Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2010

 

or

 

o         Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Transition Period from                             to                 

 

Commission file number 1-11656

 

GENERAL GROWTH PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

42-1283895

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

110 N. Wacker Dr., Chicago, IL 60606

(Address of principal executive offices, including Zip Code)

 

(312) 960-5000

(Registrant’s telephone number, including area code)

 

N / A

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “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.  x 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).  x Yes  o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  x No

 

The number of shares of Common Stock, $.01 par value, outstanding on October 25, 2010 was 317,392,132.

 

 

 



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

(Debtor-in-Possession)

 

INDEX

 

 

 

 

PAGE
NUMBER

 

 

 

 

Part I

FINANCIAL INFORMATION

 

 

 

Item 1: Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009

 

3

 

 

 

 

 

Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2010 and 2009

 

4

 

 

 

 

 

Consolidated Statements of Equity for the nine months ended September 30, 2010 and 2009

 

5

 

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009

 

6

 

 

 

 

 

Notes to Consolidated Financial Statements

 

8

 

Note 1: Organization

 

8

 

Note 2: Intangible Assets and Liabilities

 

23

 

Note 3: Unconsolidated Real Estate Affiliates

 

24

 

Note 4: Mortgages, Notes and Loans Payable

 

31

 

Note 5: Income Taxes

 

33

 

Note 6: Stock-Based Compensation Plans

 

34

 

Note 7: Other Assets and Liabilities

 

37

 

Note 8: Commitments and Contingencies

 

38

 

Note 9: Recently Issued Accounting Pronouncements

 

39

 

Note 10: Segments

 

39

 

 

 

 

 

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

43

 

Liquidity and Capital Resources

 

54

 

Item 3: Quantitative and Qualitative Disclosures about Market Risk

 

57

 

Item 4: Controls and Procedures

 

57

 

 

 

 

Part II

OTHER INFORMATION

 

 

 

Item 1: Legal Proceedings

 

57

 

Item 1A: Risk Factors

 

57

 

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

 

58

 

Item 3: Defaults Upon Senior Securities

 

59

 

Item 5: Other Information

 

59

 

Item 6: Exhibits

 

59

 

SIGNATURE

 

60

 

EXHIBIT INDEX

 

61

 

2



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

(Debtor-in-Possession)

 

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

Investment in real estate:

 

 

 

 

 

Land

 

$

3,326,422

 

$

3,327,447

 

Buildings and equipment

 

22,827,890

 

22,851,511

 

Less accumulated depreciation

 

(4,882,862

)

(4,494,297

)

Developments in progress

 

424,616

 

417,969

 

Net property and equipment

 

21,696,066

 

22,102,630

 

Investment in and loans to/from Unconsolidated Real Estate Affiliates

 

1,915,480

 

1,979,313

 

Investment property and property held for development and sale

 

1,906,163

 

1,753,175

 

Net investment in real estate

 

25,517,709

 

25,835,118

 

Cash and cash equivalents

 

630,014

 

654,396

 

Accounts and notes receivable, net

 

373,001

 

404,041

 

Goodwill

 

199,664

 

199,664

 

Deferred expenses, net

 

260,978

 

301,808

 

Prepaid expenses and other assets

 

761,567

 

754,747

 

Total assets

 

$

27,742,933

 

$

28,149,774

 

 

 

 

 

 

 

Liabilities and Equity:

 

 

 

 

 

Liabilities not subject to compromise:

 

 

 

 

 

Mortgages, notes and loans payable

 

$

16,927,928

 

$

7,300,772

 

Investment in and loans to/from Unconsolidated Real Estate Affiliates

 

46,099

 

38,289

 

Deferred tax liabilities

 

792,170

 

866,400

 

Accounts payable and accrued expenses

 

1,317,622

 

1,122,888

 

Liabilities not subject to compromise

 

19,083,819

 

9,328,349

 

Liabilities subject to compromise

 

7,836,856

 

17,767,253

 

Total liabilities

 

26,920,675

 

27,095,602

 

 

 

 

 

 

 

Redeemable noncontrolling interests:

 

 

 

 

 

Preferred

 

120,756

 

120,756

 

Common

 

115,117

 

86,077

 

Total redeemable noncontrolling interests

 

235,873

 

206,833

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

Redeemable Preferred Stock: $100 par value; 5,000,000 shares authorized; none issued and outstanding

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Common stock: $.01 par value; 875,000,000 shares authorized, 318,842,071 shares issued as of September 30, 2010 and 313,831,411 shares issued as of December 31, 2009

 

3,188

 

3,138

 

Additional paid-in capital

 

3,750,360

 

3,729,453

 

Retained earnings (accumulated deficit)

 

(3,129,683

)

(2,832,627

)

Accumulated other comprehensive income (loss)

 

15,300

 

(249

)

Less common stock in treasury, at cost, 1,449,939 shares as of September 30, 2010 and December 31, 2009

 

(76,752

)

(76,752

)

Total stockholders’ equity

 

562,413

 

822,963

 

Noncontrolling interests in consolidated real estate affiliates

 

23,972

 

24,376

 

Total equity

 

586,385

 

847,339

 

Total liabilities and equity

 

$

27,742,933

 

$

28,149,774

 

 

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

 

3



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

(Debtor-in-Possession)

 

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(Dollars in thousands, except for per share amounts)

 

Revenues:

 

 

 

 

 

 

 

 

 

Minimum rents

 

$

487,433

 

$

489,472

 

$

1,464,650

 

$

1,487,288

 

Tenant recoveries

 

217,906

 

217,040

 

647,744

 

674,750

 

Overage rents

 

10,333

 

10,408

 

28,126

 

26,214

 

Land and condominium sales

 

20,290

 

7,409

 

85,325

 

38,844

 

Management fees and other corporate revenues

 

14,075

 

16,851

 

48,063

 

57,569

 

Other

 

19,655

 

19,781

 

62,337

 

57,031

 

Total revenues

 

769,692

 

760,961

 

2,336,245

 

2,341,696

 

Expenses:

 

 

 

 

 

 

 

 

 

Real estate taxes

 

71,339

 

69,925

 

214,496

 

210,443

 

Property maintenance costs

 

27,176

 

28,246

 

89,207

 

77,704

 

Marketing

 

9,043

 

7,358

 

22,374

 

21,840

 

Other property operating costs

 

132,441

 

136,235

 

387,713

 

394,414

 

Land and condominium sales operations

 

19,770

 

9,582

 

89,001

 

42,046

 

Provision for doubtful accounts

 

5,628

 

5,925

 

15,575

 

25,104

 

Property management and other costs

 

41,057

 

44,876

 

125,007

 

130,485

 

General and administrative

 

9,401

 

8,324

 

22,707

 

22,436

 

Strategic initiatives

 

 

3,328

 

 

67,341

 

Provisions for impairment

 

4,620

 

60,940

 

35,893

 

474,420

 

Depreciation and amortization

 

175,336

 

185,016

 

527,956

 

576,103

 

Total expenses

 

495,811

 

559,755

 

1,529,929

 

2,042,336

 

Operating income

 

273,881

 

201,206

 

806,316

 

299,360

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

274

 

523

 

1,087

 

1,754

 

Interest expense

 

(413,237

)

(326,357

)

(1,050,241

)

(983,198

)

Loss before income taxes, noncontrolling interests, equity in income of Unconsolidated Real Estate Affiliates and reorganization items

 

(139,082

)

(124,628

)

(242,838

)

(682,084

)

(Provision for) benefit from income taxes

 

(1,913

)

14,430

 

(19,797

)

10,202

 

Equity in income of Unconsolidated Real Estate Affiliates

 

9,789

 

15,341

 

60,441

 

39,218

 

Reorganization items

 

(102,517

)

(22,597

)

(93,216

)

(47,515

)

Loss from continuing operations

 

(233,723

)

(117,454

)

(295,410

)

(680,179

)

Discontinued operations - gain (loss) on dispositions

 

 

29

 

 

(26

)

Net loss

 

(233,723

)

(117,425

)

(295,410

)

(680,205

)

Allocation to noncontrolling interests

 

2,538

 

(422

)

(1,646

)

7,876

 

Net loss attributable to common stockholders

 

$

(231,185

)

$

(117,847

)

$

(297,056

)

$

(672,329

)

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Loss Per Share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.73

)

$

(0.38

)

$

(0.94

)

$

(2.16

)

Discontinued operations

 

 

 

 

 

Total basic and diluted loss per share

 

$

(0.73

)

$

(0.38

)

$

(0.94

)

$

(2.16

)

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Loss, Net:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(233,723

)

$

(117,425

)

$

(295,410

)

$

(680,205

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Net unrealized (losses) gains on financial instruments

 

(227

)

6,055

 

7,952

 

13,679

 

Accrued pension adjustment

 

88

 

162

 

188

 

486

 

Foreign currency translation

 

16,291

 

17,448

 

7,751

 

43,132

 

Unrealized gains on available-for-sale securities

 

5

 

6

 

6

 

117

 

Other comprehensive income

 

16,157

 

23,671

 

15,897

 

57,414

 

Comprehensive loss

 

(217,566

)

(93,754

)

(279,513

)

(622,791

)

Other comprehensive loss allocated to noncontrolling interests

 

(354

)

(537

)

(348

)

(1,304

)

Adjustment for noncontrolling interests

 

 

 

 

(9,065

)

Comprehensive loss, net, attributable to common stockholders

 

$

(217,920

)

$

(94,291

)

$

(279,861

)

$

(633,160

)

 

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

 

4



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

(Debtor-in-Possession)

 

CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED)

 

 

 

Common
Stock

 

Additional
Paid-In
Capital

 

Retained
Earnings
(Accumulated
Deficit)

 

Accumulated Other
Comprehensive
Income (Loss)

 

Treasury
Stock

 

Noncontrolling
Interests in
Consolidated Real
Estate Affiliates

 

Total
Equity

 

 

 

(Dollars in thousands)

 

Balance at January 1, 2009

 

$

2,704

 

$

3,454,903

 

$

(1,488,586

)

$

(56,128

)

$

(76,752

)

$

24,266

 

$

1,860,407

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

 

 

 

 

(672,329

)

 

 

 

 

1,814

 

(670,515

)

Distributions to noncontrolling interests in consolidated Real Estate Affiliates

 

 

 

 

 

 

 

 

 

 

 

(1,270

)

(1,270

)

Conversion of operating partnership units to common stock (43,408,053 common shares)

 

434

 

324,055

 

 

 

 

 

 

 

 

 

324,489

 

Issuance of common stock (69,309 common shares)

 

1

 

42

 

 

 

 

 

 

 

 

 

43

 

Restricted stock grant, net of forfeitures and compensation expense (1,617 common shares)

 

(1

)

1,927

 

 

 

 

 

 

 

 

 

1,926

 

Other comprehensive income

 

 

 

 

 

 

 

47,046

 

 

 

 

 

47,046

 

Adjustment for noncontrolling interest in operating partnership

 

 

 

12,313

 

 

 

 

 

 

 

 

 

12,313

 

Balance at September 30, 2009

 

$

3,138

 

$

3,793,240

 

$

(2,160,915

)

$

(9,082

)

$

(76,752

)

$

24,810

 

$

1,574,439

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2010

 

$

3,138

 

$

3,729,453

 

$

(2,832,627

)

$

(249

)

$

(76,752

)

$

24,376

 

$

847,339

 

Net (loss) income

 

 

 

 

 

(297,056

)

 

 

 

 

1,475

 

(295,581

)

Distributions to noncontrolling interests in consolidated Real Estate Affiliates

 

 

 

 

 

 

 

 

 

 

 

(1,879

)

(1,879

)

Issuance of common stock - payment of dividend (4,923,287 common shares)

 

50

 

53,346

 

 

 

 

 

 

 

 

 

53,396

 

Restricted stock grants, net of forfeitures and compensation expense (87,373 common shares)

 

 

 

3,069

 

 

 

 

 

 

 

 

 

3,069

 

Other comprehensive income

 

 

 

 

 

 

 

15,549

 

 

 

 

 

15,549

 

Adjustment for noncontrolling interest in operating partnership

 

 

 

(35,508

)

 

 

 

 

 

 

 

 

(35,508

)

Balance at September 30, 2010

 

$

3,188

 

$

3,750,360

 

$

(3,129,683

)

$

15,300

 

$

(76,752

)

$

23,972

 

$

586,385

 

 

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

 

5



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

(Debtor-in-Possession)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

 

 

(In thousands)

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net loss

 

$

(295,410

)

$

(680,205

)

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

 

 

 

 

 

Equity in income of Unconsolidated Real Estate Affiliates

 

(60,441

)

(39,218

)

Provision for doubtful accounts

 

15,575

 

25,104

 

Distributions received from Unconsolidated Real Estate Affiliates

 

40,427

 

31,065

 

Depreciation

 

494,475

 

539,091

 

Amortization

 

33,481

 

37,012

 

Amortization/write-off of deferred finance costs

 

26,753

 

37,042

 

Amortization (accretion) of debt market rate adjustments

 

43,330

 

(9,357

)

(Accretion) amortization of intangibles other than in-place leases

 

(352

)

901

 

Straight-line rent amortization

 

(27,153

)

(27,173

)

Non-cash interest expense on Exchangeable Senior Notes

 

21,618

 

20,347

 

Non-cash interest expense resulting from termination of interest rate swaps

 

9,636

 

(14,156

)

Non-cash interest expense related to Special Consideration Properties

 

(33,417

)

 

Provisions for impairment

 

35,893

 

474,420

 

Participation expense pursuant to Contingent Stock Agreement

 

 

(3,572

)

Land/residential development and acquisitions expenditures

 

(53,540

)

(46,781

)

Cost of land and condominium sales

 

62,528

 

20,147

 

Revenue recognition of deferred condominium sales

 

(36,443

)

 

Reorganization items - finance costs related to emerged entities

 

138,548

 

 

Accrued interest expense related to the Plan

 

83,739

 

 

Non-cash reorganization items

 

(127,401

)

24,114

 

(Increase) decrease in restricted cash

 

(48,739

)

1,221

 

Glendale Matter deposit

 

 

67,054

 

Net changes:

 

 

 

 

 

Accounts and notes receivable

 

43,155

 

(1,140

)

Prepaid expenses and other assets

 

26,134

 

(11,954

)

Deferred expenses

 

(24,238

)

(25,667

)

Accounts payable and accrued expenses and deferred tax liabilities

 

177,845

 

238,009

 

Other, net

 

(170

)

15,063

 

Net cash provided by operating activities

 

545,833

 

671,367

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Acquisition/development of real estate and property additions/improvements

 

(204,599

)

(158,237

)

Proceeds from sales of investment properties

 

94

 

6,418

 

Proceeds from sales of investment in Unconsolidated Real Estate Affiliates

 

7,450

 

 

Increase in investments in Unconsolidated Real Estate Affiliates

 

(17,229

)

(144,293

)

Distributions received from Unconsolidated Real Estate Affiliates in excess of income

 

107,431

 

62,335

 

Loans to Unconsolidated Real Estate Affiliates, net

 

 

(9,666

)

(Increase) decrease in restricted cash

 

(8,849

)

8,900

 

Other, net

 

(4,144

)

(3,381

)

Net cash used in investing activities

 

(119,846

)

(237,924

)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from refinance/issuance of the DIP facility

 

400,000

 

400,000

 

Principal payments on mortgages, notes and loans payable

 

(704,155

)

(309,350

)

Deferred finance costs

 

 

(2,595

)

Finance costs related to emerged entities

 

(138,548

)

 

Cash distributions paid to common stockholders

 

(5,957

)

 

Cash distributions paid to holders of Common Units

 

 

(982

)

Proceeds from issuance of common stock, including from common stock plans

 

 

43

 

Other, net

 

(1,709

)

2,213

 

Net cash (used in) provided by financing activities

 

(450,369

)

89,329

 

Net change in cash and cash equivalents

 

(24,382

)

522,772

 

Cash and cash equivalents at beginning of period

 

654,396

 

168,993

 

Cash and cash equivalents at end of period

 

$

630,014

 

$

691,765

 

 

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

 

6



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

(Debtor-in-Possession)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(UNAUDITED)

 

 

 

Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

 

 

(In thousands)

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

734,684

 

$

792,543

 

Interest capitalized

 

31,526

 

43,198

 

Income taxes paid

 

5,247

 

18,068

 

Reorganization items paid

 

220,617

 

23,401

 

 

 

 

 

 

 

Non-Cash Transactions:

 

 

 

 

 

Common stock issued in exchange for Operating Partnership Units

 

$

 

$

324,489

 

Change in accrued capital expenditures included in accounts payable and accrued expenses

 

(83,524

)

(75,123

)

Change in deferred contingent property acquisition liabilities

 

161,622

 

(147,616

)

Deferred financing costs payable in conjunction with the DIP Facility

 

 

19,000

 

Recognition of note payable in conjunction with land held for development and sale

 

 

6,520

 

Mortgage debt market rate adjustments related to emerged entities

 

323,318

 

 

Gain on Aliansce IPO

 

9,652

 

 

 

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

 

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GENERAL GROWTH PROPERTIES, INC.

(Debtor-in-Possession)

 

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, 2009 which are included in the Company’s Annual Report on Form 10-K (the “Annual Report”) for the fiscal year ended December 31, 2009 (Commission File No. 1-11656), as certain footnote disclosures which would substantially duplicate those contained in our Annual Report have been omitted from this report. Capitalized terms used, but not defined, in this Quarterly Report have the same meanings as in our Annual Report.

 

General

 

General Growth Properties, Inc. (“GGP” or the “Company”), a Delaware corporation, is a self-administered and self-managed real estate investment trust, referred to as a “REIT” which, together with certain of the Company’s subsidiaries, filed for voluntary bankruptcy protection under Chapter 11 of Title 11 of the United States Code (“Chapter 11”) in the Southern District of New York (the “Bankruptcy Court”) on April 16, 2009.   On April 22, 2009 (together with April 16, 2009, as applicable, the “Petition Date”) certain additional domestic subsidiaries (collectively with GGP and the subsidiaries filing on April 16, 2009, the “Debtors”) of the Company also filed voluntary petitions for relief in the Bankruptcy Court (collectively, the “Chapter 11 Cases”), which the Bankruptcy Court ruled may be jointly administered.

 

GGP was organized in 1986 and through its subsidiaries and affiliates owns, operates, manages and develops retail and other rental properties, primarily shopping centers, which are located primarily throughout the United States. GGP also holds assets through its international Unconsolidated Real Estate Affiliates in Brazil (Note 3).  In July 2010, we sold our third party management business for nominal consideration and participation in the future earnings of the assigned management contracts.  Additionally, GGP develops and sells land for residential, commercial and other uses primarily in large-scale, long-term master planned community projects in and around Columbia, Maryland; Summerlin (Las Vegas), Nevada; and Houston, Texas, as well as one residential condominium project located in Natick (Boston), Massachusetts.

 

Substantially all of our business is conducted by our operating partnership, GGP Limited Partnership (“GGPLP” or the “Operating Partnership”), in which, at September 30, 2010, GGP holds approximately a 98% common equity ownership interest.  In these notes, the terms “we,” “us” and “our” refer to GGP and its subsidiaries.

 

On August 17, 2010, GGP filed with the Bankruptcy Court its third amended and restated disclosure statement and the plan of reorganization, as supplemented by the plan of reorganization supplement filed September 30, 2010 and as modified on October 21, 2010 (the “Plan”) for the 126 Debtors currently remaining in the Chapter 11 Cases (the “TopCo Debtors”).  On October 21, 2010, the Bankruptcy Court entered an order confirming the Plan.  Pursuant to the Plan, GGP will reorganize into a new company (“New GGP”) at the date of GGP’s emergence from bankruptcy (the “Effective Date”), which is currently expected to be on or about November 8, 2010.  The Plan (as described in more detail in the “Debtors in Possession” section below) provides that prepetition creditors will be satisfied in full and equity holders will receive current equity in New GGP and a distribution of equity in The Howard Hughes Corporation (“THHC”), a newly formed real estate company.  After such distribution, THHC will be a publicly-held company, majority-owned by our existing stockholders.  Its assets are expected to consist of the following:

 

·                  four master planned communities with an aggregate of approximately 14,700 remaining saleable acres;

·                  nine mixed-use development opportunities comprised of 1,129 acres;

·                  four mall developmental projects comprised of 647 acres;

·                  seven redevelopment-opportunity retail malls with approximately 1 million square feet of existing gross leasable space; and

·                  interests in eleven other real estate assets or projects.

 

In this report, we refer to our ownership interests in majority-owned or controlled properties as “Consolidated Properties”, to joint ventures in which we own a noncontrolling interest as “Unconsolidated Real Estate Affiliates” and the properties owned by such joint ventures as the “Unconsolidated Properties.” Our “Company Portfolio” includes both our Consolidated Properties and our Unconsolidated Properties.

 

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Principles of Consolidation

 

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. All significant intercompany balances and transactions have been eliminated.

 

In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. The results for the interim period ended September 30, 2010 are not necessarily indicative of the results to be obtained for the full fiscal year.

 

Reclassifications

 

Certain amounts in the 2009 Consolidated Financial Statements have been reclassified to conform to the current period presentation.  Specifically, we reclassified $2.4 million and $8.0 million, respectively, of joint venture asset management fees and other corporate revenues (such as sponsorship income, photo income and vending income) for the three and nine months ended September 30, 2009 from other revenue to management fees and other corporate revenues.  In addition, we reclassified $28.2 million and $84.2 million, respectively, of cleaning, landscaping and refuse removal expenses for the three and nine months ended September 30, 2009 from property maintenance costs to other property operating costs.

 

Debtors in Possession

 

As we had significant past due, or imminently due debt, and certain cross-collateralized or cross-defaulted debt, the Company, the Operating Partnership and certain of the Company’s domestic subsidiaries filed voluntary petitions for relief under Chapter 11 in April 2009. However, neither GGMI, certain of our wholly-owned subsidiaries, nor any of our joint ventures, (collectively, the “Non-Debtors”) either consolidated or unconsolidated, sought such protection.

 

Pursuant to Chapter 11, a debtor is afforded certain protection against its creditors and creditors are prohibited from taking certain actions (such as pursuing collection efforts or proceeding to foreclose on secured obligations) related to debts that were owed prior to the commencement of the Chapter 11 Cases.  Accordingly, although the commencement of the Chapter 11 Cases triggered defaults on substantially all debt obligations of the Debtors, creditors are stayed from taking any action as a result of such defaults.  These pre-petition liabilities will be settled under the Plan.

 

Through September 30, 2010, of the total 388 Debtors with approximately $21.83 billion of debt that filed in 2009 for Chapter 11 protection, 262 Debtors owning 146 properties with $14.89 billion of secured mortgage loans filed consensual plans of reorganization and emerged from bankruptcy (the “Emerged Debtors”).   During the nine months ended September 30, 2010, 149 Debtors owning 96 properties with $10.23 billion of secured mortgage debt emerged from bankruptcy, while 113 Debtors owning 50 properties with $4.66 billion secured debt had emerged from bankruptcy as of December 31, 2009.  In addition, as the result of a consensual agreement reached in the third quarter of 2010 with lenders of certain of our corporate debt, we recognized $83.7 million of additional interest expense for the three and nine months ended September 30, 2010.

 

The Plan is based on the agreements (collectively, as amended and restated, the “Investment Agreements”) with REP Investments LLC, an affiliate of Brookfield Asset Management Inc. (the “Brookfield Investor”) , an affiliate of Fairholme Funds, Inc. (“Fairholme”) and an affiliate of Pershing Square Capital Management, L.P. (“Pershing Square” and together with the Brookfield Investor and Fairholme, the “Plan Sponsors”), pursuant to which GGP would be divided into two companies, New GGP and THHC, and the Plan Sponsors would invest in the Company’s standalone emergence plan. As a result of the Investment Agreements, the Company has equity commitments for $6.55 billion subject to the conditions set forth in such agreements.  Pursuant to the Investment Agreements, the Plan Sponsors are expected to purchase on the Effective Date up to $6.3 billion of New GGP common stock at $10.00 per share and $250.0 million of THHC stock at $47.61904 per share.   In addition, pursuant to our agreement with the Teachers Retirement System of Texas (“Texas Teachers”), Texas

 

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Teachers will purchase $500.0 million of New GGP common stock at $10.25 per share, subject to the conditions set forth in such agreement.  Finally, the Plan Sponsors have entered into an agreement with The Blackstone Group (“Blackstone”) whereby Blackstone has been given the option to subscribe for approximately 7.6% of the New GGP and THHC shares to be issued to the Plan Sponsors and receive a pro rata portion of each Plan Sponsors’ Permanent Warrants (as defined below).  On September 21, 2010, we entered into a financing commitment agreement for a $300.0 million senior secured revolving facility which commences on the Effective Date and is not expected to be drawn upon.

 

The Investment Agreements and our agreement with Texas Teachers permit us to reduce the equity commitments of Pershing, Fairholme and Texas Teachers up to 50% with alternative equity sources at more favorable pricing at any time prior to the Effective Date or up to 45 days after the Effective Date.

 

On October 11, 2010, we gave notice to Pershing, Fairholme and Texas Teachers that we reserved the right to repurchase within 45 days after the Effective Date up to $1.55 billion of Fairholme’s and Pershing Square’s shares and up to $250.0 million of Texas Teachers’ shares of New GGP common stock issued on the Effective Date with the proceeds of an offering of New GGP common stock if the common stock in that offering is valued at $10.50 per share or more (net of all underwriting and other discounts, fees and related consideration). In connection with our reserving shares for repurchase after the Effective Date, we must pay to Fairholme and/or Pershing Square, as applicable, in cash on the Effective Date, an amount equal to approximately $38.75 million.  No fee is required to be paid to Texas Teachers.  In such regard, New GGP, a wholly-owned subsidiary of GGP until the Effective Date, has filed a registration statement with the Securities and Exchange Commission to raise up to $2.25 billion through the sale of common stock to repurchase the applicable shares held by Fairholme, Pershing Square and Texas Teachers.

 

In connection with our election to reserve shares for repurchase as described above, $350.0 million of Pershing Square’s equity capital commitment will be fulfilled by the payment of cash to New GGP at closing in exchange for unsecured note(s) issued by New GGP to Pershing Square which would be payable or exchangeable into New GGP common stock six months from closing (the ‘‘Pershing Square Bridge Notes’’) at the election of New GGP.  The Pershing Square Bridge Notes will bear interest at a rate of 6% per annum and will be pre-payable by New GGP (from the proceeds of equity offerings or other sources of cash) at any time without premium or penalty.  New GGP has a put right to sell up to 35 million shares, subject to reduction as provided in the investment agreement, to Pershing Square at $10.00 per share (adjusted for dividends) six months following the Effective Date to fund the repayment of the Pershing Square Bridge Notes to the extent that they have not already been repaid.

 

In lieu of the receipt of fees that would be customary in similar transactions, pursuant to the Investment Agreements, interim warrants were issued to the Brookfield Investor and Fairholme to purchase approximately 103 million shares of GGP at $15.00 per share (the “Interim Warrants”) on May 10, 2010. The Interim Warrants vest:  40% upon issuance, 20% on July 12, 2010, and the remaining Interim Warrants vest in equal daily installments from July 13, 2010 to December 31, 2010, except that any Interim Warrants that have not vested on or prior to termination of the Brookfield Investor or Fairholme’s Investment Agreement, as the case may be, will not vest and will be cancelled. The Interim Warrants may only be exercised if the Investment Agreements are not consummated. Accordingly, no expense has been recognized for the issuance of the Interim Warrants.  Upon consummation of the Plan, the Interim Warrants will be cancelled and warrants to purchase equity of THHC and New GGP will be issued to the Plan Sponsors (the “Permanent Warrants”). Specifically, eight million warrants to purchase equity of THHC at an exercise price of $50.00 per share and 120 million warrants to purchase equity of New GGP at an exercise price of $10.75 per share, in the case of the Brookfield Investor, and an exercise price of $10.50 in the case of Fairholme and Pershing Square, will be issued.  Recognition of the estimated $338.5 million value of the Permanent Warrants will occur when, and if, such Permanent Warrants are issued as an adjustment to the equity contribution of the Plan Sponsors.

 

Even if the Pershing Square, Fairholme and Texas Teachers equity commitments are replaced, to the maximum extent permitted by the Investment Agreements and the Texas Teachers agreement, the Plan Sponsors are expected to own, in the aggregate, a majority of the equity in New GGP.  As a result, consummation of the Plan will require the application of acquisition accounting to the assets and liabilities of New GGP (after the distribution of certain assets and liabilities to THHC). The assets and liabilities of New GGP will be recorded at

 

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Fair Value (Note 2) as of the Effective Date and are expected to have a carrying value substantially different than the historical cost, carrying values included in the accompanying consolidated financial statements.  The consolidated financial statements and related notes contained herein do not give effect to the Plan and related restructuring transactions, including the distribution of THHC, or acquisition accounting.  Following our emergence from bankruptcy, it will be difficult to compare certain information reflecting our results of operations and financial condition to those for historical periods prior to emergence from bankruptcy.

 

Until the Effective Date, there will continue to be substantial doubt as to our ability to continue as a going concern. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, as a result of the Chapter 11 Cases, such realization of assets and satisfaction of liabilities are subject to a significant number of uncertainties. Our consolidated financial statements do not reflect any adjustments related to the recoverability of assets and satisfaction of liabilities that might be necessary should we be unable to continue as a going concern.

 

Accounting for Reorganization

 

The generally accepted accounting principles related to financial reporting by entities in reorganization under the Bankruptcy Code provides that if a debtor, or group of debtors, has significant combined assets and liabilities of entities which have not sought, or no longer remain under, Chapter 11 bankruptcy protection, the debtors and non-debtors should continue to be combined.  However, separate disclosure of financial statement information solely relating to the debtor entities should be presented.  The accompanying unaudited combined condensed financial statements of the TopCo Debtors presented below have been prepared in accordance with generally accepted accounting principles, and on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

 

The unaudited combined condensed balance sheets of the TopCo Debtors which are operating under Chapter 11 protection, excluding the Emerged Debtors, are presented as of the dates indicated below:

 

Unaudited Combined Condensed Balance Sheets

 

 

 

September 30, 2010

 

December 31, 2009

 

 

 

(In thousands)

 

Net investment in real estate

 

$

2,986,702

 

$

2,873,317

 

Cash and cash equivalents

 

567,975

 

584,592

 

Accounts and notes receivable, net

 

18,964

 

27,431

 

Other

 

4,587,072

 

4,422,713

 

Total assets

 

$

8,160,713

 

$

7,908,053

 

 

 

 

 

 

 

Liabilities not subject to compromise:

 

 

 

 

 

Mortgages, notes and loans payable

 

$

404,591

 

$

400,000

 

Deferred tax liabilities

 

835,965

 

910,847

 

Investment in and loans to/from Unconsolidated Real Estate Affiliates

 

33,303

 

33,005

 

Accounts payable and accrued expenses

 

677,360

 

559,005

 

Liabilities subject to compromise

 

7,836,856

 

7,426,085

 

Total redeemable noncontrolling interests

 

235,873

 

206,833

 

Deficit

 

(1,863,235

)

(1,627,722

)

Total liabilities and deficit

 

$

8,160,713

 

$

7,908,053

 

 

As described above, substantially all of the subsidiary mortgage borrower Debtors have emerged from bankruptcy protection as of September 30, 2010. The unaudited combined condensed statements of operations and the unaudited combined condensed statements of cash flows presented below includes only the TopCo Debtors, and excludes Emerged Debtors, for the three and nine months ended September 30, 2010.  Since the Debtor’s commenced their respective Chapter 11 Cases on two different dates in April 2009, the unaudited combined condensed statements of operations have been prepared for the three months ended September 30,

 

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2009 and for the period from May 1, 2009 to September 30, 2009 and the combined condensed statement of cash flows have been prepared for the period from May 1, 2009 to September 30, 2009.

 

Unaudited Combined Condensed Statements of Operations

 

 

 

Three Months Ended

 

Three Months Ended

 

Nine Months Ended

 

May 1, 2009 to

 

 

 

September 30, 2010

 

September 30, 2009

 

September 30, 2010

 

September 30, 2009

 

 

 

(In thousands)

 

Operating revenues

 

$

51,344

 

$

42,798

 

$

184,406

 

$

69,313

 

Operating expenses

 

54,729

 

53,877

 

194,118

 

158,303

 

Provision for impairment

 

4,608

 

52,546

 

16,151

 

72,325

 

Operating loss

 

(7,993

)

(63,625

)

(25,863

)

(161,315

)

Interest expense, net

 

(167,949

)

(91,099

)

(349,086

)

(163,911

)

(Provision for) benefit from income taxes

 

(6,284

)

4,764

 

(20,929

)

5,780

 

Equity in income of Real Estate Affiliates

 

25,430

 

29,933

 

90,645

 

52,091

 

Reorganization items

 

(93,030

)

(24,185

)

(239,886

)

(47,308

)

Net loss

 

(249,826

)

(144,212

)

(545,119

)

(314,663

)

Allocation to noncontrolling interests

 

901

 

(471

)

(4,259

)

(149

)

Net loss attributable to common stockholders

 

$

(248,925

)

$

(144,683

)

$

(549,378

)

$

(314,812

)

 

Unaudited Combined Condensed Statements of Cash Flows

 

 

 

Nine Months Ended

 

May 1, 2009 to

 

 

 

September 30, 2010

 

September 30, 2009

 

 

 

(In thousands)

 

Net cash used in (provided by):

 

 

 

 

 

Operating activities

 

$

(12,370

)

$

330,451

 

Investing activities

 

1,710

 

55,617

 

Financing activities

 

(5,957

)

188,225

 

Net (decrease) increase in cash and cash equivalents

 

(16,617

)

574,293

 

Cash and cash equivalents, beginning of period

 

584,592

 

52,971

 

Cash and cash equivalents, end of period

 

$

567,975

 

$

627,264

 

 

 

 

 

 

 

Cash paid for reorganization items

 

$

(79,702

)

$

(22,524

)

 

Classification of Liabilities Not Subject to Compromise

 

Liabilities not subject to compromise include: (1) liabilities held by Non-Debtor entities and Debtors that have emerged from bankruptcy; (2) liabilities incurred after the Petition Date; (3) certain pre-Petition Date liabilities the TopCo Debtors expect to pay in full, even though certain of these amounts may not be paid until the Plan is effective; (4) liabilities related to pre-petition contracts that affirmatively have not been rejected; and (5) pre-Petition Date liabilities that have been approved for payment by the Bankruptcy Court and that the Debtors expect to pay (in advance of a plan of reorganization) in the ordinary course of business, including certain employee related items (salaries, vacation and medical benefits).

 

All liabilities incurred by the Debtors prior to the Petition Date other than those specified above are considered liabilities subject to compromise. The amounts of the various categories of liabilities that are subject to compromise are set forth below. These amounts represent the Company’s estimates of known or potential pre-Petition Date claims that are likely to be resolved in connection with the bankruptcy filings. Such claims remain subject to future adjustments. Adjustments may result from negotiations, actions of the Bankruptcy Court, rejection of executory contracts and unexpired leases, the determination as to the value of any collateral securing claims, proofs of claim, or other events. There can be no assurance that the equity of the Company’s stockholders will not be diluted. The amounts subject to compromise consisted of the following items:

 

 

 

September 30, 2010

 

December 31, 2009

 

 

 

(In thousands)

 

Mortgages and secured notes

 

$

403,292

 

$

11,148,467

 

Unsecured notes

 

6,528,843

 

6,006,778

 

Accounts payable and accrued liabilities

 

904,721

 

612,008

 

Total liabilities subject to compromise

 

$

7,836,856

 

$

17,767,253

 

 

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The classification of liabilities “not subject to compromise” versus liabilities “subject to compromise” is based on currently available information and analysis. Although Debtors subject to the remaining Chapter 11 Cases had their plans of reorganization confirmed as of October 21, 2010, additional analysis remains to be completed and the Bankruptcy Court may be requested to rule on pre-petition liabilities to be allowed and paid pursuant to the Plan.  Certain creditors have claimed that they are contractually entitled to approximately $117.9 million of default rate interest and other related fees.  Accordingly, the amounts in these two categories ultimately paid may change.  The amount of any such changes could be significant.  In addition, the Plan provides that certain pre-petition liabilities related to the assets distributed to THHC will remain an obligation of New GGP.

 

Reorganization Items

 

Reorganization items are expense or income items that were incurred or realized by the Debtors as a result of the Chapter 11 Cases and are presented separately in the Consolidated Statements of Income and Comprehensive Income and in the unaudited condensed combined statements of operations of the Debtors that have not emerged from bankruptcy at September 30, 2010 presented above. These items include professional fees and similar types of expenses and gains on liabilities subject to compromise directly related to the Chapter 11 Cases, resulting from activities of the reorganization process, and interest earned on cash accumulated by the Debtors as a result of the Chapter 11 Cases.

 

With respect to certain retained professionals, the terms of engagement and the timing of payment for services rendered are subject to approval by the Bankruptcy Court.  In addition, certain of these retained professionals have agreements that provide for success or completion fees that are payable upon the consummation of specified restructuring or sale transactions.  A portion of such fees, currently estimated at approximately $48.6 million in the aggregate, have been deemed probable of being paid; and therefore, we accrued the portion related to the period from the date the Bankruptcy Court approved retention of those professionals to our estimated date of successful emergence from bankruptcy.  We accrued a liability for such fees in Accounts payable and accrued expense on the Consolidated Balance Sheets of $43.1 million as of September 30, 2010 and $7.2 million as of December 31, 2009.  In addition, we recognized $13.4 million of expense in Reorganization items in the Consolidated Statements of Income and Comprehensive Income for the three months ended September 30, 2010, $35.9 million for the nine months ended September 30, 2010 and $2.4 million for the three and nine months ended September 30, 2009.

 

In addition, the key employee incentive program (the “KEIP”) provides for payment to certain key employees upon successful emergence from bankruptcy.  Although the amount of the potential KEIP payment is uncapped, a portion of the KEIP, currently estimated for financial statement purposes based on the trading value of the GGP common stock on September 30, 2010 at approximately $155.1 million in the aggregate, has been deemed probable of being paid; therefore, we are recognizing our estimated KEIP expense in the period from the date the KEIP was approved by the Bankruptcy Court to our estimated date of successful emergence from bankruptcy.  We accrued a liability for the KEIP in Accounts payable and accrued expense on the Consolidated Balance Sheets of $140.0 million as of September 30, 2010 and $27.5 million as of December 31, 2009.  In addition, we recognized expense in Reorganization items in the Consolidated Statements of Income and Comprehensive Income of $43.0 million for the three months ended September 30, 2010 and $112.5 million for the nine months ended September 30, 2010.  We did not recognize any expense related to the KEIP for the three and nine months ended September 30, 2009 as the KEIP was not approved by the Bankruptcy Court until October 2009.

 

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Reorganization items are as follows:

 

 

 

Three Months Ended

 

Three Months Ended

 

Nine Months Ended

 

Nine Months Ended

 

Reorganization Items

 

September 30, 2010

 

September 30, 2009

 

September 30, 2010

 

September 30, 2009

 

 

 

(In thousands)

 

Losses (Gains) on liabilities subject to compromise - vendors (1)

 

$

188

 

$

(2,670

)

$

(6,688

)

$

(5,049

)

Gains on liabilities subject to compromise - mortgage debt (2)

 

(4,309

)

 

(323,318

)

 

Interest income (3)

 

(73

)

(15

)

(163

)

(23

)

U.S. Trustee fees (4)

 

1,423

 

1,419

 

4,260

 

2,516

 

Restructuring costs (5)

 

105,288

 

23,863

 

419,125

 

50,071

 

Total reorganization items

 

$

102,517

 

$

22,597

 

$

93,216

 

$

47,515

 

 


(1)          This amount includes gains from repudiation, rejection or termination of contracts or guarantee of obligations. Such gains reflect agreements reached with certain critical vendors, which were authorized by the Bankruptcy Court and for which payments on an installment basis began in July 2009. Also included is a $3.4 million gain related to the accrued interest associated with the forgiveness of debt as a result of the the paydown of debt for Stonestown Galleria in June 2010.

(2)          Such net gains include the Fair Value adjustments of mortgage debt, as well as a $38.3 million recorded for the nine months ended September 30, 2010 resulting from the write off of existing Fair Value of debt adjustments for the entities that emerged from bankruptcy and a $33.9 million gain recorded in June 2010 as the result of the forgiveness of debt associated with the paydown of debt for Stonestown Galleria.

(3)          Interest income primarily reflects amounts earned on cash accumulated as a result of our Chapter 11 cases.

(4)          Estimate of fees due remain subject to confirmation and review by the Office of the United States Trustee (“U.S. Trustee”).

(5)          Restructuring costs primarily include professional fees incurred related to the bankruptcy filings, the estimated KEIP payment, finance costs incurred by the Emerged Debtors and the write off of unamortized deferred finance costs related to the Emerged Debtors.

 

Impairment

 

Operating properties and land held for development and redevelopment, including assets to be sold after such development or redevelopment

 

The generally accepted accounting principles related to accounting for the impairment or disposal of long-lived assets require that if impairment indicators exist and the undiscounted cash flows expected to be generated by an asset are less than its carrying amount, an impairment provision should be recorded to write down the carrying amount of such asset to its Fair Value.  We review our consolidated and unconsolidated real estate assets, including operating properties, land held for development and sale and developments in progress, for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

 

Impairment indicators for our retail and other segment are assessed separately for each property and include, but are not limited to, significant decreases in real estate property net operating income and occupancy percentages.

 

Impairment indicators for our Master Planned Communities segment are assessed separately for each community and include, but are not limited to, significant decreases in sales pace or average selling prices, significant increases in expected land development and construction costs or cancellation rates, and projected losses on expected future sales.

 

Impairment indicators for pre-development costs, which are typically costs incurred during the beginning stages of a potential development, developments in progress, and land held for development and redevelopment are assessed by project and include, but are not limited to, significant changes the Company’s plans with respect to the project, significant changes in projected completion dates, revenues or cash flows, development costs, market factors and sustainability of development projects.

 

If an indicator of potential impairment exists, the asset is tested for recoverability by comparing its carrying amount to the estimated future undiscounted cash flows.  The cash flow estimates used both for determining recoverability and estimating Fair Value are inherently judgmental and reflect current and projected trends in rental, occupancy and capitalization rates, and estimated holding periods for the applicable assets.  Although the estimated Fair Value of certain assets may be exceeded by the carrying amount, 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 asset 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.  The adjusted carrying amount, which represents the new cost basis of the asset, is depreciated over the remaining useful life of the asset.

 

We recorded impairment charges related to our operating properties, land held for development and sale, and properties under development of $4.6 million for the three months ended September 30, 2010, $54.7 million for

 

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the three months ended September 30, 2009, $35.9 million for the nine months ended September 30, 2010 and $339.4 million for the nine months ended September 30, 2009, as presented in the table below.  All of these impairment charges are included in Provisions for impairment in our Consolidated Statements of Income and Comprehensive Income.

 

Investment in Unconsolidated Real Estate Affiliates

 

In accordance with the generally accepted accounting principles related to the equity method of accounting for investments, a series of operating losses of an investee or other factors may indicate that an other-than-temporary decrease in value of our investment in the Unconsolidated Real Estate Affiliates has occurred. The investment in each of the Unconsolidated Real Estate Affiliates is evaluated periodically and as deemed necessary for recoverability and valuation declines that are other than temporary. Accordingly, in addition to the property-specific impairment analysis that we perform on the investment properties, land held for development and sale and developments in progress owned by such joint ventures (as part of our investment property impairment process described above), we also considered the ownership and distribution preferences and limitations and rights to sell and repurchase our ownership interests.  Based on our evaluations, no provisions for impairment were recorded for the three and nine months ended September 30, 2010 and 2009 related to our investments in Unconsolidated Real Estate Affiliates.

 

Goodwill

 

The excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed was recorded as goodwill.  Goodwill has been recognized and allocated to specific properties in our Retail and Other Segment since each individual rental property or each operating property is an operating segment and considered a reporting unit.  The generally accepted accounting principles related to goodwill and other intangible assets states that goodwill should be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.  We perform this test by first comparing the estimated Fair Value of each property with our book value of the property, including, if applicable, its allocated portion of aggregate goodwill.  We assess Fair Value based on estimated future cash flow projections that utilize discount and capitalization rates which are generally unobservable in the market place (Level 3 inputs) under these principles, but approximate the inputs we believe would be utilized by market participants in assessing Fair Value.  Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions.  If the carrying amount of a property, including its goodwill, exceeds its estimated Fair Value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. In this second step, if the implied Fair Value of goodwill is less than the carrying amount of goodwill, an impairment charge is recorded.

 

As of September 30, 2010, there were no events or changes in circumstances that would indicate that the current carrying amount of goodwill might be impaired; accordingly, we did not perform interim testing procedures.  As of September 30, 2009, we performed interim impairment tests of goodwill as changes in market and economic conditions for the three and nine months ended September 30, 2009 indicated an impairment of the asset might have occurred.  As a result of the procedures performed, we recorded provisions for impairment of goodwill of $6.3 million for the three months ended September 30, 2009 and $135.0 million for the nine months ended September 30, 2009, as presented in the table below.

 

General

 

Certain of our properties had estimated Fair Values less than their carrying amounts.  However, based on the Company’s plans with respect to the New GGP properties, we believe that the carrying amounts are recoverable and therefore, under applicable generally accepted accounting principles, no additional impairments were taken.  Additional impairment charges could be taken in the future if economic conditions change or if our plans regarding the New GGP assets change.  Therefore, we can provide no assurance that material impairment charges with respect to the New GGP assets, including operating properties, Unconsolidated Real Estate Affiliates, developments in progress, or goodwill will not occur in future periods.  Accordingly, we will continue to monitor circumstances and events in future periods to determine whether additional impairments are warranted.

 

With respect to a distribution of long-lived assets to owners in a spinoff, generally accepted accounting principles require an impairment loss be recognized at the date of disposal to the extent that the carrying amount of the disposal group exceeds its Fair Value. The distribution of certain assets and liabilities of THHC to existing GGP stockholders constitutes a distribution to the owners in a spinoff, and as such, is required to be accounted for at the lower of carrying value or Fair Value.  Accordingly, GGP will likely incur a significant impairment charge in the fourth quarter of 2010 in conjunction with the distribution of assets to THHC as the Fair Value of such assets is estimated to be lower than the carrying value.  Further, the assets distributed to THHC will be under the control of a new Board of Directors and new management who may change existing plans for these assets, which could result in future impairment charges being recorded by THHC.

 

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Table of Contents

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

Impaired Asset

 

Location

 

Method of Determining Fair Value

 

September 30, 2010

 

September 30, 2010

 

 

 

 

 

 

 

(In thousands)

 

Retail and other:

 

 

 

 

 

 

 

 

 

Operating properties:

 

 

 

 

 

 

 

 

 

Bay City Mall

 

Bay City, MI

 

Discounted cash flow analysis (1)

 

$

 

$

2,309

 

Chico Mall

 

Chico, CA

 

Discounted cash flow analysis (1)

 

 

895

 

Eagle Ridge Mall

 

Lake Wales, FL

 

Discounted cash flow analysis (1)

 

 

266

 

Lakeview Square

 

Battle Creek, MI

 

Discounted cash flow analysis (1)

 

 

7,057

 

Moreno Valley Mall

 

Moreno Valley, CA

 

Discounted cash flow analysis (1)

 

 

6,608

 

Northgate Mall

 

Chattanooga, TN

 

Discounted cash flow analysis (1)

 

 

1,398

 

Oviedo Marketplace

 

Oviedo, FL

 

Discounted cash flow analysis (1)

 

 

1,184

 

The Pines

 

Pine Bluff, AR

 

Direct Capitalization method (2)

 

 

11,057

 

Plaza 800

 

Sparks, NV

 

Projected sales price analysis (2)

 

4,516

 

4,516

 

Total operating properties

 

 

 

 

 

$

4,516

 

$

35,290

 

 

 

 

 

 

 

 

 

 

 

Various pre-development costs

 

 

 

(3)

 

104

 

603

 

 

 

 

 

 

 

 

 

 

 

Total Provisions for impairment

 

 

 

 

 

$

4,620

 

$

35,893

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

Impaired Asset

 

Location

 

Method of Determining Fair Value

 

September 30, 2009

 

September 30, 2009

 

 

 

 

 

 

 

(In thousands)

 

Retail and other:

 

 

 

 

 

 

 

 

 

Operating properties:

 

 

 

 

 

 

 

 

 

Owings Mills Mall

 

Owings Mills, MD

 

Discounted cash flow analysis (4)

 

$

 

$

40,308

 

River Falls Mall

 

Clarksville, IN

 

Discounted cash flow analysis (4)

 

 

81,114

 

The Village at Redlands

 

Redlands, CA

 

Projected sales price analysis (2)

 

5,492

 

5,492

 

Plaza 9400

 

Sandy, UT

 

Projected sales price analysis (2)

 

5,191

 

5,191

 

Owings Mills-Two Corporate Center

 

Owings Mills, MD

 

Projected sales price analysis (2)

 

7,478

 

7,478

 

Total operating properties

 

 

 

 

 

$

18,161

 

$

139,583

 

 

 

 

 

 

 

 

 

 

 

Development:

 

 

 

 

 

 

 

 

 

Allen Towne Mall

 

Allen, TX

 

Projected sales price analysis (2)

 

 

24,166

 

Redlands Promenade

 

Redlands, CA

 

Projected sales price analysis (2)

 

 

6,747

 

West Kendall development

 

Miami, FL

 

Projected sales price analysis (2)

 

35,518

 

35,518

 

Total development

 

 

 

 

 

$

35,518

 

$

66,431

 

 

 

 

 

 

 

 

 

 

 

Various pre-development costs

 

 

 

(3)

 

978

 

24,680

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

(4)

 

6,283

 

135,034

 

Total Retail and other

 

 

 

 

 

$

60,940

 

$

365,728

 

 

 

 

 

 

 

 

 

 

 

Master Planned Communities:

 

 

 

 

 

 

 

 

 

Fairwood Master Planned Community

 

Columbia, MD

 

Projected sales price analysis (5)

 

 

52,769

 

Nouvelle at Natick

 

Natick, MA

 

Discounted cash flow analysis (5)

 

 

55,923

 

Total Master Planned Communities

 

 

 

 

 

$

 

$

108,692

 

 

 

 

 

 

 

 

 

 

 

Total Provisions for impairment

 

 

 

 

 

$

60,940

 

$

474,420

 

 


(1)          These impairments were primarily driven by management’s intent to deed these properties to lenders in satisfaction of secured debt upon emergence from bankruptcy.

(2)          These impairments were primarily driven by management’s changes in current plans with respect to the property and measured based on the value of the underlying land, which is based on comparable property market analysis or a projected sales price analysis that incorporates available market information and other management assumptions as these properties are either no longer operational or operating with no or nominal income.

(3)          Related to the write down of various pre-development costs that were determined to be non-recoverable due to management’s decision to terminate the related projects.

(4)          These impairments were primarily driven by continued increases in capitalization rate assumptions during 2009 and reduced estimates of NOI, primarily due to the impact of decline in the retail market on our operations.

(5)          These impairments were driven by a recoverable value based on a per lot or unit sales price analysis incorporating market absorption and other management assumptions that is below carrying value.

 

Noncontrolling Interests

 

The TopCo Plan, as approved by the Bankruptcy Court on October 21, 2010, provided that holders of the Common Units could elect to redeem or convert their units. Three holders of the Common Units elected to redeem their 159,760 Common Units in the aggregate on the Effective Date. All remaining Common Units will be reinstated in the Operating Partnership on the Effective Date.

 

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Table of Contents

 

Generally, the holders of the Common Units shared equally with our common stockholders on a per share basis in any distributions by the Operating Partnership.  However, the Operating Partnership agreement permitted 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 would be adjusted to give effect to stock distributions.  Also, under certain circumstances, the Common Units (other than Common Units held by the parties to the Rights Agreement dated July 27, 1993, as described below) could be redeemed at the option of the holders for cash or, at our election, shares of GGP common stock.  Upon receipt of a request for redemption by a holder of such Common Units, the Company, as general partner of the Operating Partnership, had the option to pay the redemption price for such Common Units with shares of common stock of the Company (subject to certain conditions), or in cash, with a cash redemption price calculated based upon the market price of one share of common stock of the Company at the time of redemption. Parties to the Rights Agreement dated July 27, 1993 (the “Rights Agreement”) had the right to redeem the Common Units covered by such agreement for shares of GGP common stock.

 

All prior requests for redemption of Common Units have been fulfilled with shares of the Company’s common stock.  Notwithstanding this historical practice, the aggregate amount of cash that would have been paid to the holders of the outstanding Common Units as of September 30, 2010 if such holders had requested redemption of the Common Units as of September 30, 2010, and all such Common Units were redeemed (or purchased in the case of the Rights Agreement) for cash, would have been $115.1 million.  During the pendency of the Chapter 11 Cases, we were precluded from redeeming Common Units for cash or shares of GGP common stock.  In addition, the conditions necessary to issue GGP common stock upon redemption of Common Units were not currently satisfied.

 

Generally accepted accounting principles provide that the redeemable noncontrolling interests are to be presented in our Consolidated Balance Sheets at the greater of Fair Value (the conversion value of the units based on the stock price) or the carrying amount of the units.  The applicable stock price was $15.60 at September 30, 2010 and $11.56 at December 31, 2009.  Accordingly, the redeemable noncontrolling interests have been presented at Fair Value at September 30, 2010 and December 31, 2009.

 

The following table reflects the activity of the redeemable noncontrolling interests for the nine months ended September 30, 2010 and 2009.

 

 

 

(In thousands)

 

Balance at January 1, 2009

 

$

499,925

 

Net loss

 

(9,690

)

Distributions

 

(7,008

)

Conversion of Operating Partnership units into common shares

 

(324,489

)

Other comprehensive income

 

10,369

 

Adjustment for noncontrolling interests in Operating Partnership

 

(12,313

)

Balance at September 30, 2009

 

$

156,794

 

 

 

 

 

Balance at January 1, 2010

 

$

206,833

 

Net income

 

171

 

Distributions

 

(6,987

)

Other comprehensive loss

 

348

 

Adjustment for noncontrolling interests in Operating Partnership

 

35,508

 

Balance at September 30, 2010

 

$

235,873

 

 

On January 2, 2009, MB Capital Units LLC, pursuant to the Rights Agreement, converted 42,350,000 Common Units (approximately 13% of all outstanding Common Units, including those owned by GGP) held in the Company’s Operating Partnership into 42,350,000 shares of GGP common stock.

 

The Operating Partnership had also issued Convertible Preferred Units, which were convertible, with certain restrictions, at any time by the holder into Common Units of the Operating Partnership at the following rates (subject to adjustment):

 

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Table of Contents

 

 

 

Number of Common Units for each
Preferred Unit

 

Series B

 

3.000

 

Series D

 

1.508

 

Series E

 

1.298

 

 

The Plan provides that holders of the preferred units will receive their previously accrued and unpaid dividends net of the applicable taxes, reinstatement of their preferred units in the Operating Partnership and a number of shares of the THHC common stock equal to the number of shares such holder would have received had its respective preferred units below converted into GGP Common Stock immediately prior to the THHC distribution.

 

Fair Value Measurements

 

Fair Value is defined as the price that would be received to sell or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. 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 in active markets;

·                  Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

·                  Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

The asset or liability Fair Value measurement level within the Fair Value hierarchy is based on the lowest level of any input that is significant to the Fair Value measurement.  Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.  Any Fair Values utilized or disclosed in our consolidated financial statements were developed for the purpose of complying with the accounting principles established for Fair Value measurements.  The Fair Values of our assets or liabilities for enterprise value in our Chapter 11 Cases or as a component of our reorganization plan (Note 1) may reflect differing assumptions and methodologies. These estimates will be subject to a number of approvals and reviews and therefore may be materially different.

 

As of September 30, 2010 and 2009, our derivative financial instruments and our investments in marketable securities are immaterial to our consolidated financial statements. The following table summarizes our assets and liabilities that are measured at Fair Value on a nonrecurring basis:

 

 

 

Total Fair
Value
Measurement

 

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other Observable
Inputs (Level 2)

 

Significant
Unobservable
Inputs (Level 3)

 

Total (Loss)
Gain Three
Months Ended
September
30, 2010

 

Total (Loss)
Gain Three
Months Ended
September
30, 2009

 

Total (Loss)
Gain Nine
Months Ended
September
30, 2010

 

Total (Loss)
Gain Nine
Months Ended
September
30, 2009

 

 

 

(In thousands)

 

 

 

 

 

Investments in real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bay City Mall

 

$

23,950

 

$

 

$

 

$

23,950

 

$

 

$

 

$

(2,309

)

$

 

Chico Mall

 

54,000

 

 

 

54,000

 

 

 

(895

)

 

Eagle Ridge Mall

 

26,600

 

 

 

26,600

 

 

 

(266

)

 

Lakeview Square

 

25,900

 

 

 

25,900

 

 

 

(7,057

)

 

Moreno Valley Mall

 

71,000

 

 

 

71,000

 

 

 

(6,608

)

 

Northgate Mall

 

24,000

 

 

 

24,000

 

 

 

(1,398

)

 

Oviedo Marketplace

 

32,840

 

 

 

32,840

 

 

 

(1,184

)

 

The Pines Mall

 

4,100

 

 

 

4,100

 

 

 

(11,057

)

 

Plaza 800

 

600

 

 

 

600

 

(4,516

)

 

(4,516

)

 

Owings Mills Mall

 

38,068

 

 

 

38,068

 

 

 

 

(40,308

)

River Falls Mall

 

22,003

 

 

 

22,003

 

 

 

 

(81,114

)

The Village at Redlands

 

7,500

 

 

 

7,500

 

 

(5,492

)

 

(5,492

)

Plaza 9400

 

2,400

 

 

 

2,400

 

 

(5,191

)

 

(5,191

)

Owings Mills-Two Corporate Center

 

15,360

 

 

 

15,360

 

 

(7,478

)

 

(7,478

)

Allen Towne Mall

 

29,511

 

 

29,511

 

 

 

 

 

(24,166

)

Redlands Promenade

 

6,727

 

 

 

6,727

 

 

 

 

(6,747

)

West Kendall development

 

13,931

 

 

 

13,931

 

 

(35,518

)

 

(35,518

)

Fairwood Master Planned Community

 

12,629

 

 

12,629

 

 

 

 

 

(52,769

)

Nouvelle at Natick

 

64,661

 

 

 

64,661

 

 

 

 

(55,923

)

Total investments in real estate

 

$

475,780

 

$

 

$

42,140

 

$

433,640

 

$

(4,516

)

$

(53,679

)

$

(35,290

)

$

(314,706

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value of emerged entity mortgage debt (1)

 

$

9,512,579

 

$

 

$

 

$

9,512,579

 

$

4,103

 

$

 

$

181,819

 

$

 

 


(1)          The Fair Value of debt relates to the 96 properties that emerged from bankruptcy during the nine months ended September 30, 2010.

 

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Table of Contents

 

Of the Emerged Debtors, as of September 30, 2010, we have identified 13 properties (the “Special Consideration Properties”) as underperforming retail assets.  Pursuant to the terms of the agreements with the lenders for these properties, the Debtors have until two days following emergence of the TopCo Debtors to determine whether the collateral property for these loans should be deeded to the respective lender or the property should be retained with further modified loan terms.  Prior to emergence of the TopCo Debtors, all cash produced by the property is under the control of respective lenders and we are required to pay any operating expense shortfall.  In addition, prior to emergence of the TopCo Debtors, the respective lender can change the manager of the property or put the property in receivership and GGP has the right to deed the property to the lender.  We have entered into Deed in Lieu agreements dated September 9, 2010 with respect to Eagle Ridge Mall and Oviedo Marketplace which provide that the respective deed transfers will occur by November 1, 2010.  However, such transfers are subject to a number of conditions and therefore, there can be no assurance that such transfer will occur, and the dates of deed transfer for the remaining properties cannot be currently estimated.  We also agree to cooperate with the respective lenders of five of the Special Consideration Properties to jointly market such properties for sale.

 

Generally accepted accounting principles state that an entity may choose to elect the Fair Value option for an eligible item only on the date of the event that requires Fair Value measurement.  As each of the Special Consideration Properties emerged from bankruptcy, we elected to measure and report the mortgages related these properties at Fair Value from the date of emergence because the Debtor entities of the Special Consideration Properties have the right to return the properties to the lenders in full satisfaction of the related debt.  Accordingly, the Fair Value of the mortgage liability should not exceed the Fair Value of the underlying property.  See our disclosure of Impairment — Operating properties and land held for development and redevelopment, including assets to be sold after such development or redevelopment for more detail regarding the methodology used in determining the Fair Value of these properties.

 

The following is a summary of the components of our debt that was eligible for the Fair Value option, and similar items that were not eligible for the Fair Value option at September 30, 2010 and December 31, 2009.

 

 

 

September 30, 2010

 

December 31, 2009

 

 

 

(In thousands)

 

Debt related to Special Consideration Properties (elected for Fair Value option)

 

$

587,590

 

$

316,966

 

Similar eligible debt (not elected for Fair Value option)

 

184,670

 

4,233,747

 

Debt not eligible for Fair Value option

 

16,582,446

 

3,010,301

 

Market rate adjustments

 

(426,778

)

(260,242

)

Total Mortgages, notes and loans payable, not subject to compromise

 

$

16,927,928

 

$

7,300,772