10-Q 1 a12-20122_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

 

or

 

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

 

For the Transition Period from                 to                 

 

COMMISSION FILE NUMBER 001-35287

 

ROUSE PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

90-0750824

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

1114 Avenue of the Americas, Suite 2800, New York, NY

 

10036

(Address of principal executive offices)

 

(Zip Code)

 

(212) 608-5108

(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 o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

The number of shares of Common Stock, $.01 par value, outstanding on November 2, 2012 was 49,246,087

 

 

 



Table of Contents

 

ROUSE PROPERTIES, INC.

 

INDEX

 

 

 

 

PAGE
NUMBER

 

 

 

 

Part I

FINANCIAL INFORMATION

 

 

Item 1:

Consolidated and Combined Financial Statements (Unaudited)

 

 

 

 

 

 

 

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

3

 

 

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

4

 

 

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

5

 

 

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

6

 

 

Notes to Consolidated and Combined Financial Statements

7

 

Item 2:

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

20

 

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

29

 

Item 4:

Controls and Procedures

30

 

 

 

 

Part II

OTHER INFORMATION

 

 

Item 1:

Legal Proceedings

30

 

Item 1A:

Risk Factors

30

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

Item 3:

Defaults Upon Senior Securities

30

 

Item 4:

Mine Safety Disclosures

30

 

Item 5:

Other Information

30

 

Item 6:

Exhibits

30

 

SIGNATURE

32

 

EXHIBIT INDEX

33

 

2



Table of Contents

 

ROUSE PROPERTIES, INC.

 

CONSOLIDATED AND COMBINED BALANCE SHEETS

(UNAUDITED)

 

 

 

September 30,
2012

 

December 31,
2011

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

Investment in real estate:

 

 

 

 

 

Land

 

$

317,383

 

$

299,941

 

Buildings and equipment

 

1,226,404

 

1,162,541

 

Less accumulated depreciation

 

(106,825

)

(72,620

)

Net investment in real estate

 

1,436,962

 

1,389,862

 

Cash and cash equivalents

 

22,412

 

204

 

Restricted cash

 

37,569

 

13,323

 

Demand deposit from affiliate

 

150,161

 

 

Accounts receivable, net

 

22,264

 

17,561

 

Deferred expenses, net

 

39,396

 

35,549

 

Prepaid expenses and other assets

 

116,323

 

127,025

 

Total assets

 

$

1,825,087

 

$

1,583,524

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Mortgages, notes and loans payable

 

$

1,187,377

 

$

1,059,684

 

Accounts payable and accrued expenses

 

88,456

 

97,512

 

Total liabilities

 

1,275,833

 

1,157,196

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Common stock: $0.01 par value; 500,000,000 shares authorized, 49,225,133 and 0 shares issued and outstanding, respectively

 

493

 

 

Class B common stock: $0.01 par value; 1,000,000 shares authorized, 359,056 and 0 shares issued and outstanding, respectively

 

4

 

 

Additional paid-in capital

 

591,472

 

 

GGP Equity

 

 

426,328

 

Accumulated deficit

 

(42,793

)

 

Accumulated other comprehensive loss

 

(33

)

 

Total stockholders’ equity

 

549,143

 

426,328

 

Non-controlling interest

 

111

 

 

Total equity

 

549,254

 

426,328

 

Total liabilities and equity

 

$

1,825,087

 

$

1,583,524

 

 

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

 

3



Table of Contents

 

ROUSE PROPERTIES, INC.

 

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(UNAUDITED)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,
2012

 

September 30,
2011

 

September 30,
2012

 

September 30,
2011

 

 

 

(In thousands, except per share amounts)

 

Revenues:

 

 

 

 

 

 

 

 

 

Minimum rents

 

$

38,458

 

$

38,467

 

$

113,742

 

$

113,423

 

Tenant recoveries

 

18,006

 

17,899

 

51,517

 

53,837

 

Overage rents

 

786

 

779

 

2,890

 

2,541

 

Other

 

1,213

 

1,410

 

3,671

 

4,108

 

Total revenues

 

58,463

 

58,555

 

171,820

 

173,909

 

Expenses:

 

 

 

 

 

 

 

 

 

Real estate taxes

 

5,979

 

5,829

 

17,544

 

17,943

 

Property maintenance costs

 

2,916

 

2,731

 

9,708

 

9,691

 

Marketing

 

729

 

777

 

1,850

 

2,351

 

Other property operating costs

 

16,070

 

15,804

 

45,386

 

43,395

 

Provision for doubtful accounts

 

699

 

294

 

1,413

 

806

 

General and administrative

 

5,267

 

2,374

 

15,726

 

8,100

 

Depreciation and amortization

 

16,799

 

20,425

 

51,846

 

58,911

 

Other

 

1,512

 

240

 

7,954

 

162

 

Total expenses

 

49,971

 

48,474

 

151,427

 

141,359

 

Operating income

 

8,492

 

10,081

 

20,393

 

32,550

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

253

 

6

 

263

 

14

 

Interest expense

 

(21,712

)

(18,963

)

(75,400

)

(54,285

)

Loss before income taxes

 

(12,967

)

(8,876

)

(54,744

)

(21,721

)

Provision for income taxes

 

(89

)

(97

)

(328

)

(385

)

Net loss

 

$

(13,056

)

$

(8,973

)

$

(55,072

)

$

(22,106

)

 

 

 

 

 

 

 

 

 

 

Net loss per share - Basic and Diluted

 

$

(0.27

)

$

(0.25

)

$

(1.22

)

$

(0.62

)

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.07

 

$

 

$

0.14

 

$

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(13,056

)

$

(8,973

)

$

(55,072

)

$

(22,106

)

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on derivative instrument

 

32

 

 

(33

)

 

Comprehensive loss

 

$

(13,024

)

$

(8,973

)

$

(55,105

)

$

(22,106

)

 

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

 

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Table of Contents

 

ROUSE PROPERTIES, INC.

 

CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY

(UNAUDITED)

 

 

 

Common
Shares

 

Class B
Common
Shares

 

Common
Stock

 

Class B
Common
Stock

 

Additional
Paid-In
Capital

 

GGP Equity

 

Accumulated
Deficit

 

Accumulated
Other
Comprehensive
Loss

 

Non-controlling
Interest

 

Total
Equity

 

 

 

(In thousands, except share amounts)

 

Balance at January 1, 2011

 

 

 

$

 

$

 

$

 

$

329,862

 

$

 

$

 

$

 

$

329,862

 

Net loss

 

 

 

 

 

 

(22,106

)

 

 

 

(22,106

)

Contributions from GGP, net

 

 

 

 

 

 

127,762

 

 

 

 

127,762

 

Balance at September 30, 2011

 

 

 

$

 

$

 

$

 

$

435,518

 

$

 

$

 

$

 

$

435,518

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2012

 

 

 

$

 

$

 

$

 

$

426,328

 

$

 

$

 

$

 

$

426,328

 

Net loss

 

 

 

 

 

 

(12,279

)

(42,793

)

 

 

(55,072

)

Other comprehensive loss

 

 

 

 

 

 

 

 

(33

)

 

(33

)

Distributions to GGP prior to the spin-off

 

 

 

 

 

 

(8,394

)

 

 

 

(8,394

)

Contributions from noncontrolling interest

 

 

 

 

 

 

 

 

 

111

 

111

 

Issuance of 35,547,049 shares of common stock and 359,056 shares of Class B common stock related to the spin-off and transfer of GGP equity on the spin-off date

 

35,547,049

 

359,056

 

356

 

4

 

405,295

 

(405,655

)

 

 

 

 

Issuance of 13,333,333 shares of common stock related to the rights offering

 

13,333,333

 

 

133

 

 

199,867

 

 

 

 

 

200,000

 

Offering costs

 

 

 

 

 

(8,392

)

 

 

 

 

(8,392

)

Dividends

 

 

 

 

 

(6,945

)

 

 

 

 

(6,945

)

Issuance and amortization of stock compensation

 

344,751

 

 

4

 

 

1,647

 

 

 

 

 

1,651

 

Balance at September 30, 2012

 

49,225,133

 

359,056

 

$

493

 

$

4

 

$

591,472

 

$

 

$

(42,793

)

$

(33

)

$

111

 

$

549,254

 

 

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

 

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Table of Contents

 

ROUSE PROPERTIES, INC.

 

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net loss

 

$

(55,072

)

$

(22,106

)

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

 

 

 

 

 

Provision for doubtful accounts

 

1,413

 

806

 

Depreciation

 

46,925

 

54,321

 

Amortization

 

4,921

 

4,590

 

Amortization/write-off of deferred finance costs

 

7,288

 

 

Amortization/write-off of debt market rate adjustments

 

16,876

 

8,587

 

Amortization of above/below market leases

 

18,425

 

18,575

 

Straight-line rent amortization

 

(3,852

)

(5,313

)

Stock based compensation

 

1,651

 

 

Net changes:

 

 

 

 

 

Accounts receivable

 

(2,264

)

(2,180

)

Prepaid expenses and other assets

 

(379

)

51

 

Deferred expenses

 

(4,593

)

(4,783

)

Restricted cash

 

(3,994

)

8,857

 

Accounts payable and accrued expenses

 

6,714

 

1,389

 

Net cash provided by operating activities

 

34,059

 

62,794

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Acquisition/development of real estate and property additions/improvements

 

(33,154

)

(18,386

)

Demand deposit from affiliate

 

(150,000

)

 

Deposit for acquisition

 

(10,000

)

 

Purchase of short term investment

 

(29,989

)

 

Sale of short term investment

 

29,989

 

 

Increase in restricted cash

 

(20,251

)

(936

)

Net cash used in investing activities

 

(213,405

)

(19,322

)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds received from rights offering

 

200,000

 

 

Payments for offering costs

 

(8,392

)

 

Change in GGP investment, net

 

(8,394

)

115,815

 

Contributions from noncontrolling interests

 

111

 

 

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

 

564,560

 

 

Borrowing under revolving line of credit

 

10,000

 

 

Principal payments on mortgages, notes and loans payable

 

(515,743

)

(160,818

)

Repayment under revolving line of credit

 

(10,000

)

 

Dividends paid

 

(3,471

)

 

Deferred financing costs

 

(27,117

)

 

Net cash provided by (used in) financing activities

 

201,554

 

(45,003

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

22,208

 

(1,531

)

Cash and cash equivalents at beginning of period

 

204

 

1,816

 

Cash and cash equivalents at end of period

 

$

22,412

 

$

285

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

51,894

 

$

46,185

 

 

 

 

 

 

 

Non-Cash Transactions:

 

 

 

 

 

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

 

$

1,222

 

$

282

 

Assumption of mortgage related to the acquisition of a property

 

62,000

 

 

Other non-cash GGP investment, net

 

 

11,947

 

 

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

 

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Table of Contents

 

ROUSE PROPERTIES, INC.

 

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

NOTE 1                            ORGANIZATION

 

Readers of this Quarterly Report should refer to the Company’s (as defined below) audited Combined 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 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

 

Rouse Properties, Inc. is a Delaware corporation that was created to hold certain assets and liabilities of General Growth Properties, Inc. (“GGP”). As of January 1, 2012, Rouse Properties, Inc. and its subsidiaries (“Rouse” or the “Company”) was a wholly-owned subsidiary of GGP Limited Partnership (“GGPLP”). GGP distributed the assets and liabilities of 30 of its wholly-owned properties (“RPI Businesses”) to Rouse on January 12, 2012 (the “Spin-Off Date”).  Before the spin-off, we had not conducted any business as a separate company and had no material assets or liabilities. The operations, assets and liabilities of the business were transferred to us by GGP on the spin-off date and are presented as if the transferred business was our business for all historical periods described.  As such, our assets and liabilities on the Spin-Off Date are reflective of GGP’s respective carrying values.  Unless the context otherwise requires, references to “we”, “us” and “our” refer to Rouse from January 12, 2012 through September 30, 2012 and RPI Businesses before January 12, 2012.  Before the spin-off, RPI Businesses were operated as subsidiaries of GGP, which operates as a real estate investment trust (“REIT”). After the spin-off, we elected to continue to operate as a REIT.

 

Principles of Combination and Consolidation and Basis of Presentation

 

The accompanying consolidated and combined financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  The consolidated balance sheet as of September 30, 2012 includes the accounts of Rouse, as well as all subsidiaries of Rouse.  The accompanying consolidated and combined statement of operations and comprehensive loss for the three months ended September 30, 2012 includes the consolidated accounts of Rouse and for the nine months ended September 30, 2012 includes the consolidated accounts of Rouse and the combined accounts of RPI Businesses.  The accompanying financial statements for the periods prior to the Spin-Off Date are prepared on a carve out basis from the consolidated financial statements of GGP using the historical results of operations and bases of the assets and liabilities of the transferred businesses and including allocations from GGP.  Accordingly, the results presented for the nine months ended September 30, 2012 reflect the aggregate operations and changes in cash flows and equity on a carved-out basis for the period from January 1, 2012 through January 12, 2012 and on a consolidated basis from January 13, 2012 through September 30, 2012.  All intercompany transactions have been eliminated in consolidation and combination as of and for the periods ended September 30, 2012 and 2011, except end-of-period intercompany balances on December 31, 2011 and Spin-Off Date balances between GGP and RPI Businesses which have been considered elements of RPI Businesses’ equity.  In the opinion of management, the accompanying consolidated and combined financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of the Company and its results of operations and cash flows for the interim periods presented.

 

Our historical financial results reflect allocations for certain corporate costs and we believe such allocations are reasonable; however, such results do not reflect what our expenses would have been had the Company been operating as a separate stand-alone public company. The corporate allocations for the nine months ended September 30, 2012 include allocations for the period from January 1, 2012 through January 12, 2012 which aggregated $0.4 million.  The corporate allocations for the three and nine months ended September 30, 2011 totaled $2.4 million and $8.1 million, respectively.  These allocations have been included in general and administrative expenses on the consolidated and combined statements of operations. Costs of the services that were allocated or charged to us were based on either actual costs incurred or a proportion of costs estimated to be applicable to us based on a number of factors, most significantly our percentages of GGP’s adjusted revenue and gross leasable area of assets and also the number of properties.

 

We operate in a single reportable segment referred to as our retail segment, which includes the operation, development and management of regional malls. 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.  All operations are within the United States, no customer or tenant comprises more than 10% of combined revenues, and the properties have similar economic characteristics. As a result, the Company’s operating properties are aggregated into a single reportable segment.

 

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Table of Contents

 

Properties

 

Acquisition accounting was applied to real estate assets within the Rouse portfolio either when GGP emerged from bankruptcy in November 2010 or upon any subsequent acquisitions.  After acquisition accounting is applied, the real estate assets are carried at the cost basis less accumulated depreciation.  Expenditures for development in progress, as well as significant renovations are capitalized.  Tenant improvements, either paid directly or in the form of construction allowances paid to tenants, are capitalized and depreciated over the shorter of the useful life or applicable lease term.  Maintenance and repair costs are charged to expense when incurred.  In leasing tenant space, we may provide funding to the lessee through a tenant allowance. In accounting for a tenant allowance, we determine whether the allowance represents funding for the construction of leasehold improvements and evaluate the ownership of such improvements. If we are considered the owner of the leasehold improvements for accounting purposes, we capitalize the amount of the tenant allowance and depreciate it over the shorter of the useful life of the leasehold improvements or the related lease term. If the tenant allowance represents a payment for a purpose other than funding leasehold improvements, or in the event that we are not considered the owner of the improvements for accounting purposes, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue on a straight-line basis.

 

Depreciation or amortization expense is computed using the straight-line method based upon the following estimated useful lives:

 

 

 

Years

Buildings and improvements

 

40

Equipment and fixtures

 

5 - 10

Tenant improvements

 

Shorter of useful life or applicable lease term

 

Impairment

 

Operating properties and intangible assets

 

Accounting for the impairment or disposal of long-lived assets require that if impairment indicators exist and the undiscounted cash flows expected to be generated by an asset are less than its carrying amount, an impairment provision should be recorded to write down the carrying amount of such asset to its fair value. We review our real estate assets 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 and occupancy percentages. Impairment indicators for pre-development costs, which are typically costs incurred during the beginning stages of a potential development and developments in progress are assessed by project and include, but are not limited to, significant changes to the Company’s plans with respect to the project, significant changes in projected completion dates, revenues or cash flows, development costs, market factors and sustainability of development projects.

 

If an indicator of potential impairment exists, the asset is tested for recoverability by comparing its carrying amount to the estimated future undiscounted cash flows. The cash flow estimates used both for determining recoverability and estimating fair value are inherently judgmental and reflect current and projected trends in rental, occupancy, capitalization rates, and estimated holding periods for the applicable assets. Although the estimated fair value of certain assets may be exceeded by the carrying amount, a real estate asset is only considered to be impaired when its carrying amount cannot be recovered through estimated future undiscounted cash flows. To the extent an impairment provision is determined to be necessary, the excess of the carrying amount of the asset over its estimated fair value is expensed to operations. In addition, the impairment provision is allocated proportionately to adjust the carrying amount of the asset. The adjusted carrying amount, which represents the new cost basis of the asset, is depreciated over the remaining useful life of the asset.

 

Rouse and RPI Businesses did not record impairment charges related to its operating properties for the three and nine months ended September 30, 2012 and 2011, respectively.

 

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Table of Contents

 

Revenue Recognition and Related Matters

 

Minimum rent revenues are recognized on a straight-line basis over the terms of the related leases. Minimum rent revenues also include amounts collected from tenants to allow the termination of their leases prior to their scheduled termination dates as well as the amortization related to above and below-market tenant leases on acquired properties. Minimum rent revenues also include percentage rents in lieu of minimum rent from those leases where we receive a percentage of tenant revenues. The following is a summary of amortization of straight-line rent, lease termination income, net amortization related to above and below-market tenant leases, and percentage rent in lieu of minimum rent:

 

 

 

For the three months ended September
30,

 

For the nine months ended September
30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Amortization of straight-line rent

 

$

696

 

$

1,548

 

$

3,852

 

$

5,313

 

Lease termination income

 

120

 

228

 

338

 

677

 

Net amortization of above and below-market tenant leases

 

(5,508

)

(5,925

)

(18,518

)

(18,575

)

Percentage rents in lieu of minimum rent

 

1,974

 

2,474

 

6,034

 

6,500

 

 

Straight-line rent receivables represent the current net cumulative rents recognized prior to when billed and collectible as provided by the terms of the leases. The following is a summary of straight-line rent receivables, which are included in accounts receivable, net, in our consolidated and combined balance sheets and are reduced for allowances for doubtful accounts:

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

(In thousands)

 

Straight-line rent receivables, net

 

$

9,938

 

$

6,086

 

 

We provide an allowance for doubtful accounts against the portion of accounts receivable, including straight-line rents, which is estimated to be uncollectible. Such allowances are reviewed periodically based upon our recovery experience. We also evaluate the probability of collecting future rent which is recognized currently under a straight-line methodology. This analysis considers the long term nature of our leases, as a certain portion of the straight-line rent currently recognizable will not be billed to the tenant until future periods. Our experience relative to unbilled deferred rent receivable is that a certain portion of the amounts recorded as straight-line rental revenue are never collected from (or billed to) tenants due to early lease terminations. For that portion of the recognized deferred rent that is not deemed to be probable of collection, an allowance for doubtful accounts has been provided. Accounts receivable are shown net of an allowance for doubtful accounts of $3.3 million and $2.9 million as of September 30, 2012 and December 31, 2011, respectively.

 

Overage rent is paid by a tenant when its sales exceed an agreed upon minimum amount. Overage rent is calculated by multiplying the sales in excess of the minimum amount by a percentage defined in the lease. Overage rent is recognized on an accrual basis once tenant sales exceed contractual tenant lease thresholds. Recoveries from tenants are established in the leases or computed based upon a formula related to real estate taxes, insurance and other shopping center operating expenses and are generally recognized as revenues in the period the related costs are incurred. The Company makes certain assumptions and judgments in estimating the reimbursements at the end of each reporting period. The Company does not expect the actual results to materially differ from the estimated reimbursement.

 

Loss Per Share

 

Basic net loss per share is computed by dividing the net loss applicable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per share reflects potential dilution of securities by adding other potential common shares, including stock options and nonvested restricted shares, to the weighted-average number of common shares outstanding for a period, if dilutive.  As of September 30, 2012, there were 1,648,386 stock options outstanding that potentially could be converted into common shares and 337,107 shares of nonvested restricted stock. These stock options and restricted stock have been excluded from this computation, as their effect is anti-dilutive.

 

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In connection with the spin-off, on January 12, 2012, GGP distributed to its stockholders 35,547,049 shares of our common stock and retained 359,056 shares of our Class B common stock. This share amount is being utilized for the calculation of basic and diluted EPS for all periods presented prior to the spin-off as our common stock was not traded prior to January 12, 2012 and there were no dilutive securities in the prior periods. The Company had the following weighted-average shares outstanding:

 

 

 

For the three months ended
September 30,

 

For the nine months ended September
30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Weighted average shares - basic and dilutive

 

49,244,562

 

35,906,105

 

45,105,947

 

35,906,105

 

 

Fair Value of Financial Instruments

 

The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price).  GAAP establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 — quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 — observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 — unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as consider counterparty credit risk in our assessment of fair value.  Considerable judgment is necessary to interpret Level 2 and 3 inputs in determining the fair value of our financial and non-financial assets and liabilities.  Accordingly, our fair value estimates, which are made at the end of each reporting period, may be different than the amounts that may ultimately be realized upon the sale or disposition of these assets.

 

The fair values of our financial instruments approximate their carrying amount in our consolidated and combined financial statements except for debt. At September 30, 2012 and December 31, 2011, management’s required estimates of fair value are presented below. We estimated the fair value of this debt 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”), a widely quoted market interest rate which is frequently the index used to determine the rate at which we borrow funds, 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 of such debt could be realized by immediate settlement of the obligation.

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Carrying Amount

 

Estimated Fair
Value

 

Carrying Amount

 

Estimated Fair
Value

 

 

 

 

 

(In thousands)

 

 

 

Fixed-rate debt

 

$

862,303

 

$

923,006

 

$

731,235

 

$

787,551

 

Variable-rate debt

 

325,074

 

325,074

 

328,449

 

328,162

 

Total mortgages, notes and loans payable

 

$

1,187,377

 

$

1,248,080

 

$

1,059,684

 

$

1,115,713

 

 

Offering Costs

 

Costs associated with the rights offering to our stockholders were deferred and charged against the gross proceeds of the offering upon the sale of shares during the nine months ended September 30, 2012 (note 11).

 

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Cash and Cash Equivalents

 

The Company considers all demand deposits and treasury bills with a maturity of three months or less, at the date of purchase, to be cash equivalents.

 

Restricted Cash

 

Restricted cash consists of security deposits and cash escrowed under loan agreements for debt service, real estate taxes, property insurance, capital renovations and capital improvements.  The restricted cash balance is included in prepaid expenses and other assets on the consolidated and combined balance sheets and totaled $37.6 million and $13.3 million at September 30, 2012 and December 31, 2011, respectively.

 

Deferred Expenses

 

Deferred expenses are comprised of deferred lease costs incurred in connection with obtaining new tenants or renewals of lease agreements with current tenants, which are amortized on a straight-line basis over the terms of the related leases, and deferred financing costs which are amortized on a straight-line basis (which approximates the effective interest method) over the lives of the related mortgages, notes, and loans payable.  The following table summarizes our deferred lease and financing costs:

 

 

 

Gross Asset

 

Accumulated
Amortization

 

Net Carrying
Amount

 

 

 

 

 

(In thousands)

 

 

 

As of September 30, 2012

 

 

 

 

 

 

 

Deferred lease costs

 

$

27,909

 

$

(8,342

)

$

19,567

 

Deferred financing costs

 

25,007

 

(5,178

)

19,829

 

Total

 

$

52,916

 

$

(13,520

)

$

39,396

 

 

 

 

 

 

 

 

 

As of December 31, 2011

 

 

 

 

 

 

 

Deferred lease costs

 

$

25,133

 

$

(5,367

)

$

19,766

 

Deferred financing costs

 

15,783

 

 

15,783

 

Total

 

$

40,916

 

$

(5,367

)

$

35,549

 

 

Stock-Based Compensation

 

The Company recognizes all stock-based compensation to employees, including grants of employee stock options and restricted stock awards, in the financial statements as compensation cost over the vesting period based on their fair value on the date of grant.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. For example, estimates and assumptions have been made with respect to fair values of assets and liabilities for purposes of applying the acquisition method of accounting, the useful lives of assets, capitalization of development and leasing costs, recoverable amounts of receivables, initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to acquisitions, impairment of long-lived assets and fair value of debt. Actual results could differ from these and other estimates.

 

Reclassifications

 

Certain prior year balances have been reclassified to conform to the current year presentation, which has not changed the operating results of the prior year.

 

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NOTE 2                            ACQUISITION

 

On February 21, 2012, we completed the acquisition of Grand Traverse Mall, which had previously been owned by GGP. We acquired the property for approximately $62.0 million through the assumption of a restructured and discounted $62.0 million, five year non-recourse loan at a 5.02% interest rate.  In addition, we funded cash payments of $2.4 million for escrows, $1.3 million for deferred financing costs and $0.5 million for acquisition costs.

 

NOTE 3                                                    INTANGIBLE ASSETS AND LIABILITIES

 

Acquisition accounting was applied to each of the properties within the Rouse portfolio either when GGP emerged from bankruptcy or upon any subsequent acquisitions.  The following table summarizes our intangible assets and liabilities as a result of the application of acquisition accounting:

 

 

 

Gross Asset
(Liability)

 

Accumulated
(Amortization)/
Accretion

 

Net Carrying
Amount

 

 

 

 

 

(In thousands)

 

 

 

As of September 30, 2012

 

 

 

 

 

 

 

Tenant leases:

 

 

 

 

 

 

 

In-place value

 

$

 95,861

 

$

(39,380

)

$

56,481

 

Above-market

 

152,547

 

(57,884

)

94,663

 

Below-market

 

(51,263

)

18,418

 

(32,845

)

Ground leases:

 

 

 

 

 

 

 

Below-market

 

2,173

 

(236

)

1,937

 

 

 

 

 

 

 

 

 

As of December 31, 2011

 

 

 

 

 

 

 

Tenant leases:

 

 

 

 

 

 

 

In-place value

 

$

101,425

 

$

(33,389

)

$

68,036

 

Above-market

 

157,139

 

(40,464

)

116,675

 

Below-market

 

(53,882

)

13,762

 

(40,120

)

Ground leases:

 

 

 

 

 

 

 

Below-market

 

2,173

 

(142

)

2,031

 

 

The gross asset balances of the in-place value of tenant leases are included in buildings and equipment in our consolidated and combined balance sheets. Acquired in-place tenant leases are amortized over periods that approximate the related lease terms. The above-market and below-market tenant and below-market ground leases are included in prepaid expenses and other assets and accounts payable and accrued expenses as detailed in Notes 4 and 6, respectively. Above and below-market lease values are amortized to revenue over the non-cancelable terms of the respective leases (averaging approximately five years for tenant leases and approximately 35 years for ground leases).

 

Amortization of these intangible assets and liabilities decreased our income by $11.1 million and $15.3 million for the three months ended September 30, 2012 and 2011, respectively, and $36.6 million and $45.6 million for the nine months ended September 30, 2012 and 2011, respectively.

 

Future amortization of our intangible assets and liabilities is estimated to decrease income by an additional $10.5 million for the remainder of 2012, $32.2 million in 2013, $23.5 million in 2014, $17.1 million in 2015 and $12.7 million in 2016.

 

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NOTE 4                                                    PREPAID EXPENSES AND OTHER ASSETS

 

The following table summarizes the significant components of prepaid expenses and other assets.

 

 

 

September 30,
2012

 

December 31,
2011

 

 

 

(In thousands)

 

Above-market tenant leases, net (Note 3)

 

$

94,663

 

$

116,675

 

Deposits

 

10,992

 

902

 

Below-market ground leases, net (Note 3)

 

1,937

 

2,031

 

Prepaid expenses

 

3,964

 

4,349

 

Other

 

4,767

 

3,068

 

Total prepaid expenses and other assets

 

$

116,323

 

$

127,025

 

 

NOTE 5                                                    MORTGAGES, NOTES AND LOANS PAYABLE

 

Mortgages, notes and loans payable are summarized as follows:

 

 

 

September 30, 
2012

 

December 31,

2011

 

 

 

(In thousands)

 

Fixed-rate debt:

 

 

 

 

 

Collateralized mortgages, notes and loans payable

 

$

862,303

 

$

731,235

 

Variable-rate debt:

 

 

 

 

 

Collateralized mortgages, notes and loans payable

 

325,074

 

328,449

 

Total mortgages, notes and loans payable (1)

 

$

1,187,377

 

$

1,059,684

 

 


(1)  Net of $41.2 million and $58.0 million and of non-cash debt market rate adjustments as of September 30, 2012 and December 31, 2011.

 

On the Spin-Off Date, we entered into a senior secured credit facility (“Senior Facility”) with a syndicate of banks, as lenders, and Wells Fargo Bank, National Association, as administrative agent, and Wells Fargo Securities, LLC, RBC Capital Markets, LLC, and U.S. Bank National Association, as joint lead arrangers that provides borrowings on a revolving basis of up to $50.0 million (the “Revolver”) and a senior secured term loan (the “Term Loan” and together with the Revolver, the “Facilities”) which provided an advance of approximately $433.5 million. The Facilities closed concurrently with the consummation of the spin-off and have a term of three years.  The interest rate was based on one month LIBOR, with a LIBOR floor of 1% plus 5.00% for the period from January 12, 2012 through September 28, 2012.  The Company renegotiated the Facilities on September 28, 2012 and the interest rate on the borrowings under the Facilities, effective that date, is LIBOR, with no LIBOR floor, plus 4.50%.  In the event of default the default interest rate will be 2.00% more than the then applicable interest rate.  During the period ended September 30, 2012, the outstanding balance on the Term Loan decreased from $433.5 million to $325.1 million due to the repayments on the Term Loan concurrent with the refinancing of the Pierre Bossier and Southland Center Malls.

 

In addition, we are required to pay an unused fee related to the Revolver equal to 0.30% per year if the aggregate unused amount is greater than or equal to 50% of the Revolver or 0.25% per year if the aggregate unused amount is less that 50% of the Revolver.  As of September 30, 2012, no amounts are drawn on our Revolver.

 

The Senior Facility has affirmative and negative covenants that are customary for a real estate loan, including, without limitation, restrictions on incurrence of indebtedness and liens on the mortgage collateral; restrictions on pledges; restrictions on subsidiary distributions; with respect to the mortgage collateral, limitations on our ability to enter into transactions including mergers, consolidations, sales of assets for less than fair market value and similar transactions; conduct of business; restricted

 

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distributions; transactions with affiliates; and limitation on speculative hedge agreements. In addition, we are required to comply with financial maintenance covenants relating to the following: (1) net indebtedness to value ratio, (2) liquidity, (3) minimum fixed charge coverage ratio, (4) minimum tangible net worth, and (5) minimum portfolio debt yield. Failure to comply with the covenants in the Senior Facility would result in a default under the credit agreement governing the Facilities and, absent a waiver or an amendment from our lenders, permit the acceleration of all outstanding borrowings under the Senior Facility, which would also result in a cross-default of our Subordinated Facility (as described below).  The Company is in compliance with these financial maintenance covenants as of September 30, 2012.

 

We also entered into a subordinated unsecured revolving credit facility with a wholly-owned subsidiary of Brookfield Asset Management, Inc., a related party, that provides borrowings on a revolving basis of up to $100.0 million (the “Subordinated Facility”). The Subordinated Facility has a term of three years and six months and will bear interest at LIBOR (with a LIBOR floor of 1%) plus 8.50%.  The default interest rate following a payment event of default under the Subordinated Facility will be 2.00% more than the then applicable interest rate.  Interest will be payable monthly.  In addition, we are required to pay a semi annual revolving credit fee of $0.25 million.  As of September 30, 2012, no amounts have been drawn from the Subordinated Facility.

 

We have individual Property-Level Debt (the “Property-Level Debt”) on 16 of our 31 assets, representing approximately $903.5 million (excluding $41.2 million of market rate adjustments) (this includes the Pierre Bossier Mall and Southland Center Mall financings discussed below). The Property-Level Debt has a weighted average interest rate of 5.26% and an average remaining term of 4.2 years. The Property-Level Debt is stand-alone (not cross-collateralized) first mortgage debt and is non-recourse with the exception of customary contingent guarantees/indemnities.

 

We have entered into a hedge transaction related to a portion of our Term Loan at a cost of approximately $0.13 million.  This hedge transaction was for an interest rate cap with a notional amount of $110.0 million and caps the daily LIBOR at 1%.  As of September 30, 2012, the fair value of the interest rate cap was $0 and $0.03 million of the loss on this interest cap is recorded in accumulated other comprehensive loss.

 

On May 11, 2012, we refinanced the Pierre Bossier Mall for approximately $48.5 million.  The loan bears interest at a fixed rate of 4.94% and has a term of ten years.  Approximately $38.2 million of the proceeds were used to release Pierre Bossier Mall from the Term Loan, including $9.7 million in excess of Pierre Bossier Mall’s allocated Term Loan balance.

 

On June 15, 2012, we refinanced the Southland Center for approximately $78.8 million.  The loan bears interest at a fixed rate of 5.09% and has a term of ten years.  Approximately $70.2 million of the proceeds were used to release Southland Center from the Term Loan, including $11.7 million in excess of Southland Center’s allocated Term Loan balance.

 

As of September 30, 2012, $1.54 billion of land, buildings and equipment (before accumulated depreciation) have been pledged as collateral for our mortgages, notes and loans payable. Certain mortgage notes 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. The weighted-average interest rate on our collateralized mortgages, notes and loans payable was approximately 5.1% as of September 30, 2012 and 4.9% as of December 31, 2011.

 

NOTE 6                                                    ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

The following table summarizes the significant components of accounts payable and accrued expenses.

 

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September 30,
2012

 

December 31,
2011

 

 

 

(In thousands)

 

Below-market tenant leases, net (Note 3)

 

$

32,845

 

$

40,120

 

Accounts payable and accrued expenses

 

16,962

 

28,454

 

Accrued interest

 

3,171

 

4,065

 

Accrued real estate taxes

 

9,896

 

6,553

 

Deferred income

 

2,260

 

1,211

 

Accrued payroll and other employee liabilities

 

6,213

 

76

 

Construction payable

 

7,941

 

6,719

 

Tenant and other deposits

 

1,529

 

1,424

 

Conditional asset retirement obligation liability

 

4,455

 

4,252

 

Other

 

3,184

 

4,638

 

Total accounts payable and accrued expenses

 

$

88,456

 

$

97,512

 

 

NOTE 7                                                    INCOME TAXES

 

RPI Businesses historically operated under GGP’s REIT structure. We elected to be taxed as a REIT in connection with the filing of our tax return for the 2011 fiscal year and intend to maintain this status in future periods. To qualify as a REIT, we 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.

 

We have subsidiaries which we may elect to treat as taxable REIT subsidiaries and which, if we do, will become subject to federal and state income taxes.

 

NOTE 8                                                    COMMON STOCK

 

On January 12, 2012, GGP distributed the assets and liabilities of RPI Businesses to Rouse. Pursuant to the spin-off, we received certain of the assets and liabilities of GGP. Upon this spin-off we issued 35,547,049 shares of our common stock to the existing GGP shareholders. In connection therewith $405.3 million of GGP’s equity was converted to paid in capital. The GGP shareholders received approximately 0.0375 shares of Rouse common stock for every share of GGP common stock owned as of the record date of December 31, 2011. We also issued 359,056 shares of our Class B common stock, par value $0.01 per share, to GGP LP.  The Class B common stock has the same rights as the Rouse common stock, except the holders of Class B common stock do not have any voting rights. The Class B common stock can be converted into common stock beginning on January 1, 2013 upon the request of the stockholder.

 

On March 26, 2012, we completed a rights offering and backstop purchase. Under the terms of the rights offering and backstop purchase, we issued 13,333,333 shares of our common stock at a subscription price of $15.00 per share. Net proceeds of the rights offering and backstop purchase approximated $191.9 million. After giving effect to the rights offering and backstop purchase, Brookfield Asset Management, Inc. and its affiliates and co-investors (collectively, “Brookfield”) own approximately 54.38% of the Company as of September 30, 2012.

 

On May 11, 2012, the Board of Directors declared a second quarter common stock dividend of $0.07 per share which was paid on July 30, 2012 to stockholders of record on July 16, 2012.

 

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On August 10, 2012, the Board of Directors declared a third quarter common stock dividend of $0.07 per share which was paid on October 29, 2012 to stockholders of record on October 15, 2012.

 

NOTE 9                                                    STOCK BASED COMPENSATION PLANS

 

Incentive Stock Plans

 

In January 2012, we adopted the Rouse Properties, Inc. 2012 Equity Incentive Plan (the “Equity Plan”).  The number of shares of common stock reserved for issuance under the Equity Plan is 4,887,997. The Equity Plan provides for grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, other stock-based awards and performance-based compensation (collectively, the “Awards”). Directors, officers, other employees and consultants of Rouse and its subsidiaries and affiliates are eligible for Awards.  No participant may be granted more than 2,500,000 shares.  The Equity Plan is not subject to the Employee Retirement Income Security Act of 1974, as amended.

 

Stock Options

 

Pursuant to the Equity Plan, we granted stock options to certain employees of the Company.  The vesting terms of these grants are specific to the individual grant.  In general, participating employees are required to remain employed for vesting to occur (subject to certain limited exceptions).  In the event that a participating employee ceases to be employed by the Company, any options that have not vested will generally be forfeited.

 

The following tables summarize stock option activity for the Equity Plan for the nine month period ended September 30, 2012.

 

 

 

2012

 

 

 

Shares

 

Weighted
Average
Exercise
Price

 

Stock options outstanding at January 1

 

 

$

 

Granted

 

1,688,886

 

14.68

 

Exercised

 

 

 

Forfeited

 

(40,500

)

14.72

 

Expired

 

 

 

Stock options outstanding at September 30

 

1,648,386

 

14.68

 

 

 

 

Stock Options Outstanding

 

Issuance

 

Shares

 

Weighted
Average
Remaining
Contractual
Term (in
years)

 

Weighted
Average
Exercise
Price

 

March 2012

 

1,575,486

 

9.50

 

$

14.72

 

May 2012

 

36,500

 

9.67

 

13.71

 

August 2012

 

36,400

 

9.92

 

13.75

 

Total

 

1,648,386

 

9.51

 

14.68

 

 

We recognized $0.3 million and $0.7 million in compensation expense related to the stock options for the three and nine months ended September 30, 2012.  There was no stock compensation expense for the three and nine months ended September 30, 2011.

 

Restricted Stock

 

Pursuant to the Equity Plan, we granted restricted stock to certain employees and non-employee directors.  The vesting terms of these grants are specific to the individual grant. In general, participating employees are required to remain employed for vesting

 

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to occur (subject to certain limited exceptions).  In the event that a participating employee ceases to be employed by the Company, any shares that have not vested will generally be forfeited. Dividends are paid on restricted stock and are not returnable, even if the underlying stock does not ultimately vest.

 

The following table summarizes restricted stock activity for the nine month period ended September 30, 2012:

 

 

 

2012

 

 

 

Shares

 

Weighted
Average
Grant
Date Fair
Value

 

Nonvested restricted stock grants outstanding as of beginning of period

 

 

$

 

Granted

 

344,751

 

14.69

 

Cancelled

 

 

 

Vested

 

(7,644

)

14.72

 

Nonvested restricted stock grants outstanding as of end of period

 

337,107

 

14.69

 

 

The weighted average remaining contractual term (in years) of nonvested awards as of September 30, 2012 was 2.9 years.

 

The total fair value of restricted stock grants which vested was $0.04 million and $0.11 million during the three and nine months ended September 30, 2012.  We recognized $0.38 million and $1.00 million in compensation expense related to the restricted stock for the three and nine months ended September 30, 2012.  There was no stock compensation expense for the three and nine months ended September 30, 2011.

 

Other Disclosures

 

The estimated values of options granted in the table above are based on the Black-Scholes pricing model using the assumptions in the table below.  The estimate of the risk-free interest rate is based on the average of a 5- and 10-year U.S. Treasury note on the date the options were granted.  The estimate of the dividend yield and expected volatility is based on a review of publicly-traded peer companies.  The expected life is computed using the simplified method as the Company does not have historical share option data.  The fair value of each option grant is estimated on the date of grant using the Black Scholes pricing model with the following 2012 weighted-average assumptions:

 

Risk-free interest rate

 

1.44

%

Dividend yield

 

4.25

%

Expected volatility

 

35.00

%

Expected life (in years)

 

6.50

 

 

As of September 30, 2012, total compensation expense which had not yet been recognized related to nonvested options and restricted stock grants was $8.4 million. Of this total, $0.6 million is expected to be recognized in 2012, $2.4 million in 2013, $2.4 million in 2014, $1.8 million in 2015, $1.1 million in 2016, and $0.1 million in 2017.  These amounts may be impacted by future grants, changes in forfeiture estimates or vesting terms, and actual forfeiture rates differing from estimated forfeitures.

 

NOTE 10                                             NON-CONTROLLING INTEREST

 

Non-controlling interest on our consolidated and combined balance sheets represent Series A Cumulative Non-Voting Preferred Stock (“Preferred Shares”) of Rouse Holdings, Inc. (Holdings), a subsidiary of Rouse.  Holdings issued 111 Preferred Shares at a par value of $1,000 per share to third parties on June 29, 2012.  The Preferred Shareholders are entitled to a cumulative preferential annual cash dividend of 12.5%.  These Preferred Shares may only be redeemed at the option of Holdings for $1,000 per share plus all accrued and unpaid dividends.  Furthermore, in the event of a voluntary or involuntary liquidation of Holdings the Preferred Shareholders are entitled to a liquidation preference of $1,000 per share plus all accrued and unpaid dividends.  The Preferred Shares are not convertible into or exchangeable for any property or securities of Holdings.

 

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NOTE 11                                          RELATED PARTY TRANSACTIONS

 

Transactions with GGP

 

As described in Note 1 to the consolidated and combined financial statements, the accompanying consolidated and combined financial statements present the operations of RPI Businesses as carved-out from the financial statements of GGP. Transactions between RPI Businesses have been eliminated in the combined presentation. Also as described in Note 1, an allocation of certain centralized GGP costs incurred for activities such as employee benefit programs (including incentive stock plans and stock based compensation expense), property management and asset management functions, centralized treasury, payroll and administrative functions have been made to the property operating costs of RPI Businesses. Transactions between the RPI Businesses and GGP or other GGP subsidiaries have not been eliminated except that end-of-period intercompany balances on December 31, 2011 and Spin-Off Date balances between GGP and RPI Businesses which have been considered elements of RPI Businesses’ equity.

 

Transition Services Agreement with GGP

 

We have entered into a transition services agreement with GGP whereby GGP or its subsidiaries will provide to us, on a transitional basis, certain specified services for various terms not exceeding 18 months following the spin-off. The services that GGP provides to us include, among others, payroll, human resources and employee benefits, financial systems management, treasury and cash management, accounts payable services, telecommunications services, information technology services, asset management services, legal and accounting services and various other corporate services. The charges for the transition services generally are intended to allow GGP to fully recover the costs directly associated with providing the services, plus a level of profit consistent with an arm’s length transaction together with all out-of-pocket costs and expenses. The charges of each of the transition services are generally based on an hourly fee arrangement and pass-through out-of-pocket costs. We may terminate certain specified services by giving prior written notice to GGP of any such termination.  Costs associated with the transition services agreement were $0.3 million and $1.3 million for the three and nine months ended September 30, 2012 and $0.3 million of these costs are payable at September 30, 2012.

 

Services Agreement with Brookfield

 

We have entered into a services agreement with Brookfield, pursuant to which Brookfield made certain of its employees available for a period of up to 12  months following the spin-off to serve as our Chief Financial Officer and Vice President of Finance.  Costs associated with the services agreement were $0.3 million and $0.8 million for the three and nine months ended September 30, 2012 and these costs are all payable at September 30, 2012.

 

On October 8, 2012 Tim Salvemini, Vice President of Finance, resigned from Brookfield and was then appointed our Chief Accounting Officer.  On October 16, 2012, Rael Diamond, our Chief Financial Officer resigned from Brookfield and John Wain was appointed as our new Chief Financial Officer.

 

Office Lease with Brookfield

 

Upon our spin-off from GGP, we assumed a 10-year lease agreement with Brookfield, as landlord, for office space for our corporate office in New York, New York. Costs associated with the office lease were $0.3 million and $0.8 million for the three and nine months ended September 30, 2012 and no amounts were payable as of September 30, 2012.  In addition, the landlord completed the build out of our office space during 2012 for $1.7 million of which $0.2 million was payable as of September 30, 2012. The costs associated with the build out of our office space were capitalized in buildings and equipment.

 

We have entered into a 5-year lease agreement with Brookfield, as landlord, for office space for our regional office in Dallas, Texas.  The lease commences in October 2012 and rent is free for the first 12 months. No amounts are payable as of September 30, 2012.

 

Subordinated Credit Facility with Brookfield

 

We entered into a credit agreement with a wholly-owned subsidiary of Brookfield, as lender, for a $100.0 million revolving subordinated credit facility.  We paid a one time upfront fee of $0.5 million related to this facility.  In addition, we are required to pay a semi annual revolving credit fee of $0.3 million related to this facility.  As of September 30, 2012, no amounts have been drawn on this facility and $0.1 million are payable related to the upfront fee and revolving credit fee.

 

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Backstop Agreement with Brookfield

 

In conjunction with the rights offering we entered into a backstop agreement with Brookfield whereby Brookfield agreed to purchase from us, at the rights offering subscription price, unsubscribed shares of our common stock such that the gross proceeds of the rights offering will be $200 million. Costs associated with the backstop agreement, which were paid to Brookfield, were $6.0 million during the nine months ended September 30, 2012, and are included as a reduction in equity through offering costs for the nine months ended September 30, 2012.

 

Business Infrastructure Costs

 

Upon our spin-off from GGP, we commenced the development of our information technology platform.  The development of this platform requires us to purchase, design and create various information technology applications and infrastructure.  Brookfield Corporate Operations, LLC (“BCO”) has been engaged to assist in the project development and procure the various applications and infrastructure of the Company.  As of September 30, 2012, we have incurred $3.4 million of infrastructure costs which are capitalized in buildings and equipment, of which $1.3 million were payable as of September 30, 2012.

 

Financial Service Center

 

We engaged BCO’s financial service center to manage administrative services of Rouse, such as accounts payable and receivable, employee expenses, lease administration, and other similar type services.  Approximately $0.03 million of costs were incurred for the three and nine months ended September 30, 2012.  All amounts are payable as of September 30, 2012.

 

Demand Deposit from Brookfield U.S. Holdings

 

In August 2012, we entered into an agreement with Brookfield U.S. Holdings (U.S. Holdings) to place funds into an interest bearing account which earns interest at LIBOR plus 1.05% per annum.  The note receivable is secured by a note from U.S. Holdings and guaranteed by Brookfield Asset Management Inc.  This note receivable matures on February 14, 2013 or we may demand the funds earlier by providing U.S. Holdings a three day notice.  We earned approximately $0.2 million in interest income for the three and nine months ended September 30, 2012.  As of September 30, 2012, we have $150.2 million on deposit with Brookfield which is recorded as a Demand deposit from affiliate in the consolidated balance sheets.

 

NOTE 12                                          SUBSEQUENT EVENTS

 

On October 25, 2012, the Company placed a new non-recourse mortgage on Animas Valley Mall, located in Farmington, NM for $51.8 million.  The loan bears interest at a fixed rate of 4.50% and has a term of ten years.  Approximately $37.1 million of the proceeds were used to reduce the Term Loan balance, a portion of which was used to pay the property’s release allocation, further reducing the Term Loan’s outstanding balance to approximately $287.9 million.  Net proceeds to the Company after related closing costs are approximately $14.3 million.

 

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

 

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

 

Forward-looking information

 

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

 

Forward-looking statements include:

 

·                  Descriptions of plans or objectives for future operations

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

·                  Forecasts of our future economic performance

·                  Descriptions of assumptions underlying or relating to any of the foregoing

 

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

 

There are several factors, many beyond our control, which could cause results to differ materially from our expectations, some of which are described in Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2011 (our “Annual Report”).  These factors are incorporated herein by reference. Any factor could by itself, or together with one or more other factors, adversely affect our business, results of operations or financial condition.

 

Overview—Introduction

 

Our portfolio consists of 31 regional malls in 19 states totaling approximately 22 million square feet of retail and ancillary space. We elected to be treated as a REIT in connection with the filing of our 2011 tax return and intend to maintain this status in future periods.

 

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

 

Our objective is to achieve growth in NOI, Core NOI, FFO and Core FFO (see “Non-GAAP Financial Measures”) by leasing, operating and repositioning retail properties which are primarily the only dominant enclosed mall in a market or submarket.  We plan to control costs within our portfolio of properties and to deliver an appropriate tenant mix, higher occupancy rates and increased sales productivity, resulting in higher minimum rent.

 

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

 

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

 

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·                  Increasing tenant sales in which we participate through overage rent;

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

·                  Prudently investing capital into our properties.

 

Overview—Basis of Presentation

 

The accompanying consolidated and combined financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  The consolidated balance sheet as of September 30, 2012 includes the accounts of Rouse, as well as all subsidiaries.  The accompanying consolidated and combined statement of operations and comprehensive loss for the three months ended September 30, 2012 includes the consolidated accounts of Rouse and for the nine months ended September 30, 2012 the consolidated accounts of Rouse and the combined accounts of RPI Businesses.  Accordingly, the results presented for the nine months ended September 30, 2012 reflect the aggregate operations and changes in cash flows and equity on a carved-out basis for the period from January 1, 2012 through January 12, 2012 and on a consolidated basis from January 13, 2012 through September 30, 2012.  The accompanying financial statements for the periods prior to the Spin-Off Date are prepared on a carve-out basis from the consolidated financial statements of GGP using the historical results of operations and bases of the assets and liabilities of the transferred businesses and including allocations from GGP.  All intercompany transactions have been eliminated in consolidation and combination as of and for the periods ended September 30, 2012 and 2011, except end-of-period intercompany balances on December 31, 2011 and Spin-Off Date balances between GGP and RPI Businesses which have been considered elements of RPI Businesses’ equity.

 

The consolidated and combined financial information included in this Quarterly Report does not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as a separate, publicly-traded company during the periods presented or those that we will achieve in the future.

 

Recent Developments

 

On August 10, 2012, the Board of Directors declared a third quarter common stock dividend of $0.07 per share which was paid on October 29, 2012 to stockholders of record on October 15, 2012.

 

On September 28, 2012, we renegotiated the Facilities (as defined below) and the interest rate of borrowings, effective that date, is LIBOR, with no LIBOR floor, plus 4.50%.  Prior to renegotiating the Facilities the interest rate was LIBOR plus 5.00%, with a LIBOR floor of 1.00%.

 

Operating Metrics

 

During the three month period ended September 30, 2012, we leased 698,112 square feet bringing the total volume completed during 2012 to 1,479,803 square feet.  At September 30, 2012, the leased percentage was 89.3%, an increase of 160 basis points compared to December 31, 2011 and an increase of 90 basis points compared to June 30, 2012.  While our leasing has been strong during the nine months ended September 30, 2012 there is a time period between the date a lease is signed and the tenant occupies the space and begins paying rent.  As a result, the impact of a majority of this leasing will contribute to an increase in our revenues during the second half of 2013.

 

The following table summarizes selected operating metrics for the portfolio as of September 30, 2012:

 

 

 

% Leased (1)

 

% Occupied (2)

 

In - Place
Rent <10K
SF (3)

 

Tenant Sales
PSF (4)

 

Occupancy
Cost (5)

 

Total Portfolio

 

89.3

%

85.2

%

$

37.60

 

$

295

 

12.7

%

 


(1)  Represents contractual obligations for space in regional malls and excludes traditional anchor stores.

(2)  Represents tenants’ physical or economic presence in regional malls and excludes traditional anchor stores.

(3)  Weighted average rent of mall stores at September 30, 2012.  Rent is presented on a cash basis and consists of base minimum rent, common area costs, and real estate taxes.

(4)  Rolling twelve month tenant sales for mall stores less than 10,000 square feet.

(5)  Represents tenants less than 10,000 square feet utilizing comparative tenant sales.

 

The following table summarizes leasing activity for the three months ended September 30, 2012 with respect to leases which are scheduled to commence in 2012 and 2013:

 

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New Leases

 

Number of Leases (1)

 

Square Feet

 

Term

 

Initial Rent PSF (2)

 

Average Rent PSF (3)

 

Under 10,000 sq. ft.

 

39

 

88,126

 

9.7

 

$

34.38

 

$

38.46

 

Over 10,000 sq. ft.

 

8

 

200,595

 

11

 

12.46

 

13.43

 

Total New Leases

 

47

 

288,721

 

10.6

 

19.15

 

21.07

 

 

 

 

 

 

 

 

 

 

 

 

 

Renewal Leases

 

 

 

 

 

 

 

 

 

 

 

Under 10,000 sq. ft.

 

54

 

150,100

 

4.5

 

$

35.85

 

$

38.59

 

Over 10,000 sq. ft.

 

8

 

163,125

 

4.9

 

18.04

 

18.21

 

Total Renewal Leases

 

62

 

313,225

 

4.7

 

$

26.58

 

$

27.98

 

 

 

 

 

 

 

 

 

 

 

 

 

Sub-Total

 

109

 

601,946

 

7.5

 

23.01

 

24.66

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent in Lieu

 

19

 

96,166

 

n.a.

 

n.a.

 

n.a.

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Q3 2012

 

128

 

698,112

 

7.5

 

$

23.01

 

$

24.66

 

Total Q2 2012

 

137

 

551,146

 

 

 

 

 

 

 

Total Q1 2012

 

60

 

230,545

 

 

 

 

 

 

 

Total 2012

 

325

 

1,479,803

 

 

 

 

 

 

 

 


(1) Excluding anchors and specialty leasing.

(2) Represents initial rent at time of rent commencement consisting of base minimum rent, common area costs, and real estate taxes.

(3) Represents average rent over the lease term consisting of base minimum rent, common area costs, and real estate taxes.

 

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Results of Operations

 

Three Months Ended September 30, 2012 and 2011

 

 

 

For the three months ended September 30,

 

 

 

 

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

Revenues:

 

 

 

 

 

 

 

 

 

Minimum rents

 

$

38,458

 

$

38,467

 

$

(9

)

%

Tenant recoveries

 

18,006

 

17,899

 

107

 

0.6

 

Overage rents

 

786

 

779

 

7

 

0.9

 

Other

 

1,213

 

1,410

 

(197

)

(14.0

)

Total revenues

 

58,463

 

58,555

 

(92

)

(0.2

)

Expenses:

 

 

 

 

 

 

 

 

 

Real estate taxes

 

5,979

 

5,829

 

150

 

2.6

 

Property maintenance costs

 

2,916

 

2,731

 

185

 

6.8

 

Marketing

 

729

 

777

 

(48

)

(6.2

)

Other property operating costs

 

16,070

 

15,804

 

266

 

1.7

 

Provision for doubtful accounts

 

699

 

294

 

405

 

137.8

 

General and administrative

 

5,267

 

2,374

 

2,893

 

121.9

 

Depreciation and amortization

 

16,799

 

20,425

 

(3,626

)

(17.8

)

Other

 

1,512

 

240

 

1,272

 

530.0

 

Total expenses

 

49,971

 

48,474

 

1,497

 

3.1

 

Operating income

 

8,492

 

10,081

 

(1,589

)

(15.8

)

 

 

 

 

 

 

 

 

 

 

Interest income

 

253

 

6

 

247

 

4,116.7

 

Interest expense

 

(21,712

)

(18,963

)

(2,749

)

14.5

 

Loss before income taxes

 

(12,967

)

(8,876

)

(4,091

)

46.1

 

Provision for income taxes

 

(89

)

(97

)

8

 

(8.2

)

Net loss

 

$

(13,056

)

$

(8,973

)

$

(4,083

)

45.5

%

 

Provision for doubtful accounts increased $0.4 million for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 primarily due to a recovery that was received in 2011 that was previously written off as bad debt expense.

 

General and administrative increased $2.9 million for the three months ended September 30, 2012.  The increase is due to the fact that we assumed responsibility for certain overhead costs which include costs related to property management, human resources, security, payroll and benefits, legal, corporate communications and information services.  For the three months ended September 30, 2011, the $2.4 million of costs were charged or allocated to us based on GGP’s corporate costs based on a number of factors, most significantly our percentage of GGP’s adjusted revenue and assets and the number of properties.

 

Depreciation and amortization decreased $3.6 million for the three months ended September 30, 2012 primarily due to the decrease in amortization of in-place leases due to tenant lease expirations.

 

Other expenses increased $1.3 million for the three months ended September 30, 2012 primarily due to initial costs incurred by the Company during its first year of stand alone operations.  These other costs primarily consist of $0.3 million in severance costs, $0.2 million in recruiting costs, and $0.8 million in temporary employee expenses.

 

Interest expense increased $2.7 million for the three months ended September 30, 2012 primarily due to deferred financing amortization and interest expense incurred.  The Company incurred $1.8 million in amortization of deferred financing costs for the three months ended September 30, 2012 as a result of the additional deferred financing costs associated with the refinancings completed by the Company during 2012 as compared to no amortization of deferred financing costs for the three

 

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months ended September 30, 2011.  The remainder of the change was due to the increase in debt within the overall portfolio and a change in interest rates.

 

Nine Months Ended September 30, 2012 and 2011

 

 

 

For the nine months ended September 30,

 

 

 

 

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

Revenues:

 

 

 

 

 

 

 

 

 

Minimum rents

 

$

113,742

 

$

113,423

 

$

319

 

0.3

%

Tenant recoveries

 

51,517

 

53,837

 

(2,320

)

(4.3

)

Overage rents

 

2,890

 

2,541

 

349

 

13.7

 

Other

 

3,671

 

4,108

 

(437

)

(10.6

)

Total revenues

 

171,820

 

173,909

 

(2,089

)

(1.2

)

Expenses:

 

 

 

 

 

 

 

 

 

Real estate taxes

 

17,544

 

17,943

 

(399

)

(2.2

)

Property maintenance costs

 

9,708

 

9,691

 

17

 

0.2

 

Marketing

 

1,850

 

2,351

 

(501

)

(21.3

)

Other property operating costs

 

45,386

 

43,395

 

1,991

 

4.6

 

Provision for doubtful accounts

 

1,413

 

806

 

607

 

75.3

 

General and administrative

 

15,726

 

8,100

 

7,626

 

94.1

 

Depreciation and amortization

 

51,846

 

58,911

 

(7,065

)

(12.0

)

Other

 

7,954

 

162

 

7,792

 

4,809.9

 

Total expenses

 

151,427

 

141,359

 

10,068

 

7.1

 

Operating income

 

20,393

 

32,550

 

(12,157

)

(37.3

)

 

 

 

 

 

 

 

 

 

 

Interest income

 

263

 

14

 

249

 

1,778.6

 

Interest expense

 

(75,400

)

(54,285

)

(21,115

)

38.9

 

Loss before income taxes

 

(54,744

)

(21,721

)

(33,023

)

152.0

 

Provision for income taxes

 

(328

)

(385

)

57

 

(14.8

)

Net loss

 

$

(55,072

)

$

(22,106

)

$

(32,966

)

149.1

%

 

Marketing decreased $0.5 million for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 primarily due to expenses for national marketing programs that were higher when the properties were owned by GGP during 2011.

 

Provision for doubtful accounts increased $0.6 million for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 primarily due to a recovery that was received in 2011 that was previously written off as bad debt expense.

 

General and administrative increased $7.6 million for the nine months ended September 30, 2012.  The increase is due to the fact that we assumed responsibility for certain overhead costs which include costs related to property management, human resources, security, payroll and benefits, legal, corporate communications and information services.  For the nine months ended September 30, 2011, the $8.1 million of costs were charged or allocated to us based on GGP’s corporate costs based on a number of factors, most significantly our percentage of GGP’s adjusted revenue and assets and the number of properties.

 

Depreciation and amortization decreased $7.1 million for the nine months ended September 30, 2012 primarily due to the decrease in amortization of in-place leases due to tenant lease expirations.

 

Other expenses increased $7.8 million for the nine months ended September 30, 2012 primarily due to initial costs incurred by the Company during its first year of stand alone operations.  These other costs include $1.2 million in signing bonuses, $1.8 million for severance expenses, $2.5 million for temporary employees and other one-time spin-off costs.

 

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Interest expense increased $21.1 million for the nine months ended September 30, 2012 primarily due to deferred financing amortization, write-off of deferred financing costs, write off of market rate adjustments and interest expense incurred.  The Company incurred $5.5 million in amortization of deferred financing costs for the nine months ended September 30, 2012 as a result of the additional deferred financing costs associated with the refinancings completed by the Company during 2012 as compared to no amortization of deferred financing costs for the nine months ended September 30, 2011.  Furthermore, the Company incurred $1.8 million in write-off of deferred financing costs for the nine months ended September 30, 2012 as a result of the write off of the Term Loan deferred financing costs associated with the Pierre Bossier and Southland Center Malls as compared to no write-off of deferred financing costs for the nine months ended September 30, 2011.  The Company wrote off $9.0 million of market rate adjustments on loans that were paid off on the date of the spin-off.  The remainder of the change was due to the increase in debt within the overall portfolio and a change in interest rates.

 

Liquidity and Capital Resources

 

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

 

Our primary sources of cash are operating cash flows, borrowings under our Senior Facility, borrowings under our Subordinated Facility as described under “Financings” below and the proceeds of our rights offering.

 

The successful execution of our business strategy will require the availability of substantial amounts of operating and development capital both initially and over time. Sources of such capital could include bank, life insurance company, pension plan or institutional investor capital, commercial mortgage backed securities, public and private offerings of debt or equity, sale of certain assets and joint ventures.  We have identified opportunities to invest significant capital to reposition and refresh certain of our properties, but we will sequence long-term redevelopment projects with leasing activity. We believe these capital investments will assist in increasing our revenues significantly and deliver solid net operating income growth over the medium term.  For a discussion of factors that could have an impact on our ability to realize these goals, see “Forward-Looking Information.”

 

As of September 30, 2012, our combined contractual debt, excluding non-cash debt market rate adjustments, was approximately $1.23 billion. The aggregate principal and interest payments on our outstanding indebtedness as of September 30, 2012 are approximately $21.3 million for the remainder of 2012 and approximately $140.3 million for the year ended December 31, 2013.

 

We believe that our current liquidity along with cash generated from operations will be sufficient to permit us to meet our debt service obligations, ongoing cost of operations, working capital needs, distribution requirements and capital expenditure requirements for at least the next 12 months. Our future financial and operating performance, ability to service or refinance our debt and ability to comply with the covenants and restrictions contained in our debt agreements will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.  For a discussion of factors that could have an impact on our ability to realize these goals, see “Forward-Looking Information.”

 

Financings

 

Senior Facility.  On January 12, 2012, we entered into a three year senior secured credit facility (“Senior Facility”) with a syndicate of banks, as lenders, and Wells Fargo Bank, National Association, as administrative agent, and Wells Fargo Securities, LLC, RBC Capital Markets, LLC and U.S. Bank National Association, as joint lead arrangers, that provides borrowings on a revolving basis of up to $50.0 million (the “Revolver”), and a senior secured term loan (the “Term Loan” and together with the Revolver, the “Facilities”) that provided an advance of approximately $433.5 million. We used the proceeds of the Term Loan to refinance certain mortgage debt that was not assumed by us in connection with the spin-off and to pay other transaction fees and expenses.  During the period ended September 30, 2012, the outstanding balance on the Term Loan decreased from $433.5 million to $325.1 million due to the repayments on the Term Loan concurrent with the refinancing of the Pierre Bossier and Southland Center Malls.

 

The Senior Facility has affirmative and negative covenants that are customary for a real estate loan, including, without limitation, restrictions on incurrence of indebtedness and liens on the mortgage collateral; restrictions on pledges; restrictions on subsidiary distributions; with respect to the mortgage collateral, limitations on our ability to enter into transactions including mergers, consolidations, sales of assets for less than fair market value and similar transactions; conduct of business; restricted distributions; transactions with affiliates; and limitation on speculative hedge agreements. In addition, we are required to comply with financial maintenance covenants relating to the following: (1) net indebtedness to value ratio, (2) liquidity, (3) minimum fixed charge coverage ratio, (4) minimum tangible net worth, and (5) minimum portfolio debt yield. Failure to comply with the covenants in the Senior Facility could result in a default under the credit agreement governing these Facilities

 

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and, absent a waiver or an amendment from our lenders, permit the acceleration of all outstanding borrowings under the Senior Facility and would cross-default our Subordinated Facility (as described below).

 

Property-Level Debt.    We have individual Property-Level Debt (the “Property-Level Debt”) on 16 of our 31 assets, representing approximately $903.5 million (excluding $41.2 million of market rate adjustments). The Property-Level Debt has a weighted average interest rate of 5.26% and an average remaining term of 4.2 years. The Property-Level Debt is stand-alone (not cross-collateralized) first mortgage debt and is non-recourse with the exception of customary contingent guarantees/indemnities.

 

Subordinated Facility.    On January 12, 2012, we entered into a subordinated unsecured revolving credit facility with a wholly-owned subsidiary of Brookfield Asset Management Inc. that provides for borrowings on a revolving basis of up to $100.0 million (the “Subordinated Facility”). The Subordinated Facility does not have any affirmative covenants and has the following negative covenants: mergers, consolidations and sales of all or substantially all assets; modifications of organizational documents; no adverse modifications to the facilities; and no refinancing or replacement of the facilities without the Subordinated Facility lender’s consent. There are cross-default provisions with the Senior Facility. If the Senior Facility is repaid or refinanced prior to the maturity of the Subordinated Facility, then the covenants (other than financial covenants and covenants related specifically to the mortgaged properties) from the Senior Facility shall be incorporated by reference into the Subordinated Facility.

 

Summary of Cash Flows

 

Cash Flows from Operating Activities

 

Net cash provided by operating activities was $34.1 million for the nine months ended September 30, 2012 compared to net cash provided by operating activities of $62.8 million for the nine months ended September 30, 2011.  The decrease in cash provided by operating activities of $28.7 million was due primarily to the funding of the net loss and prepaid expenses and other assets.  Our net loss increased $33.0 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.

 

Cash Flows from Investing Activities

 

Net cash used in investing activities was $213.4 million for the nine months ended September 30, 2012 compared to $19.3 million for the nine months ended September 30, 2011.  The increase in cash used in investing activities was primarily due to placing $150.0 million on deposit with Brookfield U.S. Holdings, $19.3 million increase in restricted cash required for capital renovation and replacement reserves, and $10.0 million increase for the funding of a deposit for the future acquisition of The Mall at Turtle Creek.  In addition, during the nine months ended September 30, 2012 we paid approximately $16.5 million related to four anchor acquisitions at four malls within the portfolio, which increased our cash paid for the acquisition of real estate as compared to the nine months ended September 30, 2011.

 

Cash Flows from Financing Activities

 

Net cash provided by financing activities was $201.6 million for the nine months ended September 30, 2012 compared to $45.0 million of cash used in financing activities for the nine months ended September 30, 2011.  The increase of $246.6 million in net cash provided from financing activities was primarily due to $191.6 million in net proceeds related to our rights offering as well as $433.5 million provided by a term loan that was used primarily to pay down $391.3 million of debt at the time of the spin-off as well as provide working capital.

 

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Contractual Cash Obligations and Commitments

 

The following table aggregates our contractual cash obligations and commitments as of September 30, 2012:

 

 

 

2012

 

2013

 

2014

 

2015

 

2016

 

Subsequent

 

Total

 

 

 

(In thousands)

 

Long-term debt-principal (1)

 

$

5,537

 

$

78,366

 

$

255,598

 

$

330,019

 

$

216,682

 

$

342,395

 

$

1,228,597

 

Interest payments (2)

 

15,772

 

61,938

 

52,037

 

31,478

 

23,028

 

40,159

 

224,412

 

Operating lease obligations

 

269

 

1,102

 

1,182

 

1,185

 

1,188

 

5,820

 

10,746

 

Total

 

$

21,578

 

$

141,406

 

$

308,817

 

$

362,682

 

$

240,898

 

$

388,374

 

$

1,463,755

 

 


(1)  Excludes $41.2 million of non-cash debt market rate adjustments.

(2)  Based on rates as of September 30, 2012.  Variable rates are based on LIBOR rate of 0.22%.  In order to calculate interest for future periods we utilized the interest rate on September 30, 2012 of 4.72%.  If we had increased the effective interest rate to 4.97% to calculate future interest on the variable debt, interest payments would have increased $0.2 million, $0.8 million and $0.8 million for the remainder of 2012, 2013, and 2014, respectively.

 

Off-Balance Sheet Financing Arrangements

 

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

 

REIT Requirements

 

In order to qualify as a REIT for federal income tax purposes, among other requirements, we must distribute or pay tax on 100% of our capital gains and we must distribute at least 90% of our ordinary taxable income to stockholders. To avoid current entity level U.S. federal income taxes, we plan to distribute 100% of our capital gains and ordinary income to our stockholders annually. We may not have sufficient liquidity to meet these distribution requirements.  During the second quarter of 2012 our board of directors approved a quarterly dividend of $0.07.  The board will continue to evaluate the dividend policy on a regular basis.

 

Seasonality

 

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

 

Critical Accounting Policies

 

Critical accounting policies are those that are both significant to the overall presentation of our financial condition and results of operations and require management to make difficult, complex or subjective judgments. Our critical accounting policies are discussed in our Annual Report and have not changed during 2012.

 

Non-GAAP Financial Measures

 

Funds from Operations and Core Funds from Operations

 

Consistent with real estate industry and investment community practices, we use FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), as a supplemental measure of our operating performance. NAREIT defines FFO as net income (loss) (computed in accordance with current GAAP), excluding impairment write-downs on depreciable real estate, gains or losses from cumulative effects of accounting changes, extraordinary items and sales of depreciable properties, plus real estate related depreciation and amortization.  We also include Core FFO as a supplemental measurement of operating performance.  We define Core FFO as FFO excluding straight-line rent, amortization of above-and below-market tenant leases, amortization of above-and below-market ground rent expense, amortization of deferred financing costs, mark-to-market adjustments on debt, write-off of market rate adjustments on debt, debt extinguishment costs, other non-recurring costs and

 

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provision for income taxes.  Other real estate companies may use different methodologies for calculating FFO and Core FFO, and accordingly, our FFO and Core FFO may not be comparable to other real estate companies.

 

We consider FFO and Core FFO useful supplemental measures and a complement to GAAP measures because they facilitate an understanding of the operating performance of our properties. FFO does not include real estate depreciation and amortization required by GAAP because these amounts are computed to allocate the cost of a property over its useful life. Since values for well-maintained real estate assets have historically increased or decreased based upon prevailing market conditions, we believe that FFO provides investors with a clearer view of our operating performance, particularly with respect to our mall properties.  Core FFO does not include certain items that are non-cash and certain non-comparable items.  FFO and Core FFO are not measurements of our financial performance under GAAP and should not be considered as an alternative to revenues, operating income (loss), net income (loss) or any other performance measures derived in accordance with GAAP or as an alternative to cash flows from operating activities as a measure of our liquidity.

 

Net Operating Income and Core Net Operating Income

 

We present NOI and Core NOI, as defined below, in this Quarterly Report as supplemental measures of our performance that are not required by, or presented in accordance with GAAP. We believe that NOI and Core NOI are useful supplemental measures of our operating performance. We define NOI as operating revenues (minimum rents, including lease termination fees, tenant recoveries, overage rents, and other income) less property and related expenses (real estate taxes, repairs and maintenance, marketing, other property operating costs, and provision for doubtful accounts). We define Core NOI as NOI excluding straight-line rent and amortization of above and below-market tenant leases. Other real estate companies may use different methodologies for calculating NOI and Core NOI, and accordingly, our NOI and Core NOI may not be comparable to other real estate companies.

 

Because NOI and Core NOI exclude general and administrative expenses, interest expense, depreciation and amortization, straight-line rent and above and below-market tenant leases, we believe that NOI and Core NOI provide performance measures that, when compared year over year, reflect the revenues and expenses directly associated with owning and operating regional shopping malls and the impact on operations from trends in occupancy rates, rental rates and operating costs. These measures thereby provide an operating perspective not immediately apparent from GAAP operating or net income. We use NOI and Core NOI to evaluate our operating performance on a property-by-property basis because NOI and Core NOI allow us to evaluate the impact that factors such as lease structure, lease rates and tenant base, which vary by property, have on our operating results, gross margins and investment returns.

 

Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures

 

The Company presents NOI and FFO as they are financial measures widely used in the REIT industry.  In order to provide a better understanding of the relationship between our non-GAAP supplemental financial measures of NOI, Core NOI, FFO and Core FFO, reconciliations have been provided as follows:  a reconciliation of GAAP net loss to FFO and Core FFO and a reconciliation of GAAP net loss to NOI and Core NOI.  None of our non-GAAP supplemental financial measures represent cash flow from operating activities in accordance with GAAP, none should be considered as alternatives to GAAP net loss and none are necessarily indicative of cash available to fund cash needs.

 

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The following table reconciles net loss to FFO and Core FFO:

 

 

 

For the three months ended
September 30,

 

For the nine months ended

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In Thousands)

 

Net loss

 

$

(13,056

)

$

(8,973

)

$

(55,072

)

$

(22,106

)

Depreciation and amortization

 

16,799

 

20,425

 

51,846

 

58,911

 

FFO

 

3,743

 

11,452

 

(3,226

)

36,805

 

Provision for income taxes

 

89

 

97

 

328

 

385

 

Interest expense

 

 

 

 

 

 

 

 

 

Mark-to-market adjustments on debt

 

2,535

 

4,931

 

7,919

 

8,601

 

Write-off of market rate debt adjustments

 

 

 

8,957

 

(1,489

)

Amortization of deferred financing costs

 

1,820

 

 

5,508

 

 

Write-off of deferred financing costs

 

 

 

1,780

 

 

Debt extinguishment costs

 

 

 

 

1,475

 

Other

 

1,512

 

240

 

7,954

 

162

 

Above and below market ground rent expense, net

 

31

 

31

 

93

 

93

 

Above and below market tenant leases, net

 

5,508

 

5,925

 

18,518

 

18,575

 

Amortization of straight line rent

 

(696

)

(1,548

)

(3,852

)

(5,313

)

Core FFO

 

$

14,542

 

$

21,128

 

$

43,979

 

$

59,294

 

 

The following table reconciles net loss to NOI and Core NOI:

 

 

 

For the three months ended
September 30,

 

For the nine months ended

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In Thousands)

 

Net loss

 

$

(13,056

)

$

(8,973

)

$

(55,072

)

$

(22,106

)

Provision for income taxes

 

89

 

97

 

328

 

385

 

Interest expense

 

21,712

 

18,963

 

75,400

 

54,285

 

Interest income

 

(253

)

(6

)

(263

)

(14

)

Other

 

1,512

 

240

 

7,954

 

162

 

Depreciation and amortization

 

16,799

 

20,425

 

51,846

 

58,911

 

General and administrative

 

5,267

 

2,374

 

15,726

 

8,100

 

NOI

 

32,070

 

33,120

 

95,919

 

99,723

 

Above and below market ground rent expense, net

 

31

 

31

 

93

 

93

 

Above and below market tenant leases, net

 

5,508

 

5,925

 

18,518

 

18,575

 

Amortization of straight line rent

 

(696

)

(1,548

)

(3,852

)

(5,313

)

Core NOI

 

$

36,913

 

$

37,528

 

$

110,678

 

$

113,078

 

 

ITEM 3      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been no material changes in the market risks described in our Annual Report.

 

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ITEM 4      CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)).  Based on that evaluation, the CEO and the CFO have concluded that our disclosure controls and procedures are effective.

 

Internal Controls over Financial Reporting

 

There have been no changes in our internal controls during our most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

PART II      OTHER INFORMATION

 

ITEM 1       LEGAL PROCEEDINGS

 

In the ordinary course of our business, we are from time to time involved in legal proceedings related to the ownership and operations of our properties. We are not currently involved in any legal or administrative proceedings that we believe are likely to have a materially adverse effect on our business, results of operations or financial condition.

 

ITEM 1A   RISK FACTORS

 

There are no material changes to the risk factors previously disclosed in Part I, Item 1A in our Annual Report.

 

ITEM 2   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On March 26, 2012 we sold 6,354,012 shares of our common stock to affiliates of Brookfield at a price of $15.00 per share in accordance with the terms of our backstop purchase agreement with Brookfield. The sale was made in reliance on the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.

 

ITEM 3  DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4  MINE SAFETY DISCLOSURES

 

Not Applicable

 

ITEM 5   OTHER INFORMATION

 

None

 

ITEM 6   EXHIBITS

 

31.1                        Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2