10-Q 1 a12-19983_110q.htm 10-Q

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, 2012

 

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

 

For the Transition Period from              to             

 

COMMISSION FILE NUMBER 1-34948

 

GENERAL GROWTH PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

27-2963337

(State or other jurisdiction of

 

(I.R.S. Employer

incorporating or organization)

 

Identification Number)

 

110 N. Wacker Dr., Chicago, IL

 

60606

(Address of principal executive offices)

 

(Zip Code)

 

(312) 960-5000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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

 

Indicate by checkmark whether  the Registrant has filed all documents and reports required to be filed by Sections 12,13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. x Yes o No

 

The number of shares of Common Stock, $.01 par value, outstanding on November 1, 2012 was 938,881,500.

 

GENERAL GROWTH PROPERTIES, INC.

 

 

 



Table of Contents

 

INDEX

 

 

 

PAGE

 

 

NUMBER

 

 

 

Part I

FINANCIAL INFORMATION

 

 

 

 

 

Item 1:

Consolidated Financial Statements (Unaudited)

 

 

 

Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011

3

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2012 and 2011

4

 

 

Consolidated Statements of Equity for the nine months ended September  30, 2012 and 2011

5

 

 

Consolidated Statements of Cash Flows for the nine months ended September  30, 2012 and 2011

6

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

8

 

 

Note 1: Organization

8

 

 

Note 2: Summary of Significant Accounting Policies

9

 

 

Note 3: Acquisitions and Intangibles

13

 

 

Note 4: Dispositions, Discontinued Operations and Gains (Losses) on Dispositions of Interests in Operating Properties

14

 

 

Note 5: Unconsolidated Real Estate Affiliates

15

 

 

Note 6: Mortgages, Notes and Loans Payable

17

 

 

Note 7: Income Taxes

19

 

 

Note 8: Warrant Liability

19

 

 

Note 9: Equity and Redeemable Noncontrolling Interests

21

 

 

Note 10: Earnings Per Share

23

 

 

Note 11: Stock-Based Compensation Plans

24

 

 

Note 12: Prepaid Expenses and Other Assets

25

 

 

Note 13: Accounts Payable and Accrued Expenses

26

 

 

Note 14: Litigation

26

 

 

Note 15: Commitments and Contingencies

27

 

 

Note 16: Subsequent Events

27

 

 

 

 

 

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

 

 

Liquidity and Capital Resources

33

 

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

39

 

Item 4:

Mine Safety Disclosures

40

 

Item 5:

Controls and Procedures

40

 

 

 

 

Part II

OTHER INFORMATION

 

 

Item 1:

Legal Proceedings

40

 

Item 1A:

Risk Factors

41

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

41

 

Item 3:

Defaults Upon Senior Securities

41

 

Item 5:

Other Information

41

 

Item 6:

Exhibits

41

 

SIGNATURE

43

 

EXHIBIT INDEX

44

 

2



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

 

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(Dollars in thousands, except share amounts)

 

Assets:

 

 

 

 

 

Investment in real estate:

 

 

 

 

 

Land

 

$

4,303,329

 

$

4,623,944

 

Buildings and equipment

 

18,847,928

 

19,837,750

 

Less accumulated depreciation

 

(1,286,753

)

(974,185

)

Construction in progress

 

383,977

 

135,807

 

Net property and equipment

 

22,248,481

 

23,623,316

 

Investment in and loans to/from Unconsolidated Real Estate Affiliates

 

2,717,079

 

3,052,973

 

Net investment in real estate

 

24,965,560

 

26,676,289

 

Cash and cash equivalents

 

637,946

 

572,872

 

Accounts and notes receivable, net

 

243,503

 

218,749

 

Deferred expenses, net

 

176,377

 

170,012

 

Prepaid expenses and other assets

 

1,398,494

 

1,805,535

 

Assets held for disposition

 

 

74,694

 

Total assets

 

$

27,421,880

 

$

29,518,151

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Mortgages, notes and loans payable

 

$

16,074,015

 

$

17,143,014

 

Accounts payable and accrued expenses

 

1,271,364

 

1,445,738

 

Dividend payable

 

106,312

 

526,332

 

Deferred tax liabilities

 

22,520

 

29,220

 

Tax indemnification liability

 

303,750

 

303,750

 

Junior Subordinated Notes

 

206,200

 

206,200

 

Warrant liability

 

1,399,043

 

985,962

 

Liabilities held for disposition

 

 

74,795

 

Total liabilities

 

19,383,204

 

20,715,011

 

 

 

 

 

 

 

Redeemable noncontrolling interests:

 

 

 

 

 

Preferred

 

134,531

 

120,756

 

Common

 

132,020

 

103,039

 

Total redeemable noncontrolling interests

 

266,551

 

223,795

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

Redeemable Preferred Stock: as of September 30, 2012 and December 31, 2011, $0.01 par value, 500,000 shares authorized, none issued and outstanding

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Common stock: as of September 30, 2012, $0.01 par value, 11,000,000,000 shares authorized and 938,619,521 shares issued and outstanding; as of December 31, 2011, $0.01 par value, 11,000,000,000 shares authorized and 935,307,487 shares issued and outstanding

 

9,387

 

9,353

 

Additional paid-in capital

 

10,417,657

 

10,405,318

 

Retained earnings (accumulated deficit)

 

(2,661,759

)

(1,883,569

)

Accumulated other comprehensive loss

 

(82,026

)

(47,773

)

Total stockholders’ equity

 

7,683,259

 

8,483,329

 

Noncontrolling interests in consolidated real estate affiliates

 

88,866

 

96,016

 

Total equity

 

7,772,125

 

8,579,345

 

Total liabilities and equity

 

$

27,421,880

 

$

29,518,151

 

 

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

 

3



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(Dollars in thousands, except per share amounts)

 

Revenues:

 

 

 

 

 

 

 

 

 

Minimum rents

 

$

401,259

 

$

383,541

 

$

1,175,365

 

$

1,158,479

 

Tenant recoveries

 

184,869

 

189,942

 

542,784

 

547,157

 

Overage rents

 

12,835

 

12,823

 

34,230

 

29,291

 

Management fees and other corporate revenues

 

17,823

 

14,188

 

55,646

 

43,775

 

Other

 

16,387

 

16,488

 

49,802

 

47,357

 

Total revenues

 

633,173

 

616,982

 

1,857,827

 

1,826,059

 

Expenses:

 

 

 

 

 

 

 

 

 

Real estate taxes

 

59,258

 

56,530

 

174,797

 

173,898

 

Property maintenance costs

 

18,758

 

21,419

 

62,102

 

71,128

 

Marketing

 

8,085

 

7,639

 

22,497

 

19,937

 

Other property operating costs

 

101,890

 

107,631

 

286,170

 

290,629

 

Provision for doubtful accounts

 

1,370

 

1,078

 

3,097

 

2,295

 

Property management and other costs

 

38,903

 

45,455

 

119,350

 

137,517

 

General and administrative

 

10,045

 

15,441

 

31,675

 

18,067

 

Provision for impairment

 

98,288

 

 

98,288

 

 

Depreciation and amortization

 

208,833

 

226,360

 

612,188

 

675,536

 

Total expenses

 

545,430

 

481,553

 

1,410,164

 

1,389,007

 

Operating income

 

87,743

 

135,429

 

447,663

 

437,052

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

766

 

680

 

2,307

 

1,912

 

Interest expense

 

(204,917

)

(218,932

)

(607,915

)

(672,936

)

Warrant liability adjustment

 

(123,381

)

337,781

 

(413,081

)

319,460

 

Gain from change in control of investment properties

 

 

 

18,547

 

 

Loss before income taxes, equity in income (loss) of Unconsolidated Real Estate Affiliates, discontinued operations and allocation to noncontrolling interests

 

(239,789

)

254,958

 

(552,479

)

85,488

 

Provision for income taxes

 

(2,449

)

(3,954

)

(5,553

)

(7,882

)

Equity in income (loss) of Unconsolidated Real Estate Affiliates

 

22,054

 

9,833

 

39,849

 

(2,534

)

Income (loss) from continuing operations

 

(220,184

)

260,837

 

(518,183

)

75,072

 

Discontinued operations

 

13,576

 

(4,276

)

10,982

 

(13,688

)

Net (loss) income

 

(206,608

)

256,561

 

(507,201

)

61,384

 

Allocation to noncontrolling interests

 

(1,279

)

(4,511

)

(6,236

)

(6,718

)

Net (loss) income attributable to common stockholders

 

$

(207,887

)

$

252,050

 

$

(513,437

)

$

54,666

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings (Loss) Per Share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.24

)

$

0.27

 

$

(0.56

)

$

0.07

 

Discontinued operations

 

0.01

 

 

0.01

 

(0.01

)

Total basic earnings (loss) per share

 

$

(0.23

)

$

0.27

 

$

(0.55

)

$

0.06

 

 

 

 

 

 

 

 

 

 

 

Diluted Loss Per Share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.24

)

$

(0.08

)

$

(0.56

)

$

(0.26

)

Discontinued operations

 

0.01

 

 

0.01

 

(0.01

)

Total diluted loss per share

 

$

(0.23

)

$

(0.08

)

$

(0.55

)

$

(0.27

)

Dividends declared per share

 

$

0.11

 

$

0.10

 

$

0.31

 

$

0.30

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss), Net:

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(206,608

)

$

256,561

 

$

(507,201

)

$

61,384

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

Net unrealized losses on financial instruments

 

 

 

 

(1

)

Foreign currency translation

 

(842

)

(85,935

)

(35,202

)

(43,055

)

Unrealized gains (losses) on available-for-sale securities

 

606

 

(8

)

716

 

(3

)

Other comprehensive loss

 

(236

)

(85,943

)

(34,486

)

(43,059

)

Comprehensive (loss) income

 

(206,844

)

170,618

 

(541,687

)

18,325

 

Comprehensive loss allocated to noncontrolling interests

 

(1,284

)

(3,899

)

(6,003

)

(6,416

)

Comprehensive (loss) income, net attributable to common stockholders

 

$

(208,128

)

$

166,719

 

$

(547,690

)

$

11,909

 

 

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

 

4



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

 

CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED)

 

 

 

 

 

 

 

Retained

 

 

 

Noncontrolling

 

 

 

 

 

 

 

Additional

 

Earnings

 

Accumulated Other

 

Interests in

 

 

 

 

 

Common

 

Paid-In

 

(Accumulated

 

Comprehensive

 

Consolidated Real

 

Total

 

 

 

Stock

 

Capital

 

Deficit)

 

Income (Loss)

 

Estate Affiliates

 

Equity

 

 

 

(Dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2011

 

$

9,419

 

$

10,681,586

 

$

(612,075

)

$

172

 

$

102,647

 

$

10,181,749

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

54,666

 

 

 

(600

)

54,066

 

Distributions to noncontrolling interests in consolidated Real Estate Affiliates

 

 

 

 

 

 

 

 

 

(4,759

)

(4,759

)

Issuance of common stock - payment of dividend (22,256,121 common shares)

 

223

 

(244

)

21

 

 

 

 

 

 

Restricted stock grant, net of forfeitures and compensation expense ((282,320) common shares)

 

(3

)

8,593

 

 

 

 

 

 

 

8,590

 

Stock options exercised (97,987 common shares)

 

1

 

488

 

 

 

 

 

 

 

489

 

Purchase and cancellation of common shares ((34,906,069) common shares)

 

(349

)

(388,445

)

(154,221

)

 

 

 

 

(543,015

)

Cash dividends reinvested (DRIP) in stock (4,846,784 common shares)

 

48

 

80,660

 

 

 

 

 

 

 

80,708

 

Other comprehensive loss

 

 

 

 

 

 

 

(42,757

)

 

 

(42,757

)

Cash distributions declared ($0.30 per share)

 

 

 

(16

)

(283,297

)

 

 

 

 

(283,313

)

Cash redemptions for common units in excess of carrying value

 

 

 

(648

)

 

 

 

 

 

 

(648

)

Adjustment for noncontrolling interest in operating partnership

 

 

 

12,984

 

 

 

 

 

 

 

12,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2011

 

$

9,339

 

$

10,394,958

 

$

(994,906

)

$

(42,585

)

$

97,288

 

$

9,464,094

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2012

 

$

9,353

 

$

10,405,318

 

$

(1,883,569

)

$

(47,773

)

$

96,016

 

$

8,579,345

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

(513,437

)

 

 

(115

)

(513,552

)

Distributions to noncontrolling interests in consolidated Real Estate Affiliates

 

 

 

 

 

 

 

 

 

(7,035

)

(7,035

)

Restricted stock grant, net of forfeitures and compensation expense ((48,125) common shares)

 

 

 

6,632

 

 

 

 

 

 

 

6,632

 

Employee stock purchase program (98,076 common shares)

 

1

 

1,604

 

 

 

 

 

 

 

1,605

 

Stock options exercised (396,064 common shares)

 

4

 

7,557

 

 

 

 

 

 

 

7,561

 

Cash dividends reinvested (DRIP) in stock (2,866,019 common shares)

 

29

 

43,810

 

 

 

 

 

 

 

43,839

 

Other comprehensive loss

 

 

 

 

 

 

 

(34,253

)

 

 

(34,253

)

Cash distributions declared ($0.31 per share)

 

 

 

 

 

(290,797

)

 

 

 

 

(290,797

)

Cash redemptions for common units in excess of carrying value

 

 

 

(409

)

 

 

 

 

 

 

(409

)

Adjustment for noncontrolling interest in operating partnership

 

 

 

(46,855

)

 

 

 

 

 

 

(46,855

)

Adjustment to dividend for RPI Spin-Off

 

 

 

 

 

26,044

 

 

 

 

 

26,044

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2012

 

$

9,387

 

$

10,417,657

 

$

(2,661,759

)

$

(82,026

)

$

88,866

 

$

7,772,125

 

 

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

 

5



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net (loss) income

 

$

(507,201

)

$

61,384

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

Equity in (income) loss of Unconsolidated Real Estate Affiliates

 

(39,849

)

2,534

 

Distributions received from Unconsolidated Real Estate Affiliates

 

30,021

 

21,996

 

Provision for doubtful accounts

 

3,264

 

4,733

 

Depreciation and amortization

 

621,388

 

755,152

 

Amortization/write-off of deferred finance costs

 

3,576

 

1,925

 

Accretion/write-off of debt market rate adjustments

 

(42,446

)

(57,056

)

Amortization of intangibles other than in-place leases

 

79,504

 

104,691

 

Straight-line rent amortization

 

(51,049

)

(78,272

)

Gain on dispositions

 

(13,037

)

(1,822

)

Gain from change in control of investment properties

 

(18,547

)

 

Gain on extinguishment of debt

 

(9,911

)

 

Provisions for impairment

 

118,588

 

 

Warrant liability adjustment

 

413,081

 

(319,460

)

Net changes:

 

 

 

 

 

Accounts and notes receivable

 

31,041

 

(4,628

)

Prepaid expenses and other assets

 

(1,104

)

34,115

 

Deferred expenses

 

(34,838

)

(14,936

)

Restricted cash

 

62,652

 

15,681

 

Accounts payable and accrued expenses

 

(48,870

)

(123,001

)

Other, net

 

10,994

 

(7,234

)

Net cash provided by operating activities

 

607,257

 

395,802

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Acquisition/development of real estate and property additions/improvements

 

(584,246

)

(180,506

)

Proceeds from sales of investment properties

 

194,269

 

446,765

 

Proceeds from sales of investment in Unconsolidated Real Estate Affiliates

 

 

74,906

 

Contributions to Unconsolidated Real Estate Affiliates

 

(62,139

)

(55,999

)

Distributions received from Unconsolidated Real Estate Affiliates in excess of income

 

289,366

 

49,147

 

Decrease (increase) in restricted cash

 

6,195

 

(87,822

)

Net cash (used in) provided by investing activities

 

(156,555

)

246,491

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from refinance/issuance of mortgages, notes and loans payable

 

3,892,525

 

2,145,848

 

Principal payments on mortgages, notes and loans payable

 

(4,022,632

)

(2,600,840

)

Deferred finance costs

 

(27,254

)

(20,032

)

Cash distributions paid to common stockholders

 

(281,089

)

(225,830

)

Cash distributions reinvested (DRIP) in common stock

 

43,839

 

80,708

 

Cash distributions paid to holders of common units

 

(1,543

)

(6,802

)

Purchase and cancellation of common shares

 

 

(543,015

)

Other, net

 

10,526

 

(952

)

Net cash used in financing activities

 

(385,628

)

(1,170,915

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

65,074

 

(528,622

)

Cash and cash equivalents at beginning of period

 

572,872

 

1,021,311

 

Cash and cash equivalents at end of period

 

$

637,946

 

$

492,689

 

 

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

 

6



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(UNAUDITED)

 

 

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

631,844

 

$

719,903

 

Interest capitalized

 

780

 

1,704

 

Income taxes paid

 

2,598

 

8,222

 

Reorganization items paid

 

 

128,070

 

Third party property exchange

 

 

44,672

 

Non-Cash Transactions:

 

 

 

 

 

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

 

$

1,170

 

$

(11,463

)

Debt payoffs via deeds in-lieu

 

 

161,524

 

Note receivable related to property sale

 

17,000

 

 

Rouse Properties, Inc. Dividend:

 

 

 

 

 

Adjustment to dividend for RPI Spin-off

 

(26,044

)

 

Non-Cash Distribution of RPI Spin-off:

 

 

 

 

 

Assets

 

1,554,486

 

 

Liabilities and equity

 

(1,554,486

)

 

Non-Cash Sale of Property to RPI:

 

 

 

 

 

Assets

 

63,672

 

 

Liabilities

 

(63,672

)

 

Non-Cash Acquisition of The Oaks and Westroads:

 

 

 

 

 

Assets

 

218,071

 

 

Liabilities and equity

 

(218,071

)

 

Decrease in assets and liabilities resulting from the contribution of a wholly owned mall into a newly formed unconsolidated joint venture

 

 

 

 

 

Assets

 

 

(336,744

)

Liabilities and equity

 

 

(238,126

)

 

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

 

7



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

NOTE 1        ORGANIZATION

 

Readers of this Quarterly Report should refer to the Company’s (as defined below) audited consolidated financial statements for the year ended December 31, 2011 which are included in the Company’s annual report on Form 10-K (the “Annual Report”) for the fiscal year ended December 31, 2011, and as recast in the Form 8-K filed on June 27, 2012, (Commission File No. 1-34948), as certain footnote disclosures which would substantially duplicate those contained in our Annual Report have been omitted from this Quarterly Report.  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”, the “Successor” or the “Company”), a Delaware corporation, was organized in July 2010 and is a self-administered and self-managed real estate investment trust, referred to as a “REIT”.  GGP is the successor registrant, by merger, on November 9, 2010 to GGP, Inc. (the “Predecessor”).  The Predecessor had filed for bankruptcy protection under Chapter 11 of Title 11 of the United States Code (“Chapter 11”) in the Southern District of New York on April 16, 2009 and emerged from bankruptcy, pursuant to a plan of reorganization (the “Plan”) on November 9, 2010.  In these notes, the terms “we,” “us” and “our” refer to GGP and its subsidiaries or, in certain contexts, the Predecessor and its subsidiaries.

 

GGP, through its subsidiaries and affiliates, operates, manages, develops and acquires retail and other rental properties, primarily regional malls, which are predominantly located throughout the United States. GGP also holds assets in Brazil through investments in Unconsolidated Real Estate Affiliates (as defined below).

 

Substantially all of our business is conducted through GGP Limited Partnership (the “Operating Partnership” or “GGPLP”).   GGPLP owns an interest in all retail and other rental properties that are part of the consolidated financial statements of GGP.  As of September 30, 2012, GGP holds approximately a 99% common equity ownership (without giving effect to the potential conversion of the Preferred Units as defined below) of the Operating Partnership, while the remaining 1% is held by limited partners that indirectly include family members of the original stockholders of the Predecessor and certain previous contributors of properties to the Operating Partnership.

 

The Operating Partnership also has preferred units of limited partnership interest (the “Preferred Units”) outstanding.  The terms of the Preferred Units provide that the Preferred Units are convertible into Common Units which then are redeemable for cash or, at our option, shares of GGP common stock (Note 9).

 

In addition to holding ownership interests in various joint ventures, the Operating Partnership generally conducts its operations through the following subsidiaries:

 

·      GGP-TRC, LLC (“TRCLLC”), formerly known as The Rouse Company, LLC, which has ownership interests in certain Consolidated Properties and Unconsolidated Properties (each as defined below) and is the borrower of certain unsecured bonds (Note 6).

 

·      General Growth Management, Inc. (“GGMI”), a taxable REIT subsidiary (a “TRS”), which manages, leases, and performs various services for some of our Unconsolidated Real Estate Affiliates (defined below).  GGMI also performs marketing and strategic partnership services at all of our Consolidated Properties.

 

In this Quarterly Report, we refer to our ownership interests in properties in which we own a majority or controlling interest and, as a result, are consolidated under accounting principles generally accepted in the United States of America (“GAAP”) as the “Consolidated Properties.”  We also hold some properties through joint venture entities in which we own a noncontrolling interest (“Unconsolidated Real Estate Affiliates”) and we refer to those properties as the “Unconsolidated Properties”.

 

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Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

NOTE 2        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation and Basis of Presentation

 

The accompanying consolidated financial statements include the accounts of GGP, our subsidiaries and joint ventures in which we have a controlling interest. For consolidated joint ventures, the noncontrolling partner’s share of the assets, liabilities and operations of the joint ventures (generally computed as the joint venture partner’s ownership percentage) is included in noncontrolling interests in Consolidated Real Estate Affiliates as permanent equity of the Company. All significant intercompany balances and transactions have been eliminated.

 

We operate in a single reportable segment referred to as our retail and other segment, which includes the operation, development and management of retail and other rental properties, primarily regional malls.  Our portfolio of regional malls represents a collection of retail properties that are targeted to a range of market sizes and consumer tastes.  Each of our operating properties is considered a separate operating segment, as each property earns revenues and incurs expenses, individual operating results are reviewed and discrete financial information is available.  We do not distinguish or group our consolidated operations based on geography, size or type. Further, all material operations are within the United States and no customer or tenant comprises more than 10% of consolidated revenues.  As a result, the Company’s operating properties are aggregated into a single reportable segment.

 

The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with GAAP and in conformity with the rules and regulations of the SEC applicable to interim financial information. As such, certain information and footnote disclosures normally included in complete annual financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC.

 

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, 2012 are not necessarily indicative of the results to be obtained for the full fiscal year.

 

Reclassifications

 

Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the current period presentation as amounts included on the Consolidated Statements of Operations and Comprehensive Income (Loss) for properties sold have been reclassified to discontinued operations for all periods presented.

 

In addition, three properties previously classified as held for sale were reclassified as held for use in the first quarter of 2012.  These properties are presented within continuing operations for all periods presented in the accompanying consolidated financial statements (Note 4).

 

In addition, prior period disclosures related to the Consolidated Statements of Operations and Comprehensive Income (Loss) in the accompanying footnotes have been adjusted for the impacts of discontinued operations.

 

Transactions with Affiliates

 

Management fees and other corporate revenues primarily represent management and leasing fees, development fees, financing fees and fees for other ancillary services performed for the benefit of certain of the Unconsolidated Real Estate Affiliates and are reported at 100% of the revenue earned from the joint venture in management fees and other corporate revenues on our Consolidated Statements of Operations and Comprehensive Income (Loss).  Our share of the management fee expense incurred by the Unconsolidated Real Estate Affiliates is reported within equity in income of Unconsolidated Real Estate Affiliates on our Consolidated Statements of Operations and Comprehensive Income (Loss) and in property management and other costs in the Condensed Combined Statements of Income in Note 5.  The following table summarizes the management fees from affiliates and our share of the management fee expense:

 

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Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Management fees from affiliates

 

$

17,565

 

$

14,177

 

$

54,445

 

$

43,363

 

Management fee expense

 

(5,370

)

(5,441

)

(17,037

)

(16,171

)

Net management fees from affiliates

 

$

12,195

 

$

8,736

 

$

37,408

 

$

27,192

 

 

In connection with the spin-off of Rouse Properties, Inc. (“RPI Spin-Off”), we have entered into a Transition Services Agreement (“TSA”) with RPI.  In accordance with the TSA, we have agreed to provide legal and other services to RPI for established fees, which were not material for the three and nine months ended September 30, 2012.

 

Acquisitions of Operating Properties

 

Acquisitions of properties are accounted for utilizing the acquisition method of accounting and, accordingly, the results of operations of acquired properties were included in the results of operations from the respective dates of acquisition.  Estimates of future cash flows and other valuation techniques are used to allocate the purchase price of acquired property between land, buildings and improvements, equipment, debt liabilities assumed and identifiable intangible assets and liabilities such as amounts related to in-place tenant leases, acquired above and below-market tenant and ground leases and tenant relationships. No significant value had been ascribed to the tenant relationships (Note 3).

 

Impairment

 

Operating properties

 

Accounting for the impairment of long-lived assets requires 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 properties for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

 

Impairment indicators are assessed separately for each property and include, but are not limited to, significant decreases in real estate property net operating income, significant decreases in occupancy percentage, debt maturities, management’s intent with respect to the properties and prevailing market conditions.

 

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

 

If an indicator of potential impairment exists, the property is tested for recoverability by comparing its carrying amount to the estimated future undiscounted cash flows.  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 properties.  Although the carrying amount may exceed the estimated fair value of certain properties, a real estate asset is only considered to be impaired when its carrying amount cannot be recovered through estimated future undiscounted cash flows.  To the extent an impairment provision is determined to be necessary, the excess of the carrying amount of the property over its estimated fair value is expensed to operations.  In addition, the impairment provision is allocated proportionately to adjust the carrying amount of the asset group.  The adjusted carrying amount, which represents the new cost basis of the property, is depreciated over the remaining useful life of the property.

 

Although we may market a property for sale, there can be no assurance that the transaction will be complete until the sale is finalized.  However, GAAP requires us to reduce the recoverability periods for these assets.  If we cannot recover the carrying value of these properties within the planned hold period, we will estimate the fair values of the assets and record impairment charges for properties in which the estimated fair value is less than their carrying value.

 

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Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

We recorded impairment charges of $118.6 million on nine of our operating properties during the nine months ended September 30, 2012.  Of these impairment charges, $98.3 million related to seven of our operating properties and were recorded during the three months ended September 30, 2012.  These impairment charges are included in provision for impairment in our Consolidated Statements of Operations and Comprehensive Income (Loss).

 

During the three months ended September 30, 2012, three of the impairment charges related to regional malls that were transferred to the special servicer.  One of the properties was sold, in a lender directed sale in full satisfaction of the related debt, subsequent to September 30, 2012, for an amount less than the carrying value (Note 16).  Accordingly, we recorded an impairment charge of $11.1 million, resulting in a net book value of $15.2 million, which is less than the carrying value of the non-recourse debt of $64.9 million.  We expect to record a gain on extinguishment of debt of approximately $50 million in the fourth quarter of 2012.  We recorded impairment charges on the other two properties of $46.2 million, resulting in an aggregate net book value of $100.7 million, which is less than the aggregate carrying value of the non-recourse debt of $166.1 million.  These impairment charges were recorded because the estimated fair values of the properties, based on discounted cash flow analyses, were less than the carrying values of the properties.

 

The remaining four impairment charges recorded during the three months ended September 30, 2012, totaled $41.0 million and related to two regional malls and two small office buildings.  These impairment charges were recorded because the estimated sales prices of these properties were lower than their carrying values.  The estimated sales prices were based on negotiated sales prices finalized in the third quarter of 2012.

 

During the nine months ended September 30, 2012, we previously recorded two impairment charges that totaled $20.3 million and related to two regional malls as the sales prices of these properties were lower than their carrying values.  These properties were sold in the period in which the impairment was taken.  These impairment charges are included, net of the gain on forgiveness of debt of $9.9 million, in discontinued operations in our Consolidated Statements of Operations and Comprehensive Income (Loss).

 

Gains on disposition, including settlement of debt, are recorded in the Consolidated Statements of Operations and Comprehensive Income (Loss) in the period the property is disposed.  Impairment charges are recorded in the Consolidated Statements of Operations and Comprehensive Income (Loss) when the carrying value exceeds the estimated fair value of the property, which can occur in accounting periods preceding disposition and / or in the period of disposition.

 

No provisions for impairment were necessary for the three or nine months ended September 30, 2011.

 

Investment in Unconsolidated Real Estate Affiliates

 

According to the guidance 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 valuation declines below the carrying amount. Accordingly, in addition to the property-specific impairment analysis that we perform for such joint ventures (as part of our operating property impairment process described above), we also considered whether there were other-than-temporary impairments with respect to the carrying values of our Unconsolidated Real Estate Affiliates.

 

We did not record any provisions for impairment related to our investments in Unconsolidated Real Estate Affiliates for the three and nine months ended September 30, 2012 and 2011.

 

General

 

Impairment charges could be taken in the future if economic conditions change or if the plans regarding our assets change.  Therefore, we can provide no assurance that material impairment charges with respect to our assets, including operating properties, construction in progress and investments in Unconsolidated Real Estate Affiliates,

 

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Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

will not occur in future periods.  Accordingly, we will continue to monitor circumstances and events in future periods to determine whether further impairments are warranted.

 

Fair Value Measurements

 

The accounting principles for fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers include:

 

·                  Level 1 - defined as observable inputs such as quoted prices for identical assets or liabilities in active markets;

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

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

 

The impairment section above includes a discussion of properties measured at fair value on a non recurring basis using Level 2 and Level 3 inputs.  Fair value of financial instruments below includes a discussion of the fair value of debt, which is estimated using Level 2 and Level 3 inputs.   Note 8 includes a discussion of the warrant liability which is estimated on a recurring basis using Level 3 inputs.

 

Fair Value of Operating Properties

 

The following table summarizes our assets that are measured at fair value on a nonrecurring basis as of September 30, 2012.

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

Active Markets

 

Significant Other

 

Significant

 

 

 

Total Fair Value

 

for Identical Assets

 

Observable Inputs

 

Unobservable Inputs

 

 

 

Measurement

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Balance at September 30, 2012

 

 

 

 

 

 

 

 

 

Investments in real estate (1)

 

$

238,362

 

$

 

$

137,656

 

$

100,706

 

 


(1) Refer to the impairment section above for more information regarding impairment.

 

We estimate fair value relating to impairment assessments based upon discounted cash flow and direct capitalization models that include all projected cash inflows and outflows over a specific holding period, or the negotiated sales price, if applicable.  Such projected cash flows are comprised of contractual rental revenues and forecasted rental revenues and expenses based upon market conditions and expectations for growth. Capitalization rates and discount rates utilized in these models are based on a reasonable range of current market rates for each property analyzed.  Based upon these inputs, we determined that our valuations of properties using a discounted cash flow or a direct capitalization model were classified within Level 3 of the fair value hierarchy.  For our properties for which the estimated fair value was based on negotiated sales prices, we determined that our valuation was classified within Level 2 of the fair value hierarchy.

 

The following table summarizes provisions for impairment recorded in our Consolidated Statements of Operations and Comprehensive Income (Loss) as a result of changes in the fair value of our investments in real estate:

 

 

 

Provisions for Impairment

 

 

 

Three Months Ended
September 30, 2012

 

Nine Months Ended
September 30, 2012

 

Investments in real estate (1) (2)

 

 

 

 

 

Significant Other Observable Inputs (Level 2)

 

$

(52,048

)

$

(72,348

)

Significant Unobservable Inputs (Level 3)

 

(46,240

)

(46,240

)

 


(1) Refer to the impairment section above for more information regarding impairment.

(2) Certain of the properties impaired during the year have been subsequently sold.  As such, these impairment charges are included in discontinued operations in our Consolidated Statements of Operations and Comprehensive Income (Loss).

 

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Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

The following table sets forth quantitative information about the unobservable inputs of our Level 3 real estate, which are recorded at fair value as of September 30, 2012:

 

Unobservable Quantitative Input

 

Range

 

 

 

 

 

Discount rates

 

9.0% to 10.0%

 

Terminal capitalization rates

 

9.0% to 10.0%

 

 

Fair Value of Financial Instruments

 

The fair values of our financial instruments approximate their carrying amount in our consolidated financial statements except for debt.  Management’s estimates of fair value are presented below for our debt as of September 30, 2012 and December 31, 2011.

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Carrying Amount

 

Estimated Fair
Value

 

Carrying Amount

 

Estimated Fair
Value

 

Fixed-rate debt

 

$

14,246,457

 

$

15,338,267

 

$

14,795,370

 

$

14,978,908

 

Variable-rate debt

 

1,827,558

 

1,724,031

 

2,347,644

 

2,326,533

 

 

 

$

16,074,015

 

$

17,062,298

 

$

17,143,014

 

$

17,305,441

 

 

The fair value of our Junior Subordinated Notes approximates their carrying amount as of September 30, 2012 and December 31, 2011.  We estimated the fair value of mortgages, notes and other loans payable using Level 2 and Level 3 inputs based on recent financing transactions, estimates of the fair value of the property that serves as collateral for such debt, historical risk premiums for loans of comparable quality, current London Interbank Offered Rate (“LIBOR”), U.S. treasury obligation interest rates and on the discounted estimated future cash payments to be made on such debt. The discount rates estimated reflect our judgment as to what the approximate current lending rates for loans or groups of loans with similar maturities and credit quality would be if credit markets were operating efficiently and assume that the debt is outstanding through maturity. We have utilized market information as available or present value techniques to estimate the amounts required to be disclosed.  Since such amounts are estimates that are based on limited available market information for similar transactions and do not acknowledge transfer or other repayment restrictions that may exist in specific loans, it is unlikely that the estimated fair value of any such debt could be realized by immediate settlement of the obligation.

 

NOTE 3        ACQUISITIONS AND INTANGIBLES

 

Acquisitions

 

During the nine months ended September 30, 2012, we acquired five anchor boxes, excluding the Sears anchor pads discussed below, for an aggregate purchase price of $26.3 million.

 

In addition, on April 17, 2012, we acquired 11 Sears anchor pads (including fee interests in five anchor pads and long-term leasehold interests in six anchor pads) for the purpose of redevelopment or remerchandising.  Total consideration paid was $270.0 million. The purchase price of $212.0 million for the leasehold interests was recorded in construction in progress, as the buy-out costs were necessary costs related to redevelopment projects at these properties, and the purchase price of $58.0 million for the fee interests was recorded in land and building in our Consolidated Balance Sheets as of September 30, 2012.

 

Also, on April 5, 2012, we acquired the remaining 49% interest in the Oaks and Westroads, previously owned through a joint venture, for $191.1 million which included the assumption the remaining 49% of debt of $92.8 million and $98.3 million of cash.  The properties were previously recorded under the equity method of accounting and are now consolidated.  The acquisition resulted in a remeasurement of the net assets acquired to fair value.  We recorded a gain from the change in control, since the fair value of the net assets acquired was greater than our investment in the joint venture and the cash paid.  This gain is reported in our Consolidated Statements of Operations and Comprehensive Income (Loss).  The table below summarizes the gain calculation:

 

Total fair value of net assets acquired

 

$

200,271

 

Previous investment in the Oaks and Westroads

 

(83,415

)

Cash paid to acquire our joint venture partner’s interest

 

(98,309

)

Gain from change in control of investment properties

 

$

18,547

 

 

The following table summarizes the allocation of the purchase price to the net assets acquired at the date of acquisition.  These allocations were based on the relative fair values of the assets acquired and liabilities assumed.

 

Investment in real estate

 

$

402,197

 

Above-market lease intangibles

 

15,746

 

Below-market lease intangibles

 

(29,393

)

Fair value of mortgages, notes and loans payable

 

(197,927

)

Net working capital

 

9,648

 

Net assets acquired

 

$

200,271

 

 

13



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

Intangible Assets and Liabilities

 

The following table summarizes our intangible assets and liabilities:

 

 

 

Gross Asset
(Liability)

 

Accumulated
(Amortization)/
Accretion

 

Net Carrying
Amount

 

 

 

 

 

 

 

 

 

As of September 30, 2012

 

 

 

 

 

 

 

Tenant leases:

 

 

 

 

 

 

 

In-place value

 

$

1,005,505

 

$

(394,853

)

$

610,652

 

Above-market

 

1,244,135

 

(378,625

)

865,510

 

Below-market

 

(740,840

)

228,555

 

(512,285

)

Building leases:

 

 

 

 

 

 

 

Above-market

 

(15,268

)

2,969

 

(12,299

)

Ground leases:

 

 

 

 

 

 

 

Above-market

 

(9,756

)

711

 

(9,045

)

Below-market

 

196,824

 

(8,678

)

188,146

 

Real estate tax stabilization agreement

 

111,506

 

(11,945

)

99,561

 

 

 

 

 

 

 

 

 

As of December 31, 2011

 

 

 

 

 

 

 

Tenant leases:

 

 

 

 

 

 

 

In-place value

 

$

1,252,484

 

$

(391,605

)

$

860,879

 

Above-market

 

1,478,798

 

(315,044

)

1,163,754

 

Below-market

 

(819,056

)

184,254

 

(634,802

)

Building leases:

 

 

 

 

 

 

 

Above-market

 

(15,268

)

1,697

 

(13,571

)

Ground leases:

 

 

 

 

 

 

 

Above-market

 

(9,839

)

439

 

(9,400

)

Below-market

 

204,432

 

(6,202

)

198,230

 

Real estate tax stabilization agreement

 

111,506

 

(7,211

)

104,295

 

 

The gross asset balances of the in-place value of tenant leases are included in buildings and equipment in our Consolidated Balance Sheets.  The above-market tenant leases and below-market ground leases are included in prepaid expenses and other assets (Note 12); the below-market tenant leases, above-market ground leases and above-market building lease are included in accounts payable and accrued expenses (Note 13) in our Consolidated Balance Sheets.

 

Amortization/accretion of these intangibles had the following effects on our loss from continuing operations:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Amortization/accretion effect on continuing operations

 

$

(88,769

)

$

(125,541

)

$

(276,521

)

$

(362,723

)

 

Future amortization/accretion of these intangibles is estimated to decrease results from continuing operations by approximately $74.4 million for the remainder of 2012, $247.5 million in 2013, $199.9 million in 2014, $162.1 million in 2015 and $128.1 million in 2016.

 

NOTE 4        DISPOSITIONS, DISCONTINUED OPERATIONS AND GAINS (LOSSES) ON DISPOSITIONS OF INTERESTS IN OPERATING PROPERTIES

 

During the three months ended September 30, 2012, we sold our interests in one office portfolio, two regional malls, four strip centers and one office building for an aggregate sales price of $216.6 million.  We utilized the proceeds from these sales to paydown $89.8 million of debt associated with these properties resulting in net proceeds of $126.8 million and a gain of $13.2 million.  The office property was sold to HHC.  HHC assumed the remaining $19.2 million of the debt on the property as consideration for the sale.

 

14



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

On March 2, 2012, we sold our interest in one regional mall for $25.0 million.  We received $8.0 million in cash and entered into a secured note receivable with the buyer for $17.0 million.

 

On February 21, 2012, we sold Grand Traverse Mall to RPI.  Prior to the sale, the lender forgave $18.9 million of the secured indebtedness, which was partially offset by the write-off of debt market rate adjustments of $9.0 million.  The net gain on extinguishment of debt, of $9.9 million, is included in discontinued operations in our Consolidated Statements of Operations and Comprehensive Income (Loss).  RPI assumed the remaining $62.0 million of debt on the property as consideration for the sale.

 

On January 12, 2012, we completed the spin-off of RPI, a 30-mall portfolio totaling approximately 21 million square feet.  The RPI Spin-off was accomplished through a special dividend of the common stock of RPI to holders of GGP common stock as of December 30, 2011.  Subsequent to the spin-off, we retained a 1% interest in RPI.

 

All of our 2012 and 2011 dispositions are included in discontinued operations in our Consolidated Statements of Operations and Comprehensive Income (Loss) and are summarized in the table below.  In the first quarter of 2012, we revised our intent with respect to four properties previously classified as held for sale.  As we no longer met the criteria for held for sale treatment, we reclassified these four properties as held for use in our Consolidated Balance Sheet.  Three of these properties are presented within continuing operations and one property, which was subsequently sold, is presented within discontinued operations for all periods presented. These properties were measured at the lower of the carrying amount before the asset was classified as held for sale, adjusted for any depreciation and amortization expense that would have been recognized had the asset been continuously classified as held and used, and fair value at the date of decision not to sell.

 

The following table summarizes the operations of the properties included in discontinued operations.

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Retail and other revenue

 

$

4,858

 

$

82,258

 

$

38,620

 

$

260,156

 

Retail and other operating expenses

 

3,933

 

69,023

 

23,440

 

206,264

 

Provisions for impairment

 

 

 

10,393

 

51

 

Total expenses

 

3,933

 

69,023

 

33,833

 

206,315

 

Operating income

 

925

 

13,235

 

4,787

 

53,841

 

Interest expense, net

 

(561

)

(19,628

)

(6,819

)

(68,705

)

Net income (loss) from operations

 

364

 

(6,393

)

(2,032

)

(14,864

)

Provision for income taxes

 

 

(158

)

(23

)

(500

)

Allocation to noncontrolling interest

 

 

(93

)

 

(146

)

Gain on dispositions

 

13,212

 

2,368

 

13,037

 

1,822

 

Net income (loss) from discontinued operations

 

$

13,576

 

$

(4,276

)

$

10,982

 

$

(13,688

)

 


* Includes a net gain on debt extinguishment of $9.9 million during the nine months ended September 30, 2012.

 

NOTE 5        UNCONSOLIDATED REAL ESTATE AFFILIATES

 

The Unconsolidated Real Estate Affiliates represents our investments in real estate joint ventures that are not consolidated. Generally, we share in the profits and losses, cash flows and other matters relating to our investments in Unconsolidated Real Estate Affiliates in accordance with our respective ownership percentages.  We manage most of the properties owned by these joint ventures.  As we have joint control of these ventures with our venture partners, we account for these joint ventures under the equity method.

 

In certain circumstances, we have debt obligations in excess of our pro rata share of the debt of our Unconsolidated Real Estate Affiliates (“Retained Debt”). This Retained Debt represents distributed debt proceeds of the Unconsolidated Real Estate Affiliates in excess of our pro rata share of the non-recourse mortgage indebtedness of such Unconsolidated Real Estate Affiliates. The proceeds of the Retained Debt which are distributed to us are included as a reduction in our investment in Unconsolidated Real Estate Affiliates.  Such Retained Debt existed at one property and totaled $92.1 million as of September 30, 2012 and existed at two properties and totaled $130.6

 

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Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

million as of December 31, 2011.  We are obligated to contribute funds to our Unconsolidated Real Estate Affiliates in amounts sufficient to pay debt service on such Retained Debt.  If we do not contribute such funds, our distributions from such Unconsolidated Real Estate Affiliates, or our interest in, could be reduced to the extent of such deficiencies.  As of September 30, 2012, we do not anticipate an inability to perform on our obligations with respect to such Retained Debt.

 

Indebtedness secured by our Unconsolidated Properties was $6.26 billion as of September 30, 2012 and $5.80 billion as of December 31, 2011 due to additional excess proceeds as a result of refinancings.  Our proportionate share of such debt was $2.94 billion as of September 30, 2012 and $2.78 billion as of December 31, 2011, including Retained Debt.  There can be no assurance that the Unconsolidated Properties will be able to refinance or restructure such debt on acceptable terms or otherwise, or that joint venture operations or contributions by us and/or our partners will be sufficient to repay such loans.

 

Condensed Combined Financial Information of Unconsolidated Real Estate Affiliates

 

Following is summarized financial information for our Unconsolidated Real Estate Affiliates.

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Condensed Combined Balance Sheets - Unconsolidated Real Estate Affiliates

 

 

 

 

 

Assets:

 

 

 

 

 

Land

 

$

956,214

 

$

953,603

 

Buildings and equipment

 

7,608,675

 

7,906,346

 

Less accumulated depreciation

 

(2,027,208

)

(1,950,860

)

Construction in progress

 

152,659

 

99,352

 

Net property and equipment

 

6,690,340

 

7,008,441

 

Investments in unconsolidated joint ventures

 

1,104,360

 

758,372

 

Net investment in real estate

 

7,794,700

 

7,766,813

 

Cash and cash equivalents

 

267,468

 

387,549

 

Accounts and notes receivable, net

 

157,618

 

162,822

 

Deferred expenses, net

 

297,516

 

250,865

 

Prepaid expenses and other assets

 

163,110

 

143,021

 

Total assets

 

$

8,680,412

 

$

8,711,070

 

 

 

 

 

 

 

Liabilities and Owners’ Equity:

 

 

 

 

 

Mortgages, notes and loans payable

 

$

6,259,558

 

$

5,790,509

 

Accounts payable, accrued expenses and other liabilities

 

433,871

 

446,462

 

Owners’ equity

 

1,986,983

 

2,474,099

 

Total liabilities and owners’ equity

 

$

8,680,412

 

$

8,711,070

 

 

 

 

 

 

 

Investment In and Loans To/From Unconsolidated Real Estate Affiliates, Net:

 

 

 

 

 

Owners’ equity

 

$

1,986,983

 

$

2,474,099

 

Less joint venture partners’ equity

 

(1,142,358

)

(1,417,682

)

Capital or basis differences

 

1,872,454

 

1,996,556

 

Investment in and loans to/from

 

 

 

 

 

Unconsolidated Real Estate Affiliates, net

 

$

2,717,079

 

$

3,052,973

 

 

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Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Condensed Combined Statements of Income - Unconsolidated Real Estate Affiliates

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Minimum rents

 

$

188,299

 

$

174,587

 

$

573,276

 

$

528,495

 

Tenant recoveries

 

74,767

 

72,571

 

225,059

 

219,604

 

Overage rents

 

5,788

 

4,766

 

16,743

 

12,024

 

Management and other fees

 

4,945

 

3,657

 

17,087

 

12,431

 

Other

 

7,659

 

26,381

 

40,046

 

40,831

 

Total revenues

 

281,458

 

281,962

 

872,211

 

813,385

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Real estate taxes

 

23,927

 

21,885

 

71,858

 

67,728

 

Property maintenance costs

 

8,838

 

9,219

 

27,652

 

29,296

 

Marketing

 

4,080

 

4,214

 

10,894

 

10,628

 

Other property operating costs

 

42,232

 

43,524

 

120,561

 

122,234

 

Provision for doubtful accounts

 

943

 

2,573

 

1,711

 

6,422

 

Property management and other costs

 

11,388

 

11,411

 

36,113

 

33,956

 

General and administrative

 

5,447

 

5,007

 

25,544

 

19,271

 

Depreciation and amortization

 

65,189

 

64,973

 

203,976

 

196,227

 

Total expenses

 

162,044

 

162,806

 

498,309

 

485,762

 

Operating income

 

119,414

 

119,156

 

373,902

 

327,623

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

2,400

 

5,005

 

8,114

 

15,339

 

Interest expense

 

(85,121

)

(90,858

)

(253,938

)

(265,770

)

Provision for income taxes

 

(221

)

(213

)

(672

)

(585

)

Equity in income of unconsolidated joint ventures

 

15,309

 

20,820

 

33,222

 

39,055

 

Income from continuing operations

 

51,781

 

53,910

 

160,628

 

115,662

 

Discontinued operations

 

398

 

(784

)

(543

)

111,399

 

Allocation to noncontrolling interests

 

(535

)

(459

)

(1,267

)

(3,435

)

Net income attributable to the ventures

 

$

51,644

 

$

52,667

 

$

158,818

 

$

223,626

 

 

 

 

 

 

 

 

 

 

 

Equity In Income (Loss) of Unconsolidated Real Estate Affiliates:

 

 

 

 

 

 

 

 

 

Net income attributable to the ventures

 

$

51,644

 

$

52,667

 

$

158,818

 

$

223,626

 

Joint venture partners’ share of income

 

(30,050

)

(32,352

)

(95,005

)

(123,495

)

Amortization of capital or basis differences

 

460

 

(10,482

)

(23,964

)

(102,665

)

Equity in income (loss) of Unconsolidated Real Estate Affiliates

 

$

22,054

 

$

9,833

 

$

39,849

 

$

(2,534

)

 

NOTE 6        MORTGAGES, NOTES AND LOANS PAYABLE

 

Mortgages, notes and loans payable are summarized as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Fixed-rate debt:

 

 

 

 

 

Collateralized mortgages, notes and loans payable

 

$

12,909,868

 

$

13,091,080

 

Corporate and other unsecured term loans

 

1,336,589

 

1,704,290

 

 

 

 

 

 

 

Total fixed-rate debt

 

14,246,457

 

14,795,370

 

 

 

 

 

 

 

Variable-rate debt:

 

 

 

 

 

Collateralized mortgages, notes and loans payable

 

1,827,558

 

2,347,644

 

 

 

 

 

 

 

Total Mortgages, notes and loans payable

 

$

16,074,015

 

$

17,143,014

 

 

 

 

 

 

 

Variable-rate debt:

 

 

 

 

 

Junior Subordinated Notes

 

$

206,200

 

$

206,200

 

 

The weighted-average interest rate excluding the effects of deferred finance costs on our collateralized mortgages, notes and loans payable was 4.81% at September 30, 2012 and 5.13% at December 31, 2011.  The weighted average interest rate on the remaining corporate unsecured fixed and variable rate debt was 5.98% at September 30, 2012 and 6.18% at December 31, 2011.

 

We are not aware of any instances of non-compliance with our financial covenants related to our mortgages, notes and loans payable as of September 30, 2012.  However, we have transferred three properties to the special servicer.  One of these properties was sold in a lender directed sale subsequent to September 30, 2012 (Note 16).

 

Collateralized Mortgages, Notes and Loans Payable

 

As of September 30, 2012, $21.58 billion of land, buildings and equipment (before accumulated depreciation) and construction in progress have been pledged as collateral for our mortgages, notes and loans payable. Certain of these secured loans, representing $2.13 billion of debt, are cross-collateralized with other properties.  Although a majority

 

17



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

of the $14.74 billion of fixed and variable rate collateralized mortgages, notes and loans payable are non-recourse, $1.56 billion of such mortgages, notes and loans payable are recourse to the Company as guarantees on secured financings.  In addition, certain mortgage loans contain other credit enhancement provisions (primarily master leases for all or a portion of the property) which have been provided by GGP.  Certain mortgages, notes and loans payable may be prepaid but are generally subject to a prepayment penalty equal to a yield-maintenance premium, defeasance or a percentage of the loan balance.

 

On August 3, 2012, we closed on $763.5 million secured financings of five consolidated properties with a single lender.  The loans mature between January 2019 and September 2024 and bear interest at a weighted average rate of 5.80% per annum and replace loans at these properties in the same amount with an average interest rate of 7.5%.  Proceds from the financings were used to unencumber two properties.

 

On June 6, 2012, we closed on a new loan for The Grand Canal Shoppes and The Shoppes at The Palazzo in the amount of $625.0 million, which bears interest at 4.24% and matures in 2019.  The new loan replaces the existing loans at The Grand Canal Shoppes which was $368.1 million, bore interest at 4.78% and was scheduled to mature in 2014 and The Shoppes at The Palazzo, which was $239.0 million, bore interest at LIBOR plus 300 basis points and was scheduled to mature in 2017.  The new loan eliminates $238.7 million of recourse to the Company and resulted in $18.7 million in excess proceeds.

 

On April 2, 2012, we closed the $1.40 billion secured financing of Ala Moana Center.  The loan matures in April 2022 and bears interest at 4.23% per annum. The new loan replaces the previous loan at Ala Moana, which was $1.29 billion, bore interest at 5.59% and was scheduled to mature in 2018. The transaction resulted in $110.0 million in excess proceeds.

 

Corporate and Other Unsecured Loans

 

We have certain unsecured debt obligations, the terms of which are described below.

 

We have publicly-traded unsecured bonds of $1.30 billion outstanding as of September 30, 2012 and $1.65 billion outstanding as of December 31, 2011.  Such bonds have maturity dates from May 2013 through November 2015 and interest rates ranging from 5.38% to 6.75%.  The bonds have covenants, including ratios of secured debt to gross assets and total debt to total gross assets. We are not aware of any instances of non-compliance with such covenants as of September 30, 2012. We repaid the $349.5 million bond on September 17, 2012, when it matured, with available cash on hand.

 

In April 2012, we amended our revolving credit facility (the “Facility”) providing for revolving loans of up to $1.00 billion.  The Facility is scheduled to mature in April 2016 and is guaranteed by certain of our subsidiaries and secured by (i) first lien mortgages on certain properties, (ii) first-lien pledges of equity interests in certain of our subsidiaries and (iii) various additional collateral.  No amounts have been drawn on the Facility.  Borrowings under the Facility bear interest at a rate equal to LIBOR plus 2.25%.  The Facility contains certain restrictive covenants which limit material changes in the nature of our business conducted, including but not limited to, mergers, dissolutions or liquidations, dispositions of assets, liens, incurrence of additional indebtedness, dividends, transactions with affiliates, prepayment of subordinated debt, negative pledges and changes in fiscal periods. In addition, we are required to maintain a maximum net debt to value ratio, a maximum leverage ratio and a minimum net cash interest coverage ratio; we are not aware of any instances of non-compliance with such covenants as of September 30, 2012.

 

We also have a note payable to HHC in the amount of $20.8 million, which bears interest at 4.41% per annum and matures in 2015.

 

The corporate and other unsecured loans exclude a net market rate premium of $15.2 million that increases the total amount that appears outstanding on the consolidated balance sheets.  The market rate premium amortizes as a reduction to interest expense over the life of the respective loan.

 

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Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

Junior Subordinated Notes

 

GGP Capital Trust I, a Delaware statutory trust (the “Trust”) and a wholly-owned subsidiary of GGPLP, completed a private placement of $200.0 million of trust preferred securities (“TRUPS”) in 2006.  The Trust also issued $6.2 million of Common Securities to GGPLP.  The Trust used the proceeds from the sale of the TRUPS and Common Securities to purchase $206.2 million of floating rate Junior Subordinated Notes of GGPLP due 2041.  Distributions on the TRUPS are equal to LIBOR plus 1.45%.  Distributions are cumulative and accrue from the date of original issuance.  The TRUPS mature on April 30, 2041, but may be redeemed beginning on April 30, 2011 if the Trust exercises its right to redeem a like amount of Junior Subordinated Notes.  The Junior Subordinated Notes bear interest at LIBOR plus 1.45%. Though the Trust is a wholly-owned subsidiary of GGPLP, we are not the primary beneficiary of the Trust and, accordingly, it is not consolidated for accounting purposes.  We have recorded the Junior Subordinated Notes as mortgages, notes and loans payable and our common equity interest in the Trust as prepaid expenses and other assets in our Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011.

 

Letters of Credit and Surety Bonds

 

We had outstanding letters of credit and surety bonds of $19.6 million as of September 30, 2012 and $19.1 million as of December 31, 2011. These letters of credit and bonds were issued primarily in connection with insurance requirements, special real estate assessments and construction obligations.

 

NOTE 7        INCOME TAXES

 

We have elected to be taxed as a REIT under sections 850-860 of the Internal Revenue Code.  We intend to maintain REIT status. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including requirements to distribute at least 90% of our ordinary taxable income and to either distribute capital gains to stockholders, or pay corporate income tax on the undistributed capital gains. In addition, the Company is required to meet certain asset and income tests.

 

As a REIT, we will generally not be subject to corporate level Federal income tax on taxable income we distribute currently to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to Federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years.  Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income or property, and to Federal income and excise taxes on our undistributed taxable income.  Generally, we are currently open to audit by the Internal Revenue Service for the years ending December 31, 2009 through 2011 and are open to audit by state taxing authorities for the years ending December 31, 2008 through 2011.

 

Based on our assessment of the expected outcome of examinations that are in process or may commence, or as a result of the expiration of the statute of limitations for specific jurisdictions, we do not expect that the related unrecognized tax benefits, excluding accrued interest, for tax positions taken regarding previously filed tax returns will materially change from those recorded at December 31, 2011 during the next twelve months.

 

NOTE 8        WARRANT LIABILITY

 

Pursuant to the terms of the Investment Agreements, the Plan Sponsors and Blackstone were issued 120,000,000 warrants (the “Warrants”) to purchase common stock of GGP.  Each GGP Warrant has a term of seven years and expires on November 9, 2017 and no warrants have been exercised to date.  The Brookfield Investor Warrants and the Blackstone (A and B) Investor Warrants are immediately exercisable, while the Fairholme Warrants and the Pershing Square Warrants will be exercisable (for the initial 6.5 years from the issuance) only upon 90 days prior notice.   However, upon such notice Fairholme and Pershing Square are not obligated to exercise at any point from the end of the 90 day notification period through maturity. Below is a summary of the Warrants initially received by the Plan Sponsors and Blackstone.

 

19



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

Initial

 

Warrant Holder

 

Number of Warrants

 

Exercise Price

 

Brookfield Investor

 

57,500,000

 

$

10.75

 

Blackstone - B

 

2,500,000

 

10.75

 

Fairholme

 

41,070,000

 

10.50

 

Pershing Square

 

16,430,000

 

10.50

 

Blackstone - A

 

2,500,000

 

10.50

 

 

 

120,000,000

 

 

 

 

The Warrants were fully vested upon issuance and the exercise prices are subject to adjustment for future dividends, stock dividends, distribution of assets, stock splits or reverse splits of our common stock or certain other events. In accordance with the agreement, these calculations adjust both the exercise price and the number of shares issuable for the 120,000,000 Warrants. As a result of these investment provisions, as of the record date of our common stock dividends, the number of shares issuable upon exercise of the outstanding Warrants was increased as follows:

 

 

 

Exercise Price

 

Record Date

 

Issuable Shares

 

Brookfield Investor
and Blackstone - B

 

Fairholme, Pershing
Square and
Blackstone - A

 

April 15, 2011

 

123,960,000

 

$

10.41

 

$

10.16

 

July 15, 2011

 

124,704,000

 

10.34

 

10.10

 

December 30, 2011

 

131,748,000

 

9.79

 

9.56

 

April 16, 2012

 

132,372,000

 

9.75

 

9.52

 

July 16, 2012

 

133,116,000

 

9.69

 

9.47

 

 

In addition to the adjustment for the common stock dividends, as a result of the RPI Spin-off, the exercise price of the Warrants was adjusted by $0.3943 for the Brookfield Investor and Blackstone-B Warrants and by $0.3852 for the Fairholme, Pershing Square and Blackstone-A Warrants, on the record date of December 30, 2011. As a result, the total number of issuable shares was 131,748,000.  During the three months ended September 30, 2012, as required per the terms of the Warrant Agreement, Fairholme gave notice of their intent to exercise their Warrants.  As noted above, the Warrants require a 90 day notification period prior to exercise. Fairholme is not required to exercise its Warrants as a result of the notice at any time after the 90 day period and prior to the maturity of the Warrants.

 

The estimated fair value of the Warrants was $1.40 billion as of September 30, 2012 and $986.0 million as of December 31, 2011 and is recorded as a liability as the holders of the Warrants may require GGP to settle such warrants in cash in the circumstance of a subsequent change of control.  Changes in the fair value of the Warrants are recognized in earnings.  The fair value of the Warrants was estimated using the Black Scholes option pricing model using our stock price, the Warrant term, and Level 3 inputs (Note 2).  An increase in GGP’s common stock price or in the expected volatility of the Warrants would increase the fair value; whereas, a decrease in GGP’s common stock price or an increase in the lack of marketability would decrease the fair value.  The discount for lack of marketability represents the costs associated with selling the warrants to another party.  The terms of the Warrants were not adjusted when determining the fair value as a result of the notice from Fairholme discussed above.  The following table summarizes the estimated fair value of the Warrants and significant observable and unobservable inputs used in the valuation as of September 30, 2012 and December 31, 2011:

 

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Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

September 30, 2012

 

December 31, 2011

 

Warrant liability

 

$

1,399,043

 

$

985,962

 

 

 

 

 

 

 

Observable Inputs

 

 

 

 

 

GGP stock price per share

 

$

19.48

 

$

15.02

 

Warrant term

 

5.11

 

5.86

 

 

 

 

 

 

 

Unobservable Inputs

 

 

 

 

 

Expected volatility

 

30

%

37

%

Range of values considered

 

(15% - 70

)%

(20% - 65

)%

 

 

 

 

 

 

Discount for lack of marketability

 

3

%

3

%

Range of values considered

 

(3% - 7

)%

(3% - 7

)%

 

The following table summarizes the change in fair value of the Warrant liability which is measured on a recurring basis using Level 3 inputs:

 

 

 

2012

 

2011

 

Balance as of January 1,

 

$

985,962

 

$

1,041,004

 

Warrant liability adjustment

 

413,081

 

(319,460

)

Balance as of September 30,

 

$

1,399,043

 

$

721,544

 

 

NOTE 9        EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS

 

Allocation to Noncontrolling Interests

 

Noncontrolling interests consists of the redeemable interests related to our common and preferred Operating Partnership units and the noncontrolling interest in our consolidated joint ventures.  The following table reflects the activity included in the allocation to noncontrolling interests.

 

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Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011