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EX-32.2 - EXHIBIT 32.2 - Brookfield Property REIT Inc.ggp6302017ex-322.htm
EX-32.1 - EXHIBIT 32.1 - Brookfield Property REIT Inc.ggp6302017ex-321.htm
EX-31.2 - EXHIBIT 31.2 - Brookfield Property REIT Inc.ggp6302017ex-312.htm
EX-31.1 - EXHIBIT 31.1 - Brookfield Property REIT Inc.ggp6302017ex-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 June 30, 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 August 1, 2017 was 882,003,440.
 



GGP INC.
INDEX
 
 
PAGE
NUMBER
 
 
 
Part I
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2




GGP INC.

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
June 30,
2017
 
December 31,
2016
 
(Dollars in thousands, except share and per share amounts)
Assets:
 
 
 
Investment in real estate:
 

 
 

Land
$
3,043,007

 
$
3,066,019

Buildings and equipment
16,144,950

 
16,091,582

Less accumulated depreciation
(2,930,511
)
 
(2,737,286
)
Construction in progress
273,008

 
251,616

Net property and equipment
16,530,454

 
16,671,931

Investment in Unconsolidated Real Estate Affiliates
3,866,518

 
3,868,993

Net investment in real estate
20,396,972

 
20,540,924

Cash and cash equivalents
227,626

 
474,757

Accounts receivable, net
301,515

 
322,196

Notes receivable
609,415

 
678,496

Deferred expenses, net
269,445

 
209,852

Prepaid expenses and other assets
472,473

 
506,521

Total assets
$
22,277,446

 
$
22,732,746

Liabilities:
 

 
 
Mortgages, notes and loans payable
$
12,496,119

 
$
12,430,418

Investment in Unconsolidated Real Estate Affiliates
25,863

 
39,506

Accounts payable and accrued expenses
591,023

 
655,362

Dividend payable
201,238

 
433,961

Deferred tax liabilities
3,664

 
3,843

Junior subordinated notes
206,200

 
206,200

Total liabilities
13,524,107

 
13,769,290

Redeemable noncontrolling interests:
 

 
 

Preferred
52,485

 
144,060

Common
197,294

 
118,667

Total redeemable noncontrolling interests
249,779

 
262,727

Commitments and Contingencies

 

Equity:
 

 
 

Common stock:
 
 
 
11,000,000,000 shares authorized, $0.01 par value, 965,437,229 issued, 882,008,644 outstanding as of June 30, 2017, and 968,153,526 issued, 884,097,680 outstanding as of December 31, 2016
9,380

 
9,407

Preferred Stock:
 
 
 
500,000,000 shares authorized, $0.01 par value, 10,000,000 shares issued and outstanding as of June 30, 2017 and December 31, 2016
242,042

 
242,042

Additional paid-in capital
11,400,989

 
11,417,597

Retained earnings (accumulated deficit)
(2,032,093
)
 
(1,824,866
)
Accumulated other comprehensive loss
(71,593
)
 
(70,456
)
Common stock in treasury, at cost, 55,969,390 shares as of June 30, 2017 and 56,596,651 shares as of December 31, 2016
(1,122,640
)
 
(1,137,960
)
Total stockholders' equity
8,426,085

 
8,635,764

Noncontrolling interests in consolidated real estate affiliates
34,175

 
33,583

Noncontrolling interests related to long-term incentive plan common units
43,300

 
31,382

Total equity
8,503,560

 
8,700,729

Total liabilities, redeemable noncontrolling interests and equity
$
22,277,446

 
$
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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands, except per share amounts)
Revenues:
 

 
 

 
 

 
 

Minimum rents
$
349,205

 
$
363,412

 
$
698,218

 
$
734,544

Tenant recoveries
161,926

 
169,763

 
324,982

 
342,211

Overage rents
3,280

 
4,375

 
9,217

 
12,519

Management fees and other corporate revenues
20,847

 
18,917

 
48,990

 
52,659

Other
20,538

 
18,119

 
40,722

 
39,685

Total revenues
555,796

 
574,586

 
1,122,129

 
1,181,618

Expenses:
 
 
 
 
 
 
 
Real estate taxes
59,042

 
57,309

 
116,536

 
115,412

Property maintenance costs
10,724

 
11,955

 
25,699

 
29,438

Marketing
1,296

 
2,738

 
3,441

 
4,792

Other property operating costs
69,590

 
71,601

 
138,893

 
141,995

Provision for doubtful accounts
3,166

 
1,710

 
6,617

 
5,111

Provision for loan loss

 

 

 
36,069

Property management and other costs
39,025

 
38,282

 
80,139

 
69,027

General and administrative
15,862

 
14,650

 
30,546

 
28,076

Provision for impairment

 
4,058

 

 
44,763

Depreciation and amortization
174,298

 
156,248

 
344,596

 
316,919

Total expenses
373,003

 
358,551

 
746,467

 
791,602

Operating income
182,793

 
216,035

 
375,662

 
390,016

Interest and dividend income
17,452

 
13,335

 
35,388

 
29,393

Interest expense
(134,209
)
 
(148,366
)
 
(266,532
)
 
(296,043
)
(Loss) gain on foreign currency
(3,877
)
 
7,893

 
(694
)
 
16,829

Gain on extinguishment of debt
55,112

 

 
55,112

 

(Loss) gain from changes in control of investment properties and other, net
(15,841
)
 
38,553

 
(15,841
)
 
113,108

Income before income taxes, equity in income of Unconsolidated Real Estate Affiliates and allocation to noncontrolling interests
101,430

 
127,450

 
183,095

 
253,303

(Provision for) benefit from income taxes
(3,844
)
 
2,242

 
(8,354
)
 
(679
)
Equity in income of Unconsolidated Real Estate Affiliates
30,732

 
34,618

 
63,946

 
92,108

Unconsolidated Real Estate Affiliates - gain on investment, net

 
25,591

 

 
40,506

Net income
128,318

 
189,901

 
238,687

 
385,238

Allocation to noncontrolling interests
(2,455
)
 
(3,956
)
 
(5,665
)
 
(7,513
)
Net income attributable to GGP Inc.
125,863

 
185,945

 
233,022

 
377,725

Preferred Stock dividends
(3,984
)
 
(3,983
)
 
(7,968
)
 
(7,967
)
Net income attributable to common stockholders
$
121,879

 
$
181,962

 
$
225,054

 
$
369,758

Earnings Per Share:
 
 
 
 
 
 
 
Basic
$
0.14

 
$
0.21

 
$
0.25

 
$
0.42

Diluted
$
0.13

 
$
0.19

 
$
0.24

 
$
0.39

Dividends declared per share
$
0.22

 
$
0.19

 
$
0.44

 
$
0.38

 
 
 
 
 
 
 
 

4


GGP INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Continued)
(UNAUDITED)
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands, except per share amounts)
Comprehensive Income, Net:
 

 
 

 
 

 
 

Net income
$
128,318

 
$
189,901

 
$
238,687

 
$
385,238

Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation
(4,030
)
 
8,673

 
(1,463
)
 
15,634

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

 

 

 
(11,978
)
Net unrealized gains on other financial instruments
(3
)
 
11

 
10

 
20

Other comprehensive income (loss)
(4,033
)
 
8,684

 
(1,453
)
 
3,676

Comprehensive income
124,285

 
198,585

 
237,234

 
388,914

Comprehensive income allocated to noncontrolling interests
(2,135
)
 
(4,021
)
 
(5,350
)
 
(7,516
)
Comprehensive income attributable to GGP Inc.
122,150

 
194,564

 
231,884

 
381,398

Preferred Stock dividends
(3,984
)
 
(3,983
)
 
(7,968
)
 
(7,967
)
Comprehensive income, net, attributable to common stockholders
$
118,166

 
$
190,581

 
$
223,916

 
$
373,431


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


 


 


 
377,725

 


 


 
1,073

 
378,798

Distributions to noncontrolling interests in consolidated Real Estate Affiliates


 


 


 


 


 


 
(1,522
)
 
(1,522
)
Acquisition/disposition of partner's noncontrolling interests in consolidated Real Estate Affiliates
 
 
 
 
(16,384
)
 
 
 
 
 
 
 
(2,971
)
 
(19,355
)
Long Term Incentive Plan Common Unit grants, net (684,216 LTIP Units)
 
 
 
 
43

 
(950
)
 
 
 
 
 
7,804

 
6,897

Restricted stock grants, net (339,937 common shares)
3

 

 
1,548

 


 


 


 


 
1,551

Employee stock purchase program (87,589 common shares)
1

 


 
3,109

 


 


 


 


 
3,110

Stock options exercised (1,789,201 common shares)
18

 


 
34,730

 


 


 


 


 
34,748

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

 
 
 

Cash dividends reinvested (DRIP) in stock (13,990 common shares)

 

 
385

 
(215
)
 


 


 


 
170

Other comprehensive income


 


 


 


 
15,567

 


 


 
15,567

Amounts reclassified from accumulated other comprehensive income
 
 
 
 
 
 
 
 
(11,894
)
 
 
 
 
 
(11,894
)
Cash distributions declared ($0.38 per share)


 


 


 
(335,627
)
 


 


 


 
(335,627
)
Cash distributions on Preferred Stock


 


 


 
(7,967
)
 


 


 


 
(7,967
)
Fair value adjustment for noncontrolling interest in Operating Partnership


 


 
(24,297
)
 


 


 


 


 
(24,297
)
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2016
$
9,406

 
$
242,042

 
$
11,358,088

 
$
(2,111,939
)
 
$
(69,131
)
 
$
(1,122,628
)
 
$
42,635

 
$
8,348,473

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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


 


 


 
233,022

 


 


 
1,399

 
234,421

Distributions to noncontrolling interests in consolidated Real Estate Affiliates


 


 


 


 


 


 
(3,569
)
 
(3,569
)
Acquisition/disposition of partner's noncontrolling interests in consolidated Real Estate Affiliates
 
 
 
 
 
 
 
 
 
 
 
 
(11,943
)
 
(11,943
)
Contributions to noncontrolling interest in consolidated Real Estate Affiliates
 
 
 
 

 
 
 
 
 
 
 
15,258

 
15,258

Long Term Incentive Plan Common Unit grants, net (528,617 LTIP Units)


 
 
 
795

 
(743
)
 
 
 
 
 
10,707

 
10,759

Restricted stock grants, net (738,687 common shares)
8

 

 
4,883

 


 


 


 


 
4,891

Employee stock purchase program (103,177 common shares)
1

 


 
2,547

 


 


 


 


 
2,548

Stock options exercised (406,383 common shares)
4

 


 
13,837

 


 


 


 


 
13,841

Cancellation of repurchased common shares (3,993,237 common shares)
(40
)
 
 
 
(52,054
)
 
(40,258
)
 
 
 
92,352

 
 
 

Treasury stock purchase (3,365,976 common shares)
 
 
 
 
 
 
 
 
 
 
(77,032
)
 
 
 
(77,032
)
Cash dividends reinvested (DRIP) in stock (28,693 common shares)

 

 
696

 

 


 


 


 
696

Other comprehensive loss


 


 


 


 
(1,137
)
 


 


 
(1,137
)
Cash distributions declared ($0.44 per share)


 


 


 
(388,280
)
 


 


 


 
(388,280
)
Cash distributions on Preferred Stock


 


 


 
(7,968
)
 


 


 


 
(7,968
)
Fair value adjustment for noncontrolling interest in Operating Partnership


 


 
10,346

 
 
 


 


 


 
10,346

 
 
 
 
 
 
 
 
 
 
 


 
 
 
 
Balance at June 30, 2017
$
9,380

 
$
242,042

 
$
11,400,989

 
$
(2,032,093
)
 
$
(71,593
)
 
$
(1,122,640
)
 
$
77,475

 
$
8,503,560


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


7


GGP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Six Months Ended June 30,
 
2017
 
2016
 
(Dollars in thousands)
Cash Flows provided by Operating Activities:
 

 
 

Net income
$
238,687

 
$
385,238

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

 
 

Equity in income of Unconsolidated Real Estate Affiliates
(63,946
)
 
(92,108
)
Distributions received from Unconsolidated Real Estate Affiliates
52,876

 
51,632

Provision for doubtful accounts
6,617

 
5,111

Depreciation and amortization
344,596

 
316,919

Amortization/write-off of deferred finance costs
5,972

 
5,709

Accretion/write-off of debt market rate adjustments
(2,181
)
 
(630
)
Amortization of intangibles other than in-place leases
18,857

 
24,956

Straight-line rent amortization
(493
)
 
(10,445
)
Deferred income taxes
4,817

 
(1,472
)
Gain on dispositions, net
(2,515
)
 
(24,001
)
Unconsolidated Real Estate Affiliates - gain on investment, net

 
(40,506
)
Loss (gain) from changes in control of investment properties and other, net
15,841

 
(113,108
)
Provision for impairment

 
44,763

Gain on extinguishment of debt
(55,112
)
 

Provision for loan loss

 
36,069

Loss (gain) on foreign currency
694

 
(16,829
)
Net changes:
 

 
 

Accounts and notes receivable, net
(259
)
 
2,052

Prepaid expenses and other assets
(28,887
)
 
(9,280
)
Deferred expenses, net
(22,010
)
 
(20,125
)
Restricted cash
6,341

 
6,789

Accounts payable and accrued expenses
(45,441
)
 
(22,495
)
Other, net
24,008

 
17,881

Net cash provided by operating activities
498,462

 
546,120

Cash Flows (used in) provided by Investing Activities:
 

 
 

Acquisition of real estate and property additions
(49,062
)
 
(70,709
)
Development of real estate and property improvements
(269,820
)
 
(233,502
)
Loans to joint venture partners
(47,205
)
 
(43,364
)
Proceeds from repayment of loans to joint venture partners
47,076

 
8,755

Proceeds from sales of investment properties and Unconsolidated Real Estate Affiliates
39,622

 
390,067

Contributions to Unconsolidated Real Estate Affiliates
(44,755
)
 
(78,476
)
Distributions received from Unconsolidated Real Estate Affiliates in excess of income
62,792

 
40,682

Sale of marketable securities

 
46,408

Decrease (increase) in restricted cash
436

 
(102
)
Other, net

 
36

Net cash (used in) provided by investing activities
(260,916
)

59,795

Cash Flows used in Financing Activities:
 

 
 

Proceeds from refinancing/issuance of mortgages, notes and loans payable
575,000

 
313,479

Principal payments on mortgages, notes and loans payable
(368,669
)
 
(694,233
)
Deferred finance costs
(965
)
 
(13,672
)
Treasury stock purchases
(77,032
)
 

Cash contributions from noncontrolling interests in consolidated real estate affiliates
15,258

 

Cash distributions to noncontrolling interests in consolidated real estate affiliates
(3,569
)
 
(22,609
)
Cash distributions paid to common stockholders
(618,830
)
 
(335,505
)

8


GGP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
 
Six Months Ended June 30,
 
2017
 
2016
 
(Dollars in thousands)
Cash distributions reinvested (DRIP) in common stock
696

 
385

Cash distributions paid to preferred stockholders
(7,968
)
 
(7,967
)
Cash distributions and redemptions paid to unit holders
(10,515
)
 
(2,124
)
Other, net
12,611

 
25,719

Net cash used in financing activities
(483,983
)
 
(736,527
)
Effect of foreign exchange rates on cash and cash equivalents
(694
)
 

Net change in cash and cash equivalents
(247,131
)
 
(130,612
)
Cash and cash equivalents at beginning of period
474,757

 
356,895

Cash and cash equivalents at end of period
$
227,626

 
$
226,283

Supplemental Disclosure of Cash Flow Information:
 

 
 

Interest paid
$
273,321

 
$
292,108

Interest capitalized
3,457

 
2,599

Income taxes paid
6,362

 
2,348

Accrued capital expenditures included in accounts payable and accrued expenses
105,416

 
117,130

Sale of Ala Moana (Refer to Note 3)
 
 
 
Acquisition of an additional interest in Miami Design District (Refer to Note 5)
 
 
 
Acquisition of 522 Fifth Avenue (Refer to Note 3)
 
 
 
Disposition of Lakeside (Refer to Note 3)
 
 
 
Issuance of note collateralized by Riverchase Galleria and Tysons Galleria anchor box (Refer to Note 13)
 
 
 

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 June 30, 2017, we are the owner, either entirely or with joint venture partners, of 126 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 June 30, 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 also 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 June 30, 2017
 

 
 

 
 

Tenant leases:
 

 
 

 
 

In-place value
$
270,540

 
$
(178,675
)
 
$
91,865

 
 
 
 
 
 
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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Amortization/accretion effect on continuing operations
$
(16,399
)
 
$
(24,919
)
 
$
(41,318
)
 
$
(49,104
)

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
 
$
27,053

2018
 
42,090

2019
 
27,343

2020
 
19,338

2021
 
14,257


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 six months ended June 30, 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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Management fees from affiliates (1)
$
20,847

 
$
18,917

 
$
48,990

 
$
39,587

Management fee expense
(8,443
)
 
(7,812
)
 
(17,246
)
 
(15,714
)
Net management fees from affiliates
$
12,404

 
$
11,105

 
$
31,744

 
$
23,873

(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 six months ended June 30, 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 June 30, 2016, we recorded a $4.1 million impairment charge on our Consolidated Statements of Comprehensive Income related to one operating property. During the period, we received a bona fide purchase offer for the property which was less than its carrying value. During the six months ended June 30, 2016, we recorded a $44.8 million impairment charge on our Consolidated Statements of Comprehensive Income related to three operating properties. During the period, we received bona fide purchase offers for two properties which were less than their respective carrying values. 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 and conveyed to the lender in full satisfaction of the debt during the six months ended June 30, 2017.

No provisions for impairment were recognized for the three and six months ended June 30, 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 and six months ended June 30, 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


15

GGP INC.

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


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 our credit facility is spread among a diversified group of investment grade financial institutions. We had $345.0 million outstanding and no outstanding balance under our credit facility as of June 30, 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

16

GGP INC.

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


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 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

On June 30, 2017, we conveyed Lakeside Mall to the lender in full satisfaction of $144.5 million in outstanding debt. This transaction resulted in a $55.1 million gain on extinguishment of debt.

On June 9, 2017, we closed on the acquisition of our joint venture partner's 50% interest in Neshaminy Mall located in Bensalem, Pennsylvania for a gross purchase price of $65.0 million. Post acquisition, we own 100% of the mall. Prior to the acquisition of the remaining interest, the carrying value for our investment was $55.2 million. As a result of this acquisition, the implied fair value of our previous investment in Neshaminy Mall is $33.7 million, resulting in a loss of $21.5 million, recognized in loss from changes in control of investment properties and other for the three and six months ended June 30, 2017.


17

GGP INC.

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


On May 12, 2017, we closed on the sale of Red Cliffs Mall in St. George, Utah for $39.1 million. The transaction netted proceeds of approximately $36.3 million and resulted in a gain on sale of $5.6 million recognized in gain from changes in control of investment properties and other for the three and six months ended June 30, 2017.

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 2017.

On June 30, 2016, we closed on the acquisition of a property through a joint venture located at 218 West 57th Street in New York City for $81.5 million. In connection with the acquisition, we provided a $53.0 million mortgage loan to the joint venture that bears interest at LIBOR plus 3.4%, subject to terms and conditions in the loan agreement, and matures on June 30, 2019, with two one year extension options. We own a 50% interest in the joint venture and our share of equity at closing was $15.1 million including prorated working capital. We also provided our joint venture partner with a $7.3 million loan upon closing.

On June 30, 2016, we closed on the sale of our 49.8% interest in One Stockton Partners, LLC in San Francisco, California to our joint venture partner for $49.8 million. In connection with the sale, $16.3 million in mortgage debt was assumed. This transaction netted proceeds of approximately $33.5 million and resulted in a gain of $22.7 million recognized in Unconsolidated Real Estate Affiliates - gain on investment on our Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2016. In addition to the sale, the joint venture partner made an $8.0 million repayment of a note receivable.

On June 28, 2016, we closed on the sale of the office building and parking garage at Pioneer Place in Portland, Oregon for $121.8 million. This transaction netted proceeds of approximately $116.0 million and resulted in a gain on sale of $35.5 million recognized in gain from changes in control of investment properties and other for the three and six months ended June 30, 2016.

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 $6.7 million recognized in gain from changes in control of investment properties and other for the six months ended June 30, 2016.

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. This transaction resulted in a gain on sale of $11.0 million recognized in Unconsolidated Real Estate Affiliates - gain on investment for the six months ended June 30, 2016. On May 25, 2017, we received a 10% interest in 522 Fifth Avenue in full satisfaction of the remaining $9.0 million due.

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 six months ended June 30, 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 six months ended June 30, 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.


18

GGP INC.

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


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 June 30, 2016, we recognized an additional $5.7 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 June 30, 2016. During the six months ended June 30, 2016, we recognized an additional $12.5 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 June 30, 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 June 30, 2016, we recognized an additional $2.9 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 June 30, 2016. During the six months ended June 30, 2016, we recognized an additional $6.2 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 June 30, 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. Prior to February 2015, Ala Moana Center was previously wholly owned by GGP and accounted for on a consolidated basis.


19

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 June 30, 2017 and December 31, 2016.
 
 
June 30, 2017
 
December 31, 2016
 
 
Carrying Amount (1)
 
Estimated Fair
Value
 
Carrying Amount (2)
 
Estimated Fair
Value
Fixed-rate debt
 
$
10,160,336

 
$
10,487,786

 
$
10,441,166

 
$
10,832,272

Variable-rate debt
 
2,335,783

 
2,343,870

 
1,989,252

 
1,990,458

 
 
$
12,496,119

 
$
12,831,656

 
$
12,430,418

 
$
12,822,730

 
(1) 
Includes net market rate adjustments of $25.7 million and deferred financing costs of $34.0 million, net.
(2)
Includes net market rate adjustments of $27.8 million and deferred financing costs of $40.1 million, net.

The fair value of our Junior Subordinated Notes approximates their carrying amount as of June 30, 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.


20

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).
 
June 30, 2017
 
December 31, 2016
Condensed Combined Balance Sheets - Unconsolidated Real Estate Affiliates (1)
 

 
 

Assets:
 

 
 

Land
$
3,038,598

 
$
2,664,736

Buildings and equipment
14,781,897

 
13,555,059

Less accumulated depreciation
(3,670,516
)
 
(3,538,776
)
Construction in progress
610,661

 
284,198

Net property and equipment
14,760,640

 
12,965,217

Investment in unconsolidated joint ventures
566,853

 
503,305

Net investment in real estate
15,327,493


13,468,522

Cash and cash equivalents
510,480

 
455,862

Accounts receivable, net
726,799

 
655,655

Notes receivable
12,034

 
8,912

Deferred expenses, net
370,955

 
321,095

Prepaid expenses and other assets
240,257

 
327,645

Total assets
$
17,188,018

 
$
15,237,691

Liabilities and Owners' Equity:
\

 
 

Mortgages, notes and loans payable
$
11,004,169

 
$
10,476,935

Accounts payable, accrued expenses and other liabilities
700,746

 
595,570

Cumulative effect of foreign currency translation ("CFCT")
(52,657
)
 
(50,851
)
Owners' equity, excluding CFCT
5,535,760

 
4,216,037

Total liabilities and owners' equity
$
17,188,018

 
$
15,237,691

Investment in Unconsolidated Real Estate Affiliates, Net:
 

 
 

Owners' equity
$
5,483,103

 
$
4,165,186

Less: joint venture partners' equity
(3,155,284
)
 
(2,095,166
)
Plus: excess investment/basis differences
1,565,566

 
1,590,821

Investment in Unconsolidated Real Estate Affiliates, net (equity method)
3,893,385

 
3,660,841

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

 
180,000

Elimination of consolidated real estate investment interest through joint venture
(54,894
)
 
(27,500
)
Retail investment, net
2,164

 
16,146

Investment in Unconsolidated Real Estate Affiliates, net
$
3,840,655

 
$
3,829,487

Reconciliation - Investment in Unconsolidated Real Estate Affiliates:
 

 
 

Asset - Investment in Unconsolidated Real Estate Affiliates
$
3,866,518

 
$
3,868,993

Liability - Investment in Unconsolidated Real Estate Affiliates
(25,863
)
 
(39,506
)
Investment in Unconsolidated Real Estate Affiliates, net
$
3,840,655

 
$
3,829,487

 
(1)
The Condensed Combined Balance Sheets - Unconsolidated Real Estate Affiliates include Miami Design District as of June 30, 2017. Refer to the discussion below regarding Miami Design District.

21

GGP INC.

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


 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Condensed Combined Statements of Income - Unconsolidated Real Estate Affiliates (1)
 
 

 
 

 
 
 
 
Revenues:
 
 

 
 

 
 
 
 
Minimum rents
 
$
289,606

 
$
263,649

 
$
585,473

 
$
521,771

Tenant recoveries
 
119,923

 
112,727

 
241,942

 
228,173

Overage rents
 
4,085

 
4,276

 
10,192

 
11,803

Condominium sales
 
83,402

 
70,809

 
180,389

 
353,646

Other
 
12,763

 
11,848

 
25,842

 
23,953

Total revenues
 
509,779

 
463,309

 
1,043,838

 
1,139,346

Expenses:
 
 

 
 

 
 
 
 
Real estate taxes
 
32,408

 
25,806

 
67,465

 
56,352

Property maintenance costs
 
9,575

 
9,355

 
21,064

 
20,349

Marketing
 
3,916

 
3,685

 
8,478

 
12,193

Other property operating costs
 
56,299

 
51,457

 
109,930

 
101,968

Condominium cost of sales
 
60,809

 
51,627

 
131,524

 
257,848

Provision for doubtful accounts
 
2,059

 
5,683

 
4,023

 
9,414

Property management and other costs (2)
 
19,910

 
16,562

 
38,370

 
33,469

General and administrative
 
490

 
1,023

 
1,063

 
1,295

Depreciation and amortization
 
127,240

 
111,578

 
249,732

 
220,859

Total expenses
 
312,706

 
276,776

 
631,649

 
713,747

Operating income
 
197,073

 
186,533

 
412,189

 
425,599

Interest income
 
2,815

 
2,201

 
5,543

 
4,100

Interest expense
 
(114,193
)
 
(102,896
)
 
(225,181
)
 
(203,915
)
Provision for income taxes
 
(268
)
 
(205
)
 
(545
)
 
(374
)
Equity in loss of unconsolidated joint ventures
 
(6,357
)
 
(1,816
)
 
(10,711
)
 
(34,253
)
Income from continuing operations
 
79,070

 
83,817

 
181,295

 
191,157

Allocation to noncontrolling interests
 
(20
)
 
(42
)
 
(44
)
 
(74
)
Net income attributable to the ventures
 
$
79,050

 
$
83,775

 
$
181,251

 
$
191,083

Equity In Income of Unconsolidated Real Estate Affiliates:
 
 

 
 

 
 
 
 
Net income attributable to the ventures
 
$
79,050

 
$
83,775

 
$
181,251

 
$
191,083

Joint venture partners' share of income
 
(37,093
)
 
(41,974
)
 
(86,322
)
 
(82,434
)
Elimination of loss from consolidated real estate investment with interest owned through joint venture
 
388

 

 
1,440

 

Loss on retail investment
 
(575
)
 

 
(10,787
)
 

Amortization of capital or basis differences
 
(11,038
)
 
(7,183
)
 
(21,636
)
 
(16,541
)
Equity in income of Unconsolidated Real Estate Affiliates
 
$
30,732

 
$
34,618

 
$
63,946

 
$
92,108

 
(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 and Miami Design District subsequent to June 1, 2017.
(2)
Includes management fees charged to the unconsolidated joint ventures by GGMI and GGSI.
 

22

GGP INC.

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


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 accordance with our respective ownership percentages. We manage most of the properties owned by these joint ventures.

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.
On June 1, 2017, we received an additional 7.3% of our joint venture partner's membership interests in Miami Design District in full satisfaction of two promissory notes for $57.6 million and $40.4 million, respectively, resulting in a total ownership of 22.3% (Note 13). We determined that we had significant influence over the investment subsequent to the acquisition of the additional interest, and therefore we changed our method of accounting for this joint venture from the cost method to the equity method (Note 2).
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 June 30, 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 $85.7 million at one property as of June 30, 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 June 30, 2017, we do not anticipate an inability to perform on our obligations with respect to Retained Debt.


23

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:
 
 
June 30, 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
 
$
10,160,336

 
4.42
%
 
$
10,441,166

 
4.44
%
Total fixed-rate debt
 
10,160,336

 
4.42
%
 
10,441,166

 
4.44
%
Variable-rate debt:
 
 

 
 

 
 

 
 

Collateralized mortgages, notes and loans payable (4)
 
1,998,356

 
2.89
%
 
1,997,978

 
2.45
%
Revolving credit facility (5)
 
337,427

 
2.41
%
 
(8,726
)
 

Total variable-rate debt
 
2,335,783

 
2.82
%
 
1,989,252

 
2.45
%
Total Mortgages, notes and loans payable
 
$
12,496,119

 
4.12
%
 
$
12,430,418

 
4.12
%
Junior subordinated notes
 
$
206,200

 
2.62
%
 
$
206,200

 
2.34
%
 
(1) 
Includes $25.7 million of market rate adjustments and $34.0 million of deferred financing costs, net.
(2) 
Represents the weighted-average interest rates on our contractual principal balances.
(3)