General Growth Properties (GGP)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K

 

 

Commission File Number 1-11656

GENERAL GROWTH PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

 

(312) 960-5000

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

 

 

Securities Registered Pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES      NO þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES o     NO þ

 

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 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.  YES þ     NO o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(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 Act).  YES o     NO þ

 

On June 30, 2008, the last business day of the registrant’s most recently completed second quarter, the aggregate market value of the shares of common stock held by non-affiliates of the registrant was $8.923 billion based upon the closing price of the common stock on the New York Stock Exchange composite tape on such date.

 

As of February 20, 2009, there were 313,573,413 shares of the registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the proxy statement for the annual stockholders meeting to be held on May 12, 2009 are incorporated by reference into Part III.

 

 

GENERAL GROWTH PROPERTIES, INC.

 

Annual Report on Form 10-K

December 31, 2008

 

TABLE OF CONTENTS

 

PART I

 

 

All references to numbered Notes are to specific footnotes to the Consolidated Financial Statements of General Growth Properties, Inc. (“GGP” or the “Company”) as included in this Annual Report on Form 10-K (“Annual Report”). The descriptions included in such Notes are incorporated into the applicable Item response by reference. The following discussion should be read in conjunction with such Consolidated Financial Statements and related Notes. The terms “we,” “us” and “our” may also be used to refer to GGP and its subsidiaries. See also the Glossary at the end of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for definitions of selected terms used in this Annual Report.

 

Overview

 

GGP is a self-administered and self-managed real estate investment trust, referred to as a “REIT.” The Company has ownership interest in, or management responsibility for, over 200 regional shopping malls in 44 states, as well as ownership in master planned communities and commercial office buildings. GGP is a Delaware corporation and was organized in 1986.

 

Our business is focused in two main areas:

 

 

Substantially all of our business is conducted through GGP Limited Partnership (“the Operating Partnership” or “GGPLP”). We own one hundred percent of many of our properties and a majority or controlling interest of certain others. As a result, these properties are consolidated under generally accepted accounting principles (“GAAP”) and we refer to them as the “Consolidated Properties.” Some properties are held through joint venture entities in which we own a non-controlling interest (“Unconsolidated Real Estate Affiliates”) and we refer to those properties as the “Unconsolidated Properties.” Collectively, we refer to the Consolidated Properties and Unconsolidated Properties as our “Company Portfolio.”

 

We generally make all key strategic decisions for our Consolidated Properties. However, in connection with the Unconsolidated Properties, such strategic decisions are made with the respective stockholders, members or joint venture partners. We are also the asset manager for most of the Company Portfolio, executing the strategic decisions and overseeing the day-to-day property management functions, including operations, leasing, construction management, maintenance, accounting, marketing and promotional services. With respect to jointly owned properties, we generally conduct the management activities through one of our taxable REIT subsidiaries (“TRS”). As of December 31, 2008, we managed the properties for 19 of our unconsolidated joint ventures and 10 of our consolidated joint ventures. Our joint venture partners or other third parties managed 11 of our unconsolidated joint ventures and one of our consolidated joint ventures.

 

During 2008, the global economy entered into a significant downturn. For the domestic retail market, the recession has resulted in sales declines, reduced margins and cash flows and, for some of our tenants, bankruptcies. This, in turn, has yielded revenue and occupancy declines at our properties, as a function of terminations, reduced demand for rental space, and reductions in rents that can be charged and collected. Concurrently, the new and replacement commercial lending market has come to a virtual standstill. Accordingly, we have been unable to refinance or repay a number of our existing loans which had scheduled 2008 maturities, triggering certain cross-default provisions on certain other financing arrangements. To temporarily forestall foreclosure or bankruptcy proceedings, we have entered into a number of short-term extension and forbearance agreements with our various lender groups (Note 1 — Liquidity). Such agreements have imposed lender operational oversight on our operations and, with respect to certain properties, have resulted in lender control of operational cash receipts. Reduced cashflows, increased borrowing costs and the suspension of our common stock dividend have raised liquidity concerns in the equity markets such that our stock price as of December 31, 2008 has declined by almost 97% since December 31, 2007.

Accordingly, this annual report describes a number of risks and uncertainties concerning our future operations. Although we believe a forced liquidation is not likely, the potential for such a substantially adverse outcome to our current liquidity crisis raises substantial doubts as to our ability to continue as a going concern. We continue to work with our financial advisors and lender groups to reach a collectively satisfactory resolution of these liquidity and financing difficulties.

 

General Development of Business

 

As described above, our current focus is the management and refinancing of our existing debt. Preservation of capital is paramount and, operationally, we are striving to increase net operating income (“NOI”) at our existing retail operations through proactive property management and leasing and through operating cost reductions. Specific actions we have used to increase productivity of our properties include changing the tenant mix, increasing alternative sources of revenue and integrating new retail formats such as power, lifestyle and mixed use centers.

 

Prior to the acquisition of The Rouse Company (the “TRC Merger”) in November 2004, acquisitions had been a key contributor to our growth. Since 2005, our only major acquisition has been the July 6, 2007 acquisition of the fifty percent interest owned by New York State Common Retirement Fund (“NYSCRF”) in the GGP/Homart I portfolio of 19 regional shopping malls, one community center and three regional shopping malls owned with joint venture partners pursuant to an election by NYSCRF to exercise its exchange right with respect to its ownership in GGP/Homart I.

 

From 2005 to the third quarter of 2008, our operational focus was on development projects, including new development and redevelopment and expansion of existing properties. In such regard, we opened in September 2007 Natick Collection in Natick, Massachusetts, which, anchored by Nordstrom, Neiman Marcus, JC Penney, Lord & Taylor, Macy’s and Sears, is the largest mall in New England. Additionally, we opened The Shops at Fallen Timbers in Maumee, Ohio in October 2007. In March 2008, we opened The Shoppes at River Crossing in Macon, Georgia, a 750,600 square foot open-air center anchored by Dillard’s and Belk. Internationally, in November 2008 we opened Shopping Caxias in Rio de Janeiro, Brazil. As a result of our current financial condition, we have halted or suspended substantially all of our development and redevelopment activity. Accordingly, development expenditures, including new developments, redevelopments and expansions were approximately $1.01 billion as of December 31, 2008 and the cost to complete the remaining active projects is expected to approximate $308 million in 2009 and beyond.

 

Financial Information About Industry Segments

 

Reference is made to Note 16 for information regarding our segments.

 

Narrative Description of Business

 

Retail and Other Segment

 

Our Retail and Other segment consists of retail centers, office and industrial buildings and mixed-use and other properties.

 

Retail Portfolio

 

The Retail Portfolio is comprised primarily of regional shopping centers, but also includes festival market places, urban mixed-use centers and strip/community centers. Most of our shopping centers are strategically located in major and middle markets where they have strong competitive positions. Most of these properties contain at least one major department store as an Anchor. We also own non-controlling interests in various international joint ventures in Brazil, Turkey and Costa Rica. We believe the Retail Portfolio’s geographic diversification mitigates the effects of regional economic conditions and local factors.

 

A detailed listing of the principal properties in our Retail Portfolio is included in Item 2 of this Annual Report.

 

The majority of the income from the properties in the Retail Portfolio is derived from rents received through long-term leases with retail tenants. These long-term leases generally require the tenants to pay base rent which is a fixed

amount specified in the lease. The base rent is often subject to scheduled increases during the term of the lease. Another component of income is overage rent. Overage rent is paid by a tenant generally if its sales exceed an agreed upon minimum amount. Overage rent is calculated by multiplying the sales in excess of the minimum amount by a percentage defined in the lease, the majority of which is typically earned in the fourth quarter. Our leases include both a base rent component and a component which requires tenants to pay amounts related to all, or substantially all, of their share of real estate taxes and certain property operating expenses, including common area maintenance and insurance. The portion of these leases attributable to real estate tax and operating expense recoveries are recorded as “Tenant recoveries.”

 

The following table reflects retail tenant representation by category for the domestic Consolidated Properties as of December 31, 2008. In general, similar percentages existed for the Unconsolidated Properties.

 

As of December 31, 2008, our largest tenant (based on common parent ownership) accounted for approximately 3% of consolidated rents.

 

Other Office, Industrial and Mixed-Use Buildings

 

Office and other properties are primarily components of large-scale mixed-use properties (which include retail, parking and other uses) located in urban markets. In addition, we have certain free-standing office or industrial properties in office parks in the Baltimore/Washington, D.C. and Las Vegas markets. Including properties adjacent to our retail centers, we own approximately seven million square feet of leasable office and industrial space.

 

Master Planned Communities Segment

 

The Master Planned Communities segment is comprised primarily of the following large-scale, long-term community development projects:

 

 

 

 

We develop and sell land in these communities to builders and other developers for residential, commercial and other uses. Additionally, certain saleable land within these properties may be transferred to our Retail and Other segment to be developed as commercial properties for either our own use or to be operated as investment rental property. Finally, our 215 unit residential condominium project (Nouvelle at Natick in Natick (Boston), Massachusetts) has been reflected within this segment.

 

Other Business Information

 

Competition

 

The nature and extent of the competition we face varies from property to property within each segment of our business. In our Retail and Other segment, our direct competitors include other publicly-traded retail mall development and operating companies, retail real estate companies, commercial property developers and other owners of retail real estate that engage in similar businesses.

 

Within our Retail Portfolio, we compete for retail tenants. We believe the principal factors that retailers consider in making their leasing decision include:

 

 

 

Based on these criteria, we believe that the size and scope of our property portfolio, as well as the overall quality and attractiveness of our individual properties, enable us to compete effectively for retail tenants in our local markets. Because our revenue potential is linked to the success of our retailers, we indirectly share exposure to the same competitive factors that our retail tenants experience in their respective markets when trying to attract individual shoppers. These dynamics include general competition from other regional shopping centers, including outlet malls and other discount shopping centers, as well as competition with discount shopping clubs, catalog companies, internet sales and telemarketing. We believe that we have a competitive advantage with respect to operational retail property management as our expertise allows us to evaluate existing retail properties for their increased profit potential through expansion, remodeling, re-merchandising and more efficient management of the property.

 

With respect to our office and other properties, we experience competition in the development and management of our properties similar to that of our Retail Portfolio. Prospective tenants generally consider quality and appearance, amenities, location relative to other commercial activity and price in determining the attractiveness of our properties. Based on the quality and location of our properties, which are generally in urban markets or are concentrated in the commercial centers of our master planned communities, we believe that our properties are viewed favorably among prospective tenants.

 

In our Master Planned Communities segment, we compete with other landholders and residential and commercial property developers in the development of properties within the Baltimore/Washington, D.C., Las Vegas and Houston markets. Significant factors affecting our competition in this business include:

 

 

We believe our projects offer significant advantages when viewed against these criteria.

 

Environmental Matters

 

Under various Federal, state and local laws and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on such real estate. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to promptly remediate such substances, may adversely affect the owner’s ability to sell such real estate or to borrow using such real estate as collateral. In connection with our ownership and operation of our properties, we, or the relevant joint venture through which the property is owned, may be potentially liable for such costs.

 

Substantially all of our properties have been subject to Phase I environmental assessments, which are intended to evaluate the environmental condition of the surveyed and surrounding properties. The Phase I environmental assessments included a historical review, a public records review, a preliminary investigation of the site and surrounding properties, screening for the presence of asbestos, polychlorinated biphenyls (“PCBs”) and underground storage tanks and the preparation and issuance of a written report, but do not include soil sampling or subsurface investigations. A Phase II assessment, when necessary, was conducted to further investigate any issues raised by the Phase I assessment. In each case where Phase I and/or Phase II assessments resulted in specific

recommendations for remedial actions required by law, management has either taken or scheduled the recommended action.

 

Neither the Phase I nor the Phase II assessments have revealed any environmental liability that we believe would have a material effect on our overall business, financial condition or results of operations. Nevertheless, it is possible that these assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which we are unaware. Moreover, no assurances can be given that future laws, ordinances or regulations will not impose any material environmental liability or the current environmental condition of our properties will not be adversely affected by tenants and occupants of the properties, by the condition of properties in the vicinity of our properties (such as the presence on such properties of underground storage tanks) or by third parties unrelated to us.

 

Future development opportunities may require additional capital and other expenditures in order to comply with Federal, state and local statutes and regulations relating to the protection of the environment. We cannot predict with any certainty the magnitude of any such expenditures or the long-range effect, if any, on our operations. Compliance with such laws has had no material adverse effect on our operating results or competitive position in the past.

 

Employees

 

As of February 20, 2009, we had approximately 3,500 employees.

 

Qualification as a Real Estate Investment Trust and Taxability of Distributions

 

GGP currently qualifies as a real estate investment trust pursuant to the requirements contained in Sections 856-858 of the Internal Revenue Code of 1986, as amended (the “Code”). If, as we contemplate, such qualification continues, GGP will not be subject to Federal tax on its real estate investment trust taxable income. During 2008, GGP met its distribution requirements to its common stockholders as provided for in Section 857 of the Code.

 

Available Information

 

Our Internet website address is www.ggp.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports are available and may be accessed free of charge through the Investment section of our Internet website under the Shareholder Info subsection, as soon as reasonably practicable after those documents are filed with, or furnished to, the SEC. Our Internet website and included or linked information on the website are not intended to be incorporated into this Annual Report.

 

 

Bankruptcy Risks

 

We may file for bankruptcy protection, or an involuntary petition for bankruptcy may be filed against us

 

As described below under “Liquidity Risks,” we have a substantial amount of debt which we may not be able to refinance or extend. If we are unable to refinance or extend our debt, or if such debt is accelerated due to our default, our assets may not be sufficient to repay such debt in full, and our available cash flow may not be adequate to maintain our current operations. Under such circumstances, or if we believe such circumstances are likely to occur, we may consider or pursue various forms of negotiated restructurings of our debt and equity obligations and/or asset sales, which may be required to occur under court supervision pursuant to a voluntary bankruptcy filing under Chapter 11 of the U.S. Bankruptcy Code. In addition, under certain circumstances creditors may file an involuntary petition for bankruptcy against us. Due to the possibility of such circumstances occurring, we have begun active planning for such potential restructurings.

If we file for bankruptcy protection, our business and operations will be subject to certain risks

 

A bankruptcy filing by or against GGP, GGPLP and certain of our subsidiaries (each referred to as a “filer”) would subject our business and operations to various risks, including but not limited to, the following:

 

 

Liquidity Risks

 

We may not be able to refinance, extend or repay our substantial indebtedness, which could have a materially adverse affect on our business, financial condition, results of operations and common stock price

 

We have a substantial amount of debt which we may not be able to extend, refinance or repay. As of December 31, 2008, we had an aggregate consolidated indebtedness outstanding of $24.85 billion (Note 6) of which $6.58 billion was unsecured, recourse indebtedness of the Operating Partnership and consolidated subsidiaries, while $18.27 billion was secured by our properties. A majority of the secured indebtedness was non-recourse to us. This indebtedness does not include our proportionate share of indebtedness incurred by our Unconsolidated Properties. In December, 2008, we entered into forbearance agreements with the lenders for certain loans, as described elsewhere in this report.

 

There can be no assurance that we will be able to refinance or extend our debt on acceptable terms or otherwise. Our ability to refinance our debt is negatively affected by the current condition of the credit markets, which have significantly reduced levels of commercial lending. Our ability to successfully refinance or extend our debt is also negatively affected by recent downgrades of our debt by national credit ratings agencies as well as the real or perceived decline in the value of our properties based on continued significant deterioration of general and retail economic conditions, as discussed further below. Our substantial indebtedness also requires us to use a material portion of our cash flow to service principal and interest on our debt, which will limit the cash flow available for other business expenses or opportunities.

We do not have the cash necessary to repay our debt as it matures. Therefore, failure to refinance or extend our debt as it comes due, or a failure to satisfy the conditions and requirements of such debt, will result in an event of default under such debt and would allow the lender to accelerate such debt. In addition, a default under certain debt obligations could also constitute an event of default under other debt as a result of certain cross-default and cross collateralization provisions. Although we have entered into forbearance agreements with certain lenders pursuant to which they have agreed to refrain from exercising certain rights and remedies under specified loans, these agreements are subject to certain early termination provisions, and there can be no assurance that these forbearance agreements will be extended beyond their existing terms or that similar agreements will be reached with lenders of other debt in the event of a default by us. In the event we default under debt which is secured by one or more properties, we may be required to transfer such property or properties to the lender to satisfy the terms of such debt.

 

If we are unable to refinance or extend our debt as it comes due and maintain sufficient cash flow, our business, financial condition, results of operations and common stock price will be materially and adversely affected, and we may be required to file for bankruptcy protection, as discussed under “Bankruptcy Risks.”

 

Even if we are able to refinance or extend our indebtedness, our substantial indebtedness would still adversely affect our financial health and operating flexibility

 

Risks related to debt level.  Even if we are able to refinance or extend our substantial indebtedness, our indebtedness could still have important consequences to us and the value of our common stock, including:

 

 

The terms of the 2006 Credit Facility and certain other debt also require us to satisfy certain customary affirmative and negative covenants and to meet financial ratios and tests, including ratios and tests based on leverage, interest coverage and net worth. In addition, the forbearance agreements we have entered into further restrict our operations. The covenants and other restrictions under our debt and forbearance agreements affect, among other things, our ability to:

 

 

Risks related to refinancings.  Due to the current lending environment, our financial condition and general economic factors, it is unlikely that we will be able to refinance our debt. In addition, in the event we are able to refinance all or a portion of our debt, it is likely that this new debt will contain terms which are less attractive than

the terms contained in the debt being refinanced. Such terms may include more restrictive operational and financial covenants, as well as higher fees and interest rates.

 

Risks related to extensions.  In the event we obtain extensions on existing debt, including both short term forbearance agreements and longer term extensions, such extensions will likely include operational and financial covenants significantly more restrictive than our current debt covenants. For example, the forbearance agreements entered into in December 2008 significantly restrict our ability to, among other things, incur indebtedness, sell assets, make capital expenditures, makes changes to our organizational structure, manage our cash flows and engage in other transactions outside the ordinary course of business. Additional forbearance agreements or longer term extensions may contain similar or more stringent conditions, which are likely to include provisions which significantly restrict the distribution of cash flows from properties serving as collateral for such debt. Any such extensions will also require us to pay certain fees to, and expenses of, our lenders. These fees and cash flow restrictions will affect our ability to fund our on-going operations from our operating cash flows, as discussed below.

 

Given the restrictions in our debt covenants, as well as the significant additional covenants and restrictions contained in our forbearance agreements and in any loan extensions we may obtain in the future, we may be significantly limited in our operating and financial flexibility and may be limited in our ability to respond to changes in our business or competitive activities.

 

We may not have sufficient cash to maintain our operations

 

Our operating cash flows are not sufficient to pay our debt as it comes due. In addition, there can be no assurance that our cash flows from operations will be sufficient to pay the interest on our debt and other operating expenses. Cash inflows could be negatively affected by deteriorating conditions in the retail sector, as described under “Business Risks.” In addition, we face significantly higher operating expenses due in part to payments to our financial and legal advisors, as well as fees and other amounts payable to our lenders in connection with loan extensions or refinancings. Such extensions and refinancings may also restrict how we utilize our operating cash flows. Because we have limited short term sources of cash, in the event that our cash flows from operations are insufficient to fund our operating expenses, we may be required to file for bankruptcy protection, as discussed under “Bankruptcy Risks.”

 

We may not be able to raise capital to repay debt or finance our operations

 

We are working to generate capital from a variety of sources, including, but not limited to, both core and non-core property sales, the sale of joint venture interests, a corporate level capital infusion, and/or strategic business combinations. There can be no assurance that any of these planned capital raising activities will be successful.

 

Our ability to sell our properties or raise capital through other means is limited.  The deteriorating retail economic climate negatively affects the value of our properties and therefore reduces our ability to sell these properties on acceptable terms. Our ability to sell our properties is also negatively affected by the weakness of the credit markets, which increases the cost and difficulty for potential purchasers to acquire financing, as well as by the illiquid nature of real estate. Finally, our current financial difficulties may encourage potential purchasers to offer less attractive terms for our properties. These conditions also negatively affect our ability to raise capital through other means, including through the sale of equity or joint venture interests, or through a potential strategic business combination. See “Business Risks” for a further discussion of the effects of the deteriorating retail economic climate on our properties, as well as the illiquid nature of our investments in our properties.

 

We have a low tax basis in many of our properties relative to fair market value.  We have a low tax basis in many of our properties relative to the fair market value of such properties. As a result of this low tax basis, we could recognize a substantial taxable gain upon the sale of such properties, which would impact the amount of net proceeds we would retain from any such sales as a result of the REIT distribution requirements.

Common Stock Investment Risks

 

The recent decline in our common stock price could have materially adverse effects on our business

 

The price of our common stock has declined significantly and rapidly since September 2008. In the event we seek bankruptcy protection, it is possible that the value of our common stock could decline further. This reduction in stock price could have materially adverse effects on our business, including reducing our ability to use our common stock as compensation or to otherwise provide incentives to employees and by reducing our ability to generate capital through stock sales or otherwise use our stock as currency with third parties.

 

The average closing price of our common stock has been less than $1.00 over a consecutive 30 trading-day period, and as a result, our stock could be delisted from the NYSE. The threat of delisting and/or a delisting of our common stock could have adverse effects by, among other things:

 

 

Our common stock price may be volatile, and consequently investors may not be able to resell their common stock at or above their purchase price

 

The price at which our common stock will trade may be volatile and may fluctuate due to factors such as:

 

 

Fluctuations may be unrelated to or disproportionate to our financial performance. These fluctuations may result in a material decline in the trading price of our common stock.

 

Future issuances of our common stock may depress our stock price

 

As of February 20, 2008, 12.6 million shares of common stock were issuable upon exercise of conversion and/or redemption rights as to units of limited partnership interest in the Operating Partnership. An additional 14.0 million

shares of our common stock are reserved for issuance to meet our obligations under the CSA, although based on the current market price of our common stock, a substantially greater number of shares may ultimately be issuable pursuant to the CSA, which would result in the beneficiaries of the CSA holding substantially all of our outstanding common stock. In addition, we have reserved a number of shares of common stock for issuance under our restricted stock, option and other benefit plans for employees and directors and in connection with certain other obligations, including convertible debt and these shares will be available for sale from time to time. Finally, we may issue stock dividends in order to satisfy the requirements for qualification of a REIT in the event that we have insufficient liquidity to pay the dividend in cash. No prediction can be made as to the effect, if any, that these and other future sales of our common stock, or the availability of common stock for future sales, will have on the market price of the stock. Sales in the public market of substantial amounts of our common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for our common stock.

 

Increases in market interest rates may hurt the market price of our common stock

 

Although we suspended our dividend in October 2008, we believe that investors consider the distribution rate on REIT stocks, expressed as a percentage of the price of the stocks, relative to market interest rates, as an important factor in deciding whether to buy or sell the stocks. If market interest rates increase, prospective purchasers of REIT stocks may expect a higher distribution rate. Higher interest rates would not, however, result in more funds being available for us to distribute and, in fact, would likely increase our borrowing costs and might decrease our funds available for distribution. Thus, higher market interest rates could cause the market price of our common stock to decline further.

 

Business Risks

 

Our senior management changes and focus on refinancing alternatives may adversely affect us

 

We are currently working with our advisors to develop a comprehensive strategic plan to generate capital from a variety of sources. In addition, in October 2008, we replaced our Chief Executive Officer, President and Chief Financial Officer. This focus on capital raising activities and recent changes in our senior management could adversely affect our operations in a number of ways, including the risks that such activities could, among other things:

 

 

We are party to securities, ERISA, and shareholder derivative litigation that distracts our management, is expensive to conduct, and seeks damages awards against us.

 

We and certain of our current and former directors and officers have been named as defendants in putative class action lawsuits filed in the United States District Court for the Northern District of Illinois (collectively, the “Shareholder Suits”). The Shareholder Suits seek unspecified damages and purport to allege claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 on the grounds that false and misleading statements were made relating to the Company’s refinancing ability and the nondisclosure of certain loans to officers from an affiliate of another officer’s family trust. In addition, three former employees, each claiming to represent a putative class, filed separate lawsuits against us and certain of our current and former directors and officers in the United States District Court for the Northern District of Illinois (collectively, the “ERISA Suits”) asserting breaches of fiduciary duty in connection with the management and administration of the Company’s 401(k) Savings Plan (the “Plan”). The ERISA Suits seek unspecified damages from the defendants for the alleged breach of the fiduciary duties of loyalty and prudence owed to the Plan participants by continuing to

allow or failing to cap purchases of our stock when the defendants allegedly knew or should have known such purchases were not prudent. Also, a shareholder has also filed a derivative lawsuit in the Circuit Court for Cook County, Illinois (the “Derivative Suit”) seeking recovery on behalf of the Company against certain of our current and former directors and officers for the defendants’ alleged breach of fiduciary duties in making false and misleading statements regarding our ability to access financing, failing to disclose the existence of certain loans to two officers from an affiliate of another officer’s family trust, and engaging in insider trading (with respect to certain defendants). With respect to all of these matters (collectively, the “Pending Suits”), we have certain obligations to indemnify and advance expenses to our officers and directors. Although we have directors and officers liability insurance and fiduciary liability insurance, it is uncertain whether the insurance will be sufficient to cover all damages, if any, that we may be required to pay. In addition, the Pending Suits may distract the attention of our management, and we have and may continue to incur substantial legal and other professional service costs in connection with each of the Pending Suits. The amount of any future costs or damages cannot be determined at this time and could be significant.

 

Deteriorating economic conditions, especially in the retail sector, will have an adverse affect on our revenues and available cash

 

General and retail economic conditions continue to weaken, and we expect this weakness to continue and worsen in 2009. The unemployment rate is expected to continue to rise, consumer confidence and spending has decreased dramatically and the stock market remains extremely volatile. Given these expected economic conditions, we believe there is a significantly increased risk that the sales of stores operating in our centers will continue to decrease, which will have the following negative effect on our operations:

 

Ability to lease and collect rent.  Our results of operations depend on our ability to continue to lease space in our properties on economically favorable terms. If the sales of stores operating in our centers decline sufficiently, tenants might be unable to pay their existing minimum rents or expense recovery charges, since these rents and charges would represent a higher percentage of their sales. If our tenants’ sales decline, new tenants would be less likely to be willing to pay minimum rents as high as they would otherwise pay. In addition, as substantially all of our income is derived from rentals of real property, our income and cash available for debt service, operations or distribution to our stockholders would be adversely affected if a significant number of tenants were unable to meet their obligations to us.

 

Bankruptcy or store closures of tenants.  Our leases generally do not contain provisions designed to ensure the creditworthiness of the tenant, and a number of companies in the retail industry, including some of our tenants, have declared bankruptcy or voluntarily closed certain of their stores in recent years, and this trend is expected to increase in 2009. The bankruptcy or closure of a major tenant, particularly an Anchor, may have a material adverse effect on the retail properties affected and the income produced by these properties and may make it substantially more difficult to lease the remainder of the affected retail properties. As a result, the bankruptcy or closure of a major tenant and potential additional closures as a result of co-tenancy requirements could result in a lower level of revenues and cash available.

 

Department store productivity.  Department store consolidations, as well as declining sales productivity in certain instances, are resulting in the closure of existing department stores and we may be unable to re-lease this area or to re-lease it on comparable or more favorable terms. Other tenants may be entitled to modify the terms of their existing leases, including those pertaining to rent payment, in the event of such closures. Additionally, department store closures could result in decreased customer traffic which could lead to decreased sales at other stores.

 

Ability to attract new tenants.  The factors described above not only effect our current tenants and operations, but also indirectly effect our ability to attract new tenants.

 

It may be difficult to buy and sell real estate quickly, and transfer restrictions apply to some of our properties

 

Equity real estate investments are relatively illiquid, and this characteristic tends to limit our ability to vary our portfolio promptly in response to changes in economic or other conditions. In addition, significant expenditures associated with each equity investment, such as mortgage payments, real estate taxes and maintenance costs, are

generally not reduced when circumstances cause a reduction in income from the investment. If income from a property declines while the related expenses do not decline, our income and cash available to us would be adversely affected. A significant portion of our properties are mortgaged to secure payment of indebtedness, and if we were unable to meet our mortgage payments, we could lose money as a result of foreclosure on the properties by the various mortgagees. In addition, if it becomes necessary or desirable for us to dispose of one or more of the mortgaged properties, we might not be able to obtain a release of the lien on the mortgaged property without payment of the associated debt. The foreclosure of a mortgage on a property or inability to sell a property could adversely affect the level of cash available to us.

 

A change in control may effect our ability to use our net operating loss and interest expense carry forwards

 

If we have a change in control, as defined in section 382 of the Code, our ability to use our net operating loss and interest expense carry forwards to offset future cash taxes may be reduced or eliminated. The significant stock activity we have recently experienced and the possibility of issuing additional equity to address our liquidity needs increases the risk of this provision impacting us in the future.

 

Holders of statutory and other liens on our properties could take steps to perfect their interests in such properties, which could lead to foreclosure

 

Statutory liens, including mechanics’ and tax liens, have been imposed on our properties, and the imposition of additional liens may occur. In the event that the holders of these liens seek to perfect their interests in our properties subject to such liens, foreclosure proceeds with respect to such properties could occur.

 

We invest primarily in regional shopping centers and other properties, which are subject to a number of significant risks which are beyond our control

 

Real property investments are subject to varying degrees of risk that may affect the ability of our properties to generate sufficient revenues. A number of factors may decrease the income generated by a retail property, including:

 

 

Our Master Planned Communities are also affected by some of the above factors, as well as the significant weakening of the housing market which began in 2007 and is expected to continue.

 

If we are unable to generate sufficient revenue from our properties, including those held by joint ventures, we will be unable to meet operating and other expenses, including debt service, lease payments, capital expenditures and tenant improvements, and to make distributions from our joint ventures and then, in turn, to our stockholders.

 

We develop and expand properties, and this activity is subject to various risks

 

Although we have significantly reduced our development and expansion activities, certain development and expansion projects will be undertaken. In connection with any development or expansion, we will be subject to various risks, including the following:

 

 

 

If a development project is unsuccessful, our investment in the project may not be fully recoverable from future operations or sale.

 

We may incur costs to comply with environmental laws

 

Under various federal, state or local laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances released at a property, and may be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred by the parties in connection with the contamination. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of the hazardous or toxic substances. The presence of contamination or the failure to remediate contamination may adversely affect the owner’s ability to sell or lease real estate or to borrow using the real estate as collateral. Other federal, state and local laws, ordinances and regulations require abatement or removal of asbestos-containing materials in the event of demolition or certain renovations or remodeling, the cost of which may be substantial for some of our redevelopments, and also govern emissions of and exposure to asbestos fibers in the air. Federal and state laws also regulate the operation and removal of underground storage tanks. In connection with the ownership, operation and management of our properties, we could be held liable for the costs of remedial action with respect to these regulated substances or tanks or related claims.

 

Our properties have been subjected to varying degrees of environmental assessment at various times. However, the identification of new areas of contamination, a change in the extent or known scope of contamination or changes in cleanup requirements could result in significant costs to us.

 

We are in a competitive business

 

There are numerous shopping facilities that compete with our properties in attracting retailers to lease space. In addition, retailers at our properties face continued competition from retailers at other regional shopping centers, including outlet malls and other discount shopping centers, discount shopping clubs, catalog companies, internet sales and telemarketing. Competition of this type could adversely affect our revenues and cash available for distribution to our stockholders.

 

We compete with other major real estate investors with significant capital for attractive investment opportunities. These competitors include other REITs, investment banking firms and private institutional investors.

 

Some of our properties are subject to potential natural or other disasters

 

A number of our properties are located in areas which are subject to natural disasters. For example, two of our properties, located in the New Orleans area, suffered major hurricane and/or vandalism damage in 2005. It is uncertain as to whether the New Orleans area will recover to its prior economic strength. Certain of our properties are located in California or in other areas with higher risk of earthquakes. In addition, many of our properties are located in coastal regions, and would therefore be affected by any future increases in sea levels or in the frequency or severity of hurricanes and tropical storms, whether such increases are caused by global climate changes or other factors.

Possible terrorist activity or other acts of violence could adversely affect our financial condition and results of operations

 

Future terrorist attacks in the United States, and other acts of violence, including terrorism or war, might result in declining economic activity, which could harm the demand for goods and services offered by our tenants and the value of our properties and might adversely affect the value of an investment in our securities. A decrease in retail demand could make it difficult for us to renew or re-lease our properties at lease rates equal to or above historical rates. Terrorist activities or violence also could directly affect the value of our properties through damage, destruction or loss, and the availability of insurance for such acts, or of insurance generally, might be lower, or cost more, which could increase our operating expenses and adversely affect our financial condition and results of operations. To the extent that our tenants are affected by future attacks, their businesses similarly could be adversely affected, including their ability to continue to meet obligations under their existing leases. These acts might erode business and consumer confidence and spending, and might result in increased volatility in national and international financial markets and economies. Any one of these events might decrease demand for real estate, decrease or delay the occupancy of our new or redeveloped properties, and limit our access to capital or increase our cost of raising capital.

 

Some potential losses are not insured

 

We carry comprehensive liability, fire, flood, earthquake, terrorism, extended coverage and rental loss insurance on all of our properties. We believe the policy specifications and insured limits of these policies are adequate and appropriate. There are, however, some types of losses, including lease and other contract claims, which generally are not insured. If an uninsured loss or a loss in excess of insured limits occurs, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. If this happens, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property.

 

Inflation may adversely affect our financial condition and results of operations

 

Should inflation increase in the future, we may experience any or all of the following:

 

 

Inflation also poses a potential threat to us due to the probability of future increases in interest rates. Such increases would adversely impact us due to our outstanding variable-rate debt as well as result in higher interest rates on new fixed-rate debt.

 

We have certain ownership interests outside the United States which may increase in relative significance over time

 

We hold interests in joint venture properties in Brazil, Turkey and Costa Rica. Although we do not currently expect to pursue additional expansion opportunities outside the United States, we may do so in the future. International development and ownership activities carry additional risks that are different from those we face with our domestic properties and operations. These additional risks include:

 

 

 

Although our international activities currently are a relatively small portion of our business (international properties represented less than approximately 1% of the NOI of all of our properties in 2008), to the extent that we expand our international activities, these additional risks could increase in significance and adversely affect our results of operations and financial condition.

 

Organizational Risks

 

Payments by our direct and indirect subsidiaries of dividends and distributions to us may be adversely affected by prior payments to these subsidiaries’ creditors and preferred security holders

 

Substantially all of our assets are owned through our general partnership interest in the Operating Partnership, including TRCLP. The Operating Partnership holds substantially all of its properties and assets through subsidiaries, including subsidiary partnerships, limited liability companies and corporations that have elected to be taxed as REITs. The Operating Partnership therefore derives substantially all of its cash flow from cash distributions to it by its subsidiaries, and we, in turn, derive substantially all of our cash flow from cash distributions to us by the Operating Partnership. The creditors and preferred security holders, if any, of each of our direct and indirect subsidiaries are entitled to payment of that subsidiary’s obligations to them, when due and payable, before that subsidiary may make distributions to us. Thus, the Operating Partnership’s ability to make distributions to its partners, including us, depends on its subsidiaries’ ability first to satisfy obligations to their creditors and preferred security holders, if any, and then to make distributions to the Operating Partnership. Similarly, our ability to pay dividends to holders of our common stock depends on the Operating Partnership’s ability first to satisfy its obligations to its creditors and preferred security holders and then to make distributions to us.

 

In addition, we will have the right to participate in any distribution of the assets of any of our direct or indirect subsidiaries upon the liquidation, reorganization or insolvency of the subsidiary only after the claims of the creditors, including trade creditors, and preferred security holders, if any, of the subsidiary are satisfied. Our common stockholders, in turn, will have the right to participate in any distribution of our assets upon the liquidation, reorganization or insolvency of us only after the claims of our creditors, including trade creditors, and preferred security holders, if any, are satisfied.

 

We have significant obligations under a Contingent Stock Agreement we assumed in the TRC Merger

 

We have assumed the obligations of TRC under a Contingent Stock Agreement, which we refer to as the “CSA.” The assumption includes the obligation under the CSA to potentially issue shares of common stock twice a year to the beneficiaries under the CSA and certain indemnification obligations. The number of shares is based upon our stock price and upon a formula set forth in the CSA. In addition, the CSA requires a valuation of certain assets that we own as of December 31, 2009, which is expected to result in the issuance of a significant number of additional shares to the beneficiaries under the CSA. Such issuances will be significantly dilutive to our existing stockholders. Based on the current market price of our common stock, the number of shares ultimately issuable under the CSA would be substantially greater than previously anticipated, which would result in the beneficiaries under the CSA holding substantially all of our outstanding common stock.

 

We share control of some of our properties with other investors and may have conflicts of interest with those investors

 

While we generally make all operating decisions for the Unconsolidated Properties, we are required to make other decisions with the other investors who have interests in the relevant property or properties. For example, the approval of certain of the other investors is required with respect to operating budgets and refinancing, encumbering, expanding or selling any of these properties, as well as to bankruptcy decisions related to the Unconsolidated Properties and related joint ventures. We might not have the same interests as the other investors in relation to these

transactions. Accordingly, we might not be able to favorably resolve any of these issues, or we might have to provide financial or other inducement to the other investors to obtain a favorable resolution.

 

In addition, various restrictive provisions and rights apply to sales or transfers of interests in our jointly owned properties. These may work to our disadvantage because, among other things, we might be required to make decisions about buying or selling interests in a property or properties at a time that is disadvantageous to us.

 

Bankruptcy of joint venture partners could impose delays and costs on us with respect to the jointly owned retail properties

 

In addition to the possible effects on our joint ventures of a bankruptcy filing by us, the bankruptcy of one of the other investors in any of our jointly owned shopping centers could materially and adversely affect the relevant property or properties. Under the bankruptcy laws, we would be precluded from taking some actions affecting the estate of the other investor without prior approval of the bankruptcy court, which would, in most cases, entail prior notice to other parties and a hearing in the bankruptcy court. At a minimum, the requirement to obtain court approval may delay the actions we would or might want to take. If the relevant joint venture through which we have invested in a property has incurred recourse obligations, the discharge in bankruptcy of one of the other investors might result in our ultimate liability for a greater portion of those obligations than we would otherwise bear.

 

We are impacted by tax-related obligations to some of our partners

 

We own properties through partnerships which have arrangements in place that protect the deferred tax situation of our existing third party limited partners. Violation of these arrangements could impose costs on us. As a result, we may be restricted with respect to decisions such as financing, encumbering, expanding or selling these properties.

 

Several of our joint venture partners are tax-exempt. As such, they are taxable to the extent of their share of unrelated business taxable income generated from these properties. As the managing partner in these joint ventures, we have obligations to avoid the creation of unrelated business taxable income at these properties. As a result, we may be restricted with respect to decisions such as financing and revenue generation with respect to these properties.

 

We may not maintain our status as a REIT

 

One of the requirements of the Code for a REIT generally is that it distribute or pay tax on 100% of its capital gains and distribute at least 90% of its ordinary taxable income to its stockholders. We may not have sufficient liquidity to meet these distribution requirements.

 

If, with respect to any taxable year, we fail to maintain our qualification as a REIT, we would not be allowed to deduct distributions to stockholders in computing our taxable income and federal income tax. The corporate level income tax, including any applicable alternative minimum tax, would apply to our taxable income at regular corporate rates. As a result, the amount available for distribution to stockholders would be reduced for the year or years involved, and we would no longer be required to make distributions. In addition, unless we were entitled to relief under the relevant statutory provisions, we would be disqualified from treatment as a REIT for four subsequent taxable years.

 

An ownership limit and certain anti-takeover defenses and applicable law may hinder any attempt to acquire us

 

The ownership limit.  Generally, for us to maintain our qualification as a REIT under the Code, not more than 50% in value of the outstanding shares of our capital stock may be owned, directly or indirectly, by five or fewer individuals at any time during the last half of our taxable year. The Code defines “individuals” for purposes of the requirement described in the preceding sentence to include some types of entities. In general, under our current certificate of incorporation, no person other than Martin Bucksbaum (deceased), Matthew Bucksbaum, their families and related trusts and entities, including M.B. Capital Partners III, may own more than 7.5% of the value of our outstanding capital stock. However, our certificate of incorporation also permits our company to exempt a

person from the 7.5% ownership limit upon the satisfaction of certain conditions which are described in our certificate of incorporation.

 

Selected provisions of our charter documents.  Our board of directors is divided into three classes of directors. Directors of each class are chosen for three-year staggered terms. Staggered terms of directors may reduce the possibility of a tender offer or an attempt to change control of our company, even though a tender offer or change in control might be in the best interest of our stockholders. Our charter authorizes the board of directors:

 

 

Stockholder rights plan.  We have a stockholder rights plan which will impact a potential acquirer unless the acquirer negotiates with our board of directors and the board of directors approves the transaction.

 

Selected provisions of Delaware law.  We are a Delaware corporation, and Section 203 of the Delaware General Corporation Law applies to us. In general, Section 203 prevents an “interested stockholder,” as defined in the next sentence, from engaging in a “business combination,” as defined in the statute, with us for three years following the date that person becomes an interested stockholder unless one or more of the following occurs:

 

 

The statute defines “interested stockholder” to mean generally any person that is the owner of 15% or more of our outstanding voting stock or is an affiliate or associate of us and was the owner of 15% or more of our outstanding voting stock at any time within the three-year period immediately before the date of determination.

 

Each item discussed above may delay, deter or prevent a change in control of our Company, even if a proposed transaction is at a premium over the then current market price for our common stock. Further, these provisions may apply in instances where some stockholders consider a transaction beneficial to them. As a result, our stock price may be negatively affected by these provisions.

 

Forward-Looking Information

 

We may make forward-looking statements in this Annual Report and in other reports which we file with the SEC. In addition, our senior management might make forward-looking statements orally to analysts, investors, the media and others.

 

Forward-looking statements include:

 

 

 

In this Annual Report, for example, we make forward-looking statements discussing our expectations about:

 

 

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

 

There are several factors, many beyond our control, which could cause results to differ significantly from our expectations. Factors such as bankruptcy, credit, market, operational, liquidity, interest rate and other risks are described elsewhere in this Annual Report. Any factor described in this Annual Report could by itself, or together with one or more other factors, adversely affect our business, results of operations or financial condition. There are also other factors that we have not described in this Annual Report that could cause results to differ from our expectations.

 

 

None.

 

 

Our investment in real estate as of December 31, 2008 consisted of our interests in the properties in our Retail and Other and Master Planned Communities segments. We generally own the land underlying the properties in our Retail and Other segment. However, at certain of the properties, all or part of the underlying land is owned by a third party that leases the land to us pursuant to a long-term ground lease. The leases generally contain various purchase options and typically provide us with a right of first refusal in the event of a proposed sale of the property by the landlord. Information regarding encumbrances on these properties is included in Schedule III of this Annual Report.

 

The following tables set forth certain information regarding the Consolidated Properties and the Unconsolidated Properties in our Retail Portfolio as of December 31, 2008. These tables do not reflect subsequent activity in 2009 including purchases, sales or consolidations of Anchor stores. Anchors include all stores with Gross Leasable Area greater than 30,000 square feet.

 

Combined occupancy for Consolidated Properties and Unconsolidated Properties as of December 31, 2008 was 92.5%.

 

Consolidated Retail Properties

 

 

 

 

 

Unconsolidated Retail Properties