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RSE > SEC Filings for RSE > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for ROUSE PROPERTIES, INC.


7-May-2013

Quarterly Report


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

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

Forward-looking information

We may make forward-looking statements in this Quarterly Report and in other reports that we file with the Securities and Exchange Commission (the "SEC"). In addition, our senior management may make forward-looking statements orally to analysts, investors, creditors, the media and others.

Forward-looking statements include:

Descriptions of plans or objectives for future operations

Projections of our revenues, net operating income ("NOI"), core net operating income ("Core NOI"), earnings per share, funds from operations ("FFO"), core funds from operations ("Core FFO"), capital expenditures, income tax and other contingent liabilities, dividends, leverage, capital structure or other financial items

          Forecasts of our future economic performance

          Descriptions of assumptions underlying or relating to any of the
foregoing

Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements often include words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "should," "would" or similar expressions. Forward-looking statements should not be unduly relied upon. They give our expectations about the future and are not guarantees. Forward-looking statements speak only as of the date they are made and we might not update them to reflect changes that occur after the date they are made.

There are several factors, many beyond our control, which could cause results to differ materially from our expectations, some of which are described in Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2012 . These factors are incorporated herein by reference. Any factor could by itself, or together with one or more other factors, adversely affect our business, results of operations or financial condition.

Overview-Introduction

As of March 31, 2013, our portfolio consisted of 32 regional malls in 20 states totaling over 22.5 million square feet of retail and ancillary space. We elected to be treated as a REIT in connection with the filing of our federal income tax return for the 2011 taxable year. Subject to our ability to meet the requirements of a REIT, we intend to maintain this status in future periods.

The majority of the income from our properties is derived from rents received through long-term leases with retail tenants. These long-term leases generally require the tenants to pay base rent which is a fixed amount specified in the lease. The base rent is often subject to scheduled increases during the term of the lease. Our financial statements refer to this as "minimum rents." Certain of our leases also include a component which requires tenants to pay amounts related to all or substantially all of their share of real estate taxes and certain property operating expenses, including common area maintenance and insurance. The revenue earned attributable to real estate tax and operating expense recoveries are recorded as "tenant recoveries." Another component of income is overage rent. Overage rent is paid by a tenant when its sales exceed an agreed upon minimum amount. Overage rent is calculated by multiplying the tenant's sales in excess of the minimum amount by a percentage defined in the lease, the majority of which is typically earned in the fourth quarter.

Our objective is to achieve high growth in NOI, Core NOI, FFO and Core FFO by leasing, operating and repositioning retail properties with locations that are either market dominant (the only mall within an extended distance) or trade area dominant (positioned to be the premier mall serving the defined regional consumer). We plan to continue to control costs and to deliver an appropriate tenant mix, higher occupancy rates and increased sales productivity, resulting in higher minimum rents.

We believe that the most significant operating factor affecting incremental cash flow, NOI, Core NOI, FFO and Core FFO is increased rents earned from tenants at our properties. These rental revenue increases are primarily achieved by:

Increasing occupancy at the properties so that more space is generating rent;

Increasing tenant sales in which we participate through overage rent;


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Re-leasing existing space and renewing expiring leases at rates higher than expiring or existing rates; and

Prudently investing capital into our properties.

Overview-Basis of Presentation

We were formed in August 2011 for the purpose of holding certain assets and assuming certain liabilities of GGP. Following the distribution of these assets and liabilities to us on January 12, 2012, we began operating our business as a stand-alone owner and operator of regional malls. The financial information included in this Quarterly Report has been presented on a consolidated basis for the period after the Spin-Off Date. The financial information is presented on a combined basis prior to the Spin-Off Date as the entities were under common control and ownership, and reflects the allocation of certain overhead items within property management and other costs in the accompanying combined financial statements.

Recent Developments

On January 22, 2013, we paid down $100.0 million on our Term Loan and increased our Revolver to $150.0 million in order to maintain our current level of liquidity. As of March 31, 2013, the outstanding balance on the Term Loan is $187.9 million and no amounts are drawn on the Revolver.

On February 28, 2013, the Board of Directors declared a first quarter common stock dividend of $0.13 per share, which was an increase of $0.06 per share from our previous dividend. The dividend was paid on April 29, 2013 to stockholders of record on April 15, 2013.

On March 6, 2013, we placed a new non-recourse mortgage loan on the Lakeland Mall located in Lakeland, FL for $65.0 million. The loan bears interest at a fixed rate of 4.17% and has a term of ten years. This loan replaced a $50.3 million loan that had a fixed rate of 5.12% and was the only mortgage in our portfolio that was due in 2013. Net proceeds to us after related closing costs and defeasance was approximately $13.4 million.

On March 21, 2013, we increased the loan associated with the Lakeland Mall $5.0 million in order to partially fund the acquisition of an anchor previously owned by a third property. The additional $5.0 million loan has the same terms as the Lakeland Mall loan that closed on March 6, 2013.

Operating Metrics



The following table represents the leases that we signed during the three months
ended March 31, 2013:



                              No. of                Term
2013 Leasing Activity(1)(2)   Leases     SF      (in years)    Initial Rent PSF     Average Rent PSF
New Leases
Under 10,000 sq. ft.              21    58,755          8.1   $            30.16   $            32.45
Over 10,000 sq. ft.                8   241,266          9.9                11.19                10.85
Total New Leases                  29   300,021          9.6                14.91                15.08

Renewal Leases
Under 10,000 sq. ft.              46   102,795          3.7   $            30.71   $            31.71
Over 10,000 sq. ft.                4    72,495          4.5                 6.59                 6.99
Total Renewal Leases              50   175,290          4.0                20.74                21.49

Sub-Total                         79   475,311          7.5                17.06                17.44

Percent in Lieu                   10    54.458         n.a.                 n.a.                 n.a.

Total Q1 2013                     89   529,769          7.5   $            17.06   $            17.44



(1) Represents signed leases as of March 31, 2013.

(2) Represents signed leases for malls and excludes traditional anchor stores.


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Results of Operations

Three Months Ended March 31, 2013 compared to the Three Months Ended March 31, 2012

                                  March 31,     March 31,
                                    2013           2012        $ Change   % Change
                                              (In thousands)
Revenues:
Minimum rents                       $40,148          $37,212     $2,936        7.9 %
Tenant recoveries                    16,998           16,596        402        2.4
Overage rents                         1,504            1,445         59        4.1
Other                                 1,229            1,155         74        6.4
Total revenues                       59,879           56,408      3,471        6.2
Expenses:
Real estate taxes                     5,874            5,990       (116 )     (1.9 )
Property maintenance costs            3,414            3,441        (27 )     (0.8 )
Marketing                               679              461        218       47.3
Other property operating costs       14,405           14,399          6          -
Provision for doubtful accounts         139              263       (124 )    (47.1 )
General and administrative            4,852            5,144       (292 )     (5.7 )
Provision for impairment             21,661                -     21,661      100.0
Depreciation and amortization        16,675           18,274     (1,599 )     (8.8 )
Other                                   497            4,459     (3,962 )    (88.9 )
Total expenses                       68,196           52,431     15,765       30.1
Operating income                     (8,317 )          3,977    (12,294 )  >(100.0 )

Interest income                         201                1        200     >100.0
Interest expense                    (21,335 )        (29,989 )    8,654       28.9
Loss before income taxes            (29,451 )        (26,011 )   (3,440 )    (13.2 )
Provision for income taxes              (35 )            (66 )       31       47.0
Net loss                           $(29,486 )       $(26,077 )  $(3,409 )    (13.1 )%

Revenues

Total revenues increased $3.5 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The comparable properties owned during the three months ended March 31, 2013 and 2012 generated a $0.1 million increase in total revenues. The remaining increase is related to the 2012 property acquisitions of Grand Traverse Mall and the Mall at Turtle Creek.

Operating Expenses

Property operating expenses decreased $0.04 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Property operating expenses include real estate taxes, property maintenance costs, marketing, other property operating costs, and provision for doubtful accounts. The comparable properties owned for the three months ended March 31, 2013 and 2012 decreased approximately $1.0 million and 2012 property acquisitions contributed to the increase of approximately $1.0 million. The comparable property decrease of $1.0 million is primarily related to decreases in other property operating costs of $0.6 million and provision for doubtful accounts of $0.1 million. Other property operating costs decreased due to professional fees incurred at the property level and provision for doubtful accounts decreased due to a reduction in the bad debt reserve that was required as of March 31, 2013.


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Provision for impairment for the three months ended March 31, 2013 resulted in a charge of $21.7 million due to a property impairment analysis that indicated the property was not recoverable. No impairment charges were recorded for the three months ended March 31, 2012.

Depreciation and amortization decreased $1.6 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The change is primarily due to the decrease in amortization of in-place leases due to tenant lease expirations.

Other expenses decreased $4.0 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 primarily due to initial costs incurred by the Company during its first year of stand alone operations. These other costs included $1.2 million in signing bonuses, $1.0 million for severance expenses, and other formation costs of the Company.

Other Income and Expenses

Interest income increased $0.2 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The increase is due to the interest income earned on the demand deposit from Brookfield U.S. Holdings, see Note 10 to our Consolidated and Combined Financial Statements.

Interest expense decreased $8.7 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The decrease is primarily related to the $9.0 million write-off of market rate adjustments that was incurred in January 2012 upon the spin-off of the Company and the refinancing of various loans.

Liquidity and Capital Resources

Our primary uses of cash include payment of operating expenses, working capital, capital expenditures, debt repayment, including principal and interest, reinvestment in properties, development and redevelopment of properties, acquisitions, tenant allowances, and dividends.

Our primary sources of cash are operating cash flow, refinancings of existing loans, equity previously raised from our rights offering, borrowings under our revolver and borrowings under our subordinated revolving credit facility and the funds from our demand deposit.

Our short-term (less than one year) liquidity requirements include recurring operating costs, capital expenditures, debt service requirements, and dividend requirements on our shares of common stock. We anticipate that these needs will be met with cash flows provided by operations and funds available under our Revolver.

Our long-term (greater than one year) liquidity requirements include scheduled debt maturities, capital expenditures to maintain, renovate and expand existing malls, property acquisitions, and development projects. Management anticipates that net cash provided by operating activities, the funds available under our Revolver and Subordinated Facility (as each is described below) and funds from our demand deposit will provide sufficient capital resources to meet our long-term liquidity requirements.

As of March 31, 2013, our combined contractual debt, excluding non-cash debt market rate adjustments, was approximately $1.2 billion. The aggregate principal and interest payments due on our outstanding indebtedness as of March 31, 2013 is approximately $69.7 million for the year ending 2013 and approximately $303.6 million for the year ending 2014.

Financings

Senior Secured Credit Facility. On the Spin-Off Date, we entered into a senior secured credit facility ("Senior Facility") with a syndicate of banks, as lenders, and Wells Fargo Bank, National Association, as administrative agent, and Wells Fargo Securities, LLC, RBC Capital Markets, LLC, and U.S. Bank National Association, as joint lead arrangers, that provided borrowings on a revolving basis of up to $50.0 million (the "Revolver") and a senior secured term loan (the "Term Loan" and together with the Revolver, the "Facilities") which provided an advance of approximately $433.5 million and is a direct obligation to us. The Facilities closed concurrently with the consummation of the spin-off and have a term of three years. During 2012, the outstanding balance on the Term Loan decreased from $433.5 million to $287.9 million due to the repayments on the Term Loan concurrent with the refinancing of the Pierre Bossier, Southland Center, and Animas Valley Malls. In addition, during 2012, the interest rate was renegotiated from LIBOR plus 5.0% (with a LIBOR floor of 1.0%) to LIBOR plus 4.5% (with no LIBOR floor). During 2013, we paid down an additional $100.0 million on our Term Loan and increased our Revolver from $50.0 million to $150.0 million in order to maintain the same level of liquidity. As of March 31, 2013, the outstanding balance on the Term Loan was $187.9 million and no amounts were drawn on the Revolver.

We are required to pay an unused fee, paid quarterly in arrears, related to the Revolver equal to 0.30% per year if the aggregate unused amount is greater than or equal to 50% of the Revolver or 0.25% per year if the aggregate unused amount is less that 50% of the Revolver.


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The Senior Facility has affirmative and negative covenants that are customary for a real estate loan, including, without limitation, restrictions on incurrence of indebtedness and liens on the mortgage collateral; restrictions on pledges; restrictions on subsidiary distributions; with respect to the mortgage collateral, limitations on our ability to enter into transactions including mergers, consolidations, sales of assets for less than fair market value and similar transactions; conduct of business; restricted distributions; transactions with affiliates; and limitation on speculative hedge agreements. In addition, we are required to comply with financial maintenance covenants relating to the following: (1) net indebtedness to value ratio, (2) liquidity,
(3) minimum fixed charge coverage ratio, (4) minimum tangible net worth, and
(5) minimum portfolio debt yield. Failure to comply with the covenants in the Senior Facility would result in a default under the credit agreement governing the Facilities and, absent a waiver or an amendment from our lenders, permit the acceleration of all outstanding borrowings under the Senior Facility, which would also result in a cross-default of our Subordinated Facility. As of March 31, 2013, we were in compliance with these financial maintenance covenants

Subordinated Revolving Credit Facility. On the Spin-Off Date we also entered into a subordinated unsecured revolving credit facility with a wholly-owned subsidiary of Brookfield Asset Management, Inc., a related party, that provides borrowings on a revolving basis of up to $100.0 million (the "Subordinated Facility"). The Subordinated Facility has a term of three years and six months and will bear interest at LIBOR (with a LIBOR floor of 1%) plus 8.50%. The default interest rate following a payment event of default under the Subordinated Facility will be 2.00% more than the then applicable interest rate. Interest will be payable monthly. In addition, we are required to pay a semi-annual revolving credit fee of $0.25 million. As of March 31, 2013, no amounts have been drawn from the Subordinated Facility.

Property-Level Debt. We have individual Property-Level Debt (the "Property-Level Debt") on 18 of our 32 assets, representing approximately $1,042.4 million (excluding $31.9 million of market rate adjustments). The Property-Level Debt has a weighted average interest rate of 5.25% and an average remaining term of 4.6 years. The Property-Level Debt is stand-alone (not cross-collateralized) first mortgage debt and is non-recourse with the exception of customary contingent guarantees/indemnities.

During January 2013 the Boulevard Mall was moved into special servicing. We are not in default on this loan as of March 31, 2013.

Redevelopment

We continue to evaluate and execute in the redevelopment of various malls within our portfolio. A component of our business strategy is to identify value creation initiatives for our properties and to then invest significant capital to reposition and refresh our properties. These redevelopment opportunities are typically completed in conjunction with leasing activity for that respective space. We anticipate funding our redevelopment projects with the net cash provided by operating activities, borrowings under our Revolver, borrowings under our Subordinated Revolving Credit Facility and the funds of our demand deposit.

We have started redevelopment projects at two of our malls, Lakeland Mall in Lakeland, FL, and Silver Lake Mall in Coeur D'Alene, ID. We anticipate investing approximately $18.2 million during the next nine months to renovate these malls to convert vacant anchor space and unproductive in-line space to space for tenants such as Cinemark Theaters, The Sports Authority, and Jo-Anns Fabrics.

Summary of Cash Flows

Three Months Ended March 31, 2013 compared to the Three Months Ended March 31, 2012

Cash Flows from Operating Activities

Net cash provided by operating activities was $11.0 million for the three months ended March 31, 2013, compared to $7.4 million for the three months ended March 31, 2012. The increase in cash available from operations is primarily related to the additional proceeds generated by our acquisitions of Grand Traverse Mall and the Mall at Turtle Creek in February 2012 and December 2012.

Cash Flows from Investing Activities

Net cash used in investing activities was $85.8 million for the three months ended March 31, 2013, compared to $(19.6) million for the three months ended March 31, 2012. Cash used for acquisition/development of real estate and property additions/improvements was $14.0 million for the three months ended March 31, 2013, compared to $7.9 million for the same period in 2012. During the three months ended March 31, 2013, we reduced our demand deposit by $110.0 million with Brookfield U.S. Holdings in order to pay down $100.0 million on our Term Loan.


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Cash Flows from Financing Activities

Net cash provided by (used in) financing activities was $(91.6) million for the three months ended March 31, 2013, compared to $207.0 million for the three months ended March 31, 2012.

Principal payments were $157.0 million for the three months ended March 31, 2013, compared to $397.2 million for the three months ended March 31, 2012. During the three months ended March 31, 2013, we also received $70.0 million in proceeds from refinancings / issuances of mortgage, notes, and loans payable as a result of our refinancing of the Lakeland Mall. During the three months ended March 31, 2012, we received $433.5 million in proceeds from the Term Loan.

Contractual Cash Obligations and Commitments



The following table aggregates our contractual cash obligations and commitments
as of March 31, 2013:



                      2013        2014        2015        2016        2017       Subsequent       Total
                                                        (In thousands)
Long-term
debt-principal(1)   $  21,726   $ 247,186   $ 209,784   $ 295,519   $ 149,222   $    306,875   $ 1,230,312
Interest
payments(2)            48,003      56,376      41,647      30,731      17,586         51,485       245,828
Operating lease
obligations               833       1,182       1,185       1,198       1,232          4,524        10,154
Total               $  70,562   $ 304,744   $ 252,616   $ 327,448   $ 168,040   $    362,884   $ 1,486,294



(1) Excludes $31.9 million of non-cash debt market rate adjustments.

(2) Based on rates as of March 31, 2013. Variable rates are based on LIBOR rate of 0.21%.

We lease land or buildings at certain properties from third parties. The leases generally provide us with a right of first refusal in the event of a proposed sale of the property by the landlord. Rental payments are expensed as incurred and have, to the extent applicable, been straight-lined over the term of the lease.

Off-Balance Sheet Financing Arrangements

We do not have any off-balance sheet financing arrangements.

REIT Requirements

In order to maintain our qualification as a real estate investment trust for federal income tax purposes, among other requirements, we must distribute or pay tax on 100% of our capital gains and we must distribute at least 90% of our ordinary taxable income to stockholders. To avoid current entity level U.S. federal income taxes, we plan to distribute 100% of our capital gains and ordinary income to our stockholders annually. We may not have sufficient liquidity to meet these distribution requirements. We have no present intention to pay any dividends on our common stock in the future other than in order to maintain our REIT status, of which dividends our board of directors may decide to pay in the form of cash, common stock or a combination of cash and common stock.

Seasonality

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

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, recoverable amounts of receivables, initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to acquisitions, impairment of long-lived assets, fair value of debt, and valuation of stock options granted. Actual results could differ from these and other estimates.


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Critical Accounting Policies

Critical accounting policies are those that are both significant to the overall presentation of our financial condition and results of operations and require . . .

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