Noncontrolling interests in consolidated real estate affiliates
32,381

 
33,583

Noncontrolling interests related to long-term incentive plan common units
37,221

 
31,382

Total equity
8,583,491

 
8,700,729

Total liabilities, redeemable noncontrolling interests and equity
$
22,467,454

 
$
22,732,746

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

3


GGP INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
Three Months Ended March 31,
 
2017
 
2016
 
(Dollars in thousands, except per share amounts)
Revenues:
 

 
 

Minimum rents
$
349,013

 
$
371,132

Tenant recoveries
163,055

 
172,448

Overage rents
5,937

 
8,145

Management fees and other corporate revenues
28,143

 
33,741

Other
20,184

 
21,566

Total revenues
566,332

 
607,032

Expenses:
 
 
 
Real estate taxes
57,494

 
58,103

Property maintenance costs
14,975

 
17,483

Marketing
2,145

 
2,054

Other property operating costs
69,303

 
70,394

Provision for doubtful accounts
3,451

 
3,401

Provision for loan loss

 
36,069

Property management and other costs
41,114

 
30,745

General and administrative
14,683

 
13,427

Provision for impairment

 
40,705

Depreciation and amortization
170,298

 
160,671

Total expenses
373,463

 
433,052

Operating income
192,869

 
173,980

Interest and dividend income
17,936

 
16,058

Interest expense
(132,323
)
 
(147,677
)
Gain on foreign currency
3,183

 
8,936

Gain from changes in control of investment properties and other, net

 
74,555

Income before income taxes, equity in income of Unconsolidated Real Estate Affiliates and allocation to noncontrolling interests
81,665

 
125,852

Provision for income taxes
(4,510
)
 
(2,920
)
Equity in income of Unconsolidated Real Estate Affiliates
33,214

 
57,491

Unconsolidated Real Estate Affiliates - gain on investment, net

 
14,914

Net income
110,369

 
195,337

Allocation to noncontrolling interests
(3,209
)
 
(3,557
)
Net income attributable to GGP Inc.
107,160

 
191,780

Preferred Stock dividends
(3,984
)
 
(3,984
)
Net income attributable to common stockholders
$
103,176

 
$
187,796

Earnings Per Share:
 
 
 
Basic
$
0.12

 
$
0.21

Diluted
$
0.11

 
$
0.20

Dividends declared per share
$
0.22

 
$
0.19

 
 
 
 
 
 
 
 

4


GGP INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Continued)
(UNAUDITED)
 
Three Months Ended March 31,
 
2017
 
2016
 
(Dollars in thousands, except per share amounts)
Comprehensive Income, Net:
 

 
 

Net income
$
110,369

 
$
195,337

Other comprehensive income (loss)
 
 
 
Foreign currency translation
2,567

 
6,961

Reclassification adjustment for realized gains on available-for-sale securities included in net income

 
(11,978
)
Net unrealized gains on other financial instruments
13

 
9

Other comprehensive income (loss)
2,580

 
(5,008
)
Comprehensive income
112,949

 
190,329

Comprehensive income allocated to noncontrolling interests
(3,214
)
 
(3,495
)
Comprehensive income attributable to GGP Inc.
109,735

 
186,834

Preferred Stock dividends
(3,984
)
 
(3,984
)
Comprehensive income, net, attributable to common stockholders
$
105,751

 
$
182,850


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

5


GGP 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 per share and share amounts)
Balance at January 1, 2016
$
9,386

 
$
242,042

 
$
11,362,369

 
$
(2,141,549
)
 
$
(72,804
)
 
$
(1,129,401
)
 
$
38,251

 
$
8,308,294

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income


 


 


 
191,780

 


 


 
321

 
192,101

Distributions to noncontrolling interests in consolidated Real Estate Affiliates


 


 


 


 


 


 
(954
)
 
(954
)
Acquisition/disposition of partner's noncontrolling interests in consolidated Real Estate Affiliates
 
 
 
 
(16,384
)
 
 
 
 
 
 
 
(3,002
)
 
(19,386
)
Long Term Incentive Plan Common Unit grants, net (684,216 LTIP Units)
 
 
 
 
12

 
(950
)
 
 
 
 
 
4,326

 
3,388

Restricted stock grants, net (333,953 common shares)
3

 

 
673

 


 


 


 


 
676

Employee stock purchase program (66,666 common shares)
1

 


 
2,451

 


 


 


 


 
2,452

Stock option exercised (318,826 common shares)
3

 


 
9,901

 


 


 


 


 
9,904

Cancellation of repurchased common shares (270,869 common shares)
(2
)
 
 
 
(3,415
)
 
(3,356
)
 
 
 
6,773

 
 
 

Cash dividends reinvested (DRIP) in stock (6,398 common shares)

 

 
170

 


 


 


 


 
170

Other comprehensive loss


 


 


 


 
6,948

 


 


 
6,948

Amounts reclassified from accumulated other comprehensive income
 
 
 
 
 
 
 
 
(11,894
)
 
 
 
 
 
(11,894
)
Cash distributions declared ($0.19 per share)


 


 


 
(167,766
)
 


 


 


 
(167,766
)
Cash distributions on Preferred Stock


 


 


 
(3,984
)
 


 


 


 
(3,984
)
Fair value adjustment for noncontrolling interest in Operating Partnership


 


 
(24,130
)
 


 


 


 


 
(24,130
)
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2016
$
9,391

 
$
242,042

 
$
11,331,647

 
$
(2,125,825
)
 
$
(77,750
)
 
$
(1,122,628
)
 
$
38,942

 
$
8,295,819

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6


GGP 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 per share and share amounts)
Balance at January 1, 2017
$
9,407

 
$
242,042

 
$
11,417,597

 
$
(1,824,866
)
 
$
(70,456
)
 
$
(1,137,960
)
 
$
64,965

 
$
8,700,729

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative effect of accounting change
 
 
 
 
2,342

 
(3,000
)
 
 
 
 
 
658

 

Net income


 


 


 
107,160

 


 


 
503

 
107,663

Distributions to noncontrolling interests in consolidated Real Estate Affiliates


 


 


 


 


 


 
(1,450
)
 
(1,450
)
Long Term Incentive Plan Common Unit grants, net (582,229 LTIP Units)


 
 
 
795

 
(800
)
 
 
 
 
 
4,926

 
4,921

Restricted stock grants, net (742,273 common shares)
8

 

 
2,026

 


 


 


 


 
2,034

Employee stock purchase program (81,709 common shares)
1

 


 
2,024

 


 


 


 


 
2,025

Stock options exercised (231,799 common shares)
2

 


 
7,710

 


 


 


 


 
7,712

Cancellation of repurchased common shares (627,261 common shares)
(6
)
 
 
 
(8,178
)
 
(7,136
)
 
 
 
15,320

 
 
 

Treasury stock purchase (2,569,605 common shares)
 
 
 
 
 
 
 
 
 
 
(59,576
)
 
 
 
(59,576
)
Cash dividends reinvested (DRIP) in stock (21,837 common shares)

 

 
547

 

 


 


 


 
547

Other comprehensive income


 


 


 


 
2,575

 


 


 
2,575

Cash distributions declared ($0.22 per share)


 


 


 
(194,441
)
 


 


 


 
(194,441
)
Cash distributions on Preferred Stock


 


 


 
(3,984
)
 


 


 


 
(3,984
)
Fair value adjustment for noncontrolling interest in Operating Partnership


 


 
14,736

 
 
 


 


 


 
14,736

 
 
 
 
 
 
 
 
 
 
 


 
 
 
 
Balance at March 31, 2017
$
9,412

 
$
242,042

 
$
11,439,599

 
$
(1,927,067
)
 
$
(67,881
)
 
$
(1,182,216
)
 
$
69,602

 
$
8,583,491


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


7


GGP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Three Months Ended March 31,
 
2017
 
2016
 
(Dollars in thousands)
Cash Flows provided by Operating Activities:
 

 
 

Net income
$
110,369

 
$
195,337

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

 
 

Equity in income of Unconsolidated Real Estate Affiliates
(33,214
)
 
(57,491
)
Distributions received from Unconsolidated Real Estate Affiliates
28,752

 
26,609

Provision for doubtful accounts
3,451

 
3,401

Depreciation and amortization
170,298

 
160,671

Amortization/write-off of deferred finance costs
2,985

 
2,710

Accretion/write-off of debt market rate adjustments
(1,120
)
 
(207
)
Amortization of intangibles other than in-place leases
11,437

 
11,530

Straight-line rent amortization
893

 
(5,447
)
Deferred income taxes
2,623

 
2,118

Gain on dispositions, net

 
(20,248
)
Unconsolidated Real Estate Affiliates - gain on investment, net

 
(14,914
)
Gain from changes in control of investment properties and other, net

 
(74,555
)
Provision for impairment

 
40,705

Provision for loan loss

 
36,069

Gain on foreign currency

 
(8,936
)
Net changes:
 

 
 

Accounts and notes receivable, net
(9,955
)
 
(2,842
)
Prepaid expenses and other assets
(6,920
)
 
(8,031
)
Deferred expenses, net
(10,722
)
 
(9,547
)
Restricted cash
6,783

 
6,981

Accounts payable and accrued expenses
(44,557
)
 
(55,141
)
Other, net
7,812

 
9,248

Net cash provided by operating activities
238,915

 
238,020

Cash Flows (used in) provided by Investing Activities:
 

 
 

Acquisition of real estate and property additions

 
(21,087
)
Development of real estate and property improvements
(110,619
)
 
(120,410
)
Loans to joint venture partners
(3,787
)
 
(20,957
)
Proceeds from sales of investment properties and Unconsolidated Real Estate Affiliates

 
238,676

Contributions to Unconsolidated Real Estate Affiliates
(28,818
)
 
(30,200
)
Distributions received from Unconsolidated Real Estate Affiliates in excess of income
40,177

 
20,384

Sale of marketable securities

 
46,409

Decrease (increase) in restricted cash
734

 
(80
)
Net cash (used in) provided by investing activities
(102,313
)

112,735

Cash Flows used in Financing Activities:
 

 
 

Proceeds from refinancing/issuance of mortgages, notes and loans payable
290,000

 

Principal payments on mortgages, notes and loans payable
(154,624
)
 
(350,375
)
Treasury stock purchases
(71,105
)
 

Cash distributions to noncontrolling interests in consolidated real estate affiliates
(1,450
)
 
(954
)
Cash distributions paid to common stockholders
(424,656
)
 
(167,698
)
Cash distributions reinvested (DRIP) in common stock
547

 
170

Cash distributions paid to preferred stockholders
(3,984
)
 
(3,984
)
Cash distributions and redemptions paid to unit holders
(5,797
)
 
(1,233
)
Other, net
9,245

 
9,523

Net cash used in financing activities
(361,824
)
 
(514,551
)
Effect of foreign exchange rates on cash and cash equivalents
3,183

 

Net change in cash and cash equivalents
(222,039
)
 
(163,796
)
Cash and cash equivalents at beginning of period
474,757

 
356,895

Cash and cash equivalents at end of period
$
252,718

 
$
193,099


8


GGP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
 
Three Months Ended March 31,
 
2017
 
2016
 
(Dollars in thousands)
Supplemental Disclosure of Cash Flow Information:
 

 
 

Interest paid
$
128,316

 
$
145,398

Interest capitalized
1,595

 
1,466

Income taxes paid
2,467

 
544

Accrued capital expenditures included in accounts payable and accrued expenses
106,862

 
116,220

Sale of Ala Moana (Refer to Note 3)
 
 
 
 
 
 
 

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


9

GGP 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, 2016 which are included in the Company's Annual Report on Form 10-K (our "Annual Report") for the fiscal year ended December 31, 2016 (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
 
GGP 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". Effective January 27, 2017, the Company changed its name from General Growth Properties, Inc. to GGP Inc. 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 March 31, 2017, we are the owner, either entirely or with joint venture partners, of 127 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 and GGPOP, 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 March 31, 2017, 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% 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 GGPN and GGPLP. 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 9). 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 11).

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 GGPLP 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 noncontrolling interests in consolidated real estate affiliates as permanent equity of the Company. Intercompany balances and

10

GGP INC.

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


transactions have been eliminated. Noncontrolling interests are included on our Consolidated Balance Sheets related to the Common, Preferred, and LTIP Units of GGPOP and are presented either as redeemable noncontrolling interests or as noncontrolling interests in our permanent equity. Each of the Operating Partnerships are variable interest entities as the limited partners do not have substantive kick-out rights or substantive participating rights. However, as the Company holds a majority voting interest in the Operating Partnerships, it qualifies for the exemption from providing certain of the disclosure requirements associated with variable interest entities.

We operate in a single reportable segment, which includes the operation, development and management of retail and other rental properties. 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 for purposes of making property operating decisions. 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.

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 (Note 3)

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.

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

11

GGP INC.

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


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 March 31, 2017
 

 
 

 
 

Tenant leases:
 

 
 

 
 

In-place value
$
286,795

 
$
(185,432
)
 
$
101,363

 
 
 
 
 
 
As of December 31, 2016
 
 
 
 
 
Tenant leases:
 
 
 
 
 
In-place value
$
306,094

 
$
(214,111
)
 
$
91,983


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 March 31,
 
2017
 
2016
Amortization/accretion effect on continuing operations
$
(24,919
)
 
$
(24,184
)

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
2017 Remaining
 
$
46,119

2018
 
41,819

2019
 
26,050

2020
 
19,247

2021
 
14,275


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. 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. During the three months ended March 31, 2016, we recognized gains of $13.1 million in management fees and other corporate revenues on the Consolidated Statements of Comprehensive Income from the sale of Seritage Growth Properties stock.
Investments in Unconsolidated Real Estate Affiliates (Note 5)
We account for investments in joint ventures where we own a non-controlling joint interest using either the equity method or the cost method. If we have significant influence but not control over the investment, we utilize the equity method. If we have neither control nor significant influence, we utilize the cost method. Under the equity method, the cost of our investment is adjusted for

12

GGP INC.

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


our share of the earnings of such Unconsolidated Real Estate Affiliates from the date of acquisition, increased by our contributions and reduced by distributions received. Under the cost method, the cost of our investment is not adjusted for our share of the earnings of such Unconsolidated Real Estate Affiliates from the date of acquisition and distributions are treated as earnings when received.
To determine the method of accounting for partially owned joint ventures, we evaluate the characteristics of associated entities and determine whether an entity is a variable interest entity ("VIE"). A limited partnership or other similar entity is considered a VIE unless a simple majority of limited partners (excluding limited partners that are under common control with the general partner) have substantive kick-out rights or participating rights. Accounting guidance amended the following: (i) modified the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities, (ii) eliminated the presumption that a general partner should consolidate a limited partnership, (iii) affected the consolidation analysis of reporting entities that are involved with VIEs, and (iv) provided a scope exception for certain entities. If an entity is determined to be a VIE, we determine which party is the primary beneficiary by analyzing whether we have both the power to direct the entity's significant economic activities and the obligation to absorb potentially significant losses or receive potentially significant benefits. Significant judgments and assumptions inherent in this analysis include the nature of the entity's operations, future cash flow projections, the entity's financing and capital structure, and contractual relationship and terms. The adoption of the consolidation guidance did not materially impact our consolidated financial statements.
Primary risks associated with our VIEs include the potential of funding the entities' debt obligations or making additional contributions to fund the entities' operations.
Generally, the operating agreements with respect to our Unconsolidated Real Estate Affiliates provide that assets, liabilities and funding obligations are shared in accordance with our ownership percentages. Therefore, we generally also share in the profit and losses, cash flows and other matters relating to our Unconsolidated Real Estate Affiliates in accordance with our respective ownership percentages. Except for Retained Debt (as described in Note 5), differences between the carrying amount of our investment in the Unconsolidated Real Estate Affiliates and our share of the underlying equity of our Unconsolidated Real Estate Affiliates are typically amortized over lives ranging from 5 to 45 years. When cumulative distributions exceed our investment in the joint venture, the investment is reported as a liability in our consolidated financial statements. The liability is limited to our maximum potential obligation to fund contractual obligations, including recourse related to certain debt obligations.
Partially owned, non-variable interest joint ventures over which we have controlling financial interest are consolidated in our consolidated financial statements. In determining if we have a controlling financial interest, we consider factors such as ownership interest, authority to make decisions, kick-out rights and substantive participating rights. Partially owned joint ventures where we do not have a controlling financial interest, but have the ability to exercise significant influence, are accounted for using the equity method.
To the extent that we contribute assets to a joint venture accounted for using the equity method, our investment in the joint venture is recorded at our cost basis in the assets that were contributed to the joint venture. We will recognize gains and losses on the contribution of our 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 we will not be required to support the operations of the property or its related obligations to an extent greater than our proportionate interest.
The combined summarized financial information of unconsolidated joint ventures is disclosed in Note 5 to the Consolidated Financial Statements.
We continually analyze and assess reconsideration events, including changes in the factors mentioned above, to determine if the consolidation treatment remains appropriate. Decisions regarding consolidation of partially owned entities frequently require significant judgment by our management.
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 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 emergence from bankruptcy.

13

GGP INC.

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


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) our receivable is not subject to future subordination, and (4) we have transferred to the buyer the risks and rewards of ownership and do 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, net 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 5. The following table summarizes the management fees from affiliates and our share of the management fee expense:
 
Three Months Ended March 31,
 
2017
 
2016
Management fees from affiliates (1)
$
28,143

 
$
20,669

Management fee expense
(8,803
)
 
(7,902
)
Net management fees from affiliates
$
19,340

 
$
12,767

(1)
Excludes a $13.1 million gain recognized in management fees and other corporate revenues on the divestiture of our investment in Seritage Growth Properties during the three months ended March 31, 2016.

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, changes in 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.

14

GGP INC.

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



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.

During the three months ended March 31, 2016, we recorded a $40.7 million impairment charge on our Consolidated Statements of Comprehensive Income related to two operating properties. We received a bona fide purchase offer during the three months ended March 31, 2016 for one property which was less than the carrying value. The other property had non-recourse debt that matured during 2016 and exceeded the fair value of the operating property. This property was transferred to a special servicer during 2016.

No provisions for impairment were recognized for the three months ended March 31, 2017.

Changes in economic and operating conditions that occur subsequent to our review of recoverability of our properties could impact the assumptions used in that assessment and could result in future impairment if assumptions regarding those properties differ from actual results.

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 performed 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 months ended March 31, 2017 and 2016. Changes in economic and operating conditions that occur subsequent to our review of recoverability of our investments in Unconsolidated Real Estate Affiliates could impact the assumptions used in that assessment and could result in future impairment if assumptions regarding those investments differ from actual results.

Fair Value Measurements (Note 4)

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 4 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 certain redeemable noncontrolling interests that are measured at fair value using Level 1 inputs.

Concentrations of Credit Risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. We are exposed to credit risk with respect to cash held at various financial institutions and access to our credit facility. Our credit risk exposure with regard to our cash and the $1.5 billion, including the uncommitted accordion feature, available under

15

GGP INC.

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


our credit facility is spread among a diversified group of investment grade financial institutions. We had $240.0 million outstanding and no outstanding balance under our credit facility as of March 31, 2017 and December 31, 2016, respectively.

Recently Issued Accounting Pronouncements
Effective January 1, 2018, companies will be required to apply a five-step model in accounting for revenue. 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 has completed a preliminary review of the potential impact of this pronouncement to determine specific areas that will be affected by the adoption of this standard. Once the new guidance setting forth principles for the recognition, measurement, presentation and disclosure of leases (discussed below) goes into effect, the new revenue standard may apply to executory costs and other components of revenue due under leases that are deemed to be non-lease components (such as common area maintenance and provision of utilities), even when the revenue for such activities is not separately stipulated in the lease. In that case, then revenue from these items previously recognized on a straight-line basis under current lease guidance would be recognized under the new revenue guidance as the related services are delivered. As a result, while the total revenue recognized over time would not differ under the new guidance, the recognition pattern would be different. 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 currently evaluating the adoption method that will be used for the implementation.
In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02 which will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under ASU 2016-02, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Lessor accounting remains substantially similar to current GAAP. However, leasing costs that are currently eligible to be capitalized as initial direct costs are limited by ASU 2016-02. In addition, disclosures of leasing activities are to be expanded to include qualitative along with specific quantitative information. For public entities, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2016-02 mandates a modified retrospective transition method. The Company is evaluating the potential impact of this pronouncement on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07 which eliminates the requirement for retrospective application of equity method accounting when an investment previously accounted for by another method initially qualifies for the equity method. This standard is effective for all entities for fiscal years beginning after December 15, 2016 with earlier application permitted. The adoption of this standard did not materially impact the Company's consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09 which simplifies the accounting for stock compensation related items such as income tax accounting, award classification, estimation of forfeitures, and cash flow presentation. The amendments in the ASU are effective for public business entities for annual periods beginning after December 15, 2016. The Company accounted for this compensation award adjustment by means of a cumulative-effect adjustment to equity as of January 1, 2017.
In June 2016, the FASB issued ASU 2016-13 which changes the model for the measurement of credit losses on financial instruments. Specifically, the amendments in the ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU will be effective January 1, 2020 with early adoption permitted on January 1, 2019. The Company is evaluating the potential impact of this pronouncement on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15 which provides guidance on the statement of cash flows presentation of certain transactions where diversity in practice exists. The effective date will be the first quarter of fiscal year 2019, with early adoption permitted. The ASU will be adopted using a retrospective transition approach. The Company is evaluating the potential impact of this pronouncement on its Consolidated Statements of Cash Flows.
In November 2016, the FASB issued ASU 2016-18 which requires that a statement of cash flows explain the change during the reporting period in the total of cash and cash equivalents and restricted cash or restricted cash equivalents. This standard is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments

16

GGP INC.

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


should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is evaluating the potential impact of this pronouncement on its Consolidated Statements of Cash Flows.
In January 2017, the FASB issued ASU 2017-01 which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. Public entities should apply the amendments in this standard to annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted this pronouncement early in the first fiscal quarter of 2017. The adoption of this standard resulted in less real estate acquisitions qualifying as businesses and, accordingly, acquisition costs for those acquisitions that are not businesses are capitalized rather than expensed.

In February 2017, the FASB issued ASU 2017-05 which clarifies the accounting for the derecognition of nonfinancial assets by eliminating the exception in current GAAP for transfers of investments in real estate entities (including equity method investments). The amendments in this update provide guidance on the accounting of partial sales of nonfinancial assets and contributions of nonfinancial assets to a joint venture or other noncontrolling investee. Once this guidance is adopted, an entity would use the guidance in the new revenue recognition standard (discussed above) to determine whether it is transferring multiple, distinct assets and would recognize a gain or loss for each distinct asset transferred. When an entity transfers nonfinancial assets included in a subsidiary and retains or receives an equity interest, it first determines whether it has retained a controlling financial interest in the subsidiary. If so, the entity does not derecognize the assets and accounts for the sale of noncontrolling interest in the subsidiary under the consolidation guidance covering decreases in ownership which would result in recognizing a gain or loss in equity. If an entity retains or receives a noncontrolling interest in the entity that owns the asset post-sale, that noncontrolling interest is considered noncash consideration and is included in the transaction price at its fair value. The retained noncontrolling interest is included at its fair value and results in an entity recognizing 100% of the gain on sale of the asset which differs from current applicable GAAP. Public entities should apply the amendments in this standard to annual periods beginning after December 15, 2017, including interim periods within those periods. Entities are required to adopt this standard in conjunction with the new revenue recognition standard which we will adopt on January 1, 2018. The adoption of this standard will result in higher gains on the sale of partial real estate interests due to recognizing 100% of the gain on sale of the partial interest and recording the retained noncontrolling interest at fair value.

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, provision for loan loss, 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

The acquisition of 605 N. Michigan Avenue on December 1, 2016 was recorded in 2016 using a preliminary estimate of the net assets acquired. Certain amounts were reclassified according to the subsequent purchase price allocation recorded during the three months ended March 31, 2017.

On February 2, 2016, we closed on the acquisition of our joint venture partner's 25% interest in Spokane Valley Mall in Spokane, Washington for $37.5 million. This transaction resulted in a reduction of additional paid-in capital of $16.4 million due to the acquisition of our partner's noncontrolling interest.

On January 29, 2016 we closed on the sale of our 75% interest in Provo Towne Center in Provo, Utah to our joint venture partner for $37.5 million. Mortgage debt of $31.1 million was repaid upon closing. This transaction netted proceeds of approximately $2.8 million and resulted in a loss of $4.0 million recognized in gain from changes in control of investment properties and other for the three months ended March 31, 2016.

17

GGP INC.

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



On January 29, 2016, we closed on the sale of our 10% interest in 522 Fifth Avenue in New York City to our joint venture partner for $25.0 million, inclusive of the repayment of previously existing notes receivable from our joint venture partner. We received proceeds of $10.0 million upon closing and proceeds of $5.4 million on December 15, 2016. The remaining $9.0 million will be collected on May 25, 2017. This transaction resulted in a gain on sale of $11.0 million recognized in Unconsolidated Real Estate Affiliates - gain on investment for the three months ended March 31, 2016.

On January 15, 2016, we closed on the sale of Eastridge Mall in San Jose, California for $225.0 million. This transaction netted proceeds of approximately $216.3 million and resulted in a gain on sale of $71.8 million recognized in gain from changes in control of investment properties and other for the three months ended March 31, 2016.

On January 8, 2016, we closed on the sale of our 50% interest in Owings Mills Mall in Owings Mills, Maryland to our joint venture partner for $11.6 million. This transaction netted proceeds of approximately $11.6 million and resulted in a gain on sale of $0.6 million recognized in Unconsolidated Real Estate Affiliates - gain on investment for the three months ended March 31, 2016.

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 received the remaining proceeds of $237.0 million upon completion of the redevelopment and expansion in the fourth quarter of 2016. 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 received the remaining proceeds of $118.5 million upon completion of the redevelopment and expansion in the fourth quarter of 2016. 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 three months ended March 31, 2016, we recognized an additional $6.8 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 March 31, 2016. The construction is complete and the full gain was recognized as of December 31, 2016.

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 three months ended March 31, 2016, we recognized an additional $3.3 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 March 31, 2016. The construction is complete and the full gain was recognized as of December 31, 2016.
We account for the 62.5% interest in the joint venture that owns Ala Moana Center under the equity method of accounting (Note 5) 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.


18

GGP INC.

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


NOTE 4        FAIR VALUE
 
Nonrecurring Fair Value Measurements
 
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 March 31, 2017 and December 31, 2016.
 
 
March 31, 2017
 
December 31, 2016
 
 
Carrying Amount (1)
 
Estimated Fair
Value
 
Carrying Amount (2)
 
Estimated Fair
Value
Fixed-rate debt
 
$
10,336,260

 
$
10,658,349

 
$
10,441,166

 
$
10,832,272

Variable-rate debt
 
2,231,399

 
2,232,824

 
1,989,252

 
1,990,458

 
 
$
12,567,659

 
$
12,891,173

 
$
12,430,418

 
$
12,822,730

 
(1) 
Includes net market rate adjustments of $26.7 million and deferred financing costs of $37.1 million.
(2)
Includes net market rate adjustments of $27.8 million and deferred financing costs of $40.1 million.

The fair value of our Junior Subordinated Notes approximates their carrying amount as of March 31, 2017 and December 31, 2016. 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 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.


19

GGP INC.

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


NOTE 5        UNCONSOLIDATED REAL ESTATE AFFILIATES

Following is summarized financial information for all of our real estate related Unconsolidated Real Estate Affiliates accounted for using the equity method and a reconciliation to our total investment in Unconsolidated Real Estate Affiliates, inclusive of investments accounted for using the cost method (Note 2).
 
March 31, 2017
 
December 31, 2016
Condensed Combined Balance Sheets - Unconsolidated Real Estate Affiliates
 

 
 

Assets:
 

 
 

Land
$
2,672,964

 
$
2,664,736

Buildings and equipment
13,558,564

 
13,555,059

Less accumulated depreciation
(3,636,927
)
 
(3,538,776
)
Construction in progress
311,558

 
284,198

Net property and equipment
12,906,159

 
12,965,217

Investment in unconsolidated joint ventures
505,502

 
503,305

Net investment in real estate
13,411,661


13,468,522

Cash and cash equivalents
475,505

 
455,862

Accounts receivable, net
959,654

 
655,655

Notes receivable
8,871

 
8,912

Deferred expenses, net
372,744

 
321,095

Prepaid expenses and other assets
325,651

 
327,645

Total assets
$
15,554,086

 
$
15,237,691

Liabilities and Owners' Equity:
\

 
 

Mortgages, notes and loans payable
$
10,540,596

 
$
10,476,935

Accounts payable, accrued expenses and other liabilities
831,160

 
595,570

Cumulative effect of foreign currency translation ("CFCT")
(47,722
)
 
(50,851
)
Owners' equity, excluding CFCT
4,230,052

 
4,216,037

Total liabilities and owners' equity
$
15,554,086

 
$
15,237,691

Investment in Unconsolidated Real Estate Affiliates, Net:
 

 
 

Owners' equity
$
4,182,330

 
$
4,165,186

Less: joint venture partners' equity
(2,062,935
)
 
(2,095,166
)
Plus: excess investment/basis differences
1,547,819

 
1,590,821

Investment in Unconsolidated Real Estate Affiliates, net (equity method)
3,667,214

 
3,660,841

Investment in Unconsolidated Real Estate Affiliates, net (cost method)
180,000

 
180,000

Elimination of consolidated real estate investment interest through joint venture
(25,748
)
 
(27,500
)
Retail investment, net
4,041

 
16,146

Investment in Unconsolidated Real Estate Affiliates, net
$
3,825,507

 
$
3,829,487

Reconciliation - Investment in Unconsolidated Real Estate Affiliates:
 

 
 

Asset - Investment in Unconsolidated Real Estate Affiliates
$
3,871,240

 
$
3,868,993

Liability - Investment in Unconsolidated Real Estate Affiliates
(45,733
)
 
(39,506
)
Investment in Unconsolidated Real Estate Affiliates, net
$
3,825,507

 
$
3,829,487

 


20

GGP INC.

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


 
 
Three Months Ended March 31,
 
 
2017
 
2016
Condensed Combined Statements of Income - Unconsolidated Real Estate Affiliates (1)
 
 

 
 

Revenues:
 
 

 
 

Minimum rents
 
$
295,867

 
$
258,122

Tenant recoveries
 
122,019

 
115,446

Overage rents
 
6,106

 
7,527

Condominium sales
 
96,987

 
282,838

Other
 
13,078

 
12,104

Total revenues
 
534,057

 
676,037

Expenses:
 
 

 
 

Real estate taxes
 
35,057

 
30,546

Property maintenance costs
 
11,489

 
10,995

Marketing
 
4,562

 
8,508

Other property operating costs
 
53,630

 
50,510

Condominium cost of sales
 
70,714

 
206,221

Provision for doubtful accounts
 
1,964

 
3,732

Property management and other costs (2)
 
18,460

 
16,907

General and administrative
 
573

 
273

Depreciation and amortization
 
122,491

 
109,281

Total expenses
 
318,940

 
436,973

Operating income
 
215,117

 
239,064

Interest income
 
2,729

 
1,899

Interest expense
 
(110,988
)
 
(101,018
)
Provision for income taxes
 
(278
)
 
(169
)
Equity in loss of unconsolidated joint ventures
 
(4,354
)
 
(32,437
)
Income from continuing operations
 
102,226

 
107,339

Allocation to noncontrolling interests
 
(24
)
 
(32
)
Net income attributable to the ventures
 
$
102,202

 
$
107,307

Equity In Income of Unconsolidated Real Estate Affiliates:
 
 

 
 

Net income attributable to the ventures
 
$
102,202

 
$
107,307

Joint venture partners' share of income
 
(52,236
)
 
(40,459
)
Elimination of loss from consolidated real estate investment with interest owned through joint venture
 
1,052

 

Loss on retail investment
 
(10,212
)
 

Amortization of capital or basis differences
 
(7,592
)
 
(9,357
)
Equity in income of Unconsolidated Real Estate Affiliates
 
$
33,214

 
$
57,491

 
(1)
The Condensed Combined Statements of Income - Unconsolidated Real Estate Affiliates include income from Fashion Show subsequent to the formation of the joint venture on July 29, 2016.
(2)
Includes management fees charged to the unconsolidated joint ventures by GGMI and GGSI.
 
The Unconsolidated Real Estate Affiliates represent our investments in real estate joint ventures that are not consolidated. We hold interests in 25 domestic joint ventures, comprising 41 U.S. retail properties 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

21

GGP INC.

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


accordance with our respective ownership percentages. We manage most of the properties owned by these joint ventures. We account for investments in joint ventures where we own a non-controlling joint interest using either the equity method or the cost method. If we have significant influence but not control over the investment, we utilize the equity method. If we have neither control nor significant influence, we utilize the cost method. If we control the joint venture, we account for the venture as a consolidated investment.

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. AMX commenced recognizing revenues and cost of sales from the sale of condominiums using the percentage of completion method during 2016.

In accordance with GAAP, sales of condominiums have been recognized using the percentage of completion method. Under this method, revenue is recognized when (1) construction is beyond a preliminary stage, (2) buyers are unable to receive refunds of down-payments except in the event of non-delivery, (3) a substantial percentage of the condominiums are under firm contracts, (4) collection of the sales price is reasonably assured and (5) sales proceeds and costs can be reasonably estimated. The revenue from condominium sales is calculated based on the percentage of completion, as determined by the construction contract costs incurred to date in relation to the total estimated construction costs.

On March 24, 2016, Kenwood Towne Centre in Cincinnati, Ohio (property included in a joint venture of which we are 50% owner) acquired fee title to a portion of the property previously held under ground lease for a gross purchase price of $43.0 million.

On September 15, 2016, joint ventures we formed with Simon Property Group and Authentic Brands Group LLC acquired Aeropostale, which is presented as a retail investment above.
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 $5.4 billion as of March 31, 2017 and December 31, 2016, 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 $86.1 million at one property as of March 31, 2017, and $86.5 million as of December 31, 2016. 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 March 31, 2017, we do not anticipate an inability to perform on our obligations with respect to Retained Debt.


22

GGP INC.

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


NOTE 6        MORTGAGES, NOTES AND LOANS PAYABLE

Mortgages, notes and loans payable and the weighted-average interest rates are summarized as follows:
 
 
March 31, 2017 (1)
 
Weighted-Average
Interest Rate (2)
 
December 31, 2016 (3)
 
Weighted-Average
Interest Rate (2)
Fixed-rate debt:
 
 

 
 

 
 

 
 

Collateralized mortgages, notes and loans payable
 
$
10,336,260

 
4.43
%
 
$
10,441,166

 
4.44
%
Total fixed-rate debt
 
10,336,260

 
4.43
%
 
10,441,166

 
4.44
%
Variable-rate debt:
 
 

 
 

 
 

 
 

Collateralized mortgages, notes and loans payable (4)
 
1,999,548

 
2.62
%
 
1,997,978

 
2.45
%
Revolving credit facility (5)
 
231,851

 
2.18
%
 
(8,726
)
 

Total variable-rate debt
 
2,231,399

 
2.57
%
 
1,989,252

 
2.45
%
Total Mortgages, notes and loans payable
 
$
12,567,659

 
4.10
%
 
$
12,430,418

 
4.12
%
Junior subordinated notes
 
$
206,200

 
2.49
%
 
$
206,200

 
2.34
%
 
(1) 
Includes $26.7 million of market rate adjustments and $37.1 million of deferred financing costs.
(2) 
Represents the weighted-average interest rates on our contractual principal balances.
(3) 
Includes $27.8 million of market rate adjustments and $40.1 million of deferred financing costs.
(4) 
$1.4 billion of the variable-rate balance is cross-collateralized.
(5)
Includes deferred financing costs, which are shown as a reduction to the debt balance. See table below for the balance excluding deferred financing costs.
 
Collateralized Mortgages, Notes and Loans Payable

As of March 31, 2017, $16.4 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 $1.4 billion of debt, are cross-collateralized with other properties. Although a majority of the $12.3 billion of fixed and variable rate collateralized mortgages, notes and loans payable are non-recourse, $819.0 million 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 year ended December 31, 2016, we paid down $294.4 million of consolidated mortgage notes at two properties. The prior loans had a weighted-average term-to-maturity of 1.2 years and a weighted-average interest rate of 5.3%. In conjunction with the pay down of the loans, we paid $5.4 million in transaction costs.

On April 25, 2016, we amended our $1.4 billion loan secured by cross-collateralized mortgages on 15 properties. The interest rate remained consistent at LIBOR plus 1.75%, however, we were able to decrease the recourse from 100% to 50% and extend the term for three years. The loan now matures April 25, 2019, with two one year extension options.

During the three months ended March 31, 2017, we paid down a $73.4 million consolidated mortgage note at one property. The prior loan had a term-to-maturity of 0.2 years and an interest rate of 5.6%.


23

GGP 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:
 
 
March 31, 2017 (1)
 
Weighted-Average
Interest Rate
 
December 31, 2016 (2)
 
Weighted-Average
Interest Rate
Unsecured debt:
 
 

 
 

 
 

 
 

Revolving credit facility
 
$
240,000

 
2.18
%
 
$

 

Total unsecured debt
 
$
240,000

 
2.18
%
 
$

 

 
(1)
Excludes deferred financing costs of $8.1 million in 2017 that decrease the total amount that appears outstanding in our Consolidated Balance Sheets.
(2)
Excludes deferred financing costs of $8.7 million in 2016 that decrease the total amount that appears outstanding in our Consolidated Balance Sheets.

Our revolving credit facility (the "Facility") as amended on October 30, 2015, provides for revolving loans of up to $1.1 billion. The Facility has an uncommitted accordion feature for a total facility of up to $1.5 billion. The Facility is scheduled to mature in October 2020 and is unsecured. Borrowings under the Facility bear interest at a rate equal to LIBOR plus 130 to 190 basis points or at a base rate plus 30 to 90 basis points, which is determined by the Company's leverage level. The Facility contains certain restrictive covenants which limit material changes in the nature of our business conducted, including, but not limited to, mergers, dissolutions or liquidations, dispositions of assets, liens, incurrence of additional indebtedness, dividends, transactions with affiliates, prepayment of subordinated debt, negative pledges and changes in fiscal periods. In addition, we are required not to exceed a maximum net debt-to-value ratio, a maximum leverage ratio and a minimum net cash interest coverage ratio; we are not aware of any instances of non-compliance with such covenants as of March 31, 2017. As of March 31, 2017, $240.0 million was outstanding on the Facility.

Junior Subordinated Notes

GGP Capital Trust I, a Delaware statutory trust (the "Trust") and a wholly-owned subsidiary of GGPN, completed a private placement of $200.0 million of trust preferred securities ("TRUPS") in 2006. The Trust also issued $6.2 million of Common Securities to GGPOP. The Trust used the proceeds from the sale of the TRUPS and Common Securities to purchase $206.2 million of floating rate Junior subordinated notes of GGPOP due 2036. Distributions on the TRUPS are equal to LIBOR plus 1.45%. Distributions are cumulative and accrue from the date of original issuance. The TRUPS mature on April 30, 2036, but may be redeemed beginning on April 30, 2011 if the Trust exercises its right to redeem a like amount of Junior subordinated notes. The Junior subordinated notes bear interest at LIBOR plus 1.45% and are fully recourse to the Company. Though the Trust currently is a wholly-owned subsidiary of GGPN, we are not the primary beneficiary of the Trust and, accordingly, it is not consolidated for accounting purposes. We have recorded the Junior subordinated notes as a liability and our common equity interest in the Trust as prepaid expenses and other assets in our Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016.

Letters of Credit and Surety Bonds

We had outstanding letters of credit and surety bonds of $56.4 million as of March 31, 2017 and $57.8 million as of December 31, 2016. These letters of credit and bonds were issued primarily in connection with insurance requirements, special real estate assessments and construction obligations.

We are not aware of any instances of non-compliance with our financial covenants related to our mortgages, notes and loans payable as of March 31, 2017, with the exception of one mortgage loan. A special servicer is currently managing the operations of the property securing the mortgage loan.


24

GGP INC.

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


NOTE 7        INCOME TAXES

We have elected to be taxed as a REIT under the Internal Revenue Code. We intend to maintain REIT status. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement to distribute at least 90% of our taxable ordinary income. In addition, the Company is required to meet certain asset and income tests.

As a REIT, we will generally not be subject to corporate level Federal income tax on taxable income we distribute currently to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to Federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income or property, and to Federal income and excise taxes on our undistributed taxable income and capital gains. We are currently statutorily open to audit by the Internal Revenue Service for the years ended December 31, 2013 through 2016 and are statutorily open to audit by state taxing authorities for the years ended December 31, 2012 through 2016.

We have no unrecognized tax benefits recorded pursuant to uncertain tax positions as of March 31, 2017.

NOTE 8        WARRANTS

Brookfield and certain parties who were previously members of a Brookfield investor consortium own 73,930,000 warrants (the "Warrants") to purchase common stock of GGP with an initial weighted average exercise price of $10.70. Each Warrant was fully vested upon issuance, has a term of seven years and expires on November 9, 2017. Below is a summary of Warrants that were originally issued and are still outstanding.

Initial Warrant Holder
 
 Number of Warrants
 
Initial Exercise Price
Brookfield - A
 
57,500,000

 
$
10.75

Brookfield - B
 
16,430,000

 
10.50

 
 
73,930,000

 
 

 
The exercise prices of the Warrants are subject to adjustment for future dividends, stock dividends, distribution of assets, stock splits or reverse splits of our common stock or certain other events. In accordance with the agreement, these calculations adjust both the exercise price and the number of shares issuable for the originally issued 73,930,000 Warrants. During 2016 and 2017, the number of shares issuable upon exercise of the outstanding Warrants changed as follows:

 
 
 
 
Exercise Price
Record Date
 
Issuable Shares
 
 Brookfield - A
 
Brookfield - B
April 15, 2016
 
90,288,964

 
$
8.80

 
$
8.60

July 15, 2016
 
90,865,607

 
8.75

 
8.54

October 14, 2016
 
91,553,142

 
8.68

 
8.48

December 15, 2016
 
92,344,178

 
8.61

 
8.41

December 27, 2016
 
93,268,285

 
8.52

 
8.32


The warrant holders have the option for 57,500,000 Warrants to either full share settle (i.e. deliver cash for the exercise price of the Warrants in the amount of approximately $618 million in exchange for approximately 72.5 million shares of common stock) or net share settle. The remaining 16,430,000 Warrants owned or managed by Brookfield must be net share settled. As of March 31, 2017, the Warrants are exercisable into approximately 59 million common shares of the Company, at a weighted-average exercise price of approximately $8.48 per share. Due to their ownership of Warrants, Brookfield's potential ownership of the Company may change as a result of payments of dividends and changes in our stock price.


25

GGP INC.

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


NOTE 9        EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS

Allocation to Noncontrolling Interests

Noncontrolling interests consists of the redeemable interests related to GGPOP Common, Preferred and LTIP Units and the noncontrolling interest in our consolidated joint ventures. The following table reflects the activity included in the allocation to noncontrolling interests.
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Distributions to preferred GGPOP units
 
$
(2,130
)
 
$
(2,201
)
Net income allocation to noncontrolling interests in GGPOP from continuing operations (common units)
 
(575
)
 
(1,035
)
Net income allocation to noncontrolling interests in GGPOP from continuing operations (LTIP units)
 
(255
)
 
(490
)
Net income allocated to noncontrolling interest in consolidated real estate affiliates
 
(249
)
 
169

Allocation to noncontrolling interests
 
(3,209
)
 
(3,557
)
Other comprehensive (income) loss allocated to noncontrolling interests
 
(5
)
 
62

Comprehensive income allocated to noncontrolling interests
 
$
(3,214
)
 
$
(3,495
)

Noncontrolling Interests

The noncontrolling interest related to the Common, Preferred, and LTIP Units of GGPOP are presented either as redeemable noncontrolling interests or as noncontrolling interests in our permanent equity on our Consolidated Balance Sheets. Classification as redeemable or permanent equity is considered on a tranche-by-tranche basis and is dependent on whether we could be required, under certain events outside of our control, to redeem the securities for cash by the holders of the securities. Those tranches for which we could be required to redeem the security for cash are included in redeemable equity. If we control the decision to redeem the securities for cash, the securities are classified as permanent equity.

The Common and Preferred Units of GGPOP are recorded at the greater of the carrying amount adjusted for the noncontrolling interest's share of the allocation of income or loss (and its share of other comprehensive income or loss) and dividends or their redemption value (i.e. fair value) as of each measurement date. The excess of the fair value over the carrying amount from period to period is recorded within additional paid-in capital in our Consolidated Balance Sheets. Allocation to noncontrolling interests is presented as an adjustment to net income to arrive at Net income (loss) attributable to GGP Inc.

The common redeemable noncontrolling interests have been recorded at fair value for all periods presented. One tranche of preferred redeemable noncontrolling interests has been recorded at fair value, while the other tranches of preferred redeemable noncontrolling interests have been recorded at carrying value.

Generally, the holders of the Common Units share in any distributions by GGPOP with our common stockholders. However, the GGPOP operating partnership agreement permits distributions solely to GGP if such distributions were required to allow GGP to comply with the REIT distribution requirements or to avoid the imposition of excise tax. Under certain circumstances, the conversion rate for each Common Unit is required to be adjusted to give effect to stock distributions. If the holders had requested redemption of the Common and Preferred Units as of March 31, 2017, the aggregate amount of cash we would have paid would have been $110.1 million and $137.4 million, respectively.

GGPOP issued Preferred Units that are convertible into Common Units of GGPOP at the rates below (subject to adjustment). The holder may convert the Preferred Units into Common Units of GGPOP at any time, subject to certain restrictions. The Common Units are convertible into common stock at approximately a one-to-one ratio at the current stock price.

26

GGP INC.

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


 
 
Number of Common Units for each Preferred Unit
 
Number of Contractual Preferred Units Outstanding as of March 31, 2017
 
Converted Basis to Common Units Outstanding as of March 31, 2017
 
Conversion Price
 
Redemption Value (1)
Series B
 
3.00000

 
1,184

 
3,695

 
$
16.66670

 
$
85,640

Series D
 
1.50821

 
533

 
835

 
33.15188

 
26,637

Series E
 
1.29836

 
503

 
679

 
38.51000

 
25,133

 
 
 

 
 

 
 

 
 

 
$
137,410

 
(1)
The conversion price of Series B preferred units is lower than the GGP March 31, 2017 closing common stock price of $23.18; therefore, the March 31, 2017 common stock price of $23.18, and an additional conversion rate of 1.0397624 shares is used to calculate the Series B redemption value.

The following table reflects the activity of the redeemable noncontrolling interests for the three months ended March 31, 2017, and 2016.
Balance at January 1, 2016
$
287,627

Net income
1,035

Distributions
(1,668
)
Redemption of GGPOP units
(1,592
)
Other comprehensive loss
(62
)
Fair value adjustment for noncontrolling interests in Operating Partnership
24,130

Balance at March 31, 2016
$
309,470

 
 
Balance at January 1, 2017
$
262,727

Net income
575

Distributions
(1,045
)
Other comprehensive income
5

Fair value adjustment for noncontrolling interests in Operating Partnership
(14,736
)
Balance at March 31, 2017
$
247,526


Common Stock Dividend

Our Board of Directors declared common stock dividends during 2017 and 2016 as follows:

Declaration Date
 
Record Date
 
Payment Date
 
Dividend Per Share
2017
 
 
 
 
 
 
May 1
 
July 13, 2017
 
July 28, 2017
 
$
0.22

January 30
 
April 13, 2017
 
April 28, 2017
 
0.22

2016
 
 
 
 
 
 
December 13
 
December 27, 2016
 
January 27, 2017
 
$
0.26

October 31
 
December 15, 2016
 
January 6, 2017
 
0.22

August 1
 
October 14, 2016
 
October 31, 2016
 
0.20

May 2
 
July 15, 2016
 
July 29, 2016
 
0.19

February 1
 
April 15, 2016
 
April 29, 2016
 
0.19


Our Dividend Reinvestment Plan ("DRIP") provides eligible holders of GGP's common stock with a convenient method of increasing their investment in the Company by reinvesting all or a portion of cash dividends in additional shares of common stock. Eligible stockholders who enroll in the DRIP on or before the fourth business day preceding the record date for a dividend payment

27

GGP INC.

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


will be able to have that dividend reinvested. As a result of the DRIP elections, 21,837 shares were issued during the three months ended March 31, 2017 and 6,398 shares were issued during the three months ended March 31, 2016.

Preferred Stock

On February 13, 2013, we issued, in a public offering, 10,000,000 shares of 6.375% Series A Cumulative Perpetual Preferred Stock (the "Preferred Stock") at a price of $25.00 per share, resulting in net proceeds of $242.0 million after issuance costs. The Preferred Stock is recorded net of issuance costs within equity on our Consolidated Balance Sheets, and accrues a quarterly dividend at an annual rate of 6.375%. The dividend is paid in arrears in preference to dividends on our common stock, and reduces net income available to common stockholders, and therefore, earnings per share.

The Preferred Stock does not have a stated maturity date but we may redeem the Preferred Stock after February 12, 2018, for $25.00 per share plus all accrued and unpaid dividends. We may redeem the Preferred Stock prior to February 12, 2018, in limited circumstances that preserve ownership limits and/or our status as a REIT, as well as during certain circumstances surrounding a change of control. Upon certain circumstances surrounding a change of control, holders of Preferred Stock may elect to convert each share of their Preferred Stock into a number of shares of GGP common stock equivalent to $25.00 plus accrued and unpaid dividends, but not to exceed a cap of 2.4679 common shares (subject to certain adjustments related to GGP common share splits, subdivisions, or combinations).

Our Board of Directors declared preferred stock dividends during 2017 and 2016 as follows:
Declaration Date
 
Record Date
 
Payment Date
 
Dividend Per Share
2017
 
 
 
 
 
 
May 1
 
June 15, 2017
 
July 3, 2017
 
$
0.3984

January 30
 
March 15, 2017
 
April 3, 2017
 
0.3984

2016
 
 
 
 
 
 
October 31
 
December 15, 2016
 
January 3, 2017
 
$
0.3984

August 1
 
September 15, 2016
 
October 3, 2016
 
0.3984

May 2
 
June 15, 2016
 
July 1, 2016
 
0.3984

February 1
 
March 15, 2016
 
April 1, 2016
 
0.3984


Accumulated Other Comprehensive Loss

The following table reflects the activity of the components of accumulated other comprehensive loss for the three months ended March 31, 2017, and 2016:
 
 
Foreign currency translation
 
Net unrealized gains (losses) on other financial instruments
 
Reclassification adjustment for realized gains on available-for-sale securities included in net income
 
Total
Balance at January 1, 2016
 
$
(84,798
)
 
$
100

 
$
11,894

 
$
(72,804
)
Other comprehensive income (loss)
 
6,939

 
9

 
(11,894
)
 
(4,946
)
Balance at March 31, 2016
 
$
(77,859
)
 
$
109

 
$

 
$
(77,750
)
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
 
$
(70,560
)
 
$
104

 
$

 
$
(70,456
)
Other comprehensive income (loss)
 
2,563

 
12

 

 
2,575

Balance at March 31, 2017
 
$
(67,997
)
 
$
116

 
$

 
$
(67,881
)

Realized gains from the sale of available-for-sale securities are included in management fees and other corporate revenues.


28

GGP INC.

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


NOTE 10    EARNINGS PER SHARE

Basic earnings per share ("EPS") is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of all potentially dilutive common shares. The dilutive effect of the Warrants and the dilutive effect of options and their equivalents (including fixed awards and nonvested stock issued under stock-based compensation plans), are computed using the "treasury" method.

Information related to our EPS calculations is summarized as follows:

 
 
Three Months Ended March 31,
 
 
2017
 
2016
Numerators - Basic and Diluted:
 
 

 
 

Net income
 
110,369

 
195,337

Preferred Stock dividends
 
(3,984
)
 
(3,984
)
Allocation to noncontrolling interests
 
(3,209
)
 
(3,557
)
Net income attributable to common stockholders
 
$
103,176

 
$
187,796

Denominators:
 
 

 
 

Weighted-average number of common shares outstanding - basic
 
884,505

 
882,673

Effect of dilutive securities
 
65,011

 
67,481

Weighted-average number of common shares outstanding - diluted
 
949,516

 
950,154

Anti-dilutive Securities:
 
 

 
 

Effect of Preferred Units
 
5,209

 
5,415

Effect of Common Units
 
4,751

 
4,768

Effect of LTIP Units
 
1,891

 
1,742

Weighted-average number of anti-dilutive securities
 
11,851

 
11,925

 
For the three months ended March 31, 2017 and 2016, dilutive options and dilutive shares related to the Warrants are included in the denominator of diluted EPS.

Outstanding Common Units and LTIP Units have been excluded from the diluted earnings per share calculation because including such units would also require that the share of GGPOP income attributable to such units be added back to net income therefore resulting in no effect on EPS. Outstanding Preferred Units have been excluded from the diluted EPS calculation for all periods presented because including the Preferred Units would also require that the Preferred Units dividend be added back to the net income, resulting in anti-dilution.

GGP owned 58,538,995 and 55,969,390 shares of treasury stock as of March 31, 2017 and 2016, respectively. These shares are presented as common stock in treasury, at cost, on our Consolidated Balance Sheets. Additionally, GGPOP holds 27,459,195 shares of stock as a result of warrants purchased during the year ended December 31, 2013. These shares are presented as issued, but not outstanding on our Consolidated Balance Sheets. Accordingly, these shares have been excluded from the calculation of EPS.


29

GGP INC.

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


NOTE 11    STOCK-BASED COMPENSATION PLANS

The GGP Inc. 2010 Equity Plan (the "Equity Plan") reserved for issuance of 4% of outstanding shares on a fully diluted basis. The Equity Plan provides for grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, other stock-based awards and performance-based compensation (collectively, the "Awards"). Directors, officers and other employees of GGP and its subsidiaries and affiliates are eligible for the Awards. The Equity Plan is not subject to the Employee Retirement Income Security Act of 1974, as amended. No participant may be granted more than 4,000,000 shares, or the equivalent dollar value of such shares, in any year. Options granted under the Equity Plan will be designated as either nonqualified stock options or incentive stock options. An option granted as an incentive stock option will, to the extent it fails to qualify as an incentive stock option, be treated as a nonqualified option. The exercise price of an option may not be less than the fair value of a share of GGP's common stock on the date of grant. The term of each option will be determined prior to the date of grant, but may not exceed 10 years.

On November 12, 2014, the Company's Equity Plan was amended to allow for the grant of LTIP Units to certain officers, directors, and employees of the Company as an alternative to the Company's stock options or restricted stock. LTIP Units are classes of partnership interests that under certain conditions, including vesting, are convertible by the holder into common units, which are redeemable by the holder for common shares on a one-to-one ratio (subject to adjustment for changes to GGP's capital structure) or for the cash value of such shares at the option of the Company.

On February 17, 2016, the Company's Equity Plan was amended to allow for the grant of restricted stock or LTIP Units to certain officers, directors, and employees of the Company that vest based on the achievement of certain established metrics that are based on the performance of the Company.

On January 1, 2017, the Company adopted ASU 2016-09, Compensation - Stock Compensation. This new guidance allowed us to make the election to account for share-based payment forfeitures when they occur which resulted in a cumulative effect of accounting change adjustment of $3.0 million to additional paid-in capital, noncontrolling interests related to LTIP Units and accumulated distributions in excess of earnings as of January 1, 2017.

Compensation expense related to stock-based compensation plans for the three months ended March 31, 2017, and 2016 is summarized in the following table in thousands:
 
Three Months Ended March 31,
 
2017
 
2016
Stock options - Property management and other costs
$
973

 
$
1,487

Stock options - General and administrative
2,186

 
2,755

Restricted stock - Property management and other costs
1,512

 
541

Restricted stock - General and administrative
519

 
149

LTIP Units - Property management and other costs
400

 
209

LTIP Units - General and administrative
4,608

 
3,168

Total
$
10,198

 
$
8,309


The following tables summarize stock option, LTIP Unit and restricted stock activity for the Equity Plan for GGP for the three months ended March 31, 2017, and 2016:

30

GGP INC.

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


 
2017
 
2016
 
Shares
 
Weighted Average Exercise Price
 
Shares
 
Weighted Average Exercise Price (1)
Stock options Outstanding at January 1,
15,277,189

 
$
17.90

 
18,162,700

 
$
17.34

Granted

 

 
91,261

 
25.81

Exercised
(231,799
)
 
19.64

 
(318,826
)
 
17.61

Forfeited
(99,531
)
 
22.35

 
(207,446
)
 
19.82

Expired
(1,081
)
 
28.86

 
(468
)
 
19.05

Stock options Outstanding at March 31,
14,944,778

 
$
17.84

 
17,727,221

 
$
17.35

(1)
Changes to prior year weighted average exercise price is due to adjustment of the strike price for the special dividend issued in 2016.

 
2017
 
2016
 
Shares
 
Weighted Average Grant Date Fair Value
 
Shares
 
Weighted Average Grant Date Fair Value (1)
LTIP Units Outstanding at January 1,
4,345,912

 
$
27.27

 
1,724,747

 
$
29.32

Granted
553,526

 
25.38

 
2,640,963

 
25.89

Exercised
(15,480
)
 
29.15

 

 

Forfeited
(25,565
)
 
27.69

 
(38,862
)
 
28.98

Expired

 

 

 

LTIP Units Outstanding at March 31,
4,858,393

 
$
27.05

 
4,326,848

 
$
27.23

(1)
Changes to prior year weighted average exercise price is due to adjustment of the strike price for the special dividend issued in 2016.

 
2017
 
2016
 
Shares
 
Weighted Average Exercise Price
 
Shares
 
Weighted Average Exercise Price
Restricted stock Outstanding at January 1,
476,686

 
$
27.11

 
206,219

 
$
29.16

Granted
782,869

 
25.36

 
336,518

 
26.11

Vested
(128,266
)
 
27.25

 
(56,594
)
 
28.95

Canceled
(40,596
)
 
26.28

 
(2,565
)
 
27.77

Restricted stock Outstanding at March 31,
1,090,693

 
25.87

 
483,578

 
27.07


NOTE 12    ACCOUNTS RECEIVABLE, NET

The following table summarizes the significant components of accounts receivable, net.
 
 
March 31, 2017
 
December 31, 2016
Trade receivables
 
$
103,966

 
$
107,107

Short-term tenant receivables
 
1,310

 
1,414

Straight-line rent receivable
 
226,955

 
227,859

Other accounts receivable
 
4,234

 
3,699

Total accounts receivable
 
336,465

 
340,079

Provision for doubtful accounts
 
(18,206
)
 
(17,883
)
Total accounts receivable, net
 
$
318,259

 
$
322,196



31

GGP INC.

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


NOTE 13    NOTES RECEIVABLE

The following table summarizes the significant components of notes receivable.
 
 
March 31, 2017
 
December 31, 2016
Notes receivable
 
$
683,894

 
$
665,289

Accrued interest
 
7,897

 
13,207

Total notes receivable
 
691,791

 
678,496

On November 11, 2015, we entered into a promissory note with our joint venture partner, Ashkenazy Holding Co., LLC ("AHC"), in which we lent $57.6 million that bears interest at 8% per annum. The note is collateralized by AHC's equity in Miami Design District Associates, which is part of the AACMDD Group, LLC joint venture ("AACMDD"). On November 18, 2016, the maturity date of the note was amended to November 15, 2019. Additionally, AHC may convey the collateral of the note five business days prior to any payment due date within the contract.
On September 17, 2015, we entered into a promissory note with our joint venture partner, AHC, in which we lent $40.4 million that bears interest at 6% per annum. The note is collateralized by AHC's equity in Miami Design District Associates, which is part of AACMDD. On November 18, 2016, the maturity date of the note was amended to September 17, 2019. Additionally, AHC may convey the collateral of the note five business days prior to any payment due date within the contract.

On June 30, 2015, we entered into a promissory note with our joint venture partner MKB (defined in Note 5), in which we would lend MKB up to $80 million for capital calls after an initial contribution of $80 million by MKB and until the joint venture secured construction financing. This loan bears interest at LIBOR plus 6% and is secured by MKB's partnership interest in AMX, which is constructing a luxury residential condominium tower on a site located within the Ala Moana Shopping Center. As of March 31, 2017, there was $16.6 million outstanding on this loan. Construction financing closed during the third quarter of 2015.

Notes receivable includes $204.3 million of notes receivables from our joint venture partners related to the acquisition of 730 Fifth Avenue in New York, New York. The first note was issued for $104.3 million, bears interest at 8.0% compounded annually and matures on February 12, 2025. The second note was issued for $100.0 million to the joint venture partner acquiring the office portion of the property and bears interest at 9.0% subject to terms and conditions in the loan agreement and matures on April 17, 2025. As of March 31, 2017, there was $244.9 million outstanding on these loans.

Also included in notes receivable is $128.1 million and $54.5 million due from our joint venture partner related to the acquisition of the properties at 685 Fifth Avenue and 530 Fifth Avenue in New York, New York. The notes receivable bear interest at 7.5% and 9.0% respectively. Interest is compounded quarterly with accrued but unpaid interest increasing the loan balance. The notes are collateralized by our partner's ownership interest in the joint ventures. The loans mature on June 27, 2024 and June 18, 2024, respectively.

On July 29, 2016, we settled a note receivable in the net amount of $78.9 million issued to Rique Empreendimentos e Participacoes Ltda. ("Rique") in exchange for approximately 18.3 million shares in Aliansce Shopping Centers, S.A. ("Aliansce"), resulting in an 11.3% ownership in Aliansce. On September 29, 2016, we sold the 18.3 million shares in Aliansce to the Canada Pension Plan Investment Board for a sales price of $84.9 million. The note receivable was issued in conjunction with our sale of Aliansce to Rique and Canada Pension Plan Investment Board on September 30, 2013. The note receivable was denominated in Brazilian Reais, bore interest at an effective interest rate of approximately 14%, was collateralized by shares of common stock in Aliansce, and required annual principal and interest payments over the term. During the three months ended March 31, 2016, we determined, based on current information and events, that it was probable that we would be unable to collect all amounts due according to the contractual terms of the receivable. As the note receivable was a collateral dependent loan, we estimated the provision for loss based on the fair value of the market price of the Aliansce shares which served as the collateral for the loan. We recognized a $36.1 million loss on the note recorded in the provision for loan loss on the Consolidated Statements of Comprehensive Income based on the value of the collateral and included accrued interest of $7.5 million in the provision for loan loss. We recognized the impact of changes in the exchange rate on the note receivable as gain or loss on foreign currency in our Consolidated Statements of Comprehensive Income.


32

GGP INC.

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


NOTE 14    PREPAID EXPENSES AND OTHER ASSETS
 
The following table summarizes the significant components of prepaid expenses and other assets.
 
March 31, 2017
 
December 31, 2016
 
Gross Asset
 
Accumulated
Amortization
 
Balance
 
Gross Asset
 
Accumulated
Amortization
 
Balance
Intangible assets:
 

 
 

 
 

 
 

 
 

 
 

Above-market tenant leases, net
$
462,095

 
$
(330,259
)
 
$
131,836

 
$
512,802

 
$
(368,900
)
 
$
143,902

Below-market ground leases, net
118,994

 
(13,308
)
 
105,686

 
118,994

 
(12,788
)
 
106,206

Real estate tax stabilization agreement, net
111,506

 
(40,347
)
 
71,159

 
111,506

 
(38,769
)
 
72,737

Total intangible assets
$
692,595


$
(383,914
)
 
$
308,681

 
$
743,302


$
(420,457
)
 
$
322,845

Remaining prepaid expenses and other assets:
 

 
 

 
 

 
 

 
 

 
 

Security and escrow deposits
 

 
 

 
48,836

 
 
 
 
 
59,054

Prepaid expenses
 

 
 

 
34,956

 
 
 
 
 
46,709

Other non-tenant receivables
 

 
 

 
30,335

 
 
 
 
 
34,677

Deferred tax, net of valuation allowances
 

 
 

 
4,197

 
 
 
 
 
6,943

Other
 

 
 

 
58,992

 
 
 
 
 
36,293

Total remaining prepaid expenses and other assets
 

 
 

 
177,316

 
 

 
 

 
183,676

Total prepaid expenses and other assets
 

 
 

 
$
485,997

 
 

 
 

 
$
506,521



33

GGP INC.

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


NOTE 15    ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The following table summarizes the significant components of accounts payable and accrued expenses.
 
 
March 31, 2017
 
December 31, 2016
 
Gross 
Liability
 
Accumulated
Accretion
 
Balance
 
Gross 
Liability
 
Accumulated
Accretion
 
Balance
Intangible liabilities:
 

 
 

 
 

 
 

 
 

 
 

Below-market tenant leases, net
262,238

 
(159,010
)
 
$
103,228

 
267,048

 
(172,210
)
 
$
94,838

Above-market headquarters office leases, net
15,268

 
(10,781
)
 
4,487

 
15,268

 
(10,346
)
 
4,922

Above-market ground leases, net
9,127

 
(2,349
)
 
6,778

 
9,127

 
(2,258
)
 
6,869

Total intangible liabilities
$
286,633


$
(172,140
)
 
$
114,493

 
$
291,443


$
(184,814
)
 
$
106,629

Remaining Accounts payable and accrued expenses:
 

 
 

 
 

 
 

 
 

 
 

Accrued interest
 

 
 

 
51,391

 
 

 
 

 
47,821

Accounts payable and accrued expenses
 

 
 

 
78,200

 
 

 
 

 
87,485

Accrued real estate taxes
 

 
 

 
79,639

 
 

 
 

 
87,313

Deferred gains/income
 

 
 

 
92,351

 
 

 
 

 
91,720

Accrued payroll and other employee liabilities
 

 
 

 
18,042

 
 

 
 

 
57,721

Construction payable
 

 
 

 
106,955

 
 

 
 

 
115,077

Tenant and other deposits
 

 
 

 
15,100

 
 

 
 

 
15,061

Insurance reserve liability
 

 
 

 
14,261

 
 

 
 

 
14,184

Capital lease obligations
 

 
 

 
5,386

 
 

 
 

 
5,386

Conditional asset retirement obligation liability
 

 
 

 
5,057

 
 

 
 

 
5,327

Other
 

 
 

 
30,244

 
 

 
 

 
21,638

Total remaining Accounts payable and accrued expenses
 

 
 

 
496,626

 
 

 
 

 
548,733

Total Accounts payable and accrued expenses
 

 
 

 
$
611,119

 
 

 
 

 
$
655,362


NOTE 16    LITIGATION

In the normal course of business, from time to time, we are involved in legal proceedings relating to the ownership and operations of our properties. In management's opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a material effect on our consolidated financial position, results of operations or liquidity. Neither the Company nor any of the Unconsolidated Real Estate Affiliates is currently involved in any material pending legal proceedings nor, to our knowledge, is any material legal proceeding currently threatened against the Company or any of the Unconsolidated Real Estate Affiliates.


34

GGP INC.

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


NOTE 17    COMMITMENTS AND CONTINGENCIES

We lease land or buildings at certain properties from third parties. The leases generally provide us with a right of first refusal in the event of a proposed sale of the property by the landlord. Rental payments are expensed as incurred and have been straight-lined over the term of the lease, to the extent applicable. The following is a summary of our contractual rental expense as presented in our Consolidated Statements of Comprehensive Income:
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(Dollars in thousands)
Contractual rent expense, including participation rent
 
$
2,197

 
$
2,107

Contractual rent expense, including participation rent and excluding amortization of above and below-market ground leases and straight-line rent
 
1,625

 
1,527


NOTE 18    SUBSEQUENT EVENTS

Subsequent to March 31, 2017, no events have occurred that require recognition or disclosure in the consolidated financial statements, except as recognized or disclosed previously.

35


ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

All references to numbered Notes are to specific footnotes to our consolidated financial statements included in this Quarterly Report and whose descriptions are incorporated into the applicable response by reference. The following discussion should be read in conjunction with such consolidated financial statements and related Notes. Capitalized terms used, but not defined, in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") have the same meanings as in such Notes.

Overview

Our primary business is owning and operating best-in-class retail properties that provide an outstanding environment and experience for our communities, retailers, employees, consumers and shareholders. We are an S&P 500 real estate company with a property portfolio comprised primarily of Class A retail properties (defined primarily by sales per square foot) and urban retail properties. Our retail properties are the core centers of retail, dining and entertainment within their trade areas and, therefore, represent hubs of such activity. As of March 31, 2017, we own, either entirely or with joint venture partners, 127 retail properties located throughout the United States comprising approximately 125 million square feet of gross leasable area ("GLA").

We provide management and other services to substantially all of our properties, including properties which we own through joint venture arrangements and which are unconsolidated for GAAP purposes. Our management operating philosophies and strategies are the same whether the properties are consolidated or unconsolidated.

We seek to increase long-term Company NOI and Company EBITDA (as defined below) growth through proactive management and leasing of our properties. We also recycle capital through strategic dispositions in order to opportunistically invest in high quality retail properties, as well as control operating expenses. We believe that the following items are the most significant drivers affecting incremental cash flow and Company EBITDA growth:

contractual rent increases;
occupancy growth;
positive leasing spreads;
value creation from redevelopment projects;
managing operating expenses; and
strategic acquisitions and dispositions that recycle capital.

As of March 31, 2017 the portfolio was 95.9% leased, compared to 96.1% leased at March 31, 2016. The decrease is primarily due to tenant bankruptcies during the current year quarter, which affected 1.2 million square feet in our portfolio. On a suite-to-suite basis, the leases commencing occupancy in the trailing 12 months exhibited initial rents that were 10.5% higher than the final rents paid on expiring leases. Our overall leasing activity is approximately twice the amount of GLA that shows up in the suite-to-suite comparison due to leasing of anchor boxes that are not included in the suite-to-suite spreads.

We have identified approximately $1.3 billion of income producing development and redevelopment projects within our portfolio, over 80% of which is being invested into Class A retail properties. We currently expect to achieve stabilized returns of approximately 7-9% for all projects.

We believe our long-term strategy can provide our shareholders with a competitive risk-adjusted total return comprised of dividends and share price appreciation.

Financial Overview

Net income attributable to GGP Inc. decreased from $191.8 million for the three months ended March 31, 2016 to $107.2 million for the three months ended March 31, 2017. Our Company NOI (as defined below) decreased 1.8% from $591.5 million for the three months ended March 31, 2016 to $580.9 million for the three months ended March 31, 2017. Our Company FFO (as defined below) decreased 9.6% from $382.8 million for the three months ended March 31, 2016 to $346.2 million for the three months ended March 31, 2017.

See Non-GAAP Supplemental Financial Measures below for a discussion of Company NOI, Company EBITDA and Company FFO, along with a reconciliation to the comparable GAAP measures, Operating income and Net income attributable to GGP Inc.



36




Operating Metrics

The following table summarizes selected operating metrics for our portfolio.
 
 
March 31, 2017 (1)
 
March 31, 2016 (1)
In-Place Rents per square foot (2)
 
 

 
 

Consolidated Properties
 
$
65.33

 
$
64.84

Unconsolidated Properties
 
102.25

 
98.83

Total Retail Properties
 
$
78.14

 
$
76.60

 
 
 
 
 
Percentage Leased
 
 
 
 
Consolidated Properties
 
96.0
%
 
95.9
%
Unconsolidated Properties
 
95.8
%
 
96.7
%
Total Retail Properties
 
95.9
%
 
96.1
%
 
 
 
 
 
Tenant Sales Volume (All Less Anchors) (3)
 
 
 
 
Consolidated Properties
 
$
12,175

 
$
12,171

Unconsolidated Properties
 
9,126

 
8,933

Total Retail Properties
 
$
21,300

 
$
21,104

 
 
 
 
 
Tenant Sales per square foot (3)
 
 
 
 
Consolidated Properties
 
$
509

 
$
512

Unconsolidated Properties
 
754

 
739

Total Retail Properties
 
$
591

 
$
588

 
(1)
Metrics exclude properties acquired in the year ended December 31, 2016 and the three months ended March 31, 2017 and certain other retail properties.
(2)
Rent is presented on a cash basis and consists of base minimum rent and common area costs.
(3)
Tenant Sales Volume (All Less Anchors) is presented as total sales volume in millions of dollars and Tenant Sales <10,000 square feet is presented as sales per square foot in dollars.

Lease Spread Metrics

The following table summarizes signed leases compared to expiring leases in the same suite, for leases where (1) the downtime between new and previous tenant was less than 24 months, (2) the occupied space between the previous tenant and new tenant did not change by more than 10,000 square feet and (3) the new lease is at least a year.
 
# of Leases
 
SF
 
Term
(in years)
 
Initial Rent PSF (1)
 
Expiring Rent PSF (2)
 
Initial Rent
Spread
 
% Change
Trailing 12 Commencements
1,505

 
4,833,985

 
6.8

 
$
63.60

 
$
57.53

 
$
6.07

 
10.5
%
 
(1)
Represents initial annual rent over the lease consisting of base minimum rent and common area maintenance.
(2)
Represents expiring rent at end of lease consisting of base minimum rent and common area maintenance.


37


Results of Operations
 
Three months ended March 31, 2017 and 2016
 
The following table is a breakout of the components of minimum rents:
 
Three Months Ended March 31,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
 
(Dollars in thousands)
 
 
 
 
Components of Minimum rents:
 

 
 

 
 

 
 

Base minimum rents
$
353,652

 
$
367,579

 
$
(13,927
)
 
(3.8
)%
Lease termination income
5,935

 
7,385

 
(1,450
)
 
(19.6
)
Straight-line rent
(893
)
 
5,447

 
(6,340
)
 
(116.4
)
Above and below-market tenant leases, net
(9,681
)
 
(9,279
)
 
(402
)
 
4.3

Total Minimum rents
$
349,013

 
$
371,132

 
$
(22,119
)
 
(6.0
)%

Base minimum rents decreased $13.9 million primarily due to our sale of an interest in Fashion Show during the third quarter of 2016. This resulted in $18.9 million less base minimum rents during the three months ended March 31, 2017 compared to the three months ended March 31, 2016 as the property is now accounted for as an Unconsolidated Real Estate Affiliate. The acquisition of the remaining 50% interest in Riverchase Galleria from our joint venture partner during the fourth quarter of 2016 resulted in an offsetting $6.8 million increase in base minimum rents.

Tenant recoveries decreased $9.4 million primarily due to our sale of an interest in Fashion Show during the third quarter of 2016. This resulted in $8.0 million less tenant recoveries during the three months ended March 31, 2017 compared to the three months ended March 31, 2016 as the property is now accounted for as an Unconsolidated Real Estate Affiliate. In addition, reimbursable common area maintenance charges decreased by $4.8 million across the portfolio. The acquisition of the remaining 50% interest in Riverchase Galleria from our joint venture partner during the fourth quarter of 2016 resulted in an offsetting $2.7 million increase in tenant recoveries.

Management fees and other corporate revenues decreased $5.6 million primarily due to the divestiture of our investment in Seritage
Growth Properties stock during the three months ended March 31, 2016, which resulted in a $13.1 million gain (Note 2) . This is partially offset by a $4.3 million one-time profit participation payment received during the three months ended March 31, 2017 related to our Aeropostale joint venture (Note 5). In addition, during the three months ended March 31, 2017, we received $1.5 million in fees related to the joint venture formed with Fashion Show during the third quarter of 2016.

Other revenue decreased $1.4 million primarily due to the recognition of gains on the sale of air rights at Ala Moana Center. During the three months ended March 31, 2016, $7.1 million previously deferred gains were recognized, and during the three months ended March 31, 2017, $2.4 million of previously deferred gains were recognized. The decrease was partially offset by a termination fee of $3.2 million received during the three months ended March 31, 2017.

Property maintenance costs decreased $2.5 million primarily due to operational efficiencies.

Other property operating costs decreased $1.1 million primarily due to our sale of an interest in Fashion Show during the third quarter of 2016. This resulted in $2.4 million less other property operating costs during the three months ended March 31, 2017 compared to the three months ended March 31, 2016 as the property is now accounted for as an Unconsolidated Real Estate Affiliate. The acquisition of the remaining 50% interest in Riverchase Galleria from our joint venture partner during the fourth quarter of 2016 resulted in an offsetting $1.2 million increase in other property operating costs.

Provision for loan loss of $36.1 million relates to the settlement of the Rique note receivable during 2016 (Note 13).

Property management and other costs increased $10.4 million primarily due to bonus savings in the prior year.

General and administrative increased $1.3 million primarily due to an increase in compensation expense (Note 11).

Provision for impairment of $40.7 million is related to impairment charges recorded on two operating properties during the three months ended March 31, 2016 (Note 2).
 

38


Depreciation and amortization increased $9.6 million primarily due to an increase in write-offs of tenant allowances during the three months ended March 31, 2017.

Interest expense decreased $15.4 million primarily due to our sale of an interest in Fashion Show during the third quarter of 2016. This resulted in $8.7 million less interest expense during the three months ended March 31, 2017 compared to the three months ended March 31, 2016 as the property is now accounted for as an Unconsolidated Real Estate Affiliate. In addition, we paid down mortgage notes at two operating properties during 2016, resulting in a $3.6 million decrease in interest expense (Note 6). We also sold two operating properties during 2016, resulting in a $1.2 million decrease in interest expense.

The gain on foreign currency during the three months ended March 31, 2016 is related to the impact of changes in the exchange rate on a note receivable denominated in Brazilian Reais and received in conjunction with the sale of Aliansce in the third quarter of 2013. The note receivable was settled during 2016 (Note 13). The gain on foreign currency during the three months ended March 31, 2017 is related to the impact of changes in the exchange rate on the proceeds from the settlement, which are held in Brazilian Reais.

The gain from changes in control of investment properties and other of $74.6 million during the three months ended March 31, 2016 relates to our sale of our interest in two operating properties and additional development related to our sale of a 25% interest in Ala Moana Center in 2015 (Note 3).

Provision for income taxes increased $1.6 million primarily due to the tax impact of the provision for loan loss related to the Rique note recorded during the three months ended March 31, 2016 (Note 13). This increase was partially offset by a decrease in taxable income recognized by our taxable REIT subsidiary for the sale of condominiums (Note 5).

Equity in income of Unconsolidated Real Estate Affiliates decreased by $24.3 million primarily due to decreased income recognition on condominiums during the three months ended March 31, 2017 compared to the three months ended March 31, 2016 (Note 5), partially offset by our share of income in the Fashion Show joint venture formed during the third quarter of 2016.

Unconsolidated Real Estate Affiliates - gain on investment during the three months ended March 31, 2016 relates to additional development related to the sale of an additional 12.5% interest in Ala Moana Center during the second quarter of 2015 and the sale of our interest in two joint ventures during the three months ended March 31, 2016 (Note 3).

Liquidity and Capital Resources
 
Our primary source of cash is from the ownership and management of our properties and strategic dispositions. We may generate cash from refinancings or borrowings under our revolving credit facility. Our primary uses of cash include payment of operating expenses, debt service, reinvestment in and redevelopment of properties, tenant allowances, dividends and acquisitions.
 
We anticipate maintaining financial flexibility by managing our future maturities, amortization of debt, and minimizing cross collateralizations and corporate guarantees. We believe that we currently have sufficient liquidity to satisfy all of our commitments in the form of $252.7 million of consolidated unrestricted cash and $810.0 million of available credit under our credit facility as of March 31, 2017, as well as anticipated cash provided by operations.
 
Our key financing objectives include:

to obtain property-secured debt with laddered maturities;
to strategically leverage unencumbered retail properties; and
to minimize the amount of debt that is cross-collateralized and/or recourse to us.

We may raise capital through public or private issuances of debt securities, preferred stock, common stock, common units of the Operating Partnerships (as defined in Note 1) or other capital raising activities.

During the year ended December 31, 2016, we paid down $294.4 million of consolidated mortgage notes at two properties. The prior loans had a weighted-average term-to-maturity of 1.2 years and a weighted-average interest rate of 5.3%. In conjunction with the pay down of the loans, we paid $5.4 million in transaction costs.
 
During the three months ended March 31, 2017, we paid down a $73.4 million consolidated mortgage note at one property. The prior loan had a term-to-maturity of 0.2 years and an interest rate of 5.6%.


39


As of March 31, 2017, we had $2.1 billion of debt pre-payable at our proportionate share without penalty. We may pursue opportunities to refinance this debt at lower interest rates and longer maturities.
 
As of March 31, 2017, our proportionate share of total debt aggregated $18.6 billion. Our total debt includes our consolidated debt of $12.8 billion and our share of Unconsolidated Real Estate Affiliates debt of $5.9 billion. Of our proportionate share of total debt, $1.6 billion is recourse to the Company or its subsidiaries (including the facility) due to guarantees or other security provisions for the benefit of the note holder.
 
The amount of debt due in the next three years represents 16.0% of our total debt at maturity. The maximum amount due in any one of the next ten years is no more than $3.1 billion at our proportionate share or approximately 17.6% of our total debt at maturity.

The following table illustrates the scheduled payments for our proportionate share of total debt as of March 31, 2017. The $206.2 million of Junior Subordinated Notes are due in 2036, but we may redeem them any time after April 30, 2011 (Note 6). As we do not expect to redeem the notes prior to maturity, they are included in the consolidated debt maturing subsequent to 2021.
 
Consolidated
 
Unconsolidated
 
(Dollars in thousands)
2017
$
144,862

 
$
20,270

2018
337,736

 
186,746

2019
910,958

 
1,141,459

2020
1,764,947

 
1,354,262

2021
2,893,927

 
327,926

Subsequent
6,721,429

 
2,823,405

Total
$
12,773,859

 
$
5,854,068

 
We believe we will be able to extend the maturity date, repay under our available line of credit or refinance the consolidated debt that is scheduled to mature in 2017. We also believe that the joint ventures will be able to refinance the debt of our Unconsolidated Real Estate Affiliates upon maturity; however, there can be no assurance that we 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.

Acquisitions and Joint Venture Activity

From time-to-time we may acquire whole or partial interests in high-quality retail properties or make strategic dispositions. Refer to Note 3 for more information.

Warrants and Brookfield Investor Ownership
 
Brookfield and certain parties who were previously members of a Brookfield investor consortium own or manage on behalf of third parties all of the Company's outstanding Warrants (Note 8) which are exercisable into approximately 59 million common shares of the Company at a weighted-average exercise price of $8.48 per share, assuming net share settlement. The strike price and common shares issuable under the Warrants will adjust for dividends declared by the Company.

Brookfield's potential ownership of the Company (assuming full share settlement of the Warrants) is 34.6%, based on information included in their Form 13D filed on August 19, 2016.


40


Developments and Redevelopments
 
We are currently redeveloping several consolidated and unconsolidated properties primarily to improve the productivity and value of the property, convert large-scale anchor boxes into smaller leasable areas and to create new in-line retail space and new restaurant venues.

We have development and redevelopment activities totaling approximately $679 million under construction and $599 million in the pipeline. We continue to evaluate a number of other redevelopment projects to further enhance the quality of our assets. Expected returns are based on the completion of current and future redevelopment projects, and the success of the leasing and asset management plans in place for each project. Expected returns are subject to a number of variables, risks, and uncertainties including those disclosed within Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 (our "Annual Report"). We also refer the reader to our disclosure related to forward-looking statements, below. The following table illustrates our planned redevelopments:
Property
Description
 
GGP's Total Projected Share of Cost
 
GGP's Investment to Date (1)
 
Expected Return on Investment (2)
 
Stabilized Year
Major Development Summary (in millions, at share unless otherwise noted)
Under Construction
 
 

 
 

 
 
 
 
Staten Island Mall
Staten Island, NY
Expansion
 
231

 
47

 
7-9%
 
2019
Other Projects
Redevelopment projects at various properties
 
448

 
288

 
6-8%
 
2017-2018
 
Total Projects Under Construction
 
$
679

 
$
335

 
 
 
 
Projects in Pipeline
 
 
 

 
 

 
 
 
 
New Mall Development
Norwalk, CT
Ground up mall development
 
285

 
54

 
8-10%
 
2020
Other Projects
Redevelopment projects at various properties
 
314

 
82

 
8-9%
 
TBD
 
Total Projects in Pipeline
 
$
599

 
$
136

 
 
 
 
 
(1)
Projected costs and investments to date exclude capitalized interest and overhead.
(2)
Return on investment represents first year stabilized cash-on-cash return, based upon budgeted assumptions. Actual costs may vary.

Our investment in these projects for the three months ended March 31, 2017 has increased from December 31, 2016 in conjunction with the applicable development plan and as projects near completion. The continued progression of redevelopment projects resulted in increases to GGP's investment to date.

Capital Expenditures, Capitalized Interest and Overhead (at share)

The following table illustrates our capital expenditures, capitalized interest, and internal costs associated with leasing and development overhead, which primarily relate to ordinary capital projects at our operating properties. In addition, we incurred tenant allowances and capitalized leasing costs for our operating properties as outlined below. Capitalized interest is based upon qualified expenditures and interest rates; capitalized leasing and development costs are based upon time expended on these activities. These costs are amortized over lives which are consistent with the related asset.
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(Dollars in thousands)
Operating capital expenditures (1)
 
$
37,189

 
$
39,339

Tenant allowances and capitalized leasing costs (2)
 
38,949

 
32,597

Capitalized interest and capitalized overhead
 
14,703

 
15,908

Total
 
$
90,841

 
$
87,844

(1)
Reflects only non-tenant operating capital expenditures.
(2)
Tenant allowances paid on 0.9 million square feet.




41


Common Stock Dividends

Our Board of Directors declared common stock dividends during 2017 and 2016 as follows:
Declaration Date
Record Date
Payment Date
Dividend Per Share
2017
 
 
 
May 1
July 13, 2017
July 28, 2017
$
0.22

January 30
April 13, 2017
April 28, 2017
0.22

2016
 
 
 
December 13
December 27, 2016
January 27, 2017
$
0.26

October 31
December 15, 2016
January 6, 2017
0.22

August 1
October 14, 2016
October 31, 2016
0.20

May 2
July 15, 2016
July 29, 2016
0.19

February 1
April 15, 2016
April 29, 2016
0.19


Preferred Stock Dividends

On February 13, 2013, we issued, under a public offering, 10,000,000 shares of 6.375% Series A Cumulative Stock at a price of $25.00 per share. Our Board of Directors declared preferred stock dividends during 2017 and 2016 as follows:
Declaration Date
Record Date
Payment Date
Dividend Per Share
2017
 
 
 
May 1
June 15, 2017
July 3, 2017
$
0.3984

January 30
March 15, 2017
April 3, 2017
0.3984

2016
 
 
 
October 31
December 15, 2016
January 3, 2017
$
0.3984

August 1
September 15, 2016
October 3, 2016
0.3984

May 2
June 15, 2016
July 1, 2016
0.3984

February 1
March 15, 2016
April 1, 2016
0.3984


Summary of Cash Flows

Cash Flows from Operating Activities

Net cash provided by operating activities was $238.9 million for the three months ended March 31, 2017 and $238.0 million for the three months ended March 31, 2016. Significant changes in the components of net cash provided by operating activities include:

in 2017, an increase in cash inflows from distributions received from unconsolidated real estate affiliates;
in 2017, a decrease in cash outflows for interest expense due to prior year refinancings; and
in 2016, an increase in base minimum rents and related collections due to overall increase in permanent occupancy.
 
Cash Flows from Investing Activities

Net cash (used in) provided by investing activities was ($102.3) million for the three months ended March 31, 2017 and $112.7 million for the three months ended March 31, 2016. Significant components of net cash (used in) provided by investing activities include:
 
in 2017, development of real estate and property improvements, ($110.6) million;
in 2017, net proceeds from distributions received from unconsolidated real estate in excess of income, $11.4 million;
in 2016, proceeds from the sale of real estate, $238.7 million; net of development of real estate and property improvements, ($120.4) million; and
in 2016, proceeds from the sale of marketable securities, $46.4 million.

Cash Flows from Financing Activities

Net cash used in financing activities was $361.8 million for the three months ended March 31, 2017 and $514.6 million for the three months ended March 31, 2016. Significant components of net cash used in financing activities include:


42


in 2017, proceeds from the refinancing or issuance of mortgages, notes and loans payable, of $290.0 million; net of principal payments of ($154.6) million;
in 2017, cash distributions paid to common stockholders of ($424.7) million;
in 2017, repurchase of treasury stock of ($71.1) million;
in 2016, principal payments on mortgages, notes and loans payable of ($350.4) million; and
in 2016, cash distributions paid to common stockholders of ($167.7) million.

Seasonality

Although we have a year-long temporary leasing program, occupancies for short-term tenants and, therefore, rental income recognized, are higher during the fourth quarter of the year. In addition, the majority of our tenants have December or January lease years for purposes of calculating annual overage rent amounts. Accordingly, overage rent thresholds are most commonly achieved in the fourth quarter. As a result, revenue production is generally highest in the fourth quarter of each year.

Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations is based on our consolidated interim financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the financial statements and disclosures. Some of these estimates and assumptions require application of difficult, subjective, and/or complex judgment about the effect of matters that are inherently uncertain and that may change in subsequent periods. We evaluate our estimates and assumptions on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

A disclosure of our critical accounting policies which affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements is included in our Annual Report in Management's Discussion and Analysis of Financial Condition and Results of Operations.

Refer also to the accounting policies discussed in Note 2.

REIT Requirements

In order to remain qualified as a REIT for Federal income tax purposes, we must distribute at least 90% of our taxable ordinary income to stockholders. We are also subject to federal income tax to the extent we distribute less than 100% of our REIT taxable income, including capital gains. See Note 7 to the Consolidated Financial Statements for more detail on our ability to remain qualified as a REIT.

Recently Issued Accounting Pronouncements

Refer to Note 2 of the Consolidated Financial Statements for recently issued accounting pronouncements.

Non-GAAP Supplemental Financial Measures and Definitions

Proportionate or At Share Basis

The following non-GAAP supplemental financial measures are all presented on a proportionate basis. The proportionate financial information presents the consolidated and unconsolidated properties at the Company's ownership percentage or “at share”. This form of presentation offers insights into the financial performance and condition of the Company as a whole, given the significance of the Company's unconsolidated property operations that are owned through investments accounted for under GAAP using the equity method.

The proportionate financial information is not, and is not intended to be, a presentation in accordance with GAAP. The non-GAAP proportionate financial information reflects our proportionate economic ownership of each asset in our property portfolio that we do not wholly own. The amounts in the column labeled "Noncontrolling Interests" were derived on a property-by-property basis by including the share attributable to noncontrolling interests in each line item from each individual property. The Company does not have legal claim to the noncontrolling interest of assets, liabilities, revenue, and expenses. The amount of cash each noncontrolling interest receives is based on the specific provisions of each operating agreement and varies depending on certain factors including the amount of capital contributed by each investor and whether any investors are entitled to preferential

43


distributions. The amounts in the column labeled "Unconsolidated Properties" were derived on a property-by-property basis by including our share of each line item from each individual entity. This provides visibility into our share of the operations of our joint ventures.

We do not control the unconsolidated joint ventures and the presentations of the assets and liabilities and revenues and expenses do not represent our legal claim to such items. The operating agreements of the unconsolidated joint ventures generally provide that partners may receive cash distributions (1) to the extent there is available cash from operations, (2) upon a capital event, such as a refinancing or sale or (3) upon liquidation of the venture. The amount of cash each partner receives is based upon specific provisions of each operating agreement and varies depending on factors including the amount of capital contributed by each partner and whether any contributions are entitled to priority distributions. Upon liquidation of the joint venture and after all liabilities, priority distributions and initial equity contributions have been repaid, the partners generally would be entitled to any residual cash remaining based on their respective legal ownership percentages.

We provide non-GAAP proportionate financial information because we believe it assists investors and analysts in estimating our economic interest in our unconsolidated joint ventures when read in conjunction with the Company's reported results under GAAP. Other companies in our industry may calculate their proportionate interest differently than we do, limiting the usefulness as a comparative measure. Because of these limitations, the non-GAAP proportionate financial information should not be considered in isolation or as a substitute for our financial statements as reported under GAAP.

Net Operating Income ("NOI") and Company NOI

The Company defines NOI as proportionate income from operations and after operating expenses have been deducted, but prior to deducting financing, property management, administrative and income tax expenses. NOI excludes management fees and other corporate revenue and reductions in ownership as a result of sales or other transactions. The Company considers NOI a helpful supplemental measure of its operating performance because it is a direct measure of the actual results of our properties. Because NOI excludes reductions in ownership as a result of sales or other transactions, management fees and other corporate revenue, general and administrative and property management expenses, interest expense, retail investment property impairment or non-recoverable development costs, depreciation and amortization, gains and losses from property dispositions, allocations to noncontrolling interests, provision for income taxes, preferred stock dividends, and extraordinary items, it provides a performance measure that, when compared year over year, reflects the revenues and expenses directly associated with owning and operating commercial real estate properties and the impact on operations from trends in occupancy rates, rental rates and operating costs.
The Company also considers Company NOI to be a helpful supplemental measure of its operating performance because it excludes from NOI items such as straight-line rent, and amortization of intangibles resulting from acquisition accounting and other capital contribution or restructuring events. However, due to the exclusions noted, Company NOI should only be used as an alternative measure of the Company's financial performance.
We present Company NOI, Company EBITDA (as defined below) and Company FFO (as defined below); as we believe certain investors and other users of our financial information use these measures of the Company's historical operating performance.
Adjustments to NOI, EBITDA and FFO, including debt extinguishment costs, market rate adjustments on debt, straight-line rent, intangible asset and liability amortization, real estate tax stabilization, gains and losses on foreign currency and other items that are not a result of normal operations, assist management and investors in distinguishing whether increases or decreases in revenues and/or expenses are due to growth or decline of operations at the properties or from other factors. In addition, the Company's leases include step rents that increase over the term of the lease to compensate the Company for anticipated increases in market rentals over time. The Company's leases do not include significant front loading or back loading of payments or significant rent-free periods. Therefore, we find it useful to evaluate rent on a contractual basis as it allows for comparison of existing rental rates to market rental rates. Management has historically made these adjustments in evaluating our performance, in our annual budget process and for our compensation programs.
Other REITs may use different methodologies for calculating NOI and Company NOI, and accordingly, the Company's Company NOI may not be comparable to other REITs. As a result of the elimination of corporate-level costs and expenses and depreciation and amortization, the Company NOI we present does not represent our total revenues, expenses, operating profit or net income and should not be used to evaluate our performance as a whole. Management compensates for these limitations by separately considering the impact of these excluded items, to the extent they are material, to operating decisions or assessments of our operating performance. Our consolidated GAAP statements of operations include such amounts, all of which should be considered by investors when evaluating our performance.


44


Earnings Before Interest Expense, Income Tax, Depreciation, and Amortization ("EBITDA") and Company EBITDA

The Company defines EBITDA as NOI less certain property management and administrative expenses, net of management fees and other corporate revenues. EBITDA is a commonly used measure of performance in many industries, but may not be comparable to measures calculated by other companies. Management believes EBITDA provides useful information to investors regarding our results of operations because it helps us and our investors evaluate the ongoing operating performance of our properties after removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization). Management also believes the use of EBITDA facilitates comparisons between us and other equity REITs, retail property owners who are not REITs and other capital-intensive companies. Management uses Company EBITDA to evaluate property-level results and as one measure in determining the value of acquisitions and dispositions and, like FFO (discussed below), it is widely used by management in the annual budget process and for compensation programs. Please see adjustments discussion above for the purpose and use of the adjustments included in Company EBITDA.
EBITDA and Company EBITDA, as presented, may not be comparable to similar measures calculated by other companies. This information should not be considered as an alternative to net income, operating profit, cash from operations or any other operating performance measure calculated in accordance with GAAP.

Funds From Operations ("FFO") and Company FFO

The Company determines FFO based upon the definition set forth by National Association of Real Estate Investment Trusts (“NAREIT”). The Company determines FFO to be its share of consolidated net income (loss) attributable to common shareholders and redeemable non-controlling common unit holders computed in accordance with GAAP, excluding real estate related depreciation and amortization, excluding gains and losses from extraordinary items, excluding cumulative effects of accounting changes, excluding gains and losses from the sales of, or any impairment charges related to, previously depreciated operating properties, plus the allocable portion of FFO of unconsolidated joint ventures based upon the Company's economic ownership interest, and all determined on a consistent basis in accordance with GAAP. As with the Company's presentation of NOI, FFO has been reflected on a proportionate basis.

The Company considers FFO a helpful supplemental measure of the operating performance for equity REITs and a complement to GAAP measures because it is a recognized measure of performance by the real estate industry. FFO facilitates an understanding of the operating performance of the Company's properties between periods because it does not give effect to real estate depreciation and amortization since these amounts are computed to allocate the cost of a property over its useful life. Since values for well-maintained real estate assets have historically increased or decreased based upon prevailing market conditions, the Company believes that FFO provides investors with a clearer view of the Company's operating performance.

We calculate FFO in accordance with standards established by NAREIT, which may not be comparable to measures calculated by other companies who do not use the NAREIT definition of FFO or do not calculate FFO in accordance with NAREIT guidance. In addition, although FFO is a useful measure when comparing our results to other REITs, it may not be helpful to investors when comparing us to non-REITs. As with the presentation of Company NOI and Company EBITDA, we also consider Company FFO, which is not in accordance with NAREIT guidance and may not be comparable to measures calculated by other REITs, to be a helpful supplemental measure of our operating performance. Please see adjustments discussion above for the purpose and use of the adjustments included in Company FFO.

FFO and Company FFO do not represent cash flow from operations as defined by GAAP, should not be considered as an alternative to net income determined in accordance with GAAP as a measure of operating performance, and is not an alternative to cash flows as a measure of liquidity or indicative of funds available to fund our cash needs. In addition, Company FFO per diluted share does not measure, and should not be used as a measure of, amounts that accrue directly to stockholders' benefit.

Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures

The Company presents NOI, EBITDA and FFO as they are financial measures widely used in the REIT industry. In order to provide a better understanding of the relationship between the Company's non-GAAP financial measures of NOI, Company NOI, EBITDA, Company EBITDA, FFO and Company FFO, reconciliations have been provided as follows: a reconciliation of GAAP operating income to NOI and Company NOI, a reconciliation of GAAP net income attributable to GGP to EBITDA and Company EBITDA, and a reconciliation of GAAP net income attributable to GGP to FFO and Company FFO. None of the Company's non-GAAP financial measures represents cash flow from operating activities in accordance with GAAP, none should be considered as an alternative to GAAP net income (loss) attributable to GGP and none are necessarily indicative of cash flow. In addition, the Company has presented such financial measures on a consolidated and unconsolidated basis (at the Company's proportionate share) as the Company believes that given the significance of the Company's operations that are owned through investments

45


accounted for by the equity method of accounting, the detail of the operations of the Company's unconsolidated properties provides important insights into the income and FFO produced by such investments.

The following table reconciles GAAP Operating Income to Company NOI (dollars in thousands) for the three months ended March 31, 2017 and 2016:

 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
 
Operating Income
$
192,869

 
$
173,980

Gain on sales of investment properties
(1,212
)
 

Depreciation and amortization
170,298

 
160,671

Provision for loan loss

 
36,069

Provision for impairment

 
40,705

General and administrative
14,683

 
13,427

Property management and other costs
41,114

 
30,745

Management fees and other corporate revenues
(28,143
)
 
(33,741
)
Consolidated Properties
389,609

 
421,856

Noncontrolling interest in NOI of Consolidated Properties
(5,720
)
 
(3,925
)
NOI of sold interests
113

 
(19,922
)
Unconsolidated Properties
186,094

 
187,611

Proportionate NOI
570,096

 
585,620

Company adjustments:
 
 
 
Minimum rents
8,337

 
3,338

Real estate taxes
1,490

 
1,490

Property operating expenses
999

 
1,013

Company NOI
$
580,922

 
$
591,461



























46


The following table reconciles GAAP Net income attributable to GGP to Company EBITDA for the three months ended March 31, 2017 and 2016:

 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
 
Net Income Attributable to GGP
$
107,160

 
$
191,780

Allocation to noncontrolling interests
3,209

 
3,557

Gain on sales of investment properties
(1,212
)
 

Gains from changes in control of investment properties and other

 
(74,555
)
Unconsolidated Real Estate Affiliates - gain on investment

 
(14,914
)
Equity in income of Unconsolidated Real Estate Affiliates
(33,214
)
 
(57,491
)
Provision for loan loss

 
36,069

Provision for impairment

 
40,705

Provision for income taxes
4,510

 
2,920

Gain on foreign currency
(3,183
)
 
(8,936
)
Interest expense
132,323

 
147,677

Interest and dividend income
(17,936
)
 
(16,058
)
Depreciation and amortization
170,298

 
160,671

Consolidated Properties
361,955

 
411,425

Noncontrolling interest in EBITDA of Consolidated Properties
(5,493
)
 
(3,774
)
EBITDA of sold interests
108

 
(19,785
)
Unconsolidated Properties
176,622

 
178,852

Proportionate EBITDA
533,192

 
566,718

Company adjustments:
 
 
 
Minimum rents
8,337

 
3,338

Real estate taxes
1,490

 
1,490

Property operating expenses
999

 
1,013

Company EBITDA
$
544,018

 
$
572,559


47


The following table reconciles GAAP net income attributable to GGP to Company FFO for the three months ended March 31, 2017 and 2016:
 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
 
Net Income Attributable to GGP
$
107,160

 
$
191,780

Redeemable noncontrolling interests
830

 
1,525

Provision for impairment excluded from FFO

 
40,705

Noncontrolling interests in depreciation of Consolidated Properties
(2,776
)
 
(2,115
)
Unconsolidated Real Estate Affiliates - gain on investment

 
(14,914
)
Gain on sales of investment properties
(1,212
)
 

Preferred stock dividends
(3,984
)
 
(3,984
)
Gains from change in control of investment properties and other

 
(74,555
)
Depreciation and amortization of capitalized real estate costs - Consolidated Properties
165,979

 
157,561

Depreciation and amortization of capitalized real estate costs - Unconsolidated Properties
73,993

 
67,308

FFO (1)
339,990

 
363,311

Company adjustments:
 
 
 
Minimum rents
8,337

 
3,338

Property operating expenses
1,490

 
1,490

Property management and other costs
999

 
1,013

Investment income, net
(205
)
 
(205
)
Market rate adjustments
(1,211
)
 
(294
)
Provision for loan loss

 
28,549

Gain on foreign currency
(3,183
)
 
(8,936
)
Provision for income taxes

 
(5,079
)
FFO from sold interests

 
(384
)
Company FFO
$
346,217

 
$
382,803

 
(1)
FFO as defined by the National Association of Real Estate Investment Trusts.

Forward-Looking Statements

Certain statements made in this section or elsewhere in this report may be deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes the expectations reflected in any forward-looking statement are based on reasonable assumption, it can give no assurance that its expectations will be attained, and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks, uncertainties and other factors. Such factors include, but are not limited to, the Company's ability to refinance, extend, restructure or repay near and intermediate term debt, its indebtedness, its ability to raise capital through equity issuances, asset sales or the incurrence of new debt, retail and credit market conditions, impairments, its liquidity demands and economic conditions. The Company discusses these and other risks and uncertainties in its annual and quarterly periodic reports filed with the Securities and Exchange Commission. The Company may update that discussion in its periodic reports, but otherwise takes no duty or obligation to update or revise these forward-looking statements, whether as a result of new information, future developments, or otherwise.


ITEM 3        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
There have been no significant changes in the market risks described in our Annual Report.


48


ITEM 4        CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended, (the "Exchange Act")).

Based on that evaluation, the CEO and the CFO have concluded that our disclosure controls and procedures are effective.

Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II    OTHER INFORMATION

ITEM 1        LEGAL PROCEEDINGS

In the normal course of business, from time to time, we are involved in legal proceedings relating to the ownership and operations of our properties. In management's opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a material effect on our consolidated financial position, results of operations or liquidity. Neither the Company nor any of the Unconsolidated Real Estate Affiliates is currently involved in any material pending legal proceedings nor, to our knowledge, is any material legal proceeding currently threatened against the Company or any of the Unconsolidated Real Estate Affiliates.

ITEM 1A    RISK FACTORS

There are no material changes to the risk factors previously disclosed in our Annual Report.

ITEM 2        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3        DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4         MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5        OTHER INFORMATION

None


49


ITEM 6     EXHIBITS
31.1

 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2

 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1

 
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2

 
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101

 
The following financial information from GGP Inc.'s. Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, has been filed with the SEC on May 4, 2017, formatted in XBRL (Extensible Business Reporting Language): (1) Consolidated Balance Sheets, (2) Consolidated Statements of Comprehensive Income, (3) Consolidated Statements of Equity, (4) Consolidated Statements of Cash Flows and (5) Notes to Consolidated Financial Statements.

Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the registrant has not filed debt instruments relating to long-term debt that is not registered and for which the total amount of securities authorized thereunder does not exceed 10% of total assets of the registrant and its subsidiaries on a consolidated basis as of March 31, 2017. The registrant agrees to furnish a copy of such agreements to the SEC upon request.

50


SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
GGP INC.
 
(Registrant)
 
 
 
 
Date: May 4, 2017
By:
/s/ Michael Berman
 
 
Michael Berman
 
 
Chief Financial Officer
 
 
(on behalf of the Registrant)


51


EXHIBIT INDEX
 
 
 
 
 
Incorporated by Reference Herein
Exhibit Number
 
Description
 
Form
 
Exhibit
 
Filing Date
 
File No.
31.1
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31.2
 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
32.1
 
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
32.2
 
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101
 
The following financial information from GGP Inc.'s. Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, has been filed with the SEC on May 4, 2017, formatted in XBRL (Extensible Business Reporting Language): (1) Consolidated Balance Sheets, (2) Consolidated Statements of Comprehensive Income, (3) Consolidated Statements of Equity, (4) Consolidated Statements of Cash Flows and (5) Notes to Consolidated Financial Statements.
 
 
 
 
 
 
 
 

52