0001104659-19-007504.txt : 20190212 0001104659-19-007504.hdr.sgml : 20190212 20190212161341 ACCESSION NUMBER: 0001104659-19-007504 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20190212 FILED AS OF DATE: 20190212 DATE AS OF CHANGE: 20190212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Brookfield Property Partners L.P. CENTRAL INDEX KEY: 0001545772 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 000000000 STATE OF INCORPORATION: D0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-35505 FILM NUMBER: 19590925 BUSINESS ADDRESS: STREET 1: 73 FRONT STREET CITY: HAMILTON STATE: D0 ZIP: HM 12 BUSINESS PHONE: 212-417-7000 MAIL ADDRESS: STREET 1: BROOKFIELD PLACE STREET 2: 250 VESEY STREET, 15TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10281-1023 6-K 1 a19-3636_16k.htm 6-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 6-K

 


 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of February 2019

 

Commission File Number:  001-35505

 


 

BROOKFIELD PROPERTY PARTNERS L.P.

(Exact name of registrant as specified in its charter)

 

73 Front Street, Hamilton, HM 12 Bermuda

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F x                   Form 40-F o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o

 

The information contained in Exhibits 99.1 and 99.2 of this Form 6-K is incorporated by reference into the registrant’s following registration statements on Form F-3: File No. 333-218503, 333-218504, 333-225158 and 333-225163; and the registrant’s following registration statements on Form S-8: File Nos. 333-196622, 333-203042 and 333-227082.

 

 

 


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: February 12, 2019

BROOKFIELD PROPERTY PARTNERS, L.P.

 

By its general partner, Brookfield Property Partners Limited

 

 

 

By:

/s/ Jane Sheere

 

Name:

Jane Sheere

 

Title:

Secretary

 

2


 

The information set forth in the exhibits below was provided to investors in Canada on February 11, 2019.

 

EXHIBIT INDEX

 

EXHIBIT

 

DESCRIPTION

99.1

 

Consolidated financial statements (unaudited) of GGP Inc. as at June 30, 2018 and December 31, 2017 and for the three months and six months ended June 30, 2018 and 2017

 

 

 

99.2

 

Unaudited Pro Forma Consolidated Income Statements for Brookfield Property Partners L.P.

 

3


EX-99.1 2 a19-3636_1ex99d1.htm EX-99.1

Exhibit 99.1

 

GGP INC.

 

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

 

June 30, 2018

 

December 31, 2017

 

 

 

(Dollars in thousands, except share and per share
amounts)

 

Assets:

 

 

 

 

 

Investment in real estate:

 

 

 

 

 

Land

 

$

3,887,771

 

$

4,013,874

 

Buildings and equipment

 

17,086,107

 

16,957,720

 

Less accumulated depreciation

 

(3,389,587

)

(3,188,481

)

Construction in progress

 

484,835

 

473,118

 

Net property and equipment

 

18,069,126

 

18,256,231

 

Investment in Unconsolidated Real Estate Affiliates

 

3,360,839

 

3,377,112

 

Net investment in real estate

 

21,429,965

 

21,633,343

 

Cash and cash equivalents

 

194,675

 

164,604

 

Accounts receivable, net

 

311,660

 

334,081

 

Notes receivable

 

351,422

 

417,558

 

Deferred expenses, net

 

281,570

 

284,512

 

Prepaid expenses and other assets

 

442,574

 

515,856

 

Assets held for disposition

 

120,732

 

 

Total assets

 

$

23,132,598

 

$

23,349,954

 

Liabilities:

 

 

 

 

 

Mortgages, notes and loans payable

 

$

12,847,635

 

$

12,832,459

 

Investment in Unconsolidated Real Estate Affiliates

 

22,400

 

21,393

 

Accounts payable and accrued expenses

 

878,526

 

919,432

 

Dividend payable

 

217,480

 

219,508

 

Deferred tax liabilities

 

2,245

 

2,428

 

Junior subordinated notes

 

206,200

 

206,200

 

Liabilities held for disposition

 

100,711

 

 

Total liabilities

 

14,275,197

 

14,201,420

 

Redeemable noncontrolling interests:

 

 

 

 

 

Preferred

 

52,256

 

52,256

 

Common

 

171,083

 

195,870

 

Total redeemable noncontrolling interests

 

223,339

 

248,126

 

Commitments and Contingencies

 

 

 

Equity:

 

 

 

 

 

Common stock:

 

 

 

 

 

11,000,000,000 shares authorized, $0.01 par value, 1,041,821,913 issued, 958,391,012 outstanding as of June 30, 2018, and 1,040,382,900 issued, 956,982,536 outstanding as of December 31, 2017

 

10,144

 

10,130

 

Preferred Stock:

 

 

 

 

 

500,000,000 shares authorized, $0.01 par value, 10,000,000 shares issued and outstanding as of June 30, 2018 and December 31, 2017

 

242,042

 

242,042

 

Additional paid-in capital

 

11,880,450

 

11,845,532

 

Retained earnings (accumulated deficit)

 

(2,396,371

)

(2,107,498

)

Accumulated other comprehensive loss

 

(82,229

)

(71,906

)

Common stock in treasury, at cost, 55,969,390 shares as of June 30, 2018 and December 31, 2017

 

(1,122,640

)

(1,122,640

)

Total stockholders’ equity

 

8,531,396

 

8,795,660

 

Noncontrolling interests in consolidated real estate affiliates

 

48,340

 

55,379

 

Noncontrolling interests related to long-term incentive plan common units

 

54,326

 

49,369

 

Total equity

 

8,634,062

 

8,900,408

 

Total liabilities, redeemable noncontrolling interests and equity

 

$

23,132,598

 

$

23,349,954

 

 

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

 

1


 

GGP INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(Dollars in thousands, except per share amounts)

 

Revenues:

 

 

 

 

 

 

 

 

 

Minimum rents

 

$

379,312

 

$

349,205

 

$

747,835

 

$

698,218

 

Tenant recoveries

 

156,155

 

161,926

 

313,157

 

324,982

 

Overage rents

 

3,927

 

3,280

 

10,171

 

9,217

 

Management fees and other corporate revenues

 

26,030

 

20,847

 

51,795

 

48,990

 

Other

 

17,720

 

20,538

 

34,351

 

40,722

 

Total revenues

 

583,144

 

555,796

 

1,157,309

 

1,122,129

 

Expenses:

 

 

 

 

 

 

 

 

 

Real estate taxes

 

62,604

 

59,042

 

122,337

 

116,536

 

Property maintenance costs

 

10,976

 

10,724

 

25,690

 

25,699

 

Marketing

 

1,744

 

1,296

 

3,160

 

3,441

 

Other property operating costs

 

71,752

 

69,590

 

143,504

 

138,893

 

Provision for doubtful accounts

 

2,234

 

3,166

 

5,662

 

6,617

 

Property management and other costs

 

36,595

 

39,025

 

76,169

 

80,139

 

General and administrative

 

12,041

 

15,862

 

24,288

 

30,546

 

Provision for impairment

 

 

 

38,379

 

 

Depreciation and amortization

 

173,642

 

174,298

 

359,035

 

344,596

 

Total expenses

 

371,588

 

373,003

 

798,224

 

746,467

 

Operating income

 

211,556

 

182,793

 

359,085

 

375,662

 

Interest and dividend income

 

9,518

 

17,452

 

18,667

 

35,388

 

Interest expense

 

(140,562

)

(134,209

)

(278,488

)

(266,532

)

Loss on foreign currency

 

 

(3,877

)

 

(694

)

Gain on extinguishment of debt

 

 

55,112

 

 

55,112

 

Gain (loss) from changes in control of investment properties and other, net

 

 

(15,841

)

12,664

 

(15,841

)

Income before income taxes, equity in income of Unconsolidated Real Estate Affiliates and allocation to noncontrolling interests

 

80,512

 

101,430

 

111,928

 

183,095

 

Benefit from (provision for) income taxes

 

22

 

(3,844

)

302

 

(8,354

)

Equity in income of Unconsolidated Real Estate Affiliates

 

15,030

 

30,732

 

38,869

 

63,946

 

Unconsolidated Real Estate Affiliates - gain on investment, net

 

 

 

10,361

 

 

Net income

 

95,564

 

128,318

 

161,460

 

238,687

 

Allocation to noncontrolling interests

 

(1,949

)

(2,455

)

(3,809

)

(5,665

)

Net income attributable to GGP Inc.

 

93,615

 

125,863

 

157,651

 

233,022

 

Preferred Stock dividends

 

(3,984

)

(3,984

)

(7,968

)

(7,968

)

Net income attributable to common stockholders

 

$

89,631

 

$

121,879

 

$

149,683

 

$

225,054

 

Earnings Per Share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.09

 

$

0.14

 

$

0.16

 

$

0.25

 

Diluted

 

$

0.09

 

$

0.13

 

$

0.16

 

$

0.24

 

Dividends declared per share

 

$

0.22

 

$

0.22

 

$

0.44

 

$

0.44

 

Comprehensive Income, Net:

 

 

 

 

 

 

 

 

 

Net income

 

$

95,564

 

$

128,318

 

$

161,460

 

$

238,687

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(10,038

)

(4,030

)

(10,417

)

(1,463

)

Net unrealized gains (losses) on other financial instruments

 

(43

)

(3

)

8

 

10

 

Other comprehensive income (loss)

 

(10,081

)

(4,033

)

(10,409

)

(1,453

)

Comprehensive income

 

85,483

 

124,285

 

151,051

 

237,234

 

Comprehensive income allocated to noncontrolling interests

 

(1,865

)

(2,135

)

(3,723

)

(5,350

)

Comprehensive income attributable to GGP Inc.

 

83,618

 

122,150

 

147,328

 

231,884

 

Preferred Stock dividends

 

(3,984

)

(3,984

)

(7,968

)

(7,968

)

Comprehensive income, net, attributable to common stockholders

 

$

79,634

 

$

118,166

 

$

139,360

 

$

223,916

 

 

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

 

2


 

GGP INC.

 

CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED)

 

 

 

Common
Stock

 

Preferred
Stock

 

Additional
Paid-In
Capital

 

Retained
Earnings
(Accumulated
Deficit)

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Common
Stock in
Treasury

 

Noncontrolling
Interests in
Consolidated
Real Estate
Affiliates and
Long Term
Incentive Plan
Common Units

 

Total
Equity

 

 

 

(Dollars in thousands, except for per share and share amounts)

 

Balance at January 1, 2017

 

$

9,407

 

$

242,042

 

$

11,419,939

 

$

(1,827,866

)

$

(70,456

)

$

(1,137,960

)

$

65,623

 

$

8,700,729

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

233,022

 

 

 

 

 

1,399

 

234,421

 

Distributions to noncontrolling interests in consolidated Real Estate Affiliates

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,569

)

(3,569

)

Acquisition/disposition of partner’s noncontrolling interests in consolidated Real Estate Affiliates

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,943

)

(11,943

)

Contributions from noncontrolling interest in consolidated Real Estate Affiliates

 

 

 

 

 

 

 

 

 

 

 

 

15,258

 

15,258

 

Long Term Incentive Plan Common Unit grants, net (528,617 LTIP Units)

 

 

 

 

 

795

 

(743

)

 

 

 

 

10,707

 

10,759

 

Restricted stock grants, net (738,687 common shares)

 

8

 

 

4,883

 

 

 

 

 

 

 

 

 

4,891

 

Employee stock purchase program (103,177 common shares)

 

1

 

 

 

2,547

 

 

 

 

 

 

 

 

 

2,548

 

Stock options exercised (406,383 common shares)

 

4

 

 

 

13,837

 

 

 

 

 

 

 

 

 

13,841

 

Cancellation of repurchased common shares (3,993,237 common shares)

 

(40

)

 

 

(52,054

)

(40,258

)

 

 

92,352

 

 

 

 

Treasury stock purchase (3,365,976 common shares)

 

 

 

 

 

 

 

 

 

 

 

(77,032

)

 

 

(77,032

)

Cash dividends reinvested (DRIP) in stock (28,693 common shares)

 

 

 

696

 

 

 

 

 

 

 

 

696

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

(1,137

)

 

 

 

 

(1,137

)

Cash distributions declared ($0.44 per share)

 

 

 

 

 

 

 

(388,280

)

 

 

 

 

 

 

(388,280

)

Cash distributions on Preferred Stock

 

 

 

 

 

 

 

(7,968

)

 

 

 

 

 

 

(7,968

)

Fair value adjustment for noncontrolling interest in Operating Partnership

 

 

 

 

 

10,346

 

 

 

 

 

 

 

 

 

10,346

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2017

 

$

9,380

 

$

242,042

 

$

11,400,989

 

$

(2,032,093

)

$

(71,593

)

$

(1,122,640

)

$

77,475

 

$

8,503,560

 

 

3


 

GGP INC.

 

CONSOLIDATED STATEMENTS OF EQUITY (Continued)

(UNAUDITED)

 

 

 

Common
Stock

 

Preferred
Stock

 

Additional
Paid-In
Capital

 

Retained
Earnings
(Accumulated
Deficit)

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Common
Stock in
Treasury

 

Noncontrolling
Interests in
Consolidated
Real Estate
Affiliates and
Long Term
Incentive Plan
Common Units

 

Total
Equity

 

 

 

(Dollars in thousands, except for per share and share amounts)

 

Balance at January 1, 2018

 

$

10,130

 

$

242,042

 

$

11,845,532

 

$

(2,107,498

)

$

(71,906

)

$

(1,122,640

)

$

104,748

 

$

8,900,408

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of accounting changes (Note 2)

 

 

 

 

 

 

 

(16,864

)

 

 

 

 

 

 

(16,864

)

Net income

 

 

 

 

 

 

 

157,651

 

 

 

 

 

1,170

 

158,821

 

Distributions to noncontrolling interests in consolidated Real Estate Affiliates

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,888

)

(2,888

)

Acquisition/disposition of partner’s noncontrolling interests in consolidated Real Estate Affiliates

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,998

)

(4,998

)

Long Term Incentive Plan Common Unit forfeitures (238,655 LTIP Units)

 

 

 

 

 

 

 

 

 

 

 

 

 

4,634

 

4,634

 

Restricted stock grants, net (1,000,143 common shares)

 

10

 

 

 

4,997

 

 

 

 

 

 

 

 

 

5,007

 

Employee stock purchase program (80,522 common shares)

 

1

 

 

 

1,797

 

 

 

 

 

 

 

 

 

1,798

 

Stock options exercised (249,508 common shares)

 

2

 

 

 

4,116

 

 

 

 

 

 

 

 

 

4,118

 

OP Unit Conversion to Common Stock (67,064 common shares)

 

1

 

 

 

1,368

 

 

 

 

 

 

 

 

 

1,369

 

Cash dividends reinvested (DRIP) in stock (11,239 common shares)

 

 

 

 

 

245

 

(245

)

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

(10,323

)

 

 

 

 

(10,323

)

Cash distributions declared ($0.44 per share)

 

 

 

 

 

 

 

(421,447

)

 

 

 

 

 

 

(421,447

)

Cash distributions on Preferred Stock

 

 

 

 

 

 

 

(7,968

)

 

 

 

 

 

 

(7,968

)

Fair value adjustment for noncontrolling interest in Operating Partnership

 

 

 

 

 

22,395

 

 

 

 

 

 

 

 

 

22,395

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

$

10,144

 

$

242,042

 

$

11,880,450

 

$

(2,396,371

)

$

(82,229

)

$

(1,122,640

)

$

102,666

 

$

8,634,062

 

 

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

 

4


 

GGP INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

2017

 

 

 

(Dollars in thousands)

 

Cash Flows provided by Operating Activities:

 

 

 

 

 

Net income

 

$

161,460

 

$

238,687

 

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

 

 

 

 

 

Equity in income of Unconsolidated Real Estate Affiliates

 

(38,869

)

(63,946

)

Distributions received from Unconsolidated Real Estate Affiliates

 

46,256

 

52,876

 

Provision for doubtful accounts

 

5,662

 

6,617

 

Depreciation and amortization

 

359,035

 

344,596

 

Amortization/write-off of deferred finance costs

 

5,544

 

5,972

 

Accretion/write-off of debt market rate adjustments

 

(2,230

)

(2,181

)

Amortization of intangibles other than in-place leases

 

7,150

 

18,857

 

Straight-line rent amortization

 

(594

)

(493

)

Deferred income taxes

 

(1,692

)

4,817

 

Gain on dispositions, net

 

 

(2,515

)

Unconsolidated Real Estate Affiliates - gain on investment, net

 

(10,361

)

 

Gain (loss) from changes in control of investment properties and other, net

 

(12,664

)

15,841

 

Provision for impairment

 

38,379

 

 

Gain on extinguishment of debt

 

 

(55,112

)

Loss on foreign currency

 

 

694

 

Net changes:

 

 

 

 

 

Accounts and notes receivable, net

 

5,963

 

(259

)

Prepaid expenses and other assets

 

32,811

 

(38,556

)

Deferred expenses, net

 

(21,577

)

(22,010

)

Accounts payable and accrued expenses

 

(50,045

)

(45,441

)

Other, net

 

13,803

 

24,008

 

Net cash provided by operating activities

 

538,031

 

482,452

 

Cash Flows (used in) provided by Investing Activities:

 

 

 

 

 

Acquisition of real estate and property additions

 

 

(49,062

)

Development of real estate and property improvements

 

(361,966

)

(269,820

)

Loans to joint venture partners

 

(5,772

)

(47,205

)

Proceeds from repayment of loans to joint venture partners

 

80,000

 

47,076

 

Proceeds from sales of investment properties and Unconsolidated Real Estate Affiliates

 

60,960

 

39,622

 

Contributions to Unconsolidated Real Estate Affiliates

 

(82,637

)

(44,755

)

Distributions received from Unconsolidated Real Estate Affiliates in excess of income

 

124,792

 

62,792

 

Net cash (used in) provided by investing activities

 

(184,623

)

(261,352

)

Cash Flows used in Financing Activities:

 

 

 

 

 

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

 

790,000

 

575,000

 

Principal payments on mortgages, notes and loans payable

 

(677,926

)

(368,669

)

Deferred finance costs

 

(213

)

(965

)

Treasury stock purchases

 

 

(77,032

)

Cash contributions from noncontrolling interests in consolidated real estate affiliates

 

 

15,258

 

Cash distributions to noncontrolling interests in consolidated real estate affiliates

 

(2,888

)

(3,569

)

Cash distributions paid to common stockholders

 

(421,374

)

(618,830

)

Cash distributions reinvested (DRIP) in common stock

 

245

 

696

 

Cash distributions paid to preferred stockholders

 

(7,968

)

(7,968

)

Cash distributions and redemptions paid to unit holders

 

(6,361

)

(10,515

)

Other, net

 

5,705

 

9,799

 

Net cash used in financing activities

 

(320,780

)

(486,795

)

Effect of foreign exchange rates on cash and cash equivalents

 

 

(694

)

Net change in cash, cash equivalents and restricted cash

 

32,628

 

(266,389

)

Cash, cash equivalents and restricted cash at beginning of period

 

231,939

 

531,705

 

Cash, cash equivalents and restricted cash at end of period

 

$

264,567

 

$

265,316

 

 

5


 

 

 

Six Months Ended June 30,

 

 

 

2018

 

2017

 

 

 

(Dollars in thousands)

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

284,668

 

$

273,321

 

Interest capitalized

 

9,385

 

3,457

 

Income taxes paid

 

2,358

 

6,362

 

Accrued capital expenditures included in accounts payable and accrued expenses

 

243,924

 

105,416

 

 

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

 

6


 

GGP INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

NOTE 1      ORGANIZATION

 

Readers of this Quarterly Report should refer to the Company’s (as defined below) audited consolidated financial statements for the year ended December 31, 2017 which are included in the Company’s Annual Report on Form 10-K (our “Annual Report”) for the fiscal year ended December 31, 2017 (Commission File No. 1-34948), as certain footnote disclosures which would substantially duplicate those contained in our Annual Report have been omitted from this Quarterly Report. In the opinion of management, all adjustments necessary for a fair presentation (which include only normal recurring adjustments) have been included in this Quarterly Report. Unless context otherwise requires, capitalized terms used, but not defined in this Quarterly Report, have the same meanings as in our Annual Report.

 

General

 

GGP Inc. (“GGP” or the “Company”), a Delaware corporation, was organized in July 2010 and is a self-administered and self-managed real estate investment trust, referred to as a “REIT”. In these notes, the terms “we”, “us” and “our” refer to GGP and its subsidiaries.

 

GGP, through its subsidiaries and affiliates, is an owner and operator of retail properties. As of June 30, 2018, we are the owner, either entirely or with joint venture partners, of 125 retail properties.

 

Substantially all of our business is conducted through GGP Operating Partnership, LP (“GGPOP”), GGP Nimbus, LP (“GGPN”) and GGP Limited Partnership (“GGPLP”, and together with GGPN and GGPOP, the “Operating Partnerships”), subsidiaries of GGP. The Operating Partnerships own an interest in the properties that are part of the consolidated financial statements of GGP. As of June 30, 2018, GGP held approximately a 99% common equity ownership (without giving effect to the potential conversion of the Preferred Units and LTIP Units, each as defined below) of GGPLP and GGPN, while the remaining 1% was held by limited partners and certain previous contributors of properties to GGPOP.

 

GGPOP is the general partner of, and owns a 1.5% equity interest in GGPN and GGPLP. GGPOP has common units of limited partnership (“Common Units”), which are redeemable for cash or, at our option, shares of GGP common stock. It also has preferred units of limited partnership interest (“Preferred Units”), of which, certain Preferred Units can be converted into Common Units and then redeemed for cash or, at our option, shares of GGP common stock (Note 8). GGPOP also has full value long term incentive plan units and appreciation only long term incentive plan units (collectively “LTIP Units”), which are redeemable for cash or, at our option, shares of GGP common stock (Note 10).

 

In addition to holding ownership interests in various joint ventures, the Operating Partnerships generally conduct their operations through General Growth Management, Inc. (“GGMI”), General Growth Services, Inc. (“GGSI”) and GGPLP REIT Services, LLC (“GGPRS”). GGMI and GGSI are taxable REIT subsidiaries (“TRS”s), which provide management, leasing, tenant coordination, business development, marketing, strategic partnership and other services for a majority of our Unconsolidated Real Estate Affiliates (defined below) and for substantially all of our Consolidated Properties, as defined below. GGSI also serves as a contractor to GGMI for these services. GGPRS generally provides financial, accounting, tax, legal, development, and other services to our Consolidated Properties.

 

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

 

As previously announced, we had reached an agreement with Brookfield Property Partners L.P. (“BPY”), pursuant to which, among other things, BPY will acquire all of our outstanding shares of common stock, other than those that BPY and its affiliates already own. The transactions provide for distribution and consideration per GGP share of up to $23.50 in cash or a choice of either one BPY limited partnership unit or one newly created BPY U.S. REIT share of Brookfield Property REIT Inc. (“BPR”), the successor to GGP, subject to proration in each case, based on aggregate cash amount of $9.25 billion. The BPR shares were structured with the intention of providing an economic return equivalent to BPY units, including identical distributions. BPR shareholders will have the right to exchange each BPR share for one BPY unit or the cash equivalent of one BPY unit at the election of BPY. On

 

7


 

July 26, 2018, the company held a special meeting of its common stockholders. At the special meeting, holders of record of GGP common stock on June 22, 2018, the record date for the special meeting, voted upon and approved the transactions. The completion of the transactions remains subject to certain customary closing conditions. The company expects that the transactions will be completed by the end of August this year.

 

NOTE 2      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation and Basis of Presentation

 

The accompanying consolidated financial statements include the accounts of GGP, our subsidiaries and joint ventures in which we have a controlling interest. For consolidated joint ventures, the noncontrolling partner’s share of the assets, liabilities and operations of the joint ventures (generally computed as the joint venture partner’s ownership percentage) is included in noncontrolling interests in consolidated real estate affiliates as permanent equity of the Company. Intercompany balances and transactions have been eliminated. Noncontrolling interests are included on our Consolidated Balance Sheets related to the Common, Preferred, and LTIP Units of GGPOP and are presented either as redeemable noncontrolling interests or as noncontrolling interests in our permanent equity. Each of the Operating Partnerships and our consolidated joint ventures are variable interest entities as the limited partners do not have substantive kick-out rights or substantive participating rights. However, as the Company holds a majority voting interest in the Operating Partnerships and our consolidated joint ventures, it qualifies for the exemption from providing certain of the disclosure requirements associated with variable interest entities.

 

We operate in a single reportable segment, which includes the operation, development and management of retail and other rental properties. Our portfolio is targeted to a range of market sizes and consumer tastes. Each of our operating properties is considered a separate operating segment, as each property earns revenues and incurs expenses, individual operating results are reviewed and discrete financial information is available. The Company’s chief operating decision maker is comprised of a team of several members of executive management who use Company NOI in assessing segment operating performance. We do not distinguish or group our consolidated operations based on geography, size or type for purposes of making property operating decisions. Our operating properties have similar economic characteristics and provide similar products and services to our tenants. There are no individual operating segments that are greater than 10% of combined revenue, Company NOI or combined assets. Company NOI excludes certain non-cash and non-comparable items such as straight-line rent, depreciation expense and intangible asset and liability amortization, which are a result of our emergence from bankruptcy, acquisition accounting and other capital contribution or restructuring events. Further, all material operations are within the United States and no customer or tenant comprises more than 10% of consolidated revenues. As a result, the Company’s operating properties are aggregated into a single reportable segment.

 

Properties

 

Real estate assets are stated at cost less any provisions for impairments. Expenditures for significant betterments and improvements are capitalized. Maintenance and repairs are charged to expense when incurred. Construction and improvement costs incurred in connection with the development of new properties or the redevelopment of existing properties are capitalized. Real estate taxes, interest costs, and internal costs associated with leasing and development overhead incurred during construction periods are capitalized. Capitalization is based on qualified expenditures and interest rates. Capitalized real estate taxes, interest costs, and internal costs associated with leasing and development overhead are amortized over lives which are consistent with the related assets.

 

Pre-development costs, which generally include legal and professional fees and other third-party costs directly related to the construction assets, are capitalized as part of the property being developed. In the event a development is no longer deemed to be probable of occurring, the capitalized costs are expensed (see also our impairment policies in this note below).

 

We periodically review the estimated useful lives of our properties, and may adjust them as necessary. The estimated useful lives of our properties range from 10-45 years.

 

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

 

 

 

Years

Buildings and improvements

 

10 - 45

Equipment and fixtures

 

3 - 20

Tenant improvements

 

Shorter of useful life or applicable lease term

 

8


 

GGP INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

Reclassifications

 

In November 2016, the FASB issued ASU 2016-18 which requires that a statement of cash flows explain the change during the reporting period in the total of cash, cash equivalents and restricted cash or restricted cash equivalents. The Company adopted this guidance on December 31, 2017, which changes our statements of cash flows and related disclosures for all periods presented. The following is a summary of our cash, cash equivalents and restricted cash total as presented in our statements of cash flows for the six months ended June 30, 2018 and 2017:

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

2017

 

Cash and cash equivalents

 

$

194,675

 

$

227,626

 

Restricted cash

 

69,892

 

37,690

 

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

 

$

264,567

 

$

265,316

 

 

For the six months ended June 30, 2017 the changes in restricted cash related to cash flows provided by operating activities of $16.0 million, restricted cash related to cash flows used in investing activities of $0.4 million and restricted cash related to cash flows used in financing activities of $2.8 million were reclassified.

 

Acquisitions of Operating Properties (Note 3)

 

Acquisitions of properties are typically accounted for as acquisitions of assets rather than acquisitions of a business. Accordingly, the results of operations of acquired properties have been included in the results of operations from the respective dates of acquisition and acquisition costs are capitalized. Estimates of future cash flows and other valuation techniques are used to allocate the purchase price of acquired property between land, buildings and improvements, equipment, assumed debt liabilities and identifiable intangible assets and liabilities such as amounts related to in-place tenant leases, acquired above and below-market tenant and ground leases, and tenant relationships.

 

Identifiable intangible assets and liabilities are calculated for above-market and below-market tenant and ground leases where we are either the lessor or the lessee. The difference between the contractual rental rates and our estimate of market rental rates is measured over a period equal to the remaining non-cancelable term of the leases, including significantly below-market renewal options for which exercise of the renewal option appears to be reasonably assured. The remaining term of leases with renewal options at terms significantly below market reflect the assumed exercise of such below-market renewal options and assume the amortization period would coincide with the extended lease term.

 

The gross asset balances of the in-place value of tenant leases are included in buildings and equipment in our Consolidated Balance Sheets.

 

 

 

Gross Asset

 

Accumulated
Amortization

 

Net Carrying
Amount

 

As of June 30, 2018

 

 

 

 

 

 

 

Tenant leases:

 

 

 

 

 

 

 

In-place value

 

$

285,145

 

$

(145,194

)

$

139,951

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

 

 

 

Tenant leases:

 

 

 

 

 

 

 

In-place value

 

$

347,232

 

$

(181,088

)

$

166,144

 

 

The above-market tenant leases and below-market ground leases are included in prepaid expenses and other assets (Note 13); the below-market tenant leases, above-market ground leases and above-market headquarters office lease are included in accounts payable and accrued expenses (Note 14) in our Consolidated Balance Sheets.

 

9


 

GGP INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

Amortization/accretion of all intangibles, including the intangibles in Note 13 and Note 14, had the following effects on our income from continuing operations:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Amortization/accretion effect on continuing operations

 

$

(14,826

)

$

(16,399

)

$

(30,866

)

$

(41,318

)

 

Future amortization/accretion of all intangibles, including the intangibles in Note 13 and Note 14, is estimated to decrease results from continuing operations as follows:

 

Year

 

Amount

 

2018 Remaining

 

$

20,497

 

2019

 

28,966

 

2020

 

19,567

 

2021

 

13,908

 

2022

 

12,579

 

 

Investments in Unconsolidated Real Estate Affiliates (Note 5)

 

We account for investments in joint ventures where we own a non-controlling joint interest using either the equity method or the cost method. If we have significant influence but not control over the investment, we utilize the equity method. If we have neither control nor significant influence, we utilize the cost method. Under the equity method, the cost of our investment is adjusted for our share of the earnings of such Unconsolidated Real Estate Affiliates from the date of acquisition, increased by our contributions and reduced by distributions received. Under the cost method, the cost of our investment is not adjusted for our share of the earnings of such Unconsolidated Real Estate Affiliates from the date of acquisition and distributions are treated as earnings when received.

 

To determine the method of accounting for partially owned joint ventures, we evaluate the characteristics of associated entities and determine whether an entity is a variable interest entity (“VIE”). A limited partnership or other similar entity is considered a VIE unless a simple majority of limited partners (excluding limited partners that are under common control with the general partner) have substantive kick-out rights or participating rights. Accounting guidance amended the following: (i) modified the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, (ii) eliminated the presumption that a general partner should consolidate a limited partnership, (iii) affected the consolidation analysis of reporting entities that are involved with VIEs, and (iv) provided a scope exception for certain entities. If an entity is determined to be a VIE, we determine which party is the primary beneficiary by analyzing whether we have both the power to direct the entity’s significant economic activities and the obligation to absorb potentially significant losses or receive potentially significant benefits. Significant judgments and assumptions inherent in this analysis include the nature of the entity’s operations, future cash flow projections, the entity’s financing and capital structure, and contractual relationship and terms.

 

Primary risks associated with our VIEs include the potential of funding the entities’ debt obligations or making additional contributions to fund the entities’ operations.

 

Generally, the operating agreements with respect to our Unconsolidated Real Estate Affiliates provide that assets, liabilities and funding obligations are shared in accordance with our ownership percentages. Therefore, we generally also share in the profit and losses, cash flows and other matters relating to our Unconsolidated Real Estate Affiliates in accordance with our respective ownership percentages. Except for Retained Debt (as described in Note 5), differences between the carrying amount of our investment in the Unconsolidated Real Estate Affiliates and our share of the underlying equity of our Unconsolidated Real Estate Affiliates are typically amortized over lives ranging from 5 to 45 years. When cumulative distributions exceed our investment in the joint venture, the investment is reported as a liability in our consolidated financial statements. The liability is limited to our maximum potential obligation to fund contractual obligations, including recourse related to certain debt obligations.

 

Partially owned, joint ventures over which we have controlling financial interest are consolidated in our consolidated financial statements. In determining if we have a controlling financial interest, we consider factors such as ownership interest, authority to

 

10


 

GGP INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

make decisions, kick-out rights and substantive participating rights. Partially owned joint ventures where we do not have a controlling financial interest, but have the ability to exercise significant influence, are accounted for using the equity method.

 

To the extent that we contribute assets to a joint venture accounted for using the equity method, our investment in the joint venture is recorded at the fair value of the consideration of the assets that were contributed to the joint venture. We will recognize gains and losses on the contribution of our real estate to joint ventures, relating to our entire investment in the property, to the extent the buyer is independent of the Company, the collection of the sales price is reasonably assured, and we will not be required to support the operations of the property or its related obligations to an extent greater than our proportionate interest.

 

The combined summarized financial information of unconsolidated joint ventures is disclosed in Note 5 to the Consolidated Financial Statements.

 

We continually analyze and assess reconsideration events, including changes in the factors mentioned above, to determine if the consolidation treatment remains appropriate. Decisions regarding consolidation of partially owned entities frequently require significant judgment by our management.

 

Revenue Recognition and Related Matters

 

Minimum rents are recognized on a straight-line basis over the terms of the related operating leases, including the effect of any free rent periods. Minimum rents also include lease termination income collected from tenants to allow for the tenant to vacate their space prior to their scheduled termination dates, as well as accretion related to above-market and below-market tenant leases on acquired properties and properties that were recorded at fair value at the emergence from bankruptcy.

 

Overage rent is paid by a tenant when the tenant’s sales exceed an agreed upon minimum amount and is recognized on an accrual basis once tenant sales exceed contractual tenant lease thresholds and is calculated by multiplying the sales in excess of the minimum amount by a percentage defined in the lease.

 

Tenant recoveries are established in the leases or computed based upon a formula related to real estate taxes, insurance and other property operating expenses and are generally recognized as revenues in the period the related costs are incurred.

 

Accounting for real estate sales distinguishes between sales to a customer or non-customer for purposes of revenue recognition. Once we, as the seller, determine that we have a contract, we will identify each distinct non-financial asset promised to the counter-party and whether the counter-party obtains control and transfers risks and rewards of ownership of each non-financial asset to determine if we should derecognize the asset.

 

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 each period based upon our recovery experience and the specific facts of each outstanding amount.

 

Management Fees and Other Corporate Revenues

 

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

 

11


 

GGP INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Management fees from affiliates

 

$

26,030

 

$

20,847

 

$

51,795

 

$

48,990

 

Management fee expense

 

(10,287

)

(8,443

)

(20,779

)

(17,246

)

Net management fees from affiliates

 

$

15,743

 

$

12,404

 

$

31,016

 

$

31,744

 

 

Based upon the new revenue recognition guidance, we determined that typical management fees including property and asset management, construction and development management services, leasing services, property acquisition and disposition services and financing services, needed to be evaluated for each separate performance obligation included in the contract in order to determine timing of revenue recognition. Revenues from contracts within the scope of the new revenue recognition guidance were $50.6 million for the six months ended June 30, 2018. Management determined that property and asset management and construction and development management services each represent a series of stand-ready performance obligations satisfied over time with each day of service being a distinct performance obligation. For property and asset management services, we are compensated for our services through a monthly management fee earned based on a specified percentage of the monthly rental income or rental receipts generated from the property under management. For construction and development services, we are compensated for planning, administering and monitoring the design and construction of projects at our joint venture properties typically based on a percentage of project costs, hourly rate of development staff or a fixed fee. Revenues from such contracts were $43.7 million for the six months ended June 30, 2018 and are recognized over the life of the applicable contract.

 

Conversely, leasing services, property acquisition and disposition services and financing services are each considered to be a single performance obligation, satisfied as of a point in time. Our fee is paid upon the occurrence of certain contractual event(s) that may be contingent and pattern of revenue recognition may differ from the timing of payment. For these services, the obligation is the execution of the lease, closing of the sale or acquisition, or closing of the financing or refinancing. As such, revenues are recognized at the point in time when the respective obligation has been satisfied. Revenues from such contracts were $6.9 million for the six months ended June 30, 2018.

 

Impairment

 

Operating properties

 

We regularly review our consolidated properties for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment indicators are assessed separately for each property and include, but are not limited to, significant decreases in real estate property net operating income, significant decreases in occupancy percentage, debt maturities, changes in management’s intent with respect to the properties and prevailing market conditions.

 

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

 

Although we may market a property for sale, there can be no assurance that the transaction will be complete until the sale is finalized. However, GAAP requires us to utilize the Company’s expected holding period of our properties when assessing recoverability. If we cannot recover the carrying value of these properties within the planned holding period, we will estimate the fair values of the assets and record impairment charges for properties when the estimated fair value is less than their carrying value.

 

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

 

12


 

GGP INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

Impairment charges are recorded in the Consolidated Statements of Comprehensive Income when the carrying value of a property is not recoverable and it exceeds the estimated fair value of the property, which can occur in accounting periods preceding disposition and/or in the period of disposition.

 

During the six months ended June 30, 2018, we recorded a $38.4 million impairment charge on our Consolidated Statements of Comprehensive Income related to one operating property that has non-recourse debt maturing during 2019 that exceeds the fair value of the operating property. No provisions for impairment were recognized for the three months ended June 30, 2018.

 

No provisions for impairment were recognized for the three and six months ended June 30, 2017.

 

Changes in economic and operating conditions that occur subsequent to our review of recoverability of our properties could impact the assumptions used in that assessment and could result in future impairment if assumptions regarding those properties differ from actual results.

 

Investment in Unconsolidated Real Estate Affiliates

 

A series of operating losses of an investee or other factors may indicate that an other-than-temporary decline in value of our investment in an Unconsolidated Real Estate Affiliate has occurred. The investment in each of the Unconsolidated Real Estate Affiliates is evaluated for valuation declines below the carrying amount. Accordingly, in addition to the property-specific impairment analysis that we performed for such joint ventures (as part of our operating property impairment process described above), we also considered whether there were other-than-temporary declines with respect to the carrying values of our Unconsolidated Real Estate Affiliates.

 

No impairments related to our investments in Unconsolidated Real Estate Affiliates were recognized for the three and six months ended June 30, 2018 and 2017.

 

Changes in economic and operating conditions that occur subsequent to our review of recoverability of our investments in Unconsolidated Real Estate Affiliates could impact the assumptions used in that assessment and could result in future impairment if assumptions regarding those investments differ from actual results.

 

Notes Receivable

 

Notes receivable are evaluated for impairment at least quarterly. Impairment occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. If a loan is considered to be impaired, we record an allowance through the provision for loan losses to reduce the carrying value of the loan to the present value of expected future cash flows discounted at the loan’s contractual effective rate or the fair value of the collateral, if repayment is expected solely from the collateral.

 

No impairments related to our notes receivable were recognized for the three and six months ended June 30, 2018 and 2017.

 

Held for Disposition

 

As of June 30, 2018, a non-refundable deposit of significance was received from the buyer for one property, making the sale probable. Therefore, the property was considered held for disposition as of June 30, 2018. Total assets held for disposition were $120.7 million, which included $119.4 million of net investment in real estate, and total liabilities held for disposition were $100.7 million, which included $100.0 million of mortgages, notes and loans payable. The property was subsequently sold on July 13, 2018 (Note 17).

 

Fair Value Measurements (Note 4)

 

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

 

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

 

13


 

GGP INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

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

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

 

Note 4 includes a discussion of properties measured at fair value on a non-recurring basis using Level 2 and Level 3 inputs and the fair value of debt, which is estimated on a recurring basis using Level 2 and Level 3 inputs. Note 8 includes a discussion of certain redeemable noncontrolling interests that are measured at fair value using Level 1 inputs.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. We are exposed to credit risk with respect to cash held at various financial institutions and access to our credit facility. Our credit risk exposure with regard to our cash and the $1.5 billion, including the uncommitted accordion feature, available under our credit facility is spread among a diversified group of investment grade financial institutions. We had $260.0 million outstanding and no amount outstanding under our credit facility as of June 30, 2018 and December 31, 2017, respectively.

 

Recently Issued Accounting Pronouncements

 

Based upon the new revenue recognition guidance, revenue recognized for the three and six months ended June 30, 2018 is not significantly different as compared to what would have been recognized in the same period under guidance that was in effect before the change. Effective January 1, 2018, companies are required to apply a five-step model in accounting for revenue. The core principle of the revenue model is that a company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Lease contracts are excluded from this revenue recognition criteria; however, the sale of real estate is required to follow the new model. Expanded quantitative and qualitative disclosures regarding revenue recognition are required for contracts that are subject to this pronouncement. The new standard can be adopted either retrospectively to each prior reporting period presented or on a modified retrospective approach as a cumulative effect adjustment as of the date of adoption. The Company adopted the model effective January 1, 2018 using the modified retrospective approach for implementation. We elected to use the practical expedient to apply the model only to contracts not yet completed as of the date of adoption. The adoption resulted in a cumulative-effect adjustment to increase equity as of January 1, 2018 of approximately $1.90 million related to changes in the revenue recognition pattern of lease commissions earned by the Company from our joint ventures and the sale of condos in our Unconsolidated Real Estate Affiliates (Note 5).

 

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02 which will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under ASU 2016-02, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Lessor accounting remains substantially similar to current GAAP. However, leasing costs that are currently eligible to be capitalized as initial direct costs are limited by ASU 2016-02. In addition, disclosures of leasing activities are to be expanded to include qualitative along with specific quantitative information. For public entities, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2016-02 mandates a modified retrospective transition method. The Company expects to adopt this guidance on January 1, 2019 and will continue to evaluate the potential impact of this pronouncement on its consolidated financial statements until the guidance becomes effective.

 

In June 2016, the FASB issued ASU 2016-13 which changes the model for the measurement of credit losses on financial instruments. Specifically, the amendments in the ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU will be effective for the Company January 1, 2020 with early adoption permitted on January 1, 2019. The Company is evaluating the potential impact of this pronouncement on its consolidated financial statements.

 

In October 2016, the FASB issued ASU 2016-16 which changed the current income tax accounting for intra-entity asset sales to be only for inventory. The Company adopted this standard effective January 1, 2018. For those companies that did not recognize the income tax impact of a sale other than inventory before the adoption date, the new ASU was applied on a modified retrospective

 

14


 

GGP INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

basis, with a cumulative-effect adjustment directly to retained earnings as of January 1, 2018. This resulted in a cumulative-effect adjustment to decrease retained earnings by the unamortized balance of the $18.8 million prepaid asset established in December 2016.

 

In November 2016, the FASB issued ASU 2016-18 which requires that a statement of cash flows explain the change during the reporting period in the total of cash, cash equivalents and restricted cash or restricted cash equivalents. This standard is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company adopted this guidance on December 31, 2017, which changes our statements of cash flows and related disclosures for all periods presented.

 

In February 2017, the FASB issued ASU 2017-05 which clarifies the accounting for the derecognition of nonfinancial assets by eliminating the exception in current GAAP for transfers of investments in real estate entities (including equity method investments). The amendments in this update provide guidance on the accounting of partial sales of nonfinancial assets and contributions of nonfinancial assets to a joint venture or other noncontrolling investee. Once this guidance is adopted, an entity would use the guidance in the new revenue recognition standard (discussed above) to determine whether it is transferring multiple, distinct assets and would recognize a gain or loss for each distinct asset transferred. When an entity transfers nonfinancial assets included in a subsidiary and retains or receives an equity interest, it first determines whether it has retained a controlling financial interest in the subsidiary. If so, the entity does not derecognize the assets and accounts for the sale of noncontrolling interest in the subsidiary under the consolidation guidance covering decreases in ownership which would result in recognizing a gain or loss. If an entity retains or receives a noncontrolling interest in the entity that owns the asset post-sale, that noncontrolling interest is considered noncash consideration and is included in the transaction price at its fair value. The retained noncontrolling interest is included at its fair value and results in an entity recognizing 100% of the gain on sale of the asset. The Company adopted this standard as of January 1, 2018 using the modified retrospective approach for implementation. We elected to use the practical expedient to apply the standard only to contracts not yet completed as of the date of adoption. The adoption will result in higher gains on future sales of partial real estate interests due to recognizing 100% of the gain on the sale of the partial interest and recording the retained noncontrolling interest at fair value. As of the adoption date, January 1, 2018, there was no cumulative-effect adjustment recorded to retained earnings.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. For example, estimates and assumptions have been made with respect to allocating the purchase price of real estate acquisitions, the useful lives of assets, capitalization of development and leasing costs, provision for income taxes, recoverable amounts of receivables and deferred taxes, provision for loan loss, initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to acquisitions, impairment of long-lived assets, litigation related accruals and disclosures and fair value of debt. Actual results could differ from these and other estimates.

 

NOTE 3      ACQUISITIONS, SALES AND JOINT VENTURE ACTIVITY

 

On January 29, 2018, we completed the sale of a 49.49% joint venture interest in the Sears Box at Oakbrook Center for a sales price of $44.7 million, which resulted in a gain of $12.7 million recognized in gain from changes in control of investment properties and other for the six months ended June 30, 2018.

 

On September 15, 2016, joint ventures we formed with Simon Property Group and Authentic Brands Group LLC (“ABG”) acquired Aeropostale, Inc. (“Aeropostale”) for $80.0 million in total cash which included cash for working capital requirements of the retail business. The intellectual property and brand related assets were assigned to the Aero IpCo, LLC venture (“IPCO”) and the assets and liabilities necessary to run the stores were assigned to the Aero OpCo, LLC venture (“OPCO”). In connection with the transaction, our total investment was $20.4 million of cash contributed to the ventures for an effective ownership of approximately 26% in the two joint ventures. Aeropostale is a tenant at certain properties for which we receive rental income included in minimum rents on the Consolidated Statements of Operations and Comprehensive Income.

 

15


 

GGP INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

On December 29, 2017, we sold approximately 54% of our interest in IPCO to ABG for a sales price of $16.6 million, which resulted in a gain of $12.0 million recognized in Unconsolidated Real Estate Affiliates - gain on investment on our Consolidated Statements of Comprehensive Income for the year ended December 31, 2017. On March 30, 2018, ABG exercised their call right to purchase our remaining 46% interest in IPCO for a sales price of $13.9 million, which resulted in a gain of $10.4 million recognized in Unconsolidated Real Estate Affiliates - gain on investment on our Consolidated Statements of Comprehensive Income for the six months ended June 30, 2018. In addition, we invested $30.5 million in ABG units on December 29, 2017. The investment is considered a cost method investment and is included in investment in Unconsolidated Real Estate Affiliates on the Consolidated Balance Sheets.

 

On June 30, 2017, we conveyed Lakeside Mall to the lender in full satisfaction of $144.5 million in outstanding debt. This transaction resulted in a $55.1 million gain on extinguishment of debt for the three and six months ended June 30, 2017.

 

On June 9, 2017, we closed on the acquisition of our joint venture partner’s 50% interest in Neshaminy Mall located in Bensalem, Pennsylvania for a gross purchase price of $65.0 million. Post acquisition, we own 100% of the mall. Prior to the acquisition of the remaining interest, the carrying value for our investment was $55.2 million. As a result of this acquisition, the implied fair value of our previous investment in Neshaminy Mall is $33.7 million, resulting in a loss of $21.5 million, recognized in loss from changes in control of investment properties and other for the three and six months ended June 30, 2017.

 

On May 12, 2017, we closed on the sale of Red Cliffs Mall in St. George, Utah for $39.1 million. The transaction netted proceeds of approximately $36.3 million and resulted in a gain on sale of $5.6 million recognized in gain from changes in control of investment properties and other for the three and six months ended June 30, 2017.

 

NOTE 4      FAIR VALUE

 

Nonrecurring Fair Value Measurements

 

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

 

The following table summarizes certain of our assets that are measured at fair value on a nonrecurring basis as a result of impairment charges recorded during the six months ended June 30, 2018. No impairment charges were recognized during the six months ended June 30, 2017.

 

 

 

Total Fair Value
Measurement

 

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

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Provisions for
Impairment

 

Six Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Investments in real estate (1)

 

$

71,181

 

$

 

$

 

$

71,181

 

$

38,379

 

 


(1)          Refer to Note 2 for more information regarding impairment. Investments in real estate includes consolidated properties and Unconsolidated Real Estate Affiliates.

 

Unobservable Quantitative Input

 

Rate

 

Discount rates

 

9.75

%

Terminal capitalization rates

 

10.25

%

 

16


 

GGP INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

Disclosure of Fair Value of Financial Instruments

 

The fair values of our financial instruments approximate their carrying amount in our consolidated financial statements except for debt. Management’s estimates of fair value are presented below for our debt as of June 30, 2018 and December 31, 2017.

 

 

 

June 30, 2018

 

December 31, 2017

 

 

 

Carrying Amount
(1)

 

Estimated Fair
Value

 

Carrying Amount
(2)

 

Estimated Fair
Value

 

Fixed-rate debt

 

$

10,618,364

 

$

10,441,443

 

$

10,420,252

 

$

10,467,262

 

Variable-rate debt

 

2,229,271

 

2,244,670

 

2,412,207

 

2,415,457

 

 

 

$

12,847,635

 

$

12,686,113

 

$

12,832,459

 

$

12,882,719

 

 


(1)                                 Includes net market rate adjustments of $21.3 million and deferred financing costs of $25.0 million, net.

(2)                                 Includes net market rate adjustments of $23.5 million and deferred financing costs of $30.3 million, net.

 

The fair value of our Junior Subordinated Notes approximates their carrying amount as of June 30, 2018 and December 31, 2017. We estimated the fair value of mortgages, notes and other loans payable using Level 2 and Level 3 inputs based on recent financing transactions, estimates of the fair value of the property that serves as collateral for such debt, historical risk premiums for loans of comparable quality, current LIBOR, U.S. treasury obligation interest rates and on the discounted estimated future cash payments to be made on such debt. The discount rates estimated reflect our judgment as to what the approximate current lending rates for loans or groups of loans with similar maturities and assume that the debt is outstanding through maturity. We have utilized market information as available or present value techniques to estimate the amounts required to be disclosed. Since such amounts are estimates that are based on limited available market information for similar transactions and do not acknowledge transfer or other repayment restrictions that may exist in specific loans, it is unlikely that the estimated fair value of any such debt could be realized by immediate settlement of the obligation.

 

17


 

GGP INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

NOTE 5      UNCONSOLIDATED REAL ESTATE AFFILIATES

 

Following is summarized financial information for all of our real estate related Unconsolidated Real Estate Affiliates accounted for using the equity method and a reconciliation to our total investment in Unconsolidated Real Estate Affiliates. The reconciliation to our total investment in Unconsolidated Real Estate Affiliates is inclusive of investments accounted for using the cost method (Note 2).

 

 

 

June 30, 2018

 

December 31, 2017

 

Condensed Combined Balance Sheets - Unconsolidated Real Estate Affiliates

 

 

 

 

 

Assets:

 

 

 

 

 

Land

 

$

2,949,758

 

$

2,908,181

 

Buildings and equipment

 

14,247,590

 

14,014,665

 

Less accumulated depreciation

 

(3,992,067

)

(3,794,792

)

Construction in progress

 

509,603

 

545,305

 

Net property and equipment

 

13,714,884

 

13,673,359

 

Investment in unconsolidated joint ventures

 

613,853

 

613,136

 

Net investment in real estate

 

14,328,737

 

14,286,495

 

Cash and cash equivalents

 

426,027

 

438,664

 

Accounts receivable, net

 

324,445

 

386,634

 

Notes receivable

 

18,725

 

15,058

 

Deferred expenses, net

 

350,576

 

339,327

 

Prepaid expenses and other assets

 

209,034

 

381,980

 

Total assets

 

$

15,657,544

 

$

15,848,158

 

Liabilities and Owners’ Equity:

 

 

 

 

 

Mortgages, notes and loans payable

 

$

10,539,041

 

$

10,504,799

 

Accounts payable, accrued expenses and other liabilities

 

555,692

 

1,115,549

 

Cumulative effect of foreign currency translation (“CFCT”)

 

(21,258

)

(38,013

)

Owners’ equity, excluding CFCT

 

4,584,069

 

4,265,823

 

Total liabilities and owners’ equity

 

$

15,657,544

 

$

15,848,158

 

Investment in Unconsolidated Real Estate Affiliates, Net:

 

 

 

 

 

Owners’ equity

 

$

4,562,811

 

$

4,227,810

 

Less: joint venture partners’ equity

 

(2,629,508

)

(2,413,822

)

Plus: excess investment/basis differences

 

1,421,497

 

1,547,462

 

Investment in Unconsolidated Real Estate Affiliates, net (equity method)

 

3,354,800

 

3,361,450

 

Investment in Unconsolidated Real Estate Affiliates, net (cost method)

 

30,483

 

30,483

 

Elimination of consolidated real estate investment interest through joint venture

 

(47,323

)

(52,305

)

Retail investment, net

 

479

 

16,091

 

Investment in Unconsolidated Real Estate Affiliates, net

 

$

3,338,439

 

$

3,355,719

 

Reconciliation - Investment in Unconsolidated Real Estate Affiliates:

 

 

 

 

 

Asset - Investment in Unconsolidated Real Estate Affiliates

 

$

3,360,839

 

$

3,377,112

 

Liability - Investment in Unconsolidated Real Estate Affiliates

 

(22,400

)

(21,393

)

Investment in Unconsolidated Real Estate Affiliates, net

 

$

3,338,439

 

$

3,355,719

 

 

18


 

GGP INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Condensed Combined Statements of Income - Unconsolidated Real Estate Affiliates (1)

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Minimum rents

 

$

303,103

 

$

289,606

 

$

594,575

 

$

585,473

 

Tenant recoveries

 

119,108

 

119,923

 

241,750

 

241,942

 

Overage rents

 

5,325

 

4,085

 

11,629

 

10,192

 

Condominium sales

 

12,384

 

83,402

 

49,273

 

180,389

 

Other

 

12,732

 

12,763

 

31,002

 

25,842

 

Total revenues

 

452,652

 

509,779

 

928,229

 

1,043,838

 

Expenses:

 

 

 

 

 

 

 

 

 

Real estate taxes

 

38,221

 

32,408

 

74,357

 

67,465

 

Property maintenance costs

 

945

 

9,575

 

12,608

 

21,064

 

Marketing

 

3,326

 

3,916

 

8,917

 

8,478

 

Other property operating costs

 

56,686

 

56,299

 

112,991

 

109,930

 

Condominium cost of sales

 

9,029

 

60,809

 

35,924

 

131,524

 

Provision for doubtful accounts

 

1,361

 

2,059

 

3,921

 

4,023

 

Property management and other costs (2)

 

22,453

 

19,910

 

45,863

 

38,370

 

General and administrative

 

1,109

 

490

 

1,667

 

1,063

 

Depreciation and amortization

 

159,243

 

127,240

 

284,323

 

249,732

 

Total expenses

 

292,373

 

312,706

 

580,571

 

631,649

 

Operating income

 

160,279

 

197,073

 

347,658

 

412,189

 

Interest income

 

1,583

 

2,815

 

3,424

 

5,543

 

Interest expense

 

(116,083

)

(114,193

)

(220,647

)

(225,181

)

Provision for income taxes

 

(198

)

(268

)

(402

)

(545

)

Equity in loss of unconsolidated joint ventures

 

(10,107

)

(6,357

)

(17,672

)

(10,711

)

Income from continuing operations

 

35,474

 

79,070

 

112,361

 

181,295

 

Allocation to noncontrolling interests

 

(19

)

(20

)

(37

)

(44

)

Net income attributable to the ventures

 

$

35,455

 

$

79,050

 

$

112,324

 

$

181,251

 

Equity In Income of Unconsolidated Real Estate Affiliates:

 

 

 

 

 

 

 

 

 

Net income attributable to the ventures

 

$

35,455

 

$

79,050

 

$

112,324

 

$

181,251

 

Joint venture partners’ share of income

 

(12,639

)

(37,093

)

(48,240

)

(86,322

)

Elimination of loss from consolidated real estate investment with interest owned through joint venture

 

714

 

388

 

626

 

1,440

 

Loss on retail investment

 

(1,243

)

(575

)

(7,099

)

(10,787

)

Amortization of capital or basis differences

 

(7,257

)

(11,038

)

(18,742

)

(21,636

)

Equity in income of Unconsolidated Real Estate Affiliates

 

$

15,030

 

$

30,732

 

$

38,869

 

$

63,946

 

 


(1)                                 The Condensed Combined Statements of Income - Unconsolidated Real Estate Affiliates include income from Miami Design District subsequent to June 1, 2017.

(2)                                 Includes management fees charged to the unconsolidated joint ventures by GGMI and GGSI.

 

The Unconsolidated Real Estate Affiliates represent our investments in real estate joint ventures that are not consolidated. We hold interests in 22 domestic joint ventures, comprising 38 U.S. retail properties and one joint venture in Brazil. Generally, we share in the profits and losses, cash flows and other matters relating to our investments in Unconsolidated Real Estate Affiliates in

 

19


 

GGP INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

accordance with our respective ownership percentages. We manage most of the properties owned by these joint ventures. We account for investments in joint ventures where we own a non-controlling joint interest using either the equity method or the cost method. If we have significant influence but not control over the investment, we utilize the equity method. If we have neither control nor significant influence, we utilize the cost method. If we control the joint venture, we account for the venture as a consolidated investment.

 

On June 1, 2017, we received an additional 7.3% of our joint venture partner’s membership interests in Miami Design District in full satisfaction of two promissory notes for $57.6 million and $40.4 million, respectively, resulting in a total ownership of 22.3%. We determined that we had significant influence over the investment subsequent to the acquisition of the additional interest, and therefore we changed our method of accounting for this joint venture from the cost method to the equity method (Note 2).

 

On July 12, 2017, we closed on the acquisition of the remaining 50% interest in 8 anchor boxes included in the GSPH joint venture with Seritage. We had previously owned a 50% interest in the joint venture and accounted for the joint venture using the equity method of accounting, but as a result of the transaction we now account for this joint venture using the consolidation method of accounting. Simultaneously, we distributed the 4 remaining anchor boxes in GSPH to a newly formed joint venture, GSPHII, between GGP and Seritage in which the ownership interest remains at 50% for both joint venture partners, and we continue to account for this joint venture using the equity method of accounting. Finally, we acquired a 50% interest in 5 anchor boxes through a newly formed joint venture, GSPH2017, which we account for using the equity method of accounting.

 

On September 19, 2017, we entered into three transactions with affiliates of Thor related to joint ventures between GGP and Thor at 218 West 57th Street, 530 Fifth Avenue and 685 Fifth Avenue. As a result of these transactions, we changed our method of accounting for these three joint ventures from the equity method of accounting. We now consolidate the joint ventures with our joint venture partner’s share of equity included in noncontrolling interest.

 

Condominium Sales and Condominium Cost of Sales

 

On March 7, 2014, GGP formed a joint venture, AMX Partners, LLC, with Kahikolu Partners, LLC, for the purpose of constructing a luxury residential condominium tower (the Park Lane condominium project) on a site located within the Ala Moana Shopping Center. Under the previous revenue recognition guidance, the percentage of completion method was used to account for the sales revenue of the Park Lane condominium project. Upon adoption of the new revenue recognition standard (Note 2), risks and rewards of ownership and control over the condominium unit transfers upon the closing of the sale to the customer, and as such, the joint venture will recognize revenue for the condominium unit upon closing.

 

Unconsolidated Mortgages, Notes and Loans Payable, and Retained Debt

 

Our proportionate share of the mortgages, notes and loans payable of the unconsolidated joint ventures was $5.1 billion as of June 30, 2018 and December 31, 2017, including Retained Debt (as defined below). There can be no assurance that the Unconsolidated Properties will be able to refinance or restructure such debt on acceptable terms or otherwise, or that joint venture operations or contributions by us and/or our partners will be sufficient to repay such loans.

 

We have debt obligations in excess of our pro rata share of the debt for one of our Unconsolidated Real Estate Affiliates (“Retained Debt”). This Retained Debt represents distributed debt proceeds of the Unconsolidated Real Estate Affiliates in excess of our pro rata share of the non-recourse mortgage indebtedness. The proceeds of the Retained Debt which were distributed to us are included as a reduction in our investment in Unconsolidated Real Estate Affiliates. We had retained debt of $84.1 million at one property as of June 30, 2018, and $85.2 million as of December 31, 2017. We are obligated to contribute funds on an ongoing basis, as needed, to our Unconsolidated Real Estate Affiliates in amounts sufficient to pay debt service on such Retained Debt. If we do not contribute such funds, our distributions from such Unconsolidated Real Estate Affiliates, or our interest in, could be reduced to the extent of such deficiencies. As of June 30, 2018, we do not anticipate an inability to perform on our obligations with respect to Retained Debt.

 

20


 

GGP INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

NOTE 6      MORTGAGES, NOTES AND LOANS PAYABLE

 

Mortgages, notes and loans payable and the weighted-average interest rates are summarized as follows:

 

 

 

June 30, 2018
(1)

 

Weighted-
Average
Interest Rate (2)

 

December 31, 2017
(3)

 

Weighted-
Average
Interest Rate (2)

 

Fixed-rate debt:

 

 

 

 

 

 

 

 

 

Collateralized mortgages, notes and loans payable

 

$

10,618,364

 

4.41

%

$

10,420,252

 

4.41

%

Total fixed-rate debt

 

10,618,364

 

4.41

%

10,420,252

 

4.41

%

Variable-rate debt:

 

 

 

 

 

 

 

 

 

Collateralized mortgages, notes and loans payable (4)

 

2,074,540

 

3.87

%

2,418,628

 

3.39

%

Revolving credit facility (5)

 

154,731

 

3.34

%

(6,421

)

 

Total variable-rate debt

 

2,229,271

 

3.83

%

2,412,207

 

3.39

%

Total Mortgages, notes and loans payable

 

$

12,847,635

 

4.31

%

$

12,832,459

 

4.22

%

Junior subordinated notes

 

$

206,200

 

3.81

%

$

206,200

 

2.83

%

 


(1)    Includes $21.3 million of market rate adjustments and $25.0 million of deferred financing costs, net.

(2)    Represents the weighted-average interest rates on our principal balances, excluding the effects of market rate adjustments and deferred financing costs.

(3)    Includes $23.5 million of market rate adjustments and $30.3 million of deferred financing costs, net.

(4)    $1.4 billion of the variable-rate balance is cross-collateralized.

(5) Includes deferred financing costs, which are shown as a reduction to the debt balance. See table below for the balance excluding deferred financing costs. Excludes $100.0 million categorized as held for disposition as of June 30, 2018 (Note 2).

 

Collateralized Mortgages, Notes and Loans Payable

 

As of June 30, 2018, $18.2 billion of land, buildings and equipment (before accumulated depreciation) and construction in progress have been pledged as collateral for our mortgages, notes and loans payable. Certain of these consolidated secured loans, representing $1.4 billion of debt, are cross-collateralized. Although a majority of the $12.7 billion of fixed and variable rate collateralized mortgages, notes and loans payable are non-recourse, $808.4 million of such mortgages, notes and loans payable are recourse to the Company as guarantees on secured financings. In addition, certain mortgage loans contain other credit enhancement provisions which have been provided by GGP. Certain mortgages, notes and loans payable may be prepaid but are generally subject to a prepayment penalty equal to a yield-maintenance premium, defeasance or a percentage of the loan balance.

 

During the six months ended June 30, 2018, we refinanced a consolidated mortgage note at 685 Fifth Avenue. The prior $340.0 million variable-rate consolidated mortgage note matured on July 1, 2018 and had an interest rate of LIBOR plus 2.75%. In connection with the refinancing, $100.0 million remained related to the commercial office unit and a new $275.0 million fixed-rate consolidated mortgage note with a term-to-maturity of 10.0 years and an interest rate of 4.53% was obtained on the retail unit. The $100.0 million was paid down in full in conjunction with the sale of the commercial office unit on July 13, 2018 (Note 17 ).

 

During the year ended December 31, 2017, we paid down a $73.4 million consolidated mortgage note at Four Seasons Town Centre. The prior loan had a term-to-maturity of 0.2 years and an interest rate of 5.6%. Four Seasons Town Centre subsequently replaced a property that was sold during the year ended December 31, 2017 as collateral in our $1.4 billion loan secured by cross-collateralized mortgages on 14 properties. In addition, we obtained a new consolidated mortgage note at Mall of Louisiana for $325.0 million with an interest rate of 3.98%. Finally, as a result of the three transactions at 218 West 57th Street, 530 Fifth Avenue and 685 Fifth Avenue, we now consolidate a total of $450.0 million consolidated mortgage notes with interest rates of LIBOR plus 2.75% and LIBOR plus 3.25%. Finally, we refinanced a $190.0 million consolidated mortgage note with a $110.0 million consolidated mortgage note at 530 Fifth Avenue. Both notes had an interest rate of LIBOR plus 3.25%. We manage our exposure to interest rate fluctuations related to this debt using interest rate cap agreements. However, our efforts to manage risks associated with interest rate volatility may not be successful.

 

21


 

GGP INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

Our $1.4 billion loan is secured by cross-collateralized mortgages on 14 properties. The interest rate is LIBOR plus 1.75% and the recourse is 50%. The loan matures on April 25, 2019, with two one year extension options.

 

Corporate and Other Unsecured Loans

 

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

 

 

 

June 30, 2018
(1)

 

Weighted-Average
Interest Rate

 

December 31,
2017 (2)

 

Weighted-Average
Interest Rate

 

Unsecured debt:

 

 

 

 

 

 

 

 

 

Revolving credit facility

 

$

160,000

 

3.34

%

$

 

 

Total unsecured debt

 

$

160,000

 

3.34

%

$

 

 

 


(1)                                 Excludes deferred financing costs of $5.4 million in 2018 that decrease the total amount that appears outstanding in our Consolidated Balance Sheets and $100.0 million categorized as held for disposition as of June 30, 2018 (Note 2).

(2)                                 Excludes deferred financing costs of $6.4 million in 2017 that decrease the total amount that appears outstanding in our Consolidated Balance Sheets.

 

Our revolving credit facility (the “Facility”) as amended on October 30, 2015, provides for revolving loans of up to $1.1 billion. The Facility has an uncommitted accordion feature for a total facility of up to $1.5 billion. The Facility is scheduled to mature in October 2020 and is unsecured. Borrowings under the Facility bear interest at a rate equal to LIBOR plus 130 to 190 basis points or at a base rate plus 30 to 90 basis points, which is determined by the Company’s leverage level. The Facility contains certain restrictive covenants which limit material changes in the nature of our business conducted, including, but not limited to, mergers, dissolutions or liquidations, dispositions of assets, liens, incurrence of additional indebtedness, dividends, transactions with affiliates, prepayment of subordinated debt, negative pledges and changes in fiscal periods. In addition, we are required not to exceed a maximum net debt-to-value ratio, a maximum leverage ratio and a minimum net cash interest coverage ratio; we are not aware of any instances of non-compliance with such covenants as of June 30, 2018. As of June 30, 2018, $260.0 million was outstanding on the Facility, including $100.0 million categorized as held for disposition as of June 30, 2018 (Note 2).

 

Junior Subordinated Notes

 

GGP Capital Trust I, a Delaware statutory trust (the “Trust”) and a wholly-owned subsidiary of GGPN, completed a private placement of $200.0 million of trust preferred securities (“TRUPS”) in 2006. The Trust also issued $6.2 million of Common Securities to GGPOP. The Trust used the proceeds from the sale of the TRUPS and Common Securities to purchase $206.2 million of floating rate Junior Subordinated Notes of GGPOP due 2036. Distributions on the TRUPS are equal to LIBOR plus 1.45%. Distributions are cumulative and accrue from the date of original issuance. The TRUPS mature on April 30, 2036, but may be redeemed beginning on April 30, 2011 if the Trust exercises its right to redeem a like amount of Junior Subordinated Notes. The Junior Subordinated Notes bear interest at LIBOR plus 1.45% and are fully recourse to the Company. We have recorded the Junior Subordinated Notes as a liability and our common equity interest in the Trust as prepaid expenses and other assets in our Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017.

 

Letters of Credit and Surety Bonds

 

We had outstanding letters of credit and surety bonds of $42.4 million as of June 30, 2018 and $51.3 million as of December 31, 2017. These letters of credit and bonds were issued primarily in connection with insurance requirements, special real estate assessments and construction obligations.

 

We are not aware of any instances of non-compliance with our financial covenants related to our mortgages, notes and loans payable as of June 30, 2018.

 

22


 

GGP INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

NOTE 7      INCOME TAXES

 

We have elected to be taxed as a REIT under the Internal Revenue Code. We intend to maintain REIT status. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement to distribute at least 90% of our taxable ordinary income. 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 and capital gains. We are currently statutorily open to audit by the Internal Revenue Service for the years ended December 31, 2014 through 2017 and are statutorily open to audit by state taxing authorities for the years ended December 31, 2013 through 2017. We have one TRS that has extended the statute of limitations for the year ended December 31, 2013 until September 30, 2018 for purposes of reviewing a carryback claim.

 

We have no unrecognized tax benefits recorded pursuant to uncertain tax positions as of June 30, 2018.

 

NOTE 8      EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS

 

Allocation to Noncontrolling Interests

 

Noncontrolling interests consists of the redeemable interests related to GGPOP Common, Preferred, and LTIP Units and the noncontrolling interest in our consolidated joint ventures. The following table reflects the activity included in the allocation to noncontrolling interests.

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Distributions to preferred GGPOP units

 

$

(628

)

$

(882

)

$

(1,261

)

$

(3,014

)

Net income allocation to noncontrolling interests in GGPOP from continuing operations (Common units)

 

(818

)

(676

)

(1,378

)

(1,251

)

Net income allocation to noncontrolling interests in GGPOP from continuing operations (LTIP units)

 

(190

)

(299

)

(324

)

(553

)

Net income allocated to noncontrolling interest in consolidated real estate affiliates

 

(313

)

(598

)

(846

)

(847

)

Allocation to noncontrolling interests

 

(1,949

)

(2,455

)

(3,809

)

(5,665

)

Other comprehensive (income) loss allocated to noncontrolling interests

 

84

 

320

 

86

 

315

 

Comprehensive income allocated to noncontrolling interests

 

$

(1,865

)

$

(2,135

)

$

(3,723

)

$

(5,350

)

 

Noncontrolling Interests

 

The noncontrolling interest related to the Common, Preferred, and LTIP Units of GGPOP are presented either as redeemable noncontrolling interests in mezzanine equity or as noncontrolling interests in our permanent equity on our Consolidated Balance Sheets. Classification as redeemable or permanent equity is considered on a tranche-by-tranche basis and is dependent on whether we could be required, under certain events outside of our control, to redeem the securities for cash by the holders of the securities. Those tranches for which we could be required to redeem the security for cash are included in redeemable equity. If we control the decision to redeem the securities for cash, the securities are classified as permanent equity.

 

The redeemable Common and Preferred Units of GGPOP are recorded at the greater of the carrying amount adjusted for the noncontrolling interest’s share of the allocation of income or loss (and its share of other comprehensive income or loss) and dividends or their redemption value (i.e. fair value) as of each measurement date. The excess of the fair value over the carrying amount from period to period is recorded within additional paid-in capital in our Consolidated Balance Sheets. Allocation to noncontrolling interests is presented as an adjustment to net income to arrive at net income (loss) attributable to GGP Inc.

 

23


 

GGP INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

The common redeemable noncontrolling interests have been recorded at fair value for all periods presented. The preferred redeemable noncontrolling interests have been recorded at carrying value.

 

Generally, the holders of the Common Units share in any distributions by GGPOP with our common stockholders. However, the GGPOP operating partnership agreement permits distributions solely to GGP if such distributions were required to allow GGP to comply with the REIT distribution requirements or to avoid the imposition of excise tax. Under certain circumstances, the conversion rate for each Common Unit is required to be adjusted to give effect to stock distributions. If the holders had requested redemption of the Common and Preferred Units as of June 30, 2018, the aggregate amount of cash we would have paid would have been $171.1 million and $52.3 million, respectively.

 

GGPOP issued Preferred Units that are, or were, convertible into Common Units of GGPOP at the rates below (subject to adjustment). The holder may convert the Series D and Series E Preferred Units into Common Units of GGPOP at any time, subject to certain restrictions. The Common Units are convertible into common stock at approximately a one-to-one ratio at the current stock price.

 

 

 

Number of Common
Units for each
Preferred Unit

 

Number of Contractual

Preferred Units Outstanding as

of June 30, 2018
(in thousands)

 

Converted Basis to Common
Units Outstanding as of June
30, 2018
(in thousands)

 

Conversion
Price

 

Redemption
Value (1)
(in thousands)

 

Series B

 

3.00000

 

10

 

 

$

16.66670

 

$

486

 

Series D

 

1.50821

 

533

 

835

 

33.15188

 

26,637

 

Series E

 

1.29836

 

503

 

679

 

38.51000

 

25,133

 

 

 

 

 

 

 

 

 

 

 

$

52,256

 

 


(1)                                 As of July 10, 2017, the Series B preferred unit conversion option expired and now has a fixed cash redemption value of $50 per unit.

 

The following table reflects the activity of the common redeemable noncontrolling interests for the six months ended June 30, 2018, and 2017.

 

Balance at January 1, 2017

 

$

262,727

 

Net income

 

1,251

 

Distributions

 

(2,887

)

Redemption of GGPOP units

 

(651

)

Other comprehensive loss

 

(315

)

Fair value adjustment for noncontrolling interests in Operating Partnership

 

(10,346

)

Balance at June 30, 2017

 

$

249,779

 

 

 

 

 

Balance at January 1, 2018

 

$

248,126

 

Net income

 

1,378

 

Distributions

 

(3,684

)

Other comprehensive loss

 

(86

)

Fair value adjustment for noncontrolling interests in Operating Partnership

 

(22,395

)

Balance at June 30, 2018

 

$

223,339

 

 

24


 

GGP INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

Common Stock Dividend

 

Our Board of Directors declared common stock dividends during 2018 and 2017 as follows:

 

Declaration Date

 

Record Date

 

Payment Date

 

Dividend Per Share

 

2018

 

 

 

 

 

 

 

May 3

 

July 13, 2018

 

July 31, 2018

 

$

0.22

 

February 7

 

April 13, 2018

 

April 30, 2018

 

0.22

 

2017

 

 

 

 

 

 

 

October 31

 

December 15, 2017

 

January 5, 2018

 

$

0.22

 

August 2

 

October 13, 2017

 

October 31, 2017

 

0.22

 

May 1

 

July 13, 2017

 

July 28, 2017

 

0.22

 

January 30

 

April 13, 2017

 

April 28, 2017

 

0.22

 

 

Our Dividend Reinvestment Plan (“DRIP”) provides eligible holders of GGP’s common stock with a convenient method of increasing their investment in the Company by reinvesting all or a portion of cash dividends in additional shares of common stock. Eligible stockholders who enroll in the DRIP on or before the fourth business day preceding the record date for a dividend payment will be able to have that dividend reinvested. As a result of the DRIP elections, 11,239 shares were issued during the six months ended June 30, 2018 and 28,693 shares were issued during the six months ended June 30, 2017.

 

Preferred Stock

 

On February 13, 2013, we issued, in a public offering, 10,000,000 shares of 6.375% Series A Cumulative Perpetual Preferred Stock (the “Preferred Stock”) at a price of $25.00 per share, resulting in net proceeds of $242.0 million after issuance costs. The Preferred Stock is recorded net of issuance costs within equity on our Consolidated Balance Sheets, and accrues a quarterly dividend at an annual rate of 6.375%. The dividend is paid in arrears in preference to dividends on our common stock, and reduces net income available to common stockholders, and therefore, earnings per share.

 

The Preferred Stock does not have a stated maturity date but we may redeem the Preferred Stock after February 12, 2018, for $25.00 per share plus all accrued and unpaid dividends. We may redeem the Preferred Stock prior to February 12, 2018, in limited circumstances that preserve ownership limits and/or our status as a REIT, as well as during certain circumstances surrounding a change of control. Upon certain circumstances surrounding a change of control, holders of Preferred Stock may elect to convert each share of their Preferred Stock into a number of shares of GGP common stock equivalent to $25.00 plus accrued and unpaid dividends, but not to exceed a cap of 2.4679 common shares (subject to certain adjustments related to GGP common share splits, subdivisions, or combinations).

 

Our Board of Directors declared preferred stock dividends during 2018 and 2017 as follows:

 

Declaration Date

 

Record Date

 

Payment Date

 

Dividend Per Share

 

2018

 

 

 

 

 

 

 

July 31

 

September 17, 2018

 

October 1, 2018

 

$

0.3984

 

May 3

 

June 15, 2018

 

July 2, 2018

 

0.3984

 

February 7

 

March 15, 2018

 

April 2, 2018

 

0.3984

 

2017

 

 

 

 

 

 

 

October 31

 

December 15, 2017

 

January 2, 2018

 

$

0.3984

 

August 2

 

September 15, 2017

 

October 2, 2017

 

0.3984

 

May 1

 

June 15, 2017

 

July 3, 2017

 

0.3984

 

January 30

 

March 15, 2017

 

April 3, 2017

 

0.3984

 

 

25


 

GGP INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

 

Accumulated Other Comprehensive Loss

 

The following table reflects the activity of the components of accumulated other comprehensive loss for the three months ended June 30, 2018, and 2017:

 

 

 

Foreign currency
translation

 

Net unrealized
gains (losses) on
other financial
instruments

 

Total

 

Balance at April 1, 2017

 

$

(67,998

)

$

117

 

$

(67,881

)

Other comprehensive income (loss)

 

(3,709

)

(3

)

(3,712

)

Balance at June 30, 2017

 

$

(71,707

)

$

114

 

$

(71,593

)

 

 

 

 

 

 

 

 

Balance at April 1, 2018

 

$

(72,398

)

$

167

 

$

(72,231

)

Other comprehensive income (loss)

 

(9,954

)

(44

)

(9,998

)

Balance at June 30, 2018

 

$

(82,352

)

$

123

 

$

(82,229

)

 

The following table reflects the activity of the components of accumulated other comprehensive loss for the six months ended June 30, 2018, and 2017:

 

 

 

Foreign currency
translation

 

Net unrealized
gains (losses) on
other financial
instruments

 

Total

 

Balance at January 1, 2017