10-Q 1 a09-14242_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

 

 

For the quarterly period ended June 30, 2009

 

or

 

 

o

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

 

For the Transition Period from              to

 

Commission file number 1-11656

 

GENERAL GROWTH PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

42-1283895

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

110 N. Wacker Dr., Chicago, IL 60606

(Address of principal executive offices, including Zip Code)

 

(312) 960-5000

(Registrant’s telephone number, including area code)

 

N / A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

The number of shares of Common Stock, $.01 par value, outstanding on August 3, 2009 was 313,813,646.

 

 

 



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

(Debtor-in-Possession)

INDEX

 

 

 

PAGE
NUMBER

Part I

FINANCIAL INFORMATION

 

 

Item 1: Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008

3

 

 

 

 

Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2009 and 2008

4

 

 

 

 

Consolidated Statements of Equity for the three and six months ended June 30, 2009 and 2008

5

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008

6

 

 

 

 

Notes to Consolidated Financial Statements

8

 

Note 1: Organization

8

 

Note 2: Intangible Assets and Liabilities

22

 

Note 3: Unconsolidated Real Estate Affiliates

23

 

Note 4: Mortgages, Notes and Loans Payable

29

 

Note 5: Income Taxes

30

 

Note 6: Stock-Based Compensation Plans

31

 

Note 7: Other Assets and Liabilities

34

 

Note 8: Commitments and Contingencies

35

 

Note 9: Recently Issued Accounting Pronouncements

36

 

Note 10: Segments

37

 

 

 

 

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

40

 

Liquidity and Capital Resources

50

 

Item 3: Quantitative and Qualitative Disclosures about Market Risk

52

 

Item 4: Controls and Procedures

52

 

 

 

Part II

OTHER INFORMATION

 

 

Item 1: Legal Proceedings

52

 

Item 1A: Risk Factors

52

 

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

52

 

Item 3: Defaults Upon Senior Securities

53

 

Item 4: Submission of Matters to a Vote of Security Holders

53

 

Item 5: Other Information

53

 

Item 6: Exhibits

53

 

SIGNATURE

55

 

EXHIBIT INDEX

56

 

2



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

(Debtor-in-Possession)

 

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

 

 

June 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

Investment in real estate:

 

 

 

 

 

Land

 

$

3,363,208

 

$

3,354,480

 

Buildings and equipment

 

23,389,898

 

23,609,132

 

Less accumulated depreciation

 

(4,548,134

)

(4,240,222

)

Developments in progress

 

958,298

 

1,076,675

 

Net property and equipment

 

23,163,270

 

23,800,065

 

Investment in and loans to/from Unconsolidated Real Estate Affiliates

 

1,932,356

 

1,869,929

 

Investment property and property held for development and sale

 

1,723,556

 

1,823,362

 

Net investment in real estate

 

26,819,182

 

27,493,356

 

Cash and cash equivalents

 

622,844

 

168,993

 

Accounts and notes receivable, net

 

396,252

 

385,334

 

Goodwill

 

211,540

 

340,291

 

Deferred expenses, net

 

332,011

 

333,901

 

Prepaid expenses and other assets

 

738,428

 

835,455

 

Total assets

 

$

29,120,257

 

$

29,557,330

 

 

 

 

 

 

 

Liabilities and Equity:

 

 

 

 

 

Liabilities not subject to compromise:

 

 

 

 

 

Mortgages, notes and loans payable

 

$

3,040,250

 

$

24,756,577

 

Investment in and loans to/from Unconsolidated Real Estate Affiliates

 

32,282

 

32,294

 

Deferred tax liabilities

 

860,378

 

868,978

 

Accounts payable and accrued expenses

 

967,423

 

1,539,149

 

Liabilities not subject to compromise

 

4,900,333

 

27,196,998

 

Liabilities subject to compromise

 

22,393,495

 

 

Total liabilities

 

27,293,828

 

27,196,998

 

 

 

 

 

 

 

Redeemable noncontrolling interests:

 

 

 

 

 

Preferred

 

120,756

 

120,756

 

Common

 

38,170

 

379,169

 

Total redeemable noncontrolling interests

 

158,926

 

499,925

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

Preferred Stock: $100 par value; 5,000,000 shares authorized; none issued and outstanding

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Common stock: $.01 par value; 875,000,000 shares authorized, 313,804,357 shares issued as of June 30, 2009 and 270,353,677 shares issued as of December 31, 2008

 

3,138

 

2,704

 

Additional paid-in capital

 

3,792,212

 

3,454,903

 

Retained earnings (accumulated deficit)

 

(2,043,067

)

(1,488,586

)

Accumulated other comprehensive loss

 

(32,216

)

(56,128

)

Less common stock in treasury, at cost, 1,449,939 shares as of June 30, 2009 and December 31, 2008

 

(76,752

)

(76,752

)

Total stockholders’ equity

 

1,643,315

 

1,836,141

 

Noncontrolling interests in consolidated real estate affiliates

 

24,188

 

24,266

 

Total equity

 

1,667,503

 

1,860,407

 

Total liabilities and equity

 

$

29,120,257

 

$

29,557,330

 

 

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

 

3



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

(Debtor-in-Possession)

 

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(Dollars in thousands, except for per share amounts)

 

Revenues:

 

 

 

 

 

 

 

 

 

Minimum rents

 

$

498,708

 

$

507,099

 

$

997,816

 

$

1,032,041

 

Tenant recoveries

 

224,691

 

231,548

 

457,710

 

463,179

 

Overage rents

 

5,782

 

10,892

 

15,806

 

24,410

 

Land sales

 

22,448

 

15,855

 

31,435

 

24,921

 

Management and other fees

 

15,920

 

21,918

 

35,118

 

42,157

 

Other

 

24,546

 

28,306

 

42,850

 

59,232

 

Total revenues

 

792,095

 

815,618

 

1,580,735

 

1,645,940

 

Expenses:

 

 

 

 

 

 

 

 

 

Real estate taxes

 

68,959

 

69,004

 

140,518

 

137,653

 

Repairs and maintenance

 

50,082

 

56,997

 

105,438

 

119,098

 

Marketing

 

6,906

 

8,776

 

14,482

 

21,052

 

Other property operating costs

 

98,497

 

104,198

 

202,199

 

215,718

 

Land sales operations

 

21,850

 

15,211

 

32,464

 

25,131

 

Provision for doubtful accounts

 

8,847

 

6,287

 

19,179

 

8,996

 

Property management and other costs

 

42,200

 

54,804

 

85,609

 

106,942

 

General and administrative

 

32,304

 

4,416

 

78,125

 

12,515

 

Provisions for impairment

 

82,388

 

236

 

413,480

 

608

 

Depreciation and amortization

 

186,472

 

191,242

 

391,087

 

375,501

 

Total expenses

 

598,505

 

511,171

 

1,482,581

 

1,023,214

 

Operating income

 

193,590

 

304,447

 

98,154

 

622,726

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

501

 

1,449

 

1,231

 

2,006

 

Interest expense

 

(319,543

)

(319,303

)

(648,033

)

(644,995

)

Loss before income taxes, noncontrolling interests and equity in income of Unconsolidated Real Estate Affiliates and reorganization items

 

(125,452

)

(13,407

)

(548,648

)

(20,263

)

Provision for income taxes

 

(15,742

)

(6,866

)

(4,228

)

(16,257

)

Equity in income of Unconsolidated Real Estate Affiliates

 

16,339

 

21,145

 

23,877

 

44,973

 

Reorganization items

 

(33,726

)

 

(33,726

)

 

(Loss) income from continuing operations

 

(158,581

)

872

 

(562,725

)

8,453

 

Discontinued operations - gain (loss) on dispositions

 

 

37,060

 

(55

)

37,060

 

Net (loss) income

 

(158,581

)

37,932

 

(562,780

)

45,513

 

Allocation to noncontrolling interests

 

179

 

(9,181

)

8,299

 

(13,400

)

Net (loss) income attributable to common stockholders

 

$

(158,402

)

$

28,751

 

$

(554,481

)

$

32,113

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted (Loss) Earnings Per Share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.51

)

$

 

$

(1.81

)

$

0.03

 

Discontinued operations

 

 

0.12

 

 

0.12

 

Total basic and diluted (loss) earnings per share

 

$

(0.51

)

$

0.12

 

$

(1.81

)

$

0.15

 

Dividends declared per share

 

 

0.50

 

 

1.00

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income, Net:

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(158,581

)

$

37,932

 

$

(562,780

)

$

45,513

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Net unrealized gains on financial instruments

 

5,515

 

2,596

 

7,624

 

909

 

Accrued pension adjustment

 

223

 

(78

)

324

 

(419

)

Foreign currency translation

 

27,966

 

20,419

 

25,684

 

18,399

 

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

 

89

 

(2

)

111

 

(130

)

Other comprehensive income

 

33,793

 

22,935

 

33,743

 

18,759

 

Comprehensive (loss) income allocated to noncontrolling interests

 

(767

)

(3,665

)

(766

)

(2,476

)

Adjustment for noncontrolling interests

 

 

 

(9,065

)

 

Comprehensive (loss) income, net attributable to common stockholders

 

$

(125,555

)

$

57,202

 

$

(538,868

)

$

61,796

 

 

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

 

4



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

(Debtor-in-Possession)

 

CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED)

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 

 

Noncontrolling

 

 

 

 

 

 

 

Additional

 

Earnings

 

Other

 

 

 

Interests in

 

 

 

 

 

Common

 

Paid-In

 

(Accumulated

 

Comprehensive

 

Treasury

 

Consolidated Real

 

Total

 

 

 

Stock

 

Capital

 

Deficit)

 

Income (Loss)

 

Stock

 

Estate Affiliates

 

Equity

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2007

 

$

2,457

 

$

2,601,296

 

$

(1,087,080

)

$

35,658

 

$

(95,635

)

$

 

$

1,456,696

 

Cumulative effect of change in accounting principles

 

 

 

(1,756,689

)

(14,312

)

 

 

 

 

7,457

 

(1,763,544

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted balance, January 1, 2008

 

2,457

 

844,607

 

(1,101,392

)

35,658

 

(95,635

)

7,457

 

(306,848

)

Net income

 

 

 

 

 

32,113

 

 

 

 

 

1,093

 

33,206

 

Cash distributions declared ($1.00 per share)

 

 

 

 

 

(255,662

)

 

 

 

 

 

 

(255,662

)

Contributions to (distributions from) noncontrolling interests in consolidated Real Estate Affiliates

 

 

 

 

 

 

 

 

 

 

 

6,803

 

6,803

 

Conversion of operating partnership units to common stock (18,495 common shares)

 

 

 

706

 

 

 

 

 

 

 

 

 

706

 

Issuance of common stock (23,046,888 common shares and 50 treasury shares)

 

230

 

829,239

 

 

 

 

 

3

 

 

 

829,472

 

Shares issued pursuant to CSA (356,661 treasury shares)

 

 

 

(914

)

(2,434

)

 

 

18,880

 

 

 

15,532

 

Restricted stock grant, net of compensation expense (354,380 common shares)

 

4

 

2,149

 

 

 

 

 

 

 

 

 

2,153

 

Other comprehensive loss

 

 

 

 

 

 

 

16,283

 

 

 

 

 

16,283

 

Adjustment for noncontrolling interest in operating partnership

 

 

 

(114,716

)

 

 

 

 

 

 

 

 

(114,716

)

Adjust noncontrolling interest in OP Units to fair value per FAS 160

 

 

 

423,334

 

 

 

 

 

 

 

 

 

423,334

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Balance, June 30, 2008

 

$

2,691

 

$

1,984,405

 

$

(1,327,375

)

$

51,941

 

$

(76,752

)

$

15,353

 

$

650,263

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2008 (as previously reported)

 

$

2,704

 

$

3,337,657

 

$

(1,452,733

)

$

(56,128

)

$

(76,752

)

$

 

$

1,754,748

 

Adjustments

 

 

 

117,246

 

(35,853

)

 

 

 

 

24,266

 

105,659

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted balance, January 1, 2009

 

2,704

 

3,454,903

 

(1,488,586

)

(56,128

)

(76,752

)

24,266

 

1,860,407

 

Net loss

 

 

 

 

 

(554,481

)

 

 

 

 

1,246

 

(553,235

)

Contributions to (distributions from) noncontrolling interests in consolidated Real Estate Affiliates

 

 

 

 

 

 

 

 

 

 

 

(1,324

)

(1,324

)

Conversion of operating partnership units to common stock (43,408,053 common shares)

 

434

 

324,054

 

 

 

 

 

 

 

 

 

324,488

 

Issuance of common stock (69,309 common shares)

 

1

 

42

 

 

 

 

 

 

 

 

 

43

 

Restricted stock grant forfeitures, net of compensation expense (Net 26,682 common shares forfeited)

 

(1

)

1,085

 

 

 

 

 

 

 

 

 

1,084

 

Other comprehensive loss

 

 

 

 

 

 

 

23,912

 

 

 

 

 

23,912

 

Adjustment for noncontrolling interest in operating partnership

 

 

 

12,128

 

 

 

 

 

 

 

 

 

12,128

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2009

 

$

3,138

 

$

3,792,212

 

$

(2,043,067

)

$

(32,216

)

$

(76,752

)

$

24,188

 

$

1,667,503

 

 

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

 

5



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

(Debtor-in-Possession)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2009

 

2008

 

 

 

(In thousands)

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net (loss) income

 

$

(562,780

)

$

45,513

 

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

 

 

 

 

 

Equity in income of Unconsolidated Real Estate Affiliates

 

(23,877

)

(44,973

)

Provision for doubtful accounts

 

19,179

 

8,996

 

Distributions received from Unconsolidated Real Estate Affiliates

 

20,605

 

26,065

 

Depreciation

 

365,636

 

350,452

 

Amortization

 

25,451

 

25,049

 

Amortization of deferred finance costs and debt market rate adjustments

 

18,825

 

4,002

 

Non-cash interest expense on Exchangeable Senior Notes

 

13,449

 

12,658

 

Non-cash interest expense resulting from termination of interest rate swaps

 

(18,675

)

 

Loss (gain) on dispositions

 

55

 

(37,060

)

Provisions for impairment

 

413,480

 

608

 

Participation expense pursuant to Contingent Stock Agreement

 

(1,793

)

1,252

 

Land/residential development and acquisitions expenditures

 

(29,811

)

(97,370

)

Cost of land sales

 

18,667

 

5,472

 

Straight-line rent amortization

 

(18,694

)

(21,903

)

Amortization of intangibles other than in-place leases

 

1,308

 

(3,754

)

Glendale Matter deposit

 

67,054

 

(67,054

)

Non-cash reorganization items

 

31,176

 

 

Net changes:

 

 

 

 

 

Accounts and notes receivable

 

(11,537

)

27,279

 

Prepaid expenses and other assets

 

(7,062

)

1,027

 

Deferred expenses

 

(16,408

)

(26,294

)

Accounts payable and accrued expenses and deferred tax liabilities

 

184,708

 

(12,477

)

Other, net

 

8,923

 

(7,368

)

Net cash provided by operating activities

 

497,879

 

190,120

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Acquisition/development of real estate and property additions/improvements

 

(127,584

)

(779,334

)

Proceeds from sales of investment properties

 

6,409

 

29,144

 

Increase in investments in Unconsolidated Real Estate Affiliates

 

(76,067

)

(76,305

)

Distributions received from Unconsolidated Real Estate Affiliates in excess of income

 

50,244

 

44,355

 

Loans from (to) Unconsolidated Real Estate Affiliates, net

 

(9,666

)

45,980

 

Decrease in restricted cash

 

10,620

 

681

 

Other, net

 

(2,061

)

2,999

 

Net cash used in investing activities

 

(148,105

)

(732,480

)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from issuance of mortgages, notes and loans payable

 

 

1,047,358

 

Proceeds from issuance of the DIP Facility

 

400,000

 

 

Principal payments on mortgages, notes and loans payable

 

(295,406

)

(1,030,114

)

Deferred financing costs

 

(2,176

)

(8,311

)

Cash distributions paid to common stockholders

 

 

(255,688

)

Cash distributions paid to holders of Common Units

 

(625

)

(52,035

)

Cash distributions paid to holders of perpetual and convertible preferred units

 

 

(5,806

)

Proceeds from issuance of common stock, including from common stock plans

 

43

 

828,394

 

Other, net

 

2,241

 

6,472

 

Net cash provided by financing activities

 

104,077

 

530,270

 

Net change in cash and cash equivalents

 

453,851

 

(12,090

)

Cash and cash equivalents at beginning of period

 

168,993

 

99,534

 

Cash and cash equivalents at end of period

 

$

622,844

 

$

87,444

 

 

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

 

6



Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

(Debtor-in-Possession)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(UNAUDITED)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2009

 

2008

 

 

 

(In thousands)

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

534,718

 

$

656,778

 

Interest capitalized

 

31,719

 

30,124

 

Income taxes paid

 

16,960

 

39,363

 

Reorganization items paid

 

2,550

 

 

 

 

 

 

 

 

Non-Cash Transactions:

 

 

 

 

 

Common stock issued in exchange for Operating Partnership Units

 

$

(1,031

)

$

123

 

Common stock issued pursuant to Contingent Stock Agreement

 

 

15,533

 

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

 

(50,845

)

55,286

 

Change in accrued purchase price of The Shoppes at The Palazzo

 

(147,616

)

200,288

 

Deferred financing costs payable in conjunction with the DIP Facility

 

19,000

 

 

Recognition of note payable in conjunction with land held for development and sale

 

6,520

 

 

Assumption of debt by purchaser in conjunction with sale of office buildings

 

 

84,000

 

 

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

 

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Table of Contents

 

GENERAL GROWTH PROPERTIES, INC.

(Debtor-in-Possession)

 

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, 2008 which are included in the Company’s Annual Report on Form 10-K (the “Annual Report”) for the fiscal year ended December 31, 2008 (Commission File No. 1-11656), as certain footnote disclosures which would substantially duplicate those contained in our Annual Report have been omitted from this report. Capitalized terms used, but not defined; in this Quarterly Report have the same meanings as in our Annual Report.

 

General

 

General Growth Properties, Inc. (“GGP”), a Delaware corporation, is a self-administered and self-managed real estate investment trust, referred to as a “REIT” which, as described in “Debtors in Possession” below, filed for bankruptcy protection under Chapter 11 of Title 11 of the United States Code (“Chapter 11”) in the Southern District of New York (the “Bankruptcy Court”) on April 16, 2009 (the “Petition Date”).  GGP was organized in 1986 and through its subsidiaries and affiliates owns, operates, manages and develops retail and other rental properties, primarily shopping centers, which are located primarily throughout the United States. GGP also holds assets through its international Unconsolidated Real Estate Affiliates in Brazil, Turkey and Costa Rica in which GGP has a net investment of $190.1 million at June 30, 2009 and $166.7 million at December 31, 2008.  Additionally, GGP develops and sells land for residential, commercial and other uses primarily in large-scale, long-term master planned community projects in and around Columbia, Maryland; Summerlin, Nevada; and Houston, Texas, as well as one residential condominium project located in Natick (Boston), Massachusetts.  Substantially all of our business is conducted by our operating partnership, GGP Limited Partnership (“GGPLP” or the “Operating Partnership”), in which, at June 30, 2009, GGP holds approximately a 98% ownership interest.  In these notes, the terms “we,” “us” and “our” refer to GGP and its subsidiaries (the “Company”).

 

In this report, we refer to our ownership interests in majority-owned or controlled properties as “Consolidated Properties”, to joint ventures in which we own a noncontrolling interest as “Unconsolidated Real Estate Affiliates” and the properties owned by such joint ventures as the “Unconsolidated Properties.” Our “Company Portfolio” includes both our Consolidated Properties and our Unconsolidated Properties.

 

Principles of Consolidation

 

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 operations (generally computed as the joint venture partner’s ownership percentage) is included in Noncontrolling Interests in Consolidated Real Estate Affiliates as permanent equity of the Company. All significant intercompany balances and transactions have been eliminated.

 

In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. The results for the interim periods ended June 30, 2009 are not necessarily indicative of the results to be obtained for the full fiscal year.

 

Debtors in Possession

 

As we were unable to reach an out-of-court consensus with our lenders concerning certain past due and cross-collateralized or cross-defaulted debt, on the Petition Date, the Company, the Operating Partnership and certain of the Company’s domestic subsidiaries filed voluntary petitions for relief under Chapter 11 in the Bankruptcy Court. On April 22, 2009, certain additional domestic subsidiaries (collectively with the subsidiaries filing on the Petition Date, the Company and the Operating Partnership, the “Debtors”) of the Company also filed voluntary petitions for relief in the Bankruptcy Court (collectively, the “Chapter 11 Cases”) which the Bankruptcy Court has ruled may be jointly administered.  However, neither GGMI, certain of our wholly-owned subsidiaries, nor any of our joint ventures (collectively, the “Non-Debtors”), either consolidated or unconsolidated, have sought such protection.

 

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Table of Contents

 

The Debtors, all of which are consolidated in the accompanying financial statements, are currently operating as “debtors in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the orders of the Bankruptcy Court.  The Non-Debtors are continuing their operations and are not subject to the requirements of Chapter 11.  Of the over 200 regional shopping centers we own and manage, the Debtors own and operate, in the aggregate, 166 regional shopping centers.  The Debtors intend to work with their constituencies to emerge from bankruptcy as quickly as possible by proposing a plan of reorganization that extends mortgage maturities, reduces corporate debt and overall leverage and that preserves GGP’s integrated, national business operations.  Pursuant to Chapter 11, a debtor is afforded certain protection against its creditors and creditors are prohibited from taking certain actions (such as pursuing collection efforts or proceeding to foreclose on secured obligations) related to debts that were owed prior to the commencement of the Chapter 11 Cases. Accordingly, although the commencement of the Chapter 11 Cases triggered defaults on substantially all debt obligations of the Debtors, creditors are stayed from taking any actions as a result of such defaults. Absent an order of the Bankruptcy Court, these pre-petition liabilities are subject to settlement under a plan of reorganization.

 

In addition to our mortgage and other debt, current liabilities and liens, we are subject to certain executory contracts. The Debtors, subject to the approval of the Bankruptcy Court, may assume or reject these contracts. Although we are considering the rejection of certain of such contracts (except for our operating property tenant leases), none have been rejected as of June 30, 2009. Claims may result if an executory contract is rejected; however, no such potential claims have been recorded or reflected at this time. On July 22, 2009, the Bankruptcy Court granted the Debtors an extension of time, through and including November 12, 2009, to assume or reject any unexpired leases where a Debtor is a lessee.

 

Since the Petition Date, the Bankruptcy Court has granted various motions that allow the Company to continue to operate its business in the ordinary course without interruption, and covering, among other things, employee obligations, critical service providers, tax matters, insurance matters, tenant and contractor obligations, claim settlements, ordinary course property sales, cash management and cash collateral.  The Debtors have retained, pursuant to Bankruptcy Court approval, legal and financial professionals to advise the Debtors on the bankruptcy proceedings and certain other “ordinary course” professionals. From time to time, the Debtors may seek Bankruptcy Court approval for the retention of additional professionals.  In addition, the Bankruptcy Court approved the Debtors request to enter into a post-petition financing arrangement (the “DIP Facility”), as further discussed in Note 4.  Since approval of the DIP Facility, the Debtors have focused on stabilizing their business and maintaining profitability during the Chapter 11 Cases.  In addition, certain parties have filed motions to dismiss certain of the Debtors from the Chapter 11 Cases on the grounds that, among other things, that the criteria for filing bankruptcy were not satisfied.  The Debtors, by and through their counsel, are contesting these motions and are awaiting a ruling from the Bankruptcy Court.

 

As described above, we have received legal protection from our creditors pursuant to the Chapter 11 Cases. This protection is limited in duration and we will be proceeding to negotiate a reorganization plan, subject to the approval of the Bankruptcy Court, with our lenders, other creditors, and other stakeholders. There can be no assurance that such negotiations will yield sufficient reductions or deferrals of our current and future debt maturities to allow us to continue operations.  Until February 26, 2010, we have the exclusive right to file a plan of reorganization and, if we do so, we have until April 23, 2010 to obtain necessary acceptances of our plan.

 

Our potential inability to address our debt defaults and past due and future debt maturities raise substantial doubts as to our ability to continue as a going concern. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, as a result of the bankruptcy filings, such realization of assets and satisfaction of liabilities are subject to a significant number of uncertainties. Our consolidated financial statements do not reflect any adjustments related to the recoverability of assets and satisfaction of liabilities that might be necessary should we be unable to continue as a going concern.

 

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Table of Contents

 

Accounting for Reorganization

 

The accompanying Consolidated Financial Statements and the unaudited combined condensed financial statements of the Debtors presented below have been prepared in accordance with Statement of Position 90-7 (“SOP 90-7”), “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”, and on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. SOP 90-7 also provides that if a debtor, or group of debtors, has significant combined assets and liabilities of entities which have not sought Chapter 11 bankruptcy protection, the debtors and non-debtors should continue to be combined.  However, separate disclosure of financial statement information solely relating to the debtor entities should be presented.  Accordingly, the unaudited combined condensed financial statements of the Debtors are presented below:

 

Unaudited Combined Condensed Balance Sheet

 

 

 

June 30, 2009

 

 

 

(In thousands)

 

Net investment in real estate

 

$

24,819,180

 

Cash and cash equivalents

 

501,304

 

Accounts and notes receivable, net

 

327,160

 

Other

 

1,032,506

 

Total Assets

 

26,680,150

 

 

 

 

 

Liabilities not subject to compromise:

 

 

 

Mortgages, notes and loans payable

 

400,000

 

Deferred tax liabilities

 

892,277

 

Investment in and loans to/from Unconsolidated

 

 

 

Real Estate Affiliates

 

32,282

 

Accounts payable and accrued expenses

 

808,959

 

Liabilities subject to compromise

 

22,393,495

 

Total redeemable non-controlling interest

 

158,926

 

Equity

 

1,994,211

 

Total Liabilities and Equity

 

$

26,680,150

 

 

Unaudited Combined Condensed Statement of Operations

 

 

 

May 1, 2009 to
June 30, 2009

 

 

 

(In thousands)

 

Operating Revenues

 

$

423,266

 

Operating Expenses

 

360,801

 

Operating Income

 

62,465

 

Interest expense, net

 

(193,172

)

Provision for income taxes

 

(646

)

Equity in income of Real Estate Affiliates

 

22,158

 

Reorganization items

 

(29,492

)

Net loss

 

(138,687

)

Discontinued operations

 

1

 

Allocation to noncontrolling interests

 

323

 

Net loss attributable to common stockholders

 

$

(138,363

)

 

As described above, since the Debtors commenced their respective Chapter 11 Cases on two different dates in April, the combined condensed statements of operations and cash flows have been presented from the period May 1 to June 30, 2009.

 

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Table of Contents

 

Unaudited Combined Condensed Statement of Cash Flows

 

 

 

May 1, 2009 to
June 30, 2009

 

 

 

(In thousands)

 

Net cash provided by:

 

 

 

Operating activities

 

$

304,183

 

Investing activities

 

(53,240

)

Financing activities

 

188,225

 

Net increase in cash and cash equivalents

 

439,168

 

Cash and cash equivalents, beginning of period

 

62,136

 

Cash and cash equivalents, end of period

 

$

501,304

 

 

 

 

 

Cash paid for reorganization items

 

$

2,550

 

 

As of June 30, 2009, the aggregate inter-company amounts due (to) from the Debtors were $555.7 million.

 

Classification of Liabilities Not Subject to Compromise

 

Liabilities not subject to compromise include: (1) liabilities held by Non-Debtor entities; (2) liabilities incurred after the Petition Date; (3) pre-petition date liabilities that the Debtors expect to pay in full, even though certain of these amounts may not be paid until a plan of reorganization is approved; (4) liabilities related to pre-petition contracts that affirmatively have not been rejected; and (5) pre-petition date liabilities that have been approved for payment by the Bankruptcy Court and that the Debtors expect to pay (in advance of a plan of reorganization) over the next twelve month period in the ordinary course of business, including certain employee related items (salaries, vacation and medical benefits).

 

All liabilities incurred prior to the Petition Date other than those specified above are considered liabilities subject to compromise. The amounts of the various categories of liabilities that are subject to compromise are set forth below. These amounts represent the Company’s estimates of known or potential pre-petition date claims that are likely to be resolved in connection with the bankruptcy filings. Such claims remain subject to future adjustments. Adjustments may result from negotiations, actions of the Bankruptcy Court, rejection of executory contracts and unexpired leases, the determination as to the value of any collateral securing claims, proofs of claim, or other events. There can be no assurance that the liabilities of the Debtors will not be found to exceed the fair value of their assets. This could result in claims being paid at less than 100% of their face value and the equity of the Company’s stockholders being diluted or eliminated entirely. The amounts subject to compromise consisted of the following items:

 

 

 

June 30, 2009

 

 

 

(In thousands)

 

Mortgages and secured notes

 

$

15,844,329

 

Unsecured senior notes

 

5,990,253

 

Accounts payable and accrued liabilities

 

558,913

 

Total liabilities subject to compromise

 

$

22,393,495

 

 

The classification of liabilities “not subject to compromise” versus liabilities “subject to compromise” is based on currently available information and analysis. As the Chapter 11 Cases proceed and additional information and analysis is completed, or as the Bankruptcy Court rules on relevant matters, the classification of amounts between these two categories may change. The amount of any such changes could be significant.

 

Reorganization Items

 

Reorganization items under the bankruptcy filings are expense or income items that were incurred or realized by the Debtors as a result of the Chapter 11 Cases and are presented separately in the Consolidated Statements of Income and Comprehensive Income and in the unaudited condensed combined statements of operations of the Debtors presented above. These items include professional fees and similar types of expenses incurred directly related to the bankruptcy filings, loss accruals or gains or losses resulting from activities of the reorganization process, and interest earned on cash accumulated by the Debtors.

 

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Table of Contents

 

Reorganization items are as follows:

 

Reorganization Items

 

Post-Petition
period ended

June 30, 2009

 

 

 

(In thousands)

 

Gains on liabilities subject to compromise (1)

 

$

(2,379

)

Interest income (2)

 

(7

)

U.S. Trustee fees (3)

 

1,097

 

Restructuring costs

 

26,207

 

Debtor In Possession financing costs

 

8,808

 

Total reorganization items

 

$

33,726

 

 


(1)               This amount primarily includes repudiation, rejection or termination of contracts or guarantee of obligations. For the period ended June 30, 2009, such gains reflect agreements reached with certain critical vendors (as defined), which were ratified by the Bankruptcy Court and for which payments on an installment basis began in July, 2009.

(2)               Interest income primarily reflects amounts earned on cash accumulated as a result of our Chapter 11 cases.

(3)               Estimate of fees due remain subject to confirmation and review by the Office of the United States Trustee (“U.S. Trustee”).

 

Reclassifications and Adoption of New Accounting Pronouncements

 

Certain amounts in the 2008 Consolidated Financial Statements have been reclassified to conform to the current period presentation. In addition, as of January 1, 2009 we adopted the following two accounting pronouncements that required retrospective application, in which all periods presented reflect the necessary changes.

 

As of January 1, 2009, we adopted FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (including Partial Cash Settlement)” (“FSP 14-1”) which required us to separately account for the liability and equity components of our Exchangeable Senior Notes in a manner that reflects the nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The impact of the required retrospective application of FSP 14-1 on our consolidated financial statements is that the Exchangeable Senior Notes have been reflected as originally being issued at a discount, with such discount being reflected in subsequent periods as a non-cash increase in interest expense. Below is a summary of the effects of the retrospective application of FSP 14-1 on the consolidated financial statements and the Exchangeable Senior Notes.

 

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Table of Contents

 

 

 

June 30, 2009

 

December 31, 2008

 

 

 

(In thousands)

 

Balance Sheet:

 

 

 

 

 

Principal amount of liability

 

$

1,550,000

 

$

1,550,000

 

Unamortized discount

 

(83,287

)

(96,736

)

Carrying amount of liability component

 

$

1,466,713

 

$

1,453,264

 

 

 

 

 

 

 

Carrying amount of equity component

 

$

139,882

 

$

139,882

 

 

 

 

For the Three Months
Ended June 30, 2009

 

For the Three Months
Ended June 30, 2008

 

 

 

(In thousands)

 

Income Statement:

 

 

 

 

 

Coupon interest

 

$

15,423

 

$

15,423

 

Discount amortization - FSP 14-1

 

6,757

 

6,360

 

Total interest

 

$

22,180

 

$

21,783

 

 

 

 

 

 

 

Effective interest rate

 

5.62

%

5.62

%

 

 

 

For the Six Months
Ended June 30, 2009

 

For the Six Months
Ended June 30, 2008

 

 

 

(In thousands)

 

Income Statement:

 

 

 

 

 

Coupon interest

 

$

30,845

 

$

30,845

 

Discount amortization - FSP 14-1

 

13,449

 

12,658

 

Total interest

 

$

44,294

 

$

43,503

 

 

 

 

 

 

 

Effective interest rate

 

5.62

%

5.62

%

 

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Table of Contents

 

 

 

As Previously Reported

 

Impact of

 

Current Presentation

 

Balance Sheet

 

December 31, 2008

 

FSP 14-1

 

December 31, 2008

 

 

 

(In thousands)

 

Mortgages, notes and loans payable

 

$

24,853,313

 

$

(96,736

)

$

24,756,577

 

 

 

 

As Previously Reported

 

 

 

Current Presentation

 

 

 

For the Three Months Ended

 

Impact of

 

For the Three Months Ended

 

Income Statement

 

June 30, 2008

 

FSP 14-1

 

June 30, 2008

 

 

 

(In thousands)

 

Interest expense

 

$

312,943

 

$

6,360

 

$

319,303

 

Allocation to noncontrolling interests

 

10,210

*

(1,029

)

9,181

 

Net income attributable to common stockholders

 

34,082

 

(5,331

)

28,751

 

 

 

 

 

 

 

 

 

Basic and Diluted Earnings Per Share

 

$

0.13

 

$

(0.01

)

$

0.12

 

 


*Includes the effect of SFAS #160 on the presentation of noncontrolling interests.  See below for further detail.

 

 

 

As Previously Reported

 

 

 

Current Presentation

 

 

 

For the Six Months Ended

 

Impact of

 

For the Six Months Ended

 

Income Statement

 

June 30, 2008

 

FSP 14-1

 

June 30, 2008

 

 

 

(In thousands)

 

Interest expense

 

$

632,337

 

$

12,658

 

$

644,995

 

Allocation to noncontrolling interests

 

15,531

*

(2,131

)

13,400

 

Net income attributable to common stockholders

 

42,640

 

(10,527

)

32,113

 

 

 

 

 

 

 

 

 

Basic and Diluted Earnings Per Share

 

$

0.17

 

$

(0.02

)

$

0.15

 

 


*Includes the effect of SFAS #160 on the presentation of noncontrolling interests.  See below for further detail.

 

As of January 1, 2009, we adopted SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”) which changed the reporting for minority interests in our consolidated joint ventures by re-characterizing them as noncontrolling interests and re-classifying certain of such minority interests as a component of permanent equity in our Consolidated Balance Sheets. The minority interests related to our common and preferred operating partnership units have been re-characterized as redeemable noncontrolling interests and will remain as temporary equity at a mezzanine level per EITF Topic No. D-98, “Classification and Measurement of Redeemable Securities” (“Topic D-98”), in our Consolidated Balance Sheets presented 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 the fair value as of each measurement date subsequent to the measurement date.  The excess of the fair value over the carrying value from period to period would be charged to Additional paid-in capital on our Consolidated Balance Sheets. SFAS 160 also changed the presentation of the income allocated to minority interests by re-characterizing it as allocations to noncontrolling interests and re-classifying such income as an adjustment to net income to arrive at net income attributable to common stockholders.

 

As of June 30, 2009, we adopted Staff Position (FSP) FAS 107-1, “Interim Fair Value Disclosures for Financial Instruments” (“FSP FAS 107-1”) which required us to provide fair value disclosures for our financial instruments in interim periods.   As a result of the Company’s Chapter 11 filing, the fair value for the outstanding debt that is included in liabilities subject to compromise in our consolidated balance sheets cannot be reasonably determined.  With respect to the outstanding $3.04 billion of mortgages, notes and loans payable that are not subject to compromise at June 30, 2009, the carrying value approximated the fair value at December 31, 2008, with the exception of the DIP Facility that was entered into in May 2009.  As of June 30, 2009, there is no available market data that would warrant a change in this conclusion from our year end assessment. This fair value was estimated for financial statement reporting purposes and should not be used to value the Company’s securities for any other purposes, including the Chapter 11 Cases.

 

As of June 30, 2009, we adopted SFAS No. 165, “Subsequent Events” (“SFAS 165”) which provides guidance on our assessment of subsequent events.  The new standard clarifies that we must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date “through the date that the financial statements are issued or are available to be issued.” We performed our assessment of subsequent events through August 7, 2009 and all material events or transactions since June 30, 2009 have been integrated into our disclosures in the accompanying consolidated financial statements.

 

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Table of Contents

 

Noncontrolling Interests

 

The holders of the Common Units share equally with our common stockholders on a per share basis in any distributions by the Operating Partnership on the basis that one Common Unit is equivalent to one share of GGP common stock. Under certain circumstances, the Common Units (other than Common Units held by the parties to the Rights Agreement dated July 27, 1993, as described below) can be redeemed at the option of the holders for cash or, at our election, shares of GGP common stock on a one-for-one basis. Upon receipt of a request for redemption by a holder of such Common Units, the Company, as general partner of the Operating Partnership, has the option to pay the redemption price for such Common Units with shares of common stock of the Company (subject to certain conditions), or in cash, on a one-for-one basis with a cash redemption price equivalent to the market price of one share of common stock of the Company at the time of redemption. Parties to the Rights Agreement dated July 27, 1993 (the “Rights Agreement”) have the right to redeem the Common Units covered by such agreement for shares of GGP Common Stock on a one-for-one basis until they and certain affiliates own 25% of the outstanding shares of GGP Common Stock, at which point such parties have the right, subject to certain limitations, to require the Company to purchase any additional Common Units subject to the agreement.  The Company may elect to pay for such Common Units in cash or in shares of GGP Common Stock at the Company’s election and subject to certain limitations. All prior requests for redemption of Common Units have been fulfilled with shares of the Company’s common stock. Notwithstanding this historical practice, the aggregate amount of cash that would have been paid to the holders of the outstanding Common Units as of June 30, 2009 if such holders had requested redemption of the Common Units as of June 30, 2009, and all such Common Units were redeemed (or purchased in the case of the Rights Agreement) for cash, would have been $13.3 million. We do not have the requisite Bankruptcy Court approvals necessary to redeem Common Units for cash or shares of GGP common stock.  In addition, certain conditions necessary for the issuance of GGP common stock to redeem Common Units have not been satisfied and we may not have the liquidity necessary to redeem Common Units for cash.  As of June 30, 2009, the redeemable noncontrolling interests are presented in our Consolidated Balance Sheets at carrying value because the carrying value of the units was greater than the conversion value of the units based on the stock price at June 30, 2009.  The following table reflects the activity of the redeemable noncontrolling interests for the six months ended June 30, 2009 and 2008.

 

 

 

(In thousands)

 

Balance at December 31, 2007 (as adjusted)

 

$

 2,358,901

 

Net income

 

12,307

 

Distributions

 

(57,649

)

Conversion of operating partnership units into common shares

 

(706

)

Other comprehensive loss

 

2,476

 

Adjustment for noncontrolling interests in operating partnership

 

114,716

 

Adjust redeemable noncontrolling interests fair value per SFAS 160

 

(423,334

)

Balance at June 30, 2008

 

$

 2,006,711

 

 

 

 

 

 

 

 

 

Balance at December 31, 2008 (as adjusted)

 

$

 499,925

 

Net loss

 

(9,545

)

Distributions

 

(4,670

)

Conversion of operating partnership units into common shares

 

(324,488

)

Other comprehensive income

 

9,831

 

Adjustment for noncontrolling interests in operating partnership

 

(12,128

)

Balance at June 30, 2009

 

$

 158,925

 

 

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On January 2, 2009, MB Capital Units LLC, pursuant to the Rights Agreement, converted 42,350,000 Common Units (approximately 13% of all outstanding Common Units, including those owned by GGP) held in the Company’s Operating Partnership into 42,350,000 shares of GGP common stock.

 

The Operating Partnership has also issued Convertible Preferred Units, which are convertible, with certain restrictions, at any time by the holder into Common Units of the Operating Partnership at the following rates (subject to adjustment):

 

 

 

Number of
Common Units
for each
Preferred Unit

 

Series B

 

3.000

 

Series D

 

1.508

 

Series E

 

1.298

 

 

Impairment

 

Operating properties and properties under development

 

Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” (“SFAS 144”) requires that if impairment indicators exist and the undiscounted cash flows expected to be generated by an asset are less than its carrying amount, an impairment charge should be recorded to write down the carrying amount of such asset to its fair value. We review our real estate assets, including investment land, land held for development and sale and developments in progress, for potential impairment indicators whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The cash flow estimates used both for estimating fair value and the recoverability analysis are inherently judgmental and reflect current and projected trends in rental, occupancy and capitalization rates, and our estimated holding periods for the applicable assets. Impairment indicators for our retail and other segment are assessed separately for each property and include, but are not limited to, significant decreases in real estate property net operating income and occupancy percentages. Impairment indicators for our Master Planned Communities segment are assessed separately for each community and include, but are not limited to, significant decreases in sales pace or average selling prices, significant increases in expected land development and construction costs or cancellation rates, and projected losses on expected future sales. Impairment indicators for pre-development costs, which are typically costs incurred during the beginning stages of a potential development, and developments in progress are assessed by project and include, but are not limited to, significant changes in projected completion dates, revenues or cash flows, development costs, market factors and sustainability of development projects. If an indicator of potential impairment exists, the asset is tested for recoverability by comparing its carrying value to the estimated future undiscounted cash flow. Although the estimated value of certain assets may be exceeded by the carrying amount, a real estate asset is only considered to be impaired when its carrying value cannot be recovered through estimated future undiscounted cash flows. To the extent an impairment provision is necessary, the excess of the carrying value of the asset over its estimated fair value is expensed.

 

The continuing deterioration of the economy in general and our financial condition specifically has led to further tests for impairment indicators of prospective redevelopment and development projects. Accordingly, we recorded an impairment charge of $55.9 million for the three months ended June 30, 2009 related to our residential development project, Nouvelle at Natick (Massachusetts), which was calculated using a discounted cash flow analysis (at a 12% discount rate) incorporating available market information and other management assumptions.  Significant factors in the determination of the Nouvelle at Natick impairment charge were the change in management’s intent and business strategy with respect to marketing and pricing, reduced potential of future price increases and the likelihood that the period to complete unit sales will need to be extended. In addition, we recorded impairment charges of $7.1 million for the three months ended June 30, 2009 and $0.2 million for the three months ended June 30, 2008 related to the write down of various pre-development costs that were determined to be non-recoverable due to the related projects being terminated.  Based on our evaluations, no additional provisions for impairment were recorded for the three months ended June 30, 2009, although the following provisions were recorded for the three months ended March 31, 2009 and therefore impact the six months ended June 30, 2009.

 

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We recorded impairment charges of $81.1 million for the three months ended March 31, 2009 related to our River Falls Mall located in Clarksville, Indiana, which was calculated using a discounted cash flow analysis (at a 10.75% discount rate) incorporating available market information and other management assumptions including estimates of future cash flows based on a number of factors such as historical operating results, known trends and market and economic conditions. We recorded impairment charges of $40.3 million for the three months ended March 31, 2009 related to our Owings Mills Mall located in Owings Mills, Maryland, which was calculated using a discounted cash flow analysis (at a 9.25% discount rate) incorporating available market information and other management assumptions including estimates of future cash flows based on a number of factors such as historical operating results, known trends and market/economic conditions.

 

For the three months ended March 31, 2009, we recognized impairment charges of $24.2 million for our development project in Allen, Texas, and $6.7 million related to our development project in Redlands, California, both of which were calculated using projected sales price analysis, incorporating available market information including comparable sales. We also recognized impairment charges of $16.6 million for the three months ended March 31, 2009 related to the write down of various pre-development costs that were determined to be non-recoverable due to the related projects being terminated.

 

We recorded an impairment charge of $52.8 million for the three months ended March 31, 2009 related to our Fairwood master planned community, which was calculated using a projected sales price analysis related to an existing sales contract for a large bulk sale of lots that closed during the second quarter of 2009.

 

All of these impairment charges are included in provisions for impairment in our consolidated financial statements for the three and six months ended June 30, 2009.

 

No other impairments of our investment in real estate were recorded.

 

Investment in Unconsolidated Real Estate Affiliates

 

Per Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock,” a series of operating losses of an investee or other factors may indicate that a decrease in value of our investment in the Unconsolidated Real Estate Affiliates has occurred which is other-than-temporary. The investment in each of the Unconsolidated Real Estate Affiliates is evaluated for recoverability and valuation declines that are other than temporary periodically and as deemed necessary. Accordingly, in addition to the property-specific impairment analysis that we perform on the investment properties owned by such joint ventures (as part of our investment property impairment process described above), we also considered the ownership and distribution preferences and limitations and rights to sell and repurchase of our ownership interests. Based on such evaluations, no provisions for impairment of our investments in Unconsolidated Real Estate Affiliates were recorded for the three and six months ended June 30, 2009 and 2008.

 

Goodwill

 

The excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill. Goodwill has been recognized and allocated to specific properties in our Retail and Other Segment since each individual rental property or each operating property is an operating segment and considered a reporting unit. Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), states that goodwill should be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. As of March 31, 2009 and June 30, 2009, we performed interim impairment tests of goodwill as changes in current market and economic conditions during the first and second quarter of 2009 indicated an impairment of the asset might have occurred. We perform this test by first comparing the estimated fair value of each property with our book value of the property, including, if applicable, its allocated portion of aggregate goodwill. We assess fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information which are generally unobservable in the market place (Level 3 inputs) under SFAS 157. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions. If the book value of a property, including its goodwill, exceeds its estimated fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. In this second step, if the implied fair value of goodwill is less than the book value of goodwill, an impairment charge is recorded. Based on our testing methodology, we recorded a provision for impairment of goodwill of $19.4 million for the three months ended June 30, 2009 in addition to the $109.4 million that we recorded for the three months ended March 31, 2009. These

 

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impairments were primarily driven by continued increases in capitalization rate assumptions during 2009 and reduced estimates of NOI, primarily due to the ongoing downturn in the real estate market.  No impairments of goodwill were recorded for the three and six months ended June 30, 2008.

 

General

 

We can provide no assurance that material impairment charges with respect to operating properties, Unconsolidated Real Estate Affiliates, construction in progress, property held for development and sale or goodwill will not occur in future periods. Our tests for impairment at June 30, 2009 were based on the most current information available to us. If the conditions mentioned above deteriorate further, or if our plans regarding our assets change, particularly due to our Chapter 11 Cases, subsequent tests for impairment could result in additional impairment charges in the future. Furthermore, certain of our properties had fair values less than their carrying amounts. However, based on the Company’s plans with respect to those properties, we believe that the carrying amounts are recoverable and therefore, under applicable GAAP guidance, no additional impairments were taken. Accordingly, we will continue to monitor circumstances and events in future periods to determine whether additional impairments are warranted.

 

Fair Value Measurements

 

We adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) as of January 1, 2008 for our financial assets and liabilities and such adoption did not change our valuation methods for such assets and liabilities.  This adoption applies primarily to our derivative financial instruments, which are assets and liabilities carried at fair value (primarily based on unobservable market data) on a recurring basis in our consolidated financial statements. We have investments in marketable securities that are immaterial to our consolidated financial statements. In addition, we adopted SFAS 157 as of January 1, 2009 for our non-financial assets and liabilities, which only impacted the assets measured at fair value due to impairments incurred since adoption.

 

SFAS 157 establishes 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 in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.  The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

 

The following table summarizes our liabilities that are measured at fair value on a recurring basis:

 

 

 

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)

 

 

 

(In thousands)

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest Rate Caps (1)

 

$

2,182

 

$

 —

 

$

 —

 

$

2,182

 

 

 

$

2,182

 

$

 —

 

$

 —

 

$

2,182

 

 


(1) The Credit Valuation Adjustment (“CVA”) is one component in the overall valuation of derivative instruments. The CVA is calculated using credit spreads that are generally unobservable in the market place (Level 3 inputs). The CVA was deemed to be a significant component of the valuation; therefore the entire balance of the derivative is classified as Level 3.

 

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The following table summarizes the change in our liabilities that are measured at fair value.

 

 

 

Interest Rate Swaps

 

Interest Rate Caps

 

Total

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

Balance at January 1, 2009

 

$

27,715

 

$

2,508

 

$

30,222

 

Included in other comprehensive (loss) income

 

 

(102

)

(102

)

Included in earnings (1)

 

(13,134

)

 

(13,134

)

Balance at March 31, 2009

 

14,581

 

2,406

 

16,987

 

Included in other comprehensive (loss) income

 

 

(224

)

(224

)

Included in earnings (1)

 

(14,581

)

 

(14,581

)

Balance at June 30, 2009

 

$

 

$

2,182

 

$

2,182

 

 


(1) See discussion of termination of interest rate swaps below under “Derivative Financial Instruments.”

 

The following table summarizes our assets that are measured at fair value on a nonrecurring basis:

 

 

 

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)

 

Total Gains
(Losses)

 

 

 

(In thousands)

 

Investments in real estate: (1)

 

 

 

 

 

 

 

 

 

 

 

Allen, TX development

 

$

29,511

 

$

 

$

29,511

 

$

 

$

(24,166

)

Fairwood MPC

 

12,629

 

 

12,629

 

 

(52,769

)

Owings Mills Mall

 

38,068

 

 

 

38,068

 

(40,308

)

Redlands, CA development

 

6,727

 

 

 

6,727

 

(6,747

)

River Falls Mall

 

22,003

 

 

 

22,003

 

(81,114

)

Nouvelle at Natick development

 

64,661

 

 

 

64,661

 

(55,923

)

 

 

$

 173,599

 

$

 

$

42,140

 

$

131,459

 

$

(261,027

)

 


(1) See discussion of unobservable inputs in the impairment analysis above under “Impairment.”

 

Derivative Financial Instruments

 

As of January 1, 2009, we adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”) which requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

 

We use derivative financial instruments to reduce risk associated with movement in interest rates. We may choose or be required by lenders to reduce cash flow and earnings volatility associated with interest rate risk exposure on variable-rate borrowings and/or forecasted fixed-rate borrowings by entering into interest rate swaps or interest rate caps.  We do not use derivative financial instruments for speculative purposes.

 

During the first quarter of 2009, our interest rate swaps no longer qualified as highly effective and therefore no longer qualified for hedge accounting treatment as the Company made the decision not to pay future settlement payments under such swaps. As a result of the terminations of the swaps, we reduced the liability associated with these derivative financial instruments during the first and second quarter of 2009, which is included in interest expense in our consolidated financial statements, which for the three and six months ended June 30, 2009 was a reduction in interest expense of $14.6 million and $27.7 million, respectively. As the interest payments on the hedged debt remain probable, the net balance in the gain or loss in accumulated other comprehensive (loss) income of $(27.7) million that existed as of December 31, 2008 remains in accumulated other comprehensive (loss) income and is amortized to interest expense as the hedged forecasted transactions impact earnings or are deemed probable not to occur. The amortization of the accumulated other comprehensive (loss) income for the three and six months ended June 30, 2009 was $4.5 million and $9.0 million of additional interest expense.

 

Under interest rate cap agreements, we make initial premium payments to the counterparties in exchange for the right to receive payments from them if interest rates exceed specified levels during the agreement period. Notional principal amounts are used to express the volume of these transactions, but the cash requirements and amounts subject to credit risk are substantially less. As of June 30, 2009, we had three outstanding interest rate cap derivatives that were designated as cash flow hedges of interest rate risk with a notional value of $967.5 million.

 

Parties to interest rate exchange agreements are subject to market risk for changes in interest rates and risk of credit loss in the event of nonperformance by the counterparty.  We do not require any collateral under these agreements, but deal only with well known financial institution counterparties (which, in certain cases, are also the lenders on the related debt) and expect that all counterparties will meet their obligations.

 

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The interest rate cap derivative financial instruments are carried at fair value while changes in the fair value of the receivable or payable under interest rate cap agreements are accounted for as adjustments to interest expense on the related debt.  We have not recognized any losses as a result of hedge discontinuance and the expense that we recognized related to changes in the time value of interest rate cap agreements were insignificant for 2009 and 2008.

 

Revenue Recognition and Related Matters

 

Minimum rent revenues are recognized on a straight-line basis over the terms of the related leases. Minimum rent revenues also include amounts collected from tenants to allow the termination of their leases prior to their scheduled termination dates and accretion related to above and below-market tenant leases on acquired properties. Termination income recognized was $9.3 million for the three months ended June 30, 2009, $16.6 million for the six months ended June 30, 2009; $6.5 million for the three months ended June 30, 2008 and $25.0 million for the six months ended June 30, 2008. Net accretion related to above and below-market tenant

 

leases was $2.5 million for the three months ended June 30, 2009, $3.4 million for the six months ended June 30, 2009, $2.8 million for the three months ended June 30, 2008 and $8.7 million for the six months ended June 30, 2008.

 

Straight-line rent receivables, which represent the current net cumulative rents recognized prior to when billed and collectible as provided by the terms of the leases, of $246.9 million as of June 30, 2009 and $228.1 million as of December 31, 2008, are included in Accounts and notes receivable, net in our consolidated financial statements.

 

Percentage rent in lieu of fixed minimum rent received from tenants was $13.6 million for the three months ended June 30, 2009, $24.8 million for the six months ended June 30, 2009, $12.1 million for the three months ended June 30, 2008 and $23.3 million for the six months ended June 30, 2008, and is included in Minimum rents in our consolidated financial statements.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. For example, significant estimates and assumptions have been made with respect to useful lives of assets, capitalization of development and leasing costs, provision for income taxes, recoverable amounts of receivables and deferred taxes, initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to acquisitions, impairment of long-lived assets and goodwill, and cost ratios and completion percentages used for land sales. Actual results could differ from these and other estimates.

 

The Glendale Matter

 

On December 19, 2008, the defendants (GGP and GGP/Homart II, LLC) agreed to terms of a settlement and mutual release agreement with respect to the Glendale Matter which released the defendants from all past, present and future claims in exchange for a settlement payment of $48.0 million, which was paid from the appellate bond cash collateral account in January 2009. Concurrently, GGP agreed with its joint venture partner in GGP/Homart II, LLC, New York State Common Retirement Fund (“NYSCRF”), that GGP would not be reimbursed for any portion of this payment, and we would reimburse $5.5 million of costs to NYSCRF in connection with the settlement. Accordingly, as of December 2008, the Company adjusted its liability for the Judgment Amount from $89.4 million to $48.0 million and reversed legal fees incurred by GGP/Homart II of $14.2 million that were previously recorded at 100% by GGP and post-judgment related interest expense of $7.0 million. The net impact of these items related to the settlement was a credit of $57.1 million reflected in litigation recovery in our Consolidated Statements of Income and Comprehensive Income for the year ended December 31, 2008. Also as a result of the settlement, the Company reflected its 50% share of legal costs that had previously been recorded at 100% as $7.1 million of additional expense reflected in Equity in income of Unconsolidated Real Estate Affiliates in our Consolidated Statements of Income and Comprehensive Income for the year ended December 31, 2008.

 

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Earnings Per Share (“EPS”)

 

Information related to our EPS calculations is summarized as follows:

 

 

 

Three Months Ended June 30,

 

 

 

2009

 

2008

 

 

 

Basic

 

Diluted

 

Basic

 

Diluted

 

 

 

(In thousands)

 

Numerators:

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

 (158,581

)

(158,581

)

$

 872

 

$

 872

 

Discontinued operations - loss on dispositions

 

 

 

37,060

 

37,060

 

Net (loss) income

 

(158,581

)

(158,581

)

37,932

 

37,932

 

Allocation to noncontrolling interests

 

179

 

179

 

(9,181

)

(9,181

)

Net (loss) income attributable to common stockholders

 

$

 (158,402

)

$

 (158,402

)

$

 28,751

 

$

 28,751

 

 

 

 

 

 

 

 

 

 

 

Denominators:

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - basic

 

312,337

 

312,337

 

267,369

 

267,369

 

Effect of dilutive securities - stock options

 

 

 

 

 

Weighted average number of common shares outstanding - diluted

 

312,337

 

312,337

 

267,369

 

267,369

 

 

 

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

 

 

Basic

 

Diluted

 

Basic

 

Diluted

 

 

 

(In thousands)

 

Numerators:

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

 (562,725

)

(562,725

)

$

 8,453

 

$

 8,453

 

Discontinued operations - gains (loss) on dispositions

 

(55

)

(55

)

37,060

 

37,060

 

Net (loss) income

 

(562,780

)

(562,780

)

45,513

 

45,513

 

Allocation to noncontrolling interests

 

8,299

 

8,299

 

(13,400

)

(13,400

)

Net income available to common stockholders

 

$

 (554,481

)

$

 (554,481

)

$

 32,113

 

$

 32,113