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GGP > SEC Filings for GGP > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for GENERAL GROWTH PROPERTIES, INC.

Form 10-Q for GENERAL GROWTH PROPERTIES, INC.


6-Aug-2014

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

Overview

Our primary business is to be an owner and operator of best-in-class retail properties that provide an outstanding environment and experience for our communities, retailers, employees, consumers and shareholders. Our properties are predominantly located in the United States. As of June 30, 2014, we are the owner, either entirely or with joint venture partners, of 120 regional malls comprising approximately 126 million square feet of GLA.

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

We seek to increase long-term Company NOI (as defined below) growth through proactive management and leasing of our properties. Our leasing strategy is to identify and provide the right stores to have appropriate merchandise mix. We believe that the most significant operating factor affecting incremental cash flow and Company NOI is increased rents earned from tenants at our properties.
These rental revenue increases are primarily achieved by:

• increasing permanent occupancy;

• increasing rental revenues by leasing at higher rents than those expiring; and

• increasing tenant sales, which allow us to obtain higher rents, and in which we participate through overage rent.

Since June 30, 2013, our total occupancy has risen, but more importantly the level of long-term, or "permanent" occupancy, has increased from 89.1% as of June 30, 2013 to 90.8% as of June 30, 2014. During this same period, we have seen an increase in rents between the rent paid on expiring leases and the rent commencing under new leases, on a suite-to-suite basis. On a suite-to-suite basis, the leases commencing occupancy in 2014 exhibited initial rents that were 14.4% higher than the final rents paid on expiring leases.

We may recycle capital by strategically disposing assets and opportunistically investing in high quality retail properties. Controlling operating expenses by leveraging our scale to maximize synergies is a critical component to Company NOI growth.

We have identified approximately $2.2 billion of income producing redevelopment projects within our portfolio, over 80% of which is being invested into Class A malls. We currently expect to achieve returns of approximately 12% on projects that have opened and 8-10% on projects under construction or in our pipeline, which average 9-11% for all projects (first year stabilized cash on cost return) as they commence operations.

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


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Financial Overview

Our Company NOI (as defined below) increased 4.5% from $1,047.1 million for the six months ended June 30, 2013 to $1,094.1 million for the six months ended June 30, 2014. Operating income increased 9.1% from $395.8 million for the six months ended June 30, 2013 to $431.9 million for the six months ended June 30, 2014. Our Company FFO (as defined below) increased 13.7% from $518.7 million for the six months ended June 30, 2013 to $590.0 million for the six months ended June 30, 2014. Net income (loss) attributable to General Growth Properties, Inc. increased from $197.8 million for the six months ended June 30, 2013 to $301.8 million for the six months ended June 30, 2014.

See Non-GAAP Supplemental Financial Measures below for a discussion of Company NOI and Company FFO, along with a reconciliation to the comparable GAAP measures, Operating income and Net income (loss) attributable to General Growth Properties, Inc.

Operating Metrics

Same Store Operating Metrics

The following table summarizes selected operating metrics for our same store
portfolio.
                                            June 30, 2014 (1)     June 30, 2013 (1)       % Change
In-Place Rents per square foot (2)
Consolidated Properties                    $           67.93     $           66.01             2.91  %
Unconsolidated Properties                              79.94                 79.67             0.34  %
Total                                      $           71.43     $           69.84             2.28  %

Percentage Leased
Consolidated Properties                                 96.2 %                95.6 %         60 bps
Unconsolidated Properties                               97.0 %                96.5 %         50 bps
Total                                                   96.5 %                95.9 %         60 bps

Tenant Sales per square foot (3)
Consolidated Properties                    $             517     $             520            (0.58 )%
Unconsolidated Properties                                696                   664             4.82  %
Total                                      $             563     $             560             0.54  %

Tenant Sales Volume (All Less Anchors) (3)
Consolidated Properties                    $          13,390     $          13,277             0.85  %
Unconsolidated Properties                              6,655                 6,165             7.95  %
Total                                      $          20,045     $          19,442             3.10  %

(1) Metrics exclude one asset that is being de-leased in preparation for redevelopment.
(2) Represents average rent over the term consisting of base minimum rent and common area costs.
(3) Tenant Sales <10K SF is presented as sales per square foot in dollars, and Tenant Sales Volume (All Less Anchors) is presented as total sales volume in millions of dollars.

Lease Spread Metrics

The following table summarizes new and renewal leases that were scheduled to commence in 2014 and 2015 compared to expiring leases for the prior tenant in the same suite, for leases where the downtime between new and previous tenant was less than 24 months.


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                       Number        Square                     Initial Rent Per       Expiring Rent Per       Initial Rent
                      of Leases       Feet       Term/Years      Square Foot(1)         Square Foot(2)            Spread         % Change
Commencement 2014        1,314     3,893,234            6.3   $            62.93     $             55.02     $         7.91          14.4 %
Commencement 2015          115       425,030            7.0                73.51                   62.17              11.34          18.2 %
Total 2014/2015          1,429     4,318,264            6.4   $            63.97     $             55.72     $         8.25          14.8 %

(1) Represents initial rent over the term consisting of base minimum rent and common area costs.
(2) Represents expiring rent at end of lease consisting of base minimum rent and common area costs.

Results of Operations

Three months ended June 30, 2014 and 2013

The following table is a breakout of the components of minimum rents:
                                    Three Months Ended June 30,
                                      2014               2013            $ Change         % Change
                                      (Dollars in thousands)
Components of Minimum rents:
Base minimum rents              $     395,272       $     387,182     $      8,090              2.1 %
Lease termination income                2,993               2,179              814             37.4
Straight-line rent                     13,653              11,457            2,196             19.2
Above and below-market tenant
leases, net                           (21,499 )           (15,306 )         (6,193 )           40.5
Total Minimum rents             $     390,419       $     385,512     $      4,907              1.3 %

Base minimum rents increased $8.1 million primarily due to increases in occupancy and rent between June 30, 2013 and June 30, 2014, the acquisition of an additional 50% of Quail Springs Mall during the second quarter of 2013, and the acquisition of two operating properties during the fourth quarter of 2013. These increases in occupancy and rents and these acquisitions resulted in an additional $17.0 million of Base minimum rents during the three months ended June 30, 2014. These increases were partially offset by our contribution of The Grand Canal Shoppes and the Shoppes at the Palazzo into a joint venture that was formed with TIAACREF during the second quarter of 2013, which resulted in $8.9 million less base minimum rents in the second quarter of 2014 compared to the second quarter of 2013.

Tenant recoveries increased $11.6 million primarily due to higher real estate tax recoveries in the second quarter of 2014, which were driven by increased real estate tax expense.

Real estate taxes increased $6.4 million primarily due to prior year refunds and lower than expected assessments at various properties during 2013.

General and administrative expense increased $15.1 million primarily due to the $17.9 million loss from the settlement of litigation in the second quarter of 2014 (Note 16).

Interest and dividend income increased $4.6 million primarily due to $2.9 million of interest income from the note receivable recorded in conjunction with the sale of Aliansce (Note 13).

Interest expense decreased $11.4 million primarily due to our contribution of The Grand Canal Shoppes and the Shoppes at the Palazzo into a joint venture that was formed with TIAACREF during the second quarter of 2013, the redemption of $608.7 million of 6.75% unsecured corporate bonds due November 9, 2015 during the second quarter of 2013, and an increase in capitalized interest primarily related to Ala Moana.

The Gain from change in control of investment properties of $219.8 million in 2013 relates to our contribution of The Grand Canal Shoppes and the Shoppes at the Palazzo into a joint venture that was formed with TIAACREF of $200 million, and the


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purchase of our partner's interest in Quail Springs Mall, previously held in a joint venture, of $19.8 million, during the second quarter of 2013.

Loss on extinguishment of debt of $27.2 million in 2013 represents fees incurred for the early payoff of debt. We expensed $20.5 million of fees as a result of the early redemption of the $608.7 million of 6.75% unsecured corporate bonds due November 9, 2015. In addition, we expensed $6.6 million in financing fees resulting from the refinancing of the $1.5 billion secured corporate loan.

Equity in income of Unconsolidated Real Estate affiliates increased $5.3 million primarily due to our contribution of The Grand Canal Shoppes and the Shoppes at the Palazzo into a joint venture that was formed with TIAACREF during the second quarter of 2013, which was partially offset by transaction costs associated with the formation of two joint ventures during the second quarter of 2014.

Discontinued operations, net for the three months ended June 30, 2014, is primarily comprised of a $117.5 million gain related to the sale of one property (Note 4).

Six months ended June 30, 2014 and 2013

The following table is a breakout of the components of minimum rents:

                                    Six Months Ended June 30,
                                      2014              2013           $ Change         % Change
                                     (Dollars in thousands)
Components of Minimum rents:
Base minimum rents              $     791,660       $   782,181     $      9,479              1.2 %
Lease termination income                7,191             6,787              404              6.0
Straight-line rent                     25,221            24,806              415              1.7
Above and below-market tenant
leases, net                           (39,074 )         (34,367 )         (4,707 )           13.7
Total Minimum rents             $     784,998       $   779,407     $      5,591              0.7 %

Base minimum rents increased $9.5 million primarily due to increases in occupancy and rent between June 30, 2013 and June 30, 2014, the acquisition of an additional 50% of Quail Springs Mall during the second quarter of 2013, and the acquisition of two operating properties during the fourth quarter of 2013. These increases in occupancy and rents and these acquisitions resulted in an additional $35.8 million of Base minimum rents during the six months ended June 30, 2014. These increases were partially offset by our contribution of The Grand Canal Shoppes and the Shoppes at the Palazzo into a joint venture that was formed with TIAACREF during the second quarter of 2013, which resulted in $26.3 million less base minimum rents during the six months ended June 30, 2014 compared to the six months ended June 30, 2013.

Other revenue increased by $8.8 million primarily due to a settlement related to land sold to a municipality in the first quarter of 2014.

General and administrative expenses increased $15.8 million primarily due to the $17.9 million loss from the settlement of litigation in the second quarter of 2014 (Note 16).

Interest and dividend income increased $10.3 million primarily due to $8.2 million of interest income received from the note receivable recorded in conjunction with the sale of Aliansce (Note 13).

Interest expense decreased $22.5 million primarily due to our contribution of The Grand Canal Shoppes and the Shoppes at the Palazzo into a joint venture that was formed with TIAACREF during the second quarter of 2013, the 2013 redemption of $700.5 million of unsecured corporate bonds, and an increase in capitalized interest primarily related to Ala Moana.

The Gain on foreign currency represents foreign exchange gain on the note receivable denominated in Brazilian Reais recorded in conjunction with the sale of Aliansce (Note 13).

The Warrant liability adjustment for the six months ended June 30, 2013 represents the non-cash income or expense recognized as a result of the change in the fair value of the Warrant liability. We incurred a net Warrant liability adjustment of $40.5 million during the first quarter of 2013. This adjustment reflects our purchase of the Warrants from Fairholme and Blackstone, as the amount paid exceeded the liability by approximately $55 million. This was partially offset by the revaluation of the remaining


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Warrants as of March 28, 2013. As of March 28, 2013, an amendment to the Warrant agreement changed the classification of the Warrants owned by Brookfield from a liability to a component of permanent equity. As a result, the Warrants have not been revalued after March 28, 2013. Refer to Note 9 for a discussion of transactions related to the Warrants.

The Gain from change in control of investment properties of $219.8 million in 2013 relates to our contribution of The Grand Canal Shoppes and The Shoppes at the Palazzo into a joint venture, of $200 million, and the purchase of our partner's interest in Quail Springs Mall, previously held in a joint venture, of $19.8 million.

Loss on extinguishment of debt of $36.5 million in 2013 represents fees incurred for the early payoff of debt. We expensed $20.5 million of fees as a result of the early redemption of the $608.7 million of 6.75% unsecured corporate bonds due November 9, 2015. In addition, we expensed $6.6 million in financing fees resulting from the refinancing of the $1.5 billion secured corporate loan, $3.6 million as a result of the early redemption of $91.8 million of 5.38% unsecured corporate bonds due November 26, 2013, and $5.8 million as a result of the early payoff of mortgage debt at one operating property.

Discontinued operations, net for the six months ended June 30, 2014 is primarily comprised of a $117.5 million gain related to the sale of one property, and a $66.7 million Gain on extinguishment of debt related to a lender-directed sale of one property that was previously transferred to a special servicer. Discontinued operations, net for the six months ended June 30, 2013 is comprised of a $25.9 million Gain on extinguishment of debt related to a lender-directed sale of one property that was previously transferred to a special servicer (Note 4).

Liquidity and Capital Resources

Our primary source of cash is from the ownership and management of our properties. We may also raise cash from refinancings or borrowings under our revolving credit facility. Our primary uses of cash include payment of operating expenses and capital, working capital, debt service, reinvestment in and redevelopment of properties, tenant allowances and dividends.

We anticipate maintaining financial flexibility by managing our future maturities, amortization of debt, cross collateralizations and corporate guarantees, improving operations and providing the necessary capital to fund growth. We believe that we currently have sufficient liquidity to satisfy all of our commitments in the form of $242.0 million of consolidated unrestricted cash and $918.2 million of available credit under our credit facility as of June 30, 2014, as well as anticipated cash provided by operations.

Our key financing and capital raising objectives include:

•to refinance our maturing debt and certain debt that is prepayable without penalty,
•to manage future debt maturities coming due in any one year; and
•to reduce the amount of debt that is recourse to us.

We may also raise capital through public or private issuances of debt securities, preferred stock, common stock, common units of GGPOP or other capital raising activities.

We executed the following refinancing and capital transactions (at our proportionate share):

•acquired 27.6 million of GGP common shares held by Pershing Square Capital Management, L.P. at $20.12 per share for a total price of approximately $556 million, funded by a draw on our Facility;

•completed $1.2 billion of secured financings, lowering the average interest rate 130 basis points from 4.8% to 3.5%, lengthening our average term-to-maturity from 1.7 years to 7.1 years, and generating net proceeds of $502.4 million; and

•amended our $1.4 billion corporate loan secured by cross-collateralized mortgages on 14 properties, lowering the interest rate from LIBOR plus 2.50% to LIBOR plus 1.75%, thus reducing our annual interest expense by $10.4 million. The loan matures on April 26, 2016, and then after, has two one-year maturity date extension options.

During the six months ended June 30, 2014, the Tax Court entered an adverse opinion in our ongoing tax indemnification litigation. As a result, we may pay approximately $202 million in tax and related interest in the third or fourth quarter of 2014 (Note 16).


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As of June 30, 2014, we have $2.0 billion of debt pre-payable without penalty. We may pursue opportunities to refinance this debt at lower interest rates and longer maturities.

As a result of our financing efforts in 2014, we have reduced the amount of debt due in the next three years from $1.9 billion to $1.1 billion, representing 6.2% of our total debt at maturity. The maximum amount due in any one of the next ten years is no more than $3.0 billion or approximately 16.7% of our total debt at maturity. In 2022, the $3.0 billion of debt maturing includes $1.4 billion for Ala Moana.

As of June 30, 2014, our proportionate share of total debt aggregated $19.3 billion. Our total debt includes our consolidated debt of $16.1 billion, of which $15.8 billion is secured and $215.9 million is corporate unsecured, and $81.8 million is outstanding on the Facility. Our total debt also includes $3.3 billion of our share of the secured debt of our Unconsolidated Real Estate Affiliates. Of our proportionate share of total debt, $2.0 billion is recourse to the Company or its subsidiaries (including the Facility) due to guarantees or other security provisions for the benefit of the note holder.

The following table illustrates the scheduled payments for our proportionate share of total debt as of June 30, 2014. The $206.2 million of Junior Subordinated Notes are due in 2036, but we may redeem them any time after April 30, 2011 (Note 7). As we do not expect to redeem the notes prior to maturity, they are included in the consolidated debt maturing subsequent to 2018.

            Consolidated(1)      Unconsolidated(1)
                    (Dollars in thousands)
2014       $          75,534    $            13,339
2015                 513,537                199,841
2016                 719,114                 27,194
2017                 863,066                334,054
2018               1,913,556                232,072
Subsequent        11,892,741              2,555,968
           $      15,977,548    $         3,362,468

(1) Excludes $19.1 million of adjustments related to special improvement district liabilities and debt market rate adjustment.

We generally believe that we will be able to extend the maturity date, repay or refinance the consolidated debt that is scheduled to mature in 2014. We also believe that the joint ventures will be able to refinance the debt of our Unconsolidated Real Estate Affiliates upon maturity; however there can be no assurance that we will be able to refinance or restructure such debt on acceptable terms or otherwise, or that joint venture operations or contributions by us and/or our partners will be sufficient to repay such loans.

Acquisitions and Joint Venture Activity

From time-to-time we may acquire whole or partial interests in high-quality retail properties that are consistent with our strategy of owning and operating best-in-class retail properties. Such assets provide long-term embedded growth or potential redevelopment opportunities.

On June 27, 2014, we contributed $106.6 million to a joint venture that acquired acquired 685 5th Avenue in New York, New York for a gross purchase price of $521.4 million with $340.0 million in gross property-level financing. The property comprises approximately 25,000 square feet of retail space and 115,000 square feet of office space. We have a 50% interest in the joint venture and account for the joint venture under the equity method of accounting because we share control over major decisions with our joint venture partner, which has substantive participating rights. The property will be accounted for as an Unconsolidated Real Estate Affiliate, and is recorded within Investment in and loans to/from Unconsolidated Real Estate Affiliates on our Consolidated Balance Sheets (Note 6). In connection with the acquisition, we provided an $85.3 million loan to our joint venture partner (Note 13).

The Company also entered into an agreement to acquire a 50% interest in approximately 58,000 square feet of retail space at 530 5th Avenue in New York City for a gross purchase price of approximately $295 million (approximately $147.5 million at our proportionate share). The acquisition is expected to close in the second half of 2014.


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The Company also entered into an agreement to acquire a 50% interest in 218 West 57th Street in New York City for a gross purchase price of $81.5 million ($40.8 million at our proportionate share). The property comprises approximately 35,000 square feet of retail space. The acquisition is expected to close in mid-2016.

Warrants and Brookfield Investor Ownership

Brookfield owns or manages on behalf of third parties all of the Company's remaining outstanding Warrants (Note 9), which are exercisable into approximately 52 million common shares of the Company at a weighted-average exercise price of $9.23 per share, assuming net share settlement. The Warrants will continue to adjust for dividends paid by the Company.

As of February 18, 2014, Brookfield's potential ownership of the Company (assuming full share settlement of the Warrants) is 40.9%, which is stated in their Form 13D filed on the same date. If Brookfield held or managed this same ownership through the maturity date of the Warrants, assuming: (a) GGP's common stock price increased $10 per share and (b) the Warrants were adjusted for the impact of regular dividends, we estimate that their ownership would be 39.8% of the Company under net share settlement, and 41.3% of the company under full share settlement.

Redevelopments

We are currently redeveloping several consolidated and unconsolidated properties primarily to convert large-scale anchor boxes into smaller leasable areas and to create new in-line retail space and new restaurant venues. The execution of these redevelopment projects within our portfolio was identified as providing compelling risk-adjusted returns on investment.

We have identified approximately $2.2 billion of income producing redevelopment projects within our portfolio, over 80% of which is being invested into Class A malls. We plan to fund these redevelopments with available cash flow, construction financing, and proceeds from debt refinancings. We continue to evaluate a number of other redevelopment projects to further enhance the quality of our assets. We currently expect to achieve returns that average 9-11% for all projects (cash on cost, first year stabilized). Expected returns are based on the completion of current and future redevelopment projects, and the success of the leasing and asset management plans in place for each project. Expected returns are subject to a number of variables, risks, and uncertainties including those disclosed within Item 1A of our Annual Report. We also refer the reader to our disclosure related to forward-looking statements, below. The following table illustrates our planned redevelopments:


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                                                            GGP's Total             GGP's             Expected        Expected
                                                          Projected Share       Investment to          Return         Project
Property             Description          Ownership %         of Cost             Date (1)        on Investment (2)   Opening

Major Development Summary (in millions,
at share unless otherwise noted)

Open
Northridge     The Sports Authority,
Northridge, CA Yardhouse and Plaza           100%       $            12.2     $          11.3            14%            Open

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