General Growth Properties, Inc. 10-K 2011
Documents found in this filing:
COMMISSION FILE NUMBER 1-34948
GENERAL GROWTH PROPERTIES, INC.
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 ý No o
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 ý
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 ý No o
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). Yes ý 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. o
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 definition of "accelerated filer" and "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
Indicate by check mark whether the registrant, the registrant's predecessor or its subsidiaries have filed all reports required to be filed by section 12, 13 or 15(d) of the Securities Exchange Act subsequent to the distribution of securities under a plan confirmed by a court. Yes ý No o
On June 30, 2010, the last business day of the most recently completed second quarter of the registrant's predecessor, the aggregate market value of the shares of common stock held by non-affiliates of such predecessor registrant was $4.2 billion based upon the closing price of the common stock on such date.
As of February 28, 2011, there were 964,138,156 shares of the registrant's common stock outstanding.
Portions of the proxy statement for the annual stockholders meeting to be held on April 27, 2011 are incorporated by reference into Part III.
TABLE OF CONTENTS
All references to numbered Notes are to specific footnotes to the Consolidated Financial Statements of General Growth Properties, Inc. ("GGP", the "Successor" or the "Company") as included in this Annual Report on Form 10-K ("Annual Report"). The descriptions (and definitions, if not otherwise defined) 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.
GGP is a Delaware corporation, incorporated on July 1, 2010 as New GGP, Inc., and the successor registrant (the "Successor") by merger on November 9, 2010 (the "Effective Date") to GGP, Inc. ("Old GGP" or the "Predecessor"), which had operated as a self-administered and self-managed real estate investment trust, referred to as a "REIT" since 1986. We are principally a real estate developer and operator of regional malls with, at December 31, 2010, an ownership interest in 180 regional shopping malls (including "Special Consideration Properties" as defined below) in 43 states as well as ownership interests in other rental properties as more fully described below. As discussed in Note 7, the Successor will elect REIT status for its 2010 tax year and intends to maintain this status in future periods.
The Company began over 50 years ago as the owner of a single retail property in Cedar Rapids, Iowa. Through organic growth and strategic acquisitions, we now own some of the highest quality retail assets in the United States with many of our properties located in the fastest growing regions of the country. Our portfolio includes ownership interests in more than 169 million total square feet of regional mall retail. We also own stand-alone office properties, community shopping centers and hybrid mixed-use properties. A summary of our asset portfolio is presented in "Item 2Properties."
Substantially all of our business is conducted through GGP Limited Partnership ("the Operating Partnership" or "GGPLP") in which we hold, through certain intermediate partnerships, a 1% general partnership interest and an approximate 98% limited partnership interest. We own 100% 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 in the United States of America ("GAAP") and we refer to them as our "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 our "Unconsolidated Properties." Collectively, we refer to the Consolidated Properties and Unconsolidated Properties as our "Company Portfolio."
We make all key strategic decisions for our Consolidated Properties. We are also the asset manager for most of our Company Portfolio, executing the strategic decisions and performing the day-to-day property management functions, operations, leasing, redevelopment, maintenance, accounting, marketing and promotional services. In connection with the Unconsolidated Properties, such strategic decisions are made jointly with the joint venture partners. With respect to jointly owned properties, we generally conduct the management activities through General Growth Management, Inc. ("GGMI"), one of our taxable REIT subsidiaries ("TRS") which manages, leases, and performs various services for the majority of the properties owned by our Unconsolidated Real Estate Affiliates. However, 20 of our properties owned by Unconsolidated Real Estate Affiliates (two of our regional malls and three of our community centers, located in the United States, and all of the 15 operating retail properties owned through our Brazil joint ventures) are unconsolidated and are managed by our joint venture partners.
OLD GGP BANKRUPTCY AND REORGANIZATION
On April 16, 2009, Old GGP and certain of its domestic subsidiaries filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code ("Chapter 11"). On April 22, 2009 (collectively with April 16, 2009, the "Petition Date"), certain additional domestic subsidiaries of Old GGP (collectively with Old GGP and the subsidiaries that sought Chapter 11 protection on April 16, 2009, the "Debtors") also filed voluntary petitions for relief (collectively, the "Chapter 11 Cases") in the bankruptcy court of the Southern District of New York (the "Bankruptcy Court"). However, none of GGMI, certain of our wholly-owned subsidiaries, nor any of our joint ventures, (collectively, the "Non-Debtors") either consolidated or unconsolidated, sought such protection. A total of 388 Debtors with approximately $21.83 billion of debt filed for Chapter 11 protection.
During the remainder of 2009 and to the Effective Date, the Debtors operated as "debtors in possession" under the jurisdiction of the Bankruptcy Court and the applicable provisions of Chapter 11 (Note 1). In general, as debtors in possession, we were authorized under Chapter 11 to continue to operate as an ongoing business, but could not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.
The bankruptcy petitions triggered defaults on substantially all debt obligations of the Debtors. However, under section 362 of Chapter 11, the filing of a bankruptcy petition automatically stays most actions against the debtor's estate. The Chapter 11 Cases provided the protections necessary for the Debtors to develop and execute a restructuring of the Debtors to extend mortgage maturities, reduce corporate debt and overall leverage and establish a sustainable long-term capital structure.
The first step of our reorganization was to extend our mortgage maturities by restructuring our property-level secured mortgage debt. During the period in 2010 prior to the Effective Date, 149 Debtors owning 96 properties with $10.23 billion of secured mortgage debt emerged from bankruptcy, while 113 Debtors owning 50 properties with $4.66 billion secured debt had emerged from bankruptcy as of December 31, 2009 (collectively, the "Emerged Debtors"). In addition, as the result of consensual agreements reached with lenders of certain of our corporate debt, Old GGP recognized $131.4 million of additional interest expense for the period in 2010 prior to the Effective Date. The plans of reorganization for such Emerged Debtors provided for, in exchange for payment of certain extension fees and cure of previously unpaid amounts due on the applicable mortgage loans (primarily, principal amortization otherwise scheduled to have been paid since the Petition Date), the extension of the secured mortgage loans at previously existing non-default interest rates. As a result of the extensions, none of these loans will mature prior to January 1, 2014. As of December 31, 2010 the weighted average remaining term of our corporate debt, including our ownership share of the debt of our Unconsolidated Real Estate Affiliates, is approximately 4.6 years. In conjunction with these extensions, certain financial and operating covenants and guarantees were created or reinstated, all effective with the bankruptcy emergence of the remaining Debtors (the "TopCo Debtors") on the Effective Date.
The second step of our reorganization was to establish a sustainable long-term capital structure by reducing our corporate debt and overall leverage. The key element of this step was entering into agreements (collectively, as amended and restated, the "Investment Agreements") with REP Investments LLC, an affiliate of Brookfield Asset Management Inc. (the "Brookfield Investor"), an affiliate of Fairholme Funds, Inc. ("Fairholme") and an affiliate of Pershing Square Capital Management, L.P. ("Pershing Square" and together with the Brookfield Investor and Fairholme, the "Plan Sponsors"), pursuant to which Old GGP would be divided into two companies, GGP and The Howard Hughes Corporation ("HHC"), a newly formed real estate company, and the Plan Sponsors would invest in the Company's standalone emergence plan. As a result of the Investment Agreements, Old GGP obtained equity commitments for $6.55 billion ($6.30 billion for New GGP, Inc. and $250 million for HHC) subject to the conditions set forth in such agreements. In addition, the Plan Sponsors entered into an agreement with The Blackstone Group ("Blackstone") whereby Blackstone
subscribed for approximately 7.6% of the New GGP and HHC shares to be issued to the Plan Sponsors and received a pro rata portion of each Plan Sponsors' Permanent Warrants (as defined below). Finally, on September 21, 2010 we entered into a $300.0 million senior secured revolving facility (the "Facility") commencing on the Effective Date. This Facility, which was amended in February 2011 to provide for revolving loans of up to approximately $720 million (which may be increased, under certain conditions up to $1 billion) has not, as of March 7, 2010, been drawn upon.
On August 17, 2010, Old GGP filed with the Bankruptcy Court its third amended and restated disclosure statement and the plan of reorganization, supplemented on September 30, 2010 and on October 21, 2010 (the "Plan") for the 126 TopCo Debtors. On October 21, 2010, the Bankruptcy Court entered an order confirming the Plan. Pursuant to the Plan, on the Effective Date, Old GGP merged with a wholly-owned subsidiary of New GGP, Inc. and New GGP, Inc. was re-named General Growth Properties, Inc. Also pursuant to the Plan, prepetition creditor claims were satisfied in full and equity holders received newly issued common stock in New GGP, Inc. and in HHC. After such distribution, HHC became a publicly-held company, majority-owned by Old GGP's previous stockholders. GGP does not have any ownership interst in HHC as of, or subsequent to, the Effective Date. HHC assets, all formerly owned by Old GGP, on the Effective Date consisted primarly of the following:
Pursuant to the Investment Agreements, the Plan Sponsors and Blackstone purchased, on the Effective Date, $6.3 billion of GGP common stock at $10.00 per share and $250.0 million of HHC stock at $47.61904 per share. In addition, pursuant to an agreement with the Teachers Retirement System of Texas ("Texas Teachers"), Texas Teachers purchased on the Effective Date $500.0 million of GGP common stock at $10.25 per share.
In lieu of the fees that would be customary in similar transactions, pursuant to the Investment Agreements, interim warrants were issued to the Brookfield Investor and Fairholme to purchase approximately 103 million shares of Old GGP at $15.00 per share (the "Interim Warrants") on May 10, 2010. The Interim Warrants vested: 40% upon issuance and the remaining were scheduled to vest in installments thereafter to December 31, 2010. The Interim Warrants could only be exercised if the Brookfield Investor or Fairholme Investment Agreements were not consummated. The Investment Agreements further provided that all Interim Warrants (whether vested or not) would be cancelled and warrants to purchase equity of HHC and New GGP, Inc. would be issued to the Plan Sponsors (the "Permanent Warrants") upon consummation of the Investment Agreements. As the Investment Agreements were consummated and the Interim Warrants cancelled, no expense has been recognized for the issuance of the Interim Warrants. With respect to the Permanent Warrants (including the Permanent Warrants issued to Blackstone), eight million warrants to purchase equity of HHC at an exercise price of $50.00 per share and 120 million warrants to purchase equity of New GGP, Inc. at an exercise price of $10.75 per share, in the case of the Brookfield Investor, and an exercise price of $10.50, in the case of Fairholme and Pershing Square, were issued and with respect to Blackstone, one-half of its Permanent Warrants were issued at $10.50 per share and the remaining were issued at $10.75 per share. The estimated $861.6 million fair value of the Permanent Warrants was recognized as a liability on the Effective Date. Subsequent to the Effective Date, changes in the fair value of the Permanent Warrants have been recognized in earnings and adjustments to the exercise price and conversion ratio of the Permanent Warrants have been made as of a result of stock dividends.
As the Bankruptcy Court had approved the final set of plans of reorganization for the TopCo Debtors that remained in bankruptcy, the TopCo Debtors emerged from bankruptcy on the Effective Date. The structure of the Plan Sponsors' investments triggered the application of the acquisition method of accounting, as the Plan and the consummation of the Investment Agreements and the Texas Teachers investment agreement constituted a "transaction or event" in which an acquirer obtains control of one or more "businesses" or a "business combination" requiring such application. New GGP, Inc. is the acquirer that obtains control as it obtains all of the common stock of Old GGP (a business for purposes of applying the acquisition method of accounting) in exchange for issuing its stock to the Old GGP common stockholders on a one-for-one basis (excluding fractional shares).
On the Effective Date, the Plan Sponsors, Blackstone and Texas Teachers owned a majority of the outstanding common stock of GGP. The Old GGP common stockholders held approximately 317 million shares of GGP common stock at the Effective Date; whereas, the Plan Sponsors, Blackstone, Texas Teachers held approximately 644 million shares of GGP common stock on such date. Notwithstanding such majority ownership, the Plan Sponsors entered into certain agreements that limited their discretion with respect to affiliate, change of control and other stockholder transactions or votes.
The Investment Agreements with Fairholme and Pershing Square permitted us to repurchase (within 45 days of the Effective Date) up to 155 million shares in the aggregate issued to such investors at a price of $10.00 per share. We had a similar right to repurchase up to 24.4 million shares issued to Texas Teachers at a price of $10.25 per share (collectively, the "Clawback"). Pursuant to such rights, on October 11, 2010, we gave notice to Fairholme, Pershing Square and Texas Teachers of our election to reserve the eligible shares under the Clawback and agreed to pay on the Effective Date, as provided by the Investment Agreements, $38.75 million to Fairholme and Pershing Square for such reservation. No such fee was required to be paid to Texas Teachers. On November 19, 2010 (and November 23, 2010 with respect to the underwriters option to purchase additional shares), we sold an aggregate of approximately 154.9 million common shares to the public at $14.75 per share and repurchased an equal number of shares from Fairholme and Pershing Square as permitted under the Clawback. We also used a portion of the offering proceeds to repurchase approximately 24.4 million shares from Texas Teachers, as permitted under the Clawback. In addition, in January 2011, in a transaction valued at approximately $15.10 per share, the Brookfield Investor purchased substantially all of Fairholme's common share holding in GGP, with Fairholme retaining its share of the Permanent Warrants originally issued to them.
The emergence from bankruptcy by Old GGP and the substantial equity investment and restructuring pursuant to the Investment Agreements and the Plan constitutes a new beginning for the Company. Our current business plan contemplates the continued ownership and operation of most of our retail shopping centers and divestiture of non-core assets. It also contemplates the transfer of certain non-performing retail assets to applicable lenders in satisfaction of secured mortgage debt.
During 2008 and 2009, we were focused on preservation of capital and maintenance of occupancy levels at our retail and other rental properties to stabilize our business and maintain the profitability of our operating properties. We were able to consensually modify and extend certain of our mortgage debt and we entered into the Investment Agreements as described above to facilitate our bankruptcy emergence. Prior to 2008, development projects and acquisitions were a key contributor to our growth. In such regard, we acquired The Rouse Company in November 2004 (the "TRC Merger") and in July 2007 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 NYSCRF. As these acquisitions and other activities were largely funded through debt, the resulting capital structure was not, in hindsight, flexible enough to withstand the 2008 and 2009 credit crisis.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Reference is made to Note 15 for information regarding our segments.
NARRATIVE DESCRIPTION OF OUR BUSINESS
Retail and Other Segment
After the Effective Date, we operate in a single segment, which we term the Retail and Other segment, which consists of retail centers, office and industrial buildings and mixed-use and other properties. Our portfolio of regional malls and other rental properties represents a collection of retail offerings that are targeted to a range of market sizes and consumer tastes. The tables below summarize certain information with respect to our rental properties as of December 31, 2010 and 2009, excluding de minimis properties and other corporate non-property interests. In addition, malls classified as held for sale or disposition, principally the eleven Special Consideration Properties held at December 31, 2010 (as defined below), have also been excluded from these tables. As our new management team believes that categorizing the remaining malls into groups (or "Tiers") based on criteria, such as tenant sales, NOI or GLA, does not provide meaningful incremental information for investors, such presentation below reflects a change from our previous categorization or presentation of our portfolio:
Our Regional Malls
Our regional malls are located in major and middle markets throughout the United States. For the year ended December 31, 2010, the geographic concentration of our regional malls as a percentage of our total regional mall NOI of $2,160,433 presented above was as follows: east coast (33%), west coast and Hawaii (33%), north central United States (20%), and Texas and surrounding states (14%).
We own 25 malls that we believe are the premier regional malls in their market areas when measured against the top 100 leading malls in the United States. These high quality malls typically have average annual tenant sales per square foot of $600 or higher and several are iconic in nature, e.g., Ala Moana in Honolulu, Fashion Show in Las Vegas, the Natick Collection in Natick (Boston) Massachusetts, Tysons Galleria in Washington D.C., Park Meadows in Lone Tree (Denver), Colorado and Water Tower Place in Chicago. These properties are well-known by consumers in the local market and we believe are in highly desirable locations for tenants. For example, Tysons Galleria is anchored by Neiman Marcus, Saks Fifth Avenue and Macy's. In 2010, the center was producing tenant sales of over $750 per square foot. Tysons Galleria is comprised of a significant number of luxury tenants including Chanel, Bottega Veneta, Salvatore Ferragamo and Versace. The center is located in the greater Washington, D.C. market and we believe that Tyson's Galleria is the premier destination for luxury retail consumers in its market.
More broadly, we own 125 of the top 600 regional malls in the country which represent 87% of Company NOI. A significant number of these malls are either the only one in their market areas, or as part of a cluster of malls, may receive relatively high consumer traffic. Deerbrook Mall, one of five high quality malls that we own in the Houston area, is demonstrative of this group of malls. Deerbrook Mall is located in a favorable trade area featuring high population density and convenient access to Interstate 59. Another example is Maine Mall in Portland. The Maine Mall is anchored by Macy's, JCPenney and Sears with its in-line tenant offering comprised of moderately priced mainstream retailers and is the only regional mall in Portland, Maine.
As part of the Emerged Debtor loan modification agreements, we identified 13 underperforming properties that we refer to as "Special Consideration Properties." We believe that the long-term strategic value of these regional malls, as compared to our other opportunities to deploy capital throughout our portfolio, do not justify retaining them. We expect that this group of regional malls will be given back to the applicable respective lenders within the next nine months and in such regard, five of these thirteen malls have been transferred as of March 7, 2011. Until such transfers, we have agreed to work with the applicable respective lenders as they market such properties for sale to third parties as an alternative to the lenders taking back title to the properties. Accordingly, the remaining eleven Special Consideration Properties at December 31, 2010 are included in the 180 regional malls referred to above.
A detailed listing of the principal properties in our Retail Portfolio is included in Item 2 of this Annual Report.
The following table reflects the ten largest tenants in our regional malls as of December 31, 2010.
For the year ended December 31, 2010, our largest tenant (based on common parent ownership) accounted for approximately 3% of consolidated rents. Of the approximately 71 million square feet of GLA, which includes our Special Consolidation Properties and excludes anchor tenants such as Macy's, reported above, four tenants occupied, in the aggregate, at least 10% of our GLA in 2010.
Our Other Rental Properties
In addition to regional malls, as of December 31, 2010, we own 28 community shopping centers totaling 4.3 million square feet, primarily in the Western regions of the United States, as well as 26 stand-alone office buildings totaling 2.2 million square feet, concentrated in Columbia, Maryland and Las Vegas, Nevada. Many of our community shopping centers are anchored by national grocery chains and drug stores such as Albertsons, Safeway, Rite Aid and Long's Drugs. Other tenants include leading retailers such as Target, Best Buy and Lowe's. We believe the majority of the community shopping centers are located in the growth markets of the western regions of the United States (generating approximately 80% of total 2010 NOI attributable to community shopping centers). In 2010, the community shopping centers had an overall occupancy of 89% and generated $32.3 million of NOI. On average, three retailers occupied 10% or more of the rentable square footage in our other rental properties in 2010.
We desire to sell our non-core community shopping centers and stand-alone office buildings. Our stand-alone office buildings are a legacy of The Rouse Company acquisition in 2004. The properties are located in two main areas: Summerlin, Nevada, near Las Vegas, and Columbia, Maryland, near Baltimore and Washington D.C. Both locations are office hubs in their respective Metropolitan Statistical Areas. In 2010, the office buildings had an overall occupancy of 66% and generated
$24.1 million of NOI. The Las Vegas, Nevada assets had an overall occupancy of 55% and contributed 51% of NOI attributable to office buildings. The Columbia, Maryland assets had an overall occupancy of 67% and contributed 38% of NOI attributable to office buildings. Until these assets are sold, we will continue to implement a proactive leasing strategy focused on creditworthy national branded tenants in order to maximize value at the time of divestiture.
We also currently hold non-controlling ownership interests in a public Brazilian real estate operating company, Aliansce Shopping Centers, and a large regional mall (Shopping Leblon) in Rio de Janeiro (Note 5).
Master Planned Communities Segment
The Master Planned Communities segment was, pursuant to the Plan, distributed to the Old GGP common stockholders in November 2010 and accordingly, is presented as discontinued operations in the accompanying financial statements.
OTHER BUSINESS INFORMATION
We believe that we distinguish ourselves through the following competitive strengths:
High Quality Properties. As discussed above, we own 125 of the top 600 regional malls in the country. These malls are located in core markets defined by large population density, strong population growth and household formation, and high-income consumers. Approximately one of every three U.S. households with an income of greater than $100,000 a year is located within 10 miles of one of these malls. We frequently are able to offer "first-to-market" stores (the first location of a store in a particular region or city) in these core markets that enhance the reputation of our regional malls as premier shopping destinations. For example, in 2010, the first Diane von Furstenberg and Tory Burch stores opened in our Ala Moana Center in Honolulu, Hawaii.
Second Largest Regional Mall Owner in the United States. Based on the number of malls in our portfolio, we are the second largest owner of regional malls in the United States. Our malls, located in major and middle markets nationwide, receive an average of approximately 1.9 billion consumer visits each year, and we are the #1 or #2 largest landlord to 40 of what we believe are America's premier retailers. We believe there has been a limited supply of new mall space in the last five years, that the lack of new development should help us improve occupancy levels in coming years, and that the size and strength of our portfolio is attractive to tenants.
Strategic Relationships and Scale with Tenants and Vendors. We believe that the size, quality and geographical breadth of our regional mall portfolio provide competitive advantages to our tenants and vendors. We believe that our national tenants benefit from the high traffic at our malls as well as the efficiency of being able to negotiate leases at multiple locations with just one landlord. We also maintain national contracts with certain vendors and suppliers for goods and services, such as security and maintenance, at generally more favorable terms than individual contracts.
Flexible Capital Structure. As of December 31, 2010, we had approximately $18.05 billion aggregate principal amount of our consolidated debt (excluding the Special Consideration Properties) and approximately $2.67 billion aggregate principal amount of our share of unconsolidated debt. We believe that most of our Unconsolidated Properties are generally well-capitalized and can support their portion of the indebtedness. On December 31, 2010, the weighted average interest rate on our total debt (excluding the Special Consideration Properties) was approximately 5.35% and the average maturity of our total debt (excluding the Special Consideration Properties) was 4.7 years. In addition, we have flexible terms on our property-level debt, allowing us, for example, to prepay certain recently
restructured mortgage debt, which constitutes a majority of our consolidated debt, without incurring any prepayment penalties.
Our business strategy is to further improve our financial position and maximize the value of our mall properties to tenants and consumers. We intend to improve our performance by capitalizing on our reorganized financial position and combining the appropriate merchandising mix with excellent physical property conditions in attractive locations. We believe that this will, in turn, increase consumer traffic, retailer sales and rents. We intend to pursue the following objectives in order to implement our business strategy:
We have a liquidity and operating plan designed to protect our leading position in the regional mall sector. We are committed to further improving our balance sheet. To further this strategy to build liquidity and flexibility, as discussed in Item 7, we have increased the size of our revolving credit facility to approximately $720 million, with the potential to increase it to up to $1.0 billion in the future if certain conditions are satisfied. We desire to reduce our outstanding debt and eliminate cross-collateralizations and credit enhancements through a combination of opportunistically selling non-core assets, refinancings and debt paydowns pursuant to our restructured amortization schedule. Our financing strategy is to maintain our non-recourse investment grade financing at the current level, extending maturities wherever possible.
We believe there is a synergy between our tenants and the consumers who visit our malls in that better malls lead to the best tenant mix for each market, which leads to a better shopping experience for the consumer, thereby increasing consumer traffic and consumer loyalty.
In addition, we believe that we can eliminate certain indebtedness and further improve our credit profile by deeding back to lenders in lieu of renegotiating the respective debt of our Special Consideration Properties, which represent some of our less profitable, more highly leveraged properties and accounted for $644.3 million of our indebtedness as of December 31, 2010, and two other regional mall properties (identified as underperforming and owned by Unconsolidated Real Estate Affiliates), which accounted for $196.7 million of our indebtedness, at our proportionate share, as of December 31, 2010.
We believe that corporate overhead and operational issues are closely intertwined, and this belief has guided our operating philosophy to invest in items that maximize the consumer experience, while streamlining our costs in areas that we do not believe will negatively impact the consumer or mall experience. We believe in an organization with minimal layers between the "doers" and the "decision makers", where there is a culture of meritocracy.
The nature and extent of the competition we face varies from property to property within each segment of our business. 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 portfolio of retail properties, 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, 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 our operational retail property
management, which have developed knowledge of local, regional and national real estate markets, enabling us to evaluate existing retail properties for their increased profit potential through expansion, remodeling, re-merchandising and more efficient management of the property.
Retailers are looking to expand in the highest traffic centers, and we believe malls with the optimal mix of retailers, dining and entertainment options typically have high traffic. Power centers have also presented competition and we have embraced traditional power center tenants in our malls where it is feasible. For example, in recent years we have added tenants such as Target, Kohl's, Best Buy, TJ Maxx and Dick's Sporting Goods to our regional malls, to name a few.
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 properties. 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 master planned communities, we believe that our properties are viewed favorably among prospective tenants.
Under various Federal, state and local laws and regulations, an owner of real estate may be liable for the costs of remediation of certain hazardous or toxic substances on such real estate. These laws may impose liability without regard to whether the owner knew of the presence of such hazardous or toxic substances. The costs of remediation may be substantial and may adversely affect the owner's ability to sell or borrow against 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 a Phase I environmental site assessment, which is intended to evaluate the environmental condition of the subject property and its surroundings. Phase I environmental assessments typically include a historical review, a public records review, a site visit and interviews, but do not include sampling or subsurface investigations.
To date, the Phase I environmental site assessments have not revealed any recognized environmental conditions that would have a material adverse effect on our overall business, financial condition or results of operations. However, it is possible that these assessments do not reveal all potential environmental liabilities or that conditions have changed since the assessment was prepared (typically, at the time the property was purchased or developed). No assurances can be given that future laws, ordinances or regulations will not impose any material environmental liability on us or that the current environmental condition of our properties will not be adversely affected by tenants, occupants, adjacent properties, 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 human health or 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 not had a material adverse effect on our operating results or competitive position in the past but could have such an effect in the future.
The following is a discussion of our investment policies, financing policies, conflict of interest policies and policies with respect to certain other activities. One or more of these policies may be amended or rescinded from time to time without a stockholder vote.
Our business is to own and invest in real estate assets. Old GGP was a REIT, and New GGP will elect to be treated as a REIT in connection with the filing of its tax return for 2010, subject to New GGP's ability to meet the requirements of a REIT at the time of election. REIT limitations restrict us from making an investment that would cause our real estate assets to be less than 75% of our total assets. In addition, at least 75% of our gross income must be derived directly or indirectly from investments relating to real property or mortgages on real property, including "rents from real property," dividends from other REITs and, in certain circumstances, interest from certain types of temporary investments. At least 95% of our income must be derived from such real property investments, and from dividends, interest and gains from the sale or dispositions of stock or securities or from other combinations of the foregoing.
Subject to REIT limitations, we may invest in the securities of other issuers in connection with acquisitions of indirect interests in real estate. Such an investment would normally be in the form of general or limited partnership or membership interests in special purpose partnerships and limited liability companies that own one or more properties. We may, in the future, acquire all or substantially all of the securities or assets of other REITs, management companies or similar entities where such investments would be consistent with our investment policies.
We must comply with the covenants contained in our financing agreements. We are party to a revolving credit facility that requires us to satisfy certain affirmative and negative covenants and to meet financial ratios and tests, which may include ratios and tests based on leverage, interest coverage and net worth.
If our Board of Directors determines to seek additional capital, we may raise such capital through additional equity offerings, debt financing, creating joint ventures with existing ownership interests in properties, retention of cash flows or a combination of these methods. Our ability to retain cash flows is limited by the requirement for REITs to pay tax on or distribute 100% of their capital gains income and distribute at least 90% of their taxable income and our desire to avoid entity level U.S. federal income tax by distributing 100% of our capital gains and ordinary taxable income. In 2011, we expect to implement our recently adopted dividend reinvestment plan in which all stockholders would be entitled to participate. Each of the Plan Sponsors and Blackstone have agreed (subject to tax, applicable regulatory and other legal requirements), that for 2011 and 2012 they would elect to participate in the plan and have dividends paid on the shares that they hold largely reinvested in shares of GGP common stock. As a result, we would be able to pay a larger proportion of cash dividends to other stockholders who elect to receive cash in 2011 and 2012. However, we may determine to instead pay dividends in a combination of cash and shares of common stock. We must also take into account taxes that would be imposed on undistributed taxable income. If our Board of Directors determines to raise additional equity capital, it may, without stockholder approval, issue additional shares of common stock or other capital stock. Our Board of Directors may issue a number of shares up to the amount of our authorized capital in any manner and on such terms and for such consideration as it deems appropriate. Such securities may be senior to the outstanding classes of common stock. Such securities also may include additional classes of preferred stock, which may be convertible into common stock. Under the Investment Agreements, the Plan Sponsors have preemptive rights to purchase our common stock as necessary to allow them to maintain their respective proportional ownership interest in GGP on a fully diluted basis. Any such offering could dilute a stockholder's investment in us and may make it more difficult to raise equity capital.
We do not have a policy limiting the number or amount of mortgages that may be placed on any particular property. Mortgage financing instruments, however, usually limit additional indebtedness on such properties. Typically, we invest in or form special purpose entities to assist us in obtaining
permanent financing at attractive terms. Permanent financing may be structured as a mortgage loan on a single property, or on a group of properties, and generally requires us to provide a mortgage interest on the property in favor of an institutional third party, as a joint venture with a third party, or as a securitized financing. For securitized financings, we create special purpose entities to own the properties. These special purpose entities are structured so that they would not necessarily be consolidated with us in the event we would ever become subject to a bankruptcy proceeding or liquidation. We decide upon the structure of the financing based upon the best terms then available to us and whether the proposed financing is consistent with our other business objectives. For accounting purposes, we include the outstanding securitized debt of special purpose entities owning consolidated properties as part of our consolidated indebtedness.
Conflict of Interest Policies
We maintain policies and have entered into agreements designed to reduce or eliminate potential conflicts of interest. We have adopted governance principles governing our affairs and the Board of Directors, as well as written charters for each of the standing committees of the Board of Directors. In addition, we have a Code of Business Conduct and Ethics, which applies to all of our officers, directors, and employees. At least a majority of the members of our Board of Directors must qualify as independent under the listing standards for NYSE companies. Any transaction between us and any director, officer or 5% stockholder must be approved pursuant to our Related Party Transaction Policy.
Policies With Respect To Certain Other Activities
We intend to make investments which are consistent with our qualification as a REIT, unless the Board of Directors determines that it is no longer in our best interests to so qualify as a REIT. We have authority to offer shares of our capital stock or other securities in exchange for property. We also have authority to repurchase or otherwise reacquire our shares or any other securities. We may issue shares of our common stock, or cash at our option, to holders of units of limited partnership interest in the Operating Partnership in future periods upon exercise of such holders' rights under the Operating Partnership agreement. Our policy prohibits us from making any loans to our directors or executive officers for any purpose. We may make loans to the joint ventures in which we participate.
We intend to borrow money as part of our business, and we also may issue senior securities, purchase and sell investments, offer securities in exchange for property and repurchase or reacquire shares or other securities in the future. To the extent we engage in these activities, we will comply with applicable law. We do not currently have a common stock repurchase program.
GGP makes reports to its security holders in accordance with the NYSE rules and containing such information, including financial statements certified by independent public accountants, as required by the NYSE.
We do not have policies in place with respect to making loans to other persons (other than our conflict of interest policies described above), investing in the securities of other issuers for the purpose of exercising control and underwriting the securities of other issuers, and we do not currently, and do not intend to, engage in these activities.
As of January 1, 2011, we had approximately 2,800 employees.
We have comprehensive liability, fire, flood, extended coverage and rental loss with respect to our portfolio of retail properties. Our management believes that such insurance provides adequate coverage.
Qualification as a Real Estate Investment Trust and Taxability of Distributions
The Predecessor qualified as a real estate investment trust pursuant to the requirements contained in Sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code"). The Predecessor for 2009, and the Successor for 2010, met their distribution requirements to its common stockholders as provided for in Section 857 of the Code wherein a dividend declared in October, November or December but paid in January of the following year will be considered a prior year dividend for all purposes of the Internal Revenue Code (Notes 1 and 7). For 2010, the Predecessor will meet its distribution requirement through a combination of a consent dividend under Section 565 and a distribution under Section 857. The Successor will elect to be taxed as a REIT commencing with the taxable year beginning July 1, 2010, its date of incorporation. Both the Predecessor and the Successor intend to maintain REIT status, and therefore our operations will not be subject to Federal tax on its real estate investment trust taxable income. A schedule detailing the taxability of dividends for 2010, 2009 and 2008 has been presented in Note 7.
GGP believes that it is a domestically controlled qualified investment entity as defined by the Internal Revenue Code. However, because its shares are publicly traded, no assurance can be given that the Company is or will continue to be a domestically controlled qualified investment entity.
Our Internet website address is www.ggp.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Interactive Data Files, 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. Additionally, the public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549, and may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, which can be accessed at http://www.sec.gov.
As a result of Old GGP's Chapter 11 filing, we were required to periodically file various documents with, and provide certain information to, the Bankruptcy Court, including statements of financial affairs, schedules of assets and liabilities, and monthly operating reports in forms prescribed by Chapter 11 or the U.S. Trustee, as well as certain financial information on an unconsolidated basis. Such materials were prepared in accordance with the requirements of Chapter 11 or the U.S. Trustee. While we believe that these documents and reports provided then-current information required under Chapter 11, they were prepared only for the Debtors and, hence, certain operational entities were excluded. In addition, they were prepared in a format different from that used in this Annual Report and other reports filed with the SEC and there had not been any association of our independent registered public accounting firm with such information. Accordingly, we believe that the substance and format of our bankruptcy related filed reports do not allow meaningful comparison with our regular publicly-disclosed consolidated financial statements. Moreover, the materials filed with the Bankruptcy Court were not prepared for the purpose of providing a basis for an investment decision relating to our securities, or for comparison with other financial information filed with the SEC.
Regional and local economic conditions may adversely affect our business
Our real property investments are influenced by the regional and local economy, which may be negatively impacted by plant closings, industry slowdowns, increased unemployment, lack of availability of consumer credit, increased levels of consumer debt, poor housing market conditions, adverse weather conditions, natural disasters and other factors. Similarly, local real estate conditions, such as an oversupply of, or a reduction in demand for, retail space or retail goods, and the supply and creditworthiness of current and prospective tenants may affect the ability of our properties to generate significant revenue.
Economic conditions, especially in the retail sector, may have an adverse effect on our revenues and available cash
Unemployment, weak income growth, tight credit and the need to pay down existing obligations may negatively impact consumer spending. Given these economic conditions, we believe there is a risk that the sales at stores operating in our malls may be adversely affected. This may hinder our ability to implement our strategies and may have an unfavorable effect on our operations and our ability to attract new tenants.
We may be unable to lease or re-lease space in our properties on favorable terms or at all
Our results of operations depend on our ability to continue to strategically lease space in our properties, including re-leasing space in properties where leases are expiring, optimizing our tenant mix or leasing properties on more economically favorable terms. Because approximately eight to nine percent of our total leases expire annually, we are continually focused on our ability to lease properties and collect rents from tenants. Similarly, we are pursuing a strategy of replacing expiring short-term leases with long-term leases. If the sales at certain stores operating in our regional malls do not improve 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 do not improve, new tenants would be less likely to be willing to pay minimum rents as high as they would otherwise pay. In addition, some of our leases are fixed-rate leases, and we may not be able to collect rent sufficient to meet our costs. Because substantially all of our income is derived from rentals of real property, our income and available cash would be adversely affected if a significant number of tenants are unable to meet their obligations.
The bankruptcy or store closures of national tenants, which are tenants with chains of stores in many of our properties, may adversely affect our revenues
Our leases generally do not contain provisions designed to ensure the creditworthiness of the tenant, and in recent years a number of companies in the retail industry, including some of our tenants, have declared bankruptcy or voluntarily closed certain of their stores. We may be unable to re-lease such space or to re-lease it on comparable or more favorable terms. As a result, the bankruptcy or closure of a national tenant may adversely affect our revenues.
Certain co-tenancy provisions in our lease agreements may result in reduced rent payments, which may adversely affect our operations and occupancy
Many of our lease agreements include a co-tenancy provision which allows the tenant to pay a reduced rent amount and, in certain instances, terminate the lease, if we fail to maintain certain occupancy levels. Therefore, if occupancy or tenancy falls below certain thresholds, rents we are
entitled to receive from our retail tenants could be reduced and may limit our ability to attract new tenants.
It may be difficult to sell real estate quickly, and transfer restrictions apply to some of our properties
Equity real estate investments are relatively illiquid, which may limit our ability to strategically change 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. If it becomes necessary or desirable for us to dispose of one or more of our 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.
Our business is dependent on perceptions by retailers and shoppers of the convenience and attractiveness of our retail properties, and our inability to maintain a positive perception may adversely affect our revenues
We are dependent on perceptions by retailers or shoppers of the safety, convenience and attractiveness of our retail properties. If retailers and shoppers perceive competing retail properties and other retailing options such as the internet to be more convenient or of a higher quality, our revenues may be adversely affected.
We redevelop and expand properties, and this activity is subject to risks due to various economic factors that are beyond our control
Capital investment to expand or redevelop our properties will be an ongoing part of our strategy going forward. In connection with such projects, we will be subject to various risks, including the following:
If redevelopment, expansion or reinvestment projects are unsuccessful, our investments in those projects may not be fully recoverable from future operations or sales.
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 malls, outlet malls and other discount shopping centers, discount shopping clubs, catalog companies, and through internet sales and telemarketing. Competition of these types could adversely affect our revenues and cash flows.
We compete with other major real estate investors with significant capital for attractive investment opportunities. These competitors include REITs, investment banking firms and private institutional investors.
Our ability to realize our strategies and capitalize on our competitive strengths are dependent on our ability to effectively operate a large portfolio of high quality malls, maintain good relationships with our tenants and consumers, and remain well-capitalized, and our failure to do any of the foregoing could affect our ability to compete effectively in the markets in which we operate.
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 or other disasters, including hurricanes, earthquakes and oil spills. For example, our properties in the Gulf of Mexico region could suffer economically from reduced tourism as result of the oil spill in 2010. In addition, certain of our properties are located in California or in other areas with higher risk of earthquakes. Furthermore, many of our properties are located in coastal regions, and would therefore be affected by any future increases in sea levels.
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 or other acts of violence may 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. Such a resulting 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.
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 third parties for bodily injury or property damage (investigation and/or 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 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, lease or borrow with respect to the real estate. 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 certain 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 certain 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.
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 decreasing tenant sales which may result in lower revenues. However, substantially all of our tenant leases contain provisions designed to partially mitigate the negative impact of inflation as discussed in Item 7 below, which discussion is incorporated by reference here.
Inflation also poses a risk 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. In certain cases, we have previously limited our exposure to interest rate fluctuations related to a portion of our variable-rate debt by the use of interest rate cap and swap agreements. Such agreements, subject to current market conditions, allow us to replace variable-rate debt with fixed-rate debt in order to achieve our desired ratio of variable-rate to fixed rate date. However, in an increasing interest rate environment the fixed rates we can obtain with such replacement fixed-rate cap and swap agreements or the fixed-rate on new debt will also continue to increase.
Inflation also poses a potential risk 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 are a holding company with no operations of our own and will depend on our subsidiaries for cash
Our operations are conducted almost entirely through our subsidiaries. Our ability to make dividends or distributions in connection with being a REIT is highly dependent on the earnings of and the receipt of funds from our subsidiaries through dividends or distributions, and our ability to generate cash to meet our debt service obligations is further limited by our subsidiaries' ability to make such dividends, distributions or intercompany loans. Our subsidiaries' ability to pay any dividends or distributions to us are limited by their obligations to satisfy their own obligations to their creditors and preferred stockholders before making any dividends or distributions to us. In addition, Delaware law imposes requirements that may restrict our ability to pay dividends to holders of our 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. Also, the assets of Unconsolidated Properties may be used as collateral to secure loans of our joint venture partners, and the indemnity we may be entitled to from our joint venture partners could be worth less than the value of those assets. 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 inducements 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. As such, we might be required to make decisions about buying or selling interests in a property or properties at a time that is not desirable.
Bankruptcy of our joint venture partners could impose delays and costs on us with respect to the jointly owned retail properties
The bankruptcy of one of the other investors in any of our jointly owned shopping malls could materially and adversely affect the relevant property or properties. Pursuant to the Bankruptcy Code, we would be precluded from taking some actions affecting the estate of the other investor without prior court approval which would, in most cases, entail prior notice to other parties and a hearing. 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 would otherwise be required.
We are impacted by tax-related obligations to some of our partners
We own certain 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 jointly owned properties. As the manager of 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 related to the financing of and revenue generation from these properties.
We may not be able to maintain our status as a REIT
We have agreed to elect to be treated as a REIT in connection with the filing of our tax return for 2010, subject to our ability to meet the requirements of a REIT at the time of election. Such election, with respect to the Successor, would be retroactive to July 1, 2010. It is possible that we may not meet the conditions for qualification as a REIT at the time of such election. In addition, once an entity is qualified as a REIT, the Internal Revenue Code (the "Code") generally requires that such entity pay tax on or distribute 100% of its capital gains and distribute its ordinary taxable income to shareholders. To avoid current entity level U.S. federal income taxes, we expect to distribute 100% of our capital gains and ordinary income to shareholders annually. For 2010 we made 90% of this distribution in common stock and 10% in cash. In 2011, we expect to implement a recently adopted dividend reinvestment plan in which all stockholders would be entitled to participate. The Plan Sponsors and the Blackstone Investors have agreed (subject to tax, applicable regulatory and other legal requirements), that for 2011 and 2012 they would elect to participate in the dividend reinvestment plan and have dividends paid on the shares that they hold largely reinvested in shares of our common stock. As a result, we would be able to pay a larger proportion of cash dividends to other stockholders who elect to receive cash in 2011 and 2012. However, there can be no assurances that we will not determine to instead pay dividends in a combination of cash and shares of our common stock.
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 shareholders in computing our taxable income and federal income tax. If any of our REIT subsidiaries fail to qualify as a REIT, such failure could result in our loss of REIT status. If we lose our REIT status, 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 holders of equity securities that would otherwise receive dividends 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, certain anti-takeover defenses and applicable law may hinder any attempt to acquire us
Our amended and restated certificate of incorporation and amended and restated bylaws contain the following limitations.
The ownership limit. Generally, for us to qualify as a REIT under the Code for a taxable year, 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 such taxable year. Our charter provides that no one individual may own more than 9.9% of the outstanding shares of capital stock unless our board of directors provides a waiver from the ownership restrictions, which the Investment Agreements contemplate subject to the applicable Plan Sponsor making certain representations and covenants. The Code defines "individuals" for purposes of the requirement described above to include some types of entities. However, our certificate of incorporation also permits us to exempt a person from the ownership limit described therein upon the satisfaction of certain conditions which are described in our certificate of incorporation.
Selected provisions of our charter documents. Our charter authorizes the board of directors:
Selected provisions of our bylaws. Our amended and restated bylaws contain the following limitations:
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 below), 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" as 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.
We are currently involved in an SEC inquiry
In July 2010, we received notice that, pursuant to an April 21, 2010 order, the SEC is conducting a formal, non-public investigation into possible violations of proscriptions on insider trading under the federal securities laws by certain current and former officers and directors. The formal investigation is the continuation of an informal inquiry which the SEC initiated in October 2008. We intend to continue to cooperate fully with the SEC with respect to the investigation. While we cannot predict the outcome of this investigation with certainty, based on the information currently available to us, we believe that the outcome of the investigation will not have a material adverse effect on our financial condition or results of operations.
We may be subject to litigation as a result of the Plan
We cannot assure you that our stakeholders will not contest the Plan through litigation following our emergence from bankruptcy. Also, as is typical in bankruptcy cases like ours, the final resolution of all claims against the TopCo Debtors has extended beyond the Effective Date and the ultimate resolution of such claims may be different from the treatment we have assumed for purposes of the preparation of our consolidated financial statements or the unaudited pro forma condensed consolidated financial information included in this Annual Report. An unfavorable resolution of any such claim could have a material adverse effect on us.
Because our financial statements reflect adjustments related to the acquisition method of accounting upon our emergence from bankruptcy, information reflecting our results of operations and financial condition will not be comparable to prior periods
Acquisition accounting was triggered as a result of the structure of the Plan Sponsors' investments, as set forth in the Plan. Following our emergence from bankruptcy, it will be difficult to compare certain information reflecting our results of operations and financial condition to those for historical periods prior to emergence from bankruptcy. Accordingly, we have presented certain pro forma income statement information to reflect the disposition of the HHC assets, the consummation of the Plan (including the Investment Agreements) and the application of the acquisition method of accounting (Note 3), as reflected in Note 16. The actual results of operations for periods subsequent to the Effective Date may vary from what is suggested by the estimated pro forma amounts, and may be material.
Our actual financial results may vary significantly from the projections filed with the Bankruptcy Court
The Disclosure Statement, which the TopCo Debtors were required to prepare in connection with the Plan, contained projected financial information and estimates of value that demonstrated the feasibility of the Plan and the TopCo Debtors' ability to continue operations upon their emergence from proceedings under the Bankruptcy Code. The information in the Disclosure Statement was prepared for the limited purpose of furnishing recipients of such Disclosure Statement with adequate information to make an informed judgment regarding acceptance of the Plan and was not prepared for the purpose of providing the basis for an investment decision relating to any of our securities. The projections and estimates of value, as well as the Disclosure Statement, are expressly excluded from this Annual Report and should not be relied upon in any way or manner and should not be regarded for the purpose of this report as representations or warranties by us or any other person, as to the accuracy of such information or that any such projections or valuations will be realized. Those projections and estimates of value have not been, and will not be, updated on an ongoing basis, and they were not audited or reviewed by independent accountants. They reflected numerous assumptions concerning our anticipated future performance and with respect to prevailing and anticipated market and economic conditions that were, and remain, beyond our control. Projections and estimates of value are inherently subject to substantial and numerous uncertainties and to a wide variety of significant business, economic and competitive risks, and the assumptions underlying the projections and/or valuation estimates may be wrong in any material respect. Actual results may vary and may continue to vary significantly from those contemplated by the projections and/or valuation estimates. As a result, you should not rely on those projections and/or valuation estimates.
We cannot be certain that the Chapter 11 Cases will not adversely affect our operations going forward. Our bankruptcy may have affected our relationship with key employees, tenants, consumers, suppliers and communities, and our future success depends on our ability to maintain these relationships
Although we emerged from bankruptcy upon consummation of the Plan, we cannot assure you that our having been subject to bankruptcy protection will not adversely affect our operations going forward, including our ability to negotiate favorable terms from and maintain relationships with tenants, consumers, suppliers and communities. The failure to obtain such favorable terms and maintain such relationships could adversely affect our financial performance and our ability to realize our strategy.
There is a risk of investor influence over our company that may be adverse to our best interests and those of our other shareholders
After the Clawback, the Plan Sponsors, Blackstone and Texas Teachers still own, in the aggregate, a majority of the shares of our common stock (excluding shares issuable upon the exercise of Permanent Warrants) and after giving effect to the exercise of the Permanent Warrants, representing 123,144,000 shares, or the election to receive future dividends in the form of common stock, would further increase their ownership.
Although the Plan Sponsors have entered into standstill agreements to limit their influence, the concentration of ownership of our outstanding equity in the Plan Sponsors may make some transactions more difficult or impossible without the support of the Plan Sponsors, or more likely with the support of the Plan Sponsors. The interests of any of the Plan Sponsors, any other substantial stockholder or any of their respective affiliates could conflict with or differ from our interests or the interests of the holders of our common stock. For example, the concentration of ownership held by the Plan Sponsors could delay, defer or prevent a change of control of our company or impede a merger, takeover or other business combination that may otherwise be favorable for us and the other stockholders. A Plan Sponsor, substantial stockholder or affiliate thereof may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. We cannot assure you that the standstill agreements can fully protect against these risks.
As long as the Plan Sponsors and any other substantial stockholder own, directly or indirectly, a substantial portion of our outstanding shares, subject to the terms of the standstill agreements and were they to act in a coordinated manner, they would be able to exert significant influence over us, including:
Our new directors and officers may change our current long-range plan
On the Effective Date, the composition of our board of directors changed significantly. Our executive officers also changed significantly following the Effective Date. The new board of directors and management team may make material changes to our business, operations and long-range plans described in this annual report. It is impossible to predict what these changes will be and the impact they will have on our future results of operations and the price of our common stock.
Some of our directors are involved in other businesses including, without limitation, real estate activities and public and/or private investments and, therefore, may have competing or conflicting interests with us and our board of directors has adopted resolutions renouncing any interest or expectation in any such business opportunities. In addition, our relationship agreement with Brookfield Asset Management Inc. contains significant exclusions from Brookfield's obligation to present opportunities to us
Certain of our directors have and may in the future have interests in other real estate business activities, and may have control or influence over these activities or may serve as investment advisors, directors or officers. These interests and activities, and any duties to third parties arising from such interests and activities, could divert the attention of such directors from our operations. Additionally, certain of our directors are engaged in investment and other activities in which they may learn of real estate and other related opportunities in their non-director capacities. Our board of directors has adopted resolutions applicable to our directors that expressly provide, as permitted by Section 122(17) of the DGCL, that our non-employee directors are not obligated to limit their interests or activities in their non-director capacities or to notify us of any opportunities that may arise in connection therewith, even if the opportunities are complementary to or in competition with our businesses. Accordingly, we have, and investors in our common stock should have, no expectation that we will be able to learn of or participate in such opportunities. Additionally, the relationship agreement with Brookfield Asset Management, Inc. contains significant exclusions from Brookfield Asset Management Inc.'s obligations to present opportunities to us.
Our indebtedness could adversely affect our financial health and operating flexibility
Excluding the Special Consideration Properties, as of December 31, 2010, we have approximately $20.72 billion aggregate principal amount of indebtedness outstanding, including approximately $2.67 billion of our share of unconsolidated debt. Our indebtedness may have important consequences to us and the value of our common stock, including:
Our debt contains restrictions and covenants which may limit our ability to enter into or obtain funding for certain transactions or operate our business
The terms of certain of our debt will 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, or to satisfy similar tests as a precondition to incurring additional debt. On the Effective Date, we entered into a new $300.0 million (which we recently amended to provide for loans up to approximately $720 million) revolving credit facility containing similar covenants and restrictions. In addition, certain of our indebtedness that was reinstated in connection with the Plan contains restrictions. The covenants and other restrictions under our debt agreements affect, among other things, our ability to:
Further, our ability to incur debt under the indentures governing the Rouse notes which are expected to remain outstanding through November 2015 (the latest maturity of the three series of reinstated Rouse notes or the replacement Rouse notes), is determined by the calculation of several covenant tests, including ratios of secured debt to gross assets and total debt to gross assets. We expect that Rouse and its subsidiaries may need to refinance project-level debt prior to 2015, and our ability to refinance such debt may be limited by these ratios which are calculated on an incurrence basis, and any potential non-compliance with the covenants may result in Rouse seeking other sources of capital, including investments from us, or may result in a default on the reinstated Rouse notes.
In addition, our refinanced debt contains certain terms which include restrictive operational and financial covenants, restrictions on the distribution of cash flows from properties serving as collateral for the debt and, in certain instances, higher interest rates. These fees and cash flow restrictions may affect our ability to fund our on-going operations from our operating cash flows and we may be limited in our operating and financial flexibility and, thus, may be limited in our ability to respond to changes in our business or competitive activities.
We may not be able to refinance, extend or repay our portion of indebtedness of our Unconsolidated Properties
As of December 31, 2010, our share of indebtedness secured by our Unconsolidated Properties was approximately $2.67 billion. We cannot assure you that our Unconsolidated Real Estate Affiliates will be able to support, extend, refinance or repay their debt on acceptable terms or otherwise. If we or our joint venture partners cannot service this debt, the joint venture may have to deed property back to the applicable lenders. There can be no assurance that we will be able to refinance or restructure such debt on acceptable terms or otherwise, or that joint venture operations or contributions by us and/or our partners will be sufficient to repay such loans. The ability to refinance this debt is negatively affected by the current condition of the credit markets, which have significantly reduced the capacity levels of commercial lending. The ability to successfully refinance or extend this debt may also be negatively affected by our previous bankruptcy proceedings and the restructuring of the TopCo Debtors' debt, as
well as the real or perceived decline in the value of our Unconsolidated Properties based on general and retail economic conditions.
We may not be able to raise capital through the sale of properties, including the strategic sale of non-core assets at prices we believe are appropriate
We desire to opportunistically sell non-core assets, such as stand-alone office buildings, community shopping centers and certain regional malls. Our ability to sell our properties to raise capital may be limited. The 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 could be affected by the availability of credit, which could increase the cost and difficulty for potential purchasers to acquire financing, as well as by the illiquid nature of real estate. For example, as part of our strategy to further delever our balance sheet in order to build liquidity and optimize our portfolio, we plan to reposition certain of our underperforming properties. If we cannot reposition these properties on terms that are acceptable to us, we may not be able to delever and realize our strategy of building liquidity and optimizing our portfolio. See "Business Risks" for a further discussion of the effects of the retail economic climate on our properties, as well as the illiquid nature of our investments in our properties.
Old GGP's stock price historically has been, and the trading prices of shares of our common stock are likely to be, volatile
The price of our common stock on the NYSE constantly changes and has been subject to significant price fluctuations and such volatility may continue into 2011. Factors impacting stock price may include:
In addition, the market in general has recently experienced extreme volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the market price of our common stock.
Risks related to the Distribution of HHC
If the distribution of HHC does not qualify as a tax-free distribution under Section 355 of the Code, then we may be required to pay substantial U.S. Federal Income Taxes
We received a private letter ruling from the Internal Revenue Service (the "IRS") with respect to the tax effect of the transactions transferring assets from Old GGP and its subsidiaries to HHC and to the effect that the distribution to Old GGP's shareholders of HHC would qualify as tax-free to Old GGP and its subsidiaries for U.S. federal income tax purposes (the "IRS Ruling"). A private letter ruling from the IRS is generally binding on the IRS. Such IRS Ruling did not rule that the distribution satisfies every requirement for a tax-free spin-off, and the parties will rely solely on the advice of counsel for comfort that such additional requirements are satisfied.
The IRS Ruling is based on, among other things, certain representations and assumptions as to factual matters made by Old GGP. The failure of any factual representation or assumption to be true, correct and complete in all material respects could adversely affect the validity of the IRS Ruling. In addition, the IRS Ruling is based on current law, and cannot be relied upon if current law changes with retroactive effect. Old GGP also entered into a tax matters agreement with HHC, pursuant to which, among other things, Old GGP may be held liable for costs incurred as a result of the unavailability of the IRS Ruling if Old GGP caused such invalidity. If HHC caused such invalidity, HHC could be liable for such costs. If the cause for the invalidity cannot be determined or was not caused by a single party, then Old GGP and HHC will share such liability. We have assumed such Old GGP obligations as of the Effective Date.
We have indemnified HHC for certain tax liabilities
Pursuant to the Investment Agreements, we have indemnified HHC from and against 93.75% of any and all losses, claims, damages, liabilities and reasonable expenses to which HHC and its subsidiaries become subject, in each case solely to the extent directly attributable to certain taxes related to sales in Old GGP's Master Planned Communities segment prior to March 31, 2010, in an amount up to $303,750,000 (the "Indemnity Cap") as reflected in our consolidated financial statements as of December 31, 2010. Under certain circumstances, the Successor has also agreed to be responsible for interest or penalties attributable to such MPC Taxes in excess of $303,750,000. In addition, if HHC is obligated to pay MPC Taxes (as defined in the Investment Agreements) within 36 months after the Effective Date and GGP is not then obligated to indemnify HHC as a consequence of the Indemnity Cap, then solely with respect to such payments, we shall make such payments and enter into a promissory note with HHC.
We may not obtain benefits from or be adversely affected by the distribution of HHC, and the distribution of HHC may occupy a substantial amount of management's time
GGP may not achieve some or all of the expected benefits of the distribution of HHC, or may not achieve them in a timely fashion. Following the distribution, our operational and financial profile changed as a result of the separation of HHC's assets from our other businesses. As a result, our diversification of revenue sources has diminished. Some of the assets distributed to HHC may also compete directly with our properties. In addition, GGP entered into a transition services agreement with HHC, pursuant to which members of GGP's management team will assist with transition services for HHC. In addition to possible disputes, these obligations may occupy a substantial amount of our management's time. It is also possible that the separation of GGP and HHC may result in disputes regarding the terms of such separation and/ or future performance pursuant to agreements entered into in order to effectuate the separation.
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.
Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include but are not limited to:
Our investment in real estate as of December 31, 2010 consisted of our interests in the properties in our Retail and Other segment. We generally own the land underlying properties, however, at certain of our 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 our properties is included in Schedule III of this Annual Report.
The following sets forth certain information regarding our retail properties as of December 31, 2010. These tables do not reflect subsequent activity in 2011:
CONSOLIDATED RETAIL PROPERTIES
SPECIAL CONSIDERATION PROPERTIES(*)
UNCONSOLIDATED RETAIL PROPERTIES
Anchors have traditionally been a major component of a regional shopping center. Anchors are frequently department stores whose merchandise appeals to a broad range of shoppers. Anchors generally either own their stores, the land under them and adjacent parking areas, or enter into long-term leases at rates that are generally lower than the rents charged to mall store tenants. We also typically enter into long-term reciprocal agreements with anchors that provide for, among other things, mall and anchor operating covenants and anchor expense participation. The centers in the Retail Portfolio receive a smaller percentage of their operating income from anchors than from stores (other than anchors) that are typically specialty retailers who lease space in the structure including, or attached to, the primary complex of buildings that comprise a shopping center. While the market share of many traditional department store anchors has been declining, strong anchors continue to play an important role in maintaining customer traffic and making the centers in the Retail Portfolio desirable locations for mall store tenants.
The following table indicates the parent company of certain anchors and sets forth the number of stores and square feet owned or leased by each Anchor in the Retail Portfolio (excluding properties owned by our Brazil Unconsolidated Real Estate Affiliates) as of December 31, 2010.
d.b.a. is an abbreviation for "doing business as."
Mortgage and Other Debt
Our ownership interests in real property are materially important as a whole, however, we do not own any individual materially important property and therefore do not present a description of our title to, or other interest in, our properties and the nature and amount of our mortgages in such properties.
Certain Retail Mall Historical Operating Data
For historical reference, the following information with respect to our regional malls has been presented, using the defined terms below. For 2010 and 2009 data, see Retail and Other narrative description above.
Regional Mall Lease Expiration Schedule
The following table indicates various lease expiration information related to the consolidated regional malls, community centers, and office buildings owned and excludes properties classified as discontinued operations and properties held for disposition. The table also excludes expirations and rental revenue from temporary tenants and tenants that pay percent in lieu rent. See "Note 2Summary of Significant Accounting Policies" to the consolidated financial statements for our accounting policies for revenue recognition from our tenant leases and "Note 8Rentals Under
Operating Leases" to the consolidated financial statements for the future minimum rentals of our operating leases for the consolidated properties.
See Item 1 "Narrative Description of Business" for information regarding our other properties (office, industrial and mixed-use buildings).
Other than certain remaining claims related to or arising from our Chapter 11 cases described in this Annual Report, neither the Company nor any of the Unconsolidated Real Estate Affiliates is currently involved in any material pending legal proceedings nor, to our knowledge, is any material legal proceeding currently threatened against the Company or any of the Unconsolidated Real Estate Affiliates.
In October 2004, certain limited partners (the "Urban Plaintiffs") of Urban Shopping Centers, L.P. ("Urban") filed a lawsuit against Urban's general partner, Head Acquisition, L.P. ("Head"), as well as TRCLP, Simon Property Group, Inc., Westfield America, Inc., and various of their affiliates, including Head's general partners (collectively, the "Urban Defendants"), in Circuit Court in Cook County, Illinois. Old GGP, GGPLP and other affiliates were later included as Urban Defendants. The lawsuit alleges, among other things, that the Urban Defendants breached the Urban partnership agreement, unjustly enriched themselves through misappropriation of partnership opportunities, failed to grow the partnership, breached their fiduciary duties, and tortiously interfered with several contractual relationships. The plaintiffs seek relief in the form of unspecified monetary damages, equitable relief and injunctive relief, the last of which would require the Urban Defendants, including Old GGP and its affiliates, to engage in certain future transactions through the Urban Partnership. The case is currently in discovery. John Schreiber, one of our directors, serves on the board of directors of, and is an investor in, an entity that is a principal investor in the Urban Plaintiffs, and is himself an investor in the Urban Plaintiffs and, therefore, has a financial interest in the outcome of the litigation that is adverse to us. While we do not believe that this litigation will have a material adverse effect on us, we are disclosing its existence due to Mr. Schreiber's interest in the case.
On April 16, 2009, Old GGP's common stock was suspended from trading on the New York Stock Exchange (the "Exchange"). On April 17, 2009, Old GGP's common stock began trading on the Pink Sheets under the symbol GGWPQ. Old GGP's common stock was delisted from the Exchange on May 21, 2009. On February 24, 2010, Old GGP's common stock was relisted on the Exchange. On November 5, 2010, GGP common stock and HHC common stock began trading on a "when issued basis" and such stock began regular trading on November 10, 2010 following the effectiveness of the Plan and the issuance of such stock. As of February 18, 2011, our common stock was held by 3,334 stockholders of record.
The following table summarizes the quarterly high and low bid quotations prices per share of our common stock as reported on the Pink Sheets between April 17, 2009 and February 24, 2010 and by the high and low sales prices on the Exchange for all other periods. The Pink Sheet quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
The following table summarizes quarterly distributions per share of our common stock.
trading prices of the Company's Common Stock on January 19, 20 and 21, 2011 ($14.4725 per share), approximately 22.3 million shares of Common Stock were issued and approximately $35.8 million in cash (excluding cash for fractional shares) was paid to Common Stockholders on January 27, 2011. This dividend was a 2010 dividend and was intended to allow the Company to satisfy its 2010 REIT distribution requirements (Note 7). The Company intends to pay dividends on its common stock in the future to maintain its REIT status, with the amounts paid in common stock as opposed to cash yet to be determined.
The Old GGP Board of Directors suspended its dividend in October 2008 and, accordingly, there were no dividends declared or paid from the fourth quarter of 2008 through the third quarter of 2009. There were no repurchases of Old GGP common stock during 2010 or 2009.
Recent Sales of Unregistered Securities and Repurchase of Shares
In order to fund a portion of the Plan, Old GGP entered into the Investment Agreements with the Plan Sponsors. The Investment Agreements committed the Plan Sponsors to fund an aggregate of $6.55 billion, including $6.30 billion of new equity capital at a value of $10.00 per share of New GGP. The Plan Sponsors entered into agreements with Blackstone whereby Blackstone subscribed for approximately 7.6% of the New GGP common stock to be issued to each of the Plan Sponsors on the Effective Date (for the same price to be paid by such Plan Sponsors) and, in connection therewith, Blackstone and its permitted assigns (collectively, the "Blackstone Investors") were entitled to receive an allocation of each Plan Sponsor's Permanent Warrants as described below (the "Blackstone Designation"). Old GGP also entered into an investment agreement with Texas Teachers, pursuant to which Texas Teachers committed to fund $500.00 million for new equity capital at a value of $10.25 per share.
In addition, under the Investment Agreements, in lieu of the receipt of any fees that would be customary in similar transactions, the Investment Agreements provided for the issuance of interim warrants to Brookfield Investor and Fairholme to purchase approximately 103 million shares of Old GGP at $15.00 per share (the "Interim Warrants"), which occurred on May 10, 2010 following the Bankruptcy Court's approval of the Investment Agreements. Upon consummation of the Plan contemplated by the Investment Agreements, the Interim Warrants were cancelled and the Permanent Warrants described below were issued to each of the Plan Sponsors and Blackstone.
Pursuant to the Investment Agreements, New GGP issued to (a) Brookfield Investor warrants to purchase up to 57.5 million shares of New GGP common stock with an initial exercise price of $10.75 per share, (b) Fairholme warrants to purchase up to 41.07 million shares of New GGP common stock with an initial exercise price of $10.50 per share, (c) Pershing Square warrants to purchase up to 16.43 million shares of New GGP common stock with an initial exercise price of $10.50 per share and (d) Blackstone warrants to purchase up to 5.0 million shares of New GGP common stock with an initial exercise price of $10.50 per share, with respect to one-half of the warrants and $10.75 per share with respect to the remaining one-half of the warrants collectively, the Permanent Warrants. The above exercise prices are subject to adjustment as provided in the related warrant agreements. In such regard, on the record date of the 2010 dividend (December 30, 2010), the number of outstanding Permanent Warrants was increased to 123,144,000 and the exercise prices were modified to $10.23 and $10.48, respectively. Each Permanent Warrant has a term of seven years from the closing date of the
investments. The Permanent Warrants held by each of Fairholme and Pershing Square may only be exercised upon 90 days notice. The Permanent Warrants held by each of Brookfield Investor and Blackstone are immediately exercisable.
On the Effective Date, Old GGP emerged from bankruptcy and the Plan Sponsors, as well as Blackstone and Texas Teachers, were issued shares of common stock and the Permanent Warrants in accordance with the Investment Agreements. Further, pursuant to New GGP's employment agreement with Mr. Sandeep Mathrani, New GGP granted to Mr. Mathrani, among other things, 1,500,000 shares of restricted stock on the Effective Date vesting over three years and granted as of the date of the employment agreement options to acquire 2,000,000 shares of New GGP common stock at an exercise price of $10.25 per share, which vest in equal installments on each of the first four anniversary dates of such grant. An additional 1,553,042 restricted shares were granted to various employees' on November 10, 2010, at a vesting price of $14.21 per share with vesting periods of one to four years. All of the foregoing stock and warrants were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act.
On October 11, 2010, New GGP gave a notice to the investors whereby New GGP preserved the right to repurchase within 45 days after the Effective Date up to 155 million shares (representing $1.55 billion of the shares issued to Fairholme and Pershing Square on the Effective Date) at $10.00 per share and up to approximately 24.4 million shares (representing $250.0 million of the shares issued to Texas Teachers on the Effective Date) at $10.25 per share with the proceeds of the Public Offering (as defined below).
On November 19, 2010, GGP announced the pricing of its offering of 135 million shares of GGP common stock at $14.75 per share (the "Public Offering"). In connection with the Public Offering, GGP also granted to the underwriters a 30 day option to purchase up to an additional 20.25 million shares at $14.75 per share. GGP closed the Public Offering of 135 million shares of GGP common stock on November 19, 2010. The underwriters exercised their option to purchase 19,886,000 additional shares of common stock on November 19, 2010, which GGP closed on November 23, 2010. GGP used the net proceeds of the Public Offering, including the exercise of the underwriters' option to purchase additional shares, to repurchase approximately $1.8 billion of common stock issued to Fairholme, Pershing Square and Texas Teachers on the Effective Date.
The following table provides the information with respect to the stock repurchases made by GGP pursuant to the clawback elections, as described above, for the year ended December 31, 2010:
Issuer Purchases of Equity Securities
See Note 9 for information regarding shares of our common stock that may be issued under the employment agreements of our CEO, under our equity compensation plans as of December 31, 2010, Note 2 for information regarding redemptions of the common units of GGP Limited Partnership held by limited partners (the "Common Units") for common stock and Note 13 for information regarding the previous issuance of common stock related to the Contingent Stock Agreement.
The following table sets forth selected financial data which is derived from, and should be read in conjunction with, the Consolidated Financial Statements and the related Notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this Annual Report. As the Investment Agreements and consummation of the Plan on November 9, 2010 (Note 1) triggered the application of acquisition accounting on the Effective Date, the results presented in the following table for the year ended December 31, 2010 have been presented separately for the Predecessor and Successor companies. In addition, the distribution of the HHC Businesses on the Effective Date results in such businesses being classified as discontinued operations in the Predecessor financial information and being excluded in the Successor financial information.
Real Estate Property Net Operating Income (NOI")
The Company believes that NOI is a useful supplemental measure of the Company's operating performance. The Company defines NOI as operating revenues (rental income, land sales, tenant recoveries and other income) less property and related expenses (real estate taxes, land sales operating costs, repairs and maintenance, marketing and other property expenses) and excludes the operations of properties held for disposition. As with FFO described below, NOI has been reflected on a consolidated and unconsolidated basis (at the Company's ownership share). Other real estate companies may use different methodologies for calculating NOI, and accordingly, the Company's NOI may not be comparable to other real estate companies.
Because NOI excludes general and administrative expenses, interest expense, retail investment property impairment or other non-recoverable development costs, depreciation and amortization, gains and losses from property dispositions, allocations to non-controlling interests, reorganization items, strategic initiatives, provision for income taxes, discontinued operations and extraordinary items, the Company believes that it provides a performance measure that, when compared year over year, reflects the revenues and expenses directly associated with owning and operating commercial real estate properties and the impact on operations from trends in occupancy rates, rental rates, land values (with respect to the Master Planned Communities) and operating costs. This measure thereby provides an operating perspective not immediately apparent from GAAP operating or net income attributable to common stockholders. The Company uses NOI to evaluate its operating performance on a property-by-property basis because NOI allows the Company to evaluate the impact that factors such as lease structure, lease rates and tenant base, which vary by property, have on the Company's operating results, gross margins and investment returns.
In addition, management believes that NOI provides useful information to the investment community about the Company's operating performance. However, due to the exclusions noted above, NOI should only be used as an alternative measure of the Company's financial performance and not as an alternative to GAAP operating income (loss) or net income (loss) available to common stockholders. For reference, and as an aid in understanding management's computation of NOI, a
reconciliation of NOI to consolidated operating income as computed in accordance with GAAP has been presented below.
Funds From Operations
Consistent with real estate industry and investment community practices, we use FFO as a supplemental measure of our operating performance. The National Association of Real Estate Investment Trusts ("NAREIT") defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains or losses from cumulative effects of accounting changes, extraordinary items and sales of properties, plus real estate related depreciation and amortization and after adjustments for the preceding items in our unconsolidated partnerships and joint ventures.
We consider FFO a useful supplemental measure and a complement to GAAP measures because it facilitates an understanding of the operating performance of our properties. FFO does not include real estate depreciation and amortization required by GAAP since these amounts are computed to allocate the cost of a property over its useful life. Since values for well-maintained real estate assets have historically increased or decreased based upon prevailing market conditions, we believe that FFO provides investors with a clearer view of our operating performance, particularly with respect to our rental properties. FFO is not a measurement of our financial performance under GAAP and should not be considered as an alternative to revenues, operating income (loss), net income (loss) available to common stockholders or any other performance measures derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of our liquidity.
In order to provide a better understanding of the relationship between FFO and net income available to common stockholders, a reconciliation of FFO to net income (loss) available to common stockholders has been provided.
All references to numbered Notes are to specific footnotes to our Consolidated Financial Statements included in this Annual Report and which descriptions are incorporated into the applicable response by reference. The following discussion should be read in conjunction with such Consolidated Financial Statements and related Notes. Capitalized terms used, but not defined, in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") have the same meanings as in such Notes.
As of December 31, 2010, we are the owner, either entirely or with joint venture partners of 180 regional shopping malls in 43 states (including our Special Consideration Properties). During 2010, we operated in two reportable business segments: Retail and Other and Master Planned Communities.
The Company emerged from Chapter 11 on November 9, 2010, which we refer to as the Effective Date. The Chapter 11 Cases created the protections necessary for the Debtors to develop and execute plans of reorganization to restructure the Debtors and extend mortgage maturities, reduce corporate debt and overall leverage and establish a sustainable long-term capital structure. Our current business plan contemplates the continued operation of our retail shopping centers, divestiture of non-core assets and businesses and certain non-performing retail assets, and select development projects. The plans of reorganization for the Debtors provided for payment in full of undisputed claims of creditors.
The structure of the Plan Sponsors' investments triggered the application of the acquisition method of accounting, as the Plan and the consummation of the Investment Agreements and the Texas Teachers investment agreement constituted a "transaction or event in which an acquirer obtains control of one or more "businesses" or a "business combination" requiring such application. New GGP, Inc. is the acquirer that obtains control as it obtains all of the common stock of Old GGP (a business for purposes of applying the acquisition method of accounting) in exchange for issuing its stock to the Old GGP common stockholders on a one-for-one basis (excluding fractional shares). The acquisition method of accounting was applied at the Effective Date and, therefore, the Successor's balance sheet at December 31, 2010 and income statement, statement of cash flows and equity for the period November 10, 2010 through December 31, 2010 reflects the revaluation of Old GGP's assets and liabilities to Fair Value as of the Effective Date (Note 3). Notwithstanding that the results in 2010 for the Successor and Predecessor are based on different bases of accounting, certain disclosures of 2010 items generally not impacted by acquisition accounting adjustments have been aggregated for comparison purposes.
During the pendency of the Chapter 11 cases, we identified 13 properties which we refer to as Special Consideration Properties. Pursuant to the terms of the agreements with the lenders for these properties, the Debtors had until two days following the Effective Date to determine whether the collateral property for these loans should be deeded to the respective lender in full satisfaction of the related debt or the property should be retained with further modified loan terms. All cash produced by the properties are under the control of respective lenders. As described in Note 1, we deeded two of these properties (Eagle Ridge Mall and Oviedo Marketplace) to the applicable lenders on November 1, 2010 and three additional properties (Bay City Mall, Lakeview Square and Moreno Valley Mall) to the applicable lenders on February 1, 2011.
We have notified the lenders for the remaining eight Special Consideration Properties (representing approximately $494.8 million of mortgage debt at December 31, 2010) that we intend to transfer ownership of such properties to them in full satisfaction of the applicable loans. In such regard, we have entered into joint marketing agreements with the applicable lenders for six of the properties and activities as to the disposition of the remaining properties are in process.
With respect to our Unconsolidated Real Estate Affiliates, we have received notice from the lender for our Riverchase Galleria property that we are in default with respect to the loan collateralized by the property. Our proportionate share of this loan is approximately $152.5 million. There can be no assurance that a satisfactory loan modification can be reached in order for the venture to retain ownership of the property. In addition, we have also identified two properties (Silver City and Montclair) with approximately $393.5 million of non-recourse secured mortgage debt, of which our share is $196.7 million, as underperforming assets. At these properties, all cash produced by such properties are under the control of the applicable lender. In the event we are unable to satisfactorily modify the terms of each of the loans associated with these properties, the collateral property for any such loan may be deeded to the respective lender in full satisfaction of the related debt. In such regard, on February 4, 2011, we received notice of the lender's intent to exercise its debt-in-lieu option with respect to the Montclair property which is anticipated to close on March 11, 2011. No significant net gain or loss is expected to result to our Unconsolidated Real Estate Affiliate when this transfer is completed. On October 6, 2010, Silver City entered into a Forbearance Agreement with the lender which provides for the joint marketing of the property for sale in lieu of foreclosure. Finally, on May 3, 2010, the property owned by our Highland Unconsolidated Real Estate Affiliate was transferred to the lender, yielding a nominal net gain on our investment in such Unconsolidated Real Estate Affiliate (Note 3).
Our emergence from bankruptcy was funded with the proceeds from the following transactions:
In addition, on October 11, 2010, we gave notice to Pershing, Fairholme and Texas Teachers, that we reserved the right to repurchase within 45 days after the Effective Date up to $1.80 billion of the New GGP, Inc. common stock issued to Fairholme, Pershing Square and Texas Teachers on the Effective Date and to prepay the $350.0 million Pershing Square bridge note described below. The investment agreements with Fairholme, Pershing Square and Texas Teachers permitted us to use the proceeds of a sale of common stock for not less than $10.50 per share or more (net of all underwriting and other discounts, fees and related consideration) to repurchase the amount of common stock to be sold to Fairholme, Pershing Square and Texas Teachers, pro rata as between Fairholme and Pershing Square only, by up to 50% (or approximately $2.15 billion in the aggregate) within 45 days after the Effective Date. Pursuant to the Investment Agreement with Pershing Square, 35 million shares (representing $350 million of Pershing Square's equity capital commitment) were designated as "put shares". The payment for these 35 million shares was fulfilled on the Effective Date by the payment of cash to New GGP, Inc. at closing in exchange for unsecured notes to Pershing Square which were scheduled to be payable six months from the Effective Date (the "Pershing Square Bridge Notes). The Pershing Square Bridge Notes were pre-payable at any time without premium or penalty. In addition, we had the right (the "put right") to sell up to 35 million shares of New GGP, Inc. common stock, subject to reduction as provided in the Investment Agreement, to Pershing Square at $10.00 per share (adjusted for dividends) within six months following the Effective Date to fund the repayment of the Pershing Square Bridge Notes to the extent that they had not already been repaid. In connection with our reserving shares for repurchase after the Effective Date, we paid to Fairholme and/or Pershing Square, as applicable, in cash on the Effective Date, an amount equal to approximately $38.75 million. No fee was required to be paid to Texas Teachers.
On November 9, 2010 (and November 23, 2010 with respect to the underwriters' option to purchase additional shares) we sold approximately 154.9 million shares of our common stock to the public at a price of $14.75 per share and repurchased approximately 179.3 million shares from Fairholme, Pershing Square and Texas Teachers as permitted and as described above and repaid the Pershing Square Bridge Notes in full, including accrued interest.
The Plan and the equity investments by the Plan Sponsors, Texas Teachers and Blackstone triggered the application of the acquisition method of accounting (Note 3). Operations after the Effective Date are presented reflective of adjustments to the carrying values of our assets and liabilities to Fair Value. Certain elements of our operations were significantly changed by these adjustments, such as depreciation being calculated on revalued assets and amortization of above and below market lease and other intangibles being reflected in revenues or operating expenses as applicable. However, for purposes of year-to-year comparisons in the accompanying discussion of the results of operations, pre and post Effective Date operations have been aggregated. See Note 16 for a presentation of the pro forma impact of the Plan and related transactions.
In addition, the Plan resulted in the distribution of certain of our assets, including all of the assets in our former Master Planned Community Segment, to a newly formed public entity, HHC, which as of the Effective Date was owned by Old GGP stockholders and the Plan Sponsors. Accordingly, land and condominium sales and sales operations are only presented through the Effective Date and have been reflected for all periods presented as discontinued operations. Land and condominium sales, as well as land and condominium sales operations, increased for 2010 primarily resulting in the recognition of $64.7 million of revenue and $56.8 million of associated costs of sales related to previous condominium sales at Nouvelle at Natick during the period. Unit sales were deferred until the three months ended June 30, 2010 since Old GGP had not surpassed the threshold of sold units required for recognition of revenue on the project as a whole. In addition, The Woodlands community experienced greater sales volumes of commercial land sales for 2010 compared to 2009.
OverviewRetail and Other Segment
Our primary business is owning, managing, leasing and developing rental property, primarily shopping centers. The substantial majority of our properties are located in the United States, but we also have certain retail rental property operations and property management activities (through unconsolidated joint ventures) in Brazil and, through October 2010, Turkey.
The real estate industry continues to recover from the recent recession and tough capital market and retail environment. There have been some positive signs, in the industry, despite continued unemployment and uncertainty as to when the economy will fully recover. Although a number of regional and national retailers have announced store closings or filed for bankruptcy in 2009 and 2010, such numbers have not been dramatically in excess of previous years and have not had a material impact on our overall operations. For example, Borders Bookstores filed bankruptcy in February 2011. We do not currently expect this bankruptcy to materially impact our future operations.
The majority of the income from our properties is derived from rents received through long-term leases with retail tenants. These long-term leases generally require the tenants to pay base rent which is a fixed amount specified in the lease. The base rent is often subject to scheduled increases during the term of the lease. Another component of income is overage rent ("Overage Rent"). Overage Rent is paid by a tenant when its sales exceed an agreed upon minimum amount. Overage Rent is calculated by multiplying the tenant's sales in excess of the minimum amount by a percentage defined in the lease, the majority of which is typically earned in the fourth quarter. Our 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 revenue earned attributable to real estate tax and operating expense recoveries are recorded as "Tenant recoveries."
We provide on-site management and other services to substantially all of our properties, including properties which we own through joint venture arrangements and which are unconsolidated for GAAP purposes. Our management operating philosophies and strategies are the same whether the properties are consolidated or unconsolidated. As a result, we believe that financial information and operating statistics with respect to all properties, both consolidated and unconsolidated, provide important insights into our operating results.
We seek to increase long-term NOI growth through proactive management and leasing of our retail shopping centers. Our management strategy includes strategic reinvestment in our properties, controlled operating expenditures and enhancement of the customer experience. Our leasing strategy is to identify and provide the right stores and the appropriate merchandise for each of our retail operating centers.
We believe that the most significant operating factor affecting incremental cash flow and NOI is increased rents earned from tenants at our properties. These rental revenue increases are primarily achieved by:
The following table summarizes selected operating statistics. Unless noted, all information is as of December 31, 2010.
OverviewMaster Planned Communities Segment
Old GGP's Master Planned Communities business was transferred to HHC on the Effective Date. Accordingly, all operations of the Master Planned Communities have been reported as discontinued operations. Prior to such distribution, this business consisted of the development and sale of residential and commercial land, primarily in large-scale projects in and around Columbia, Maryland; Houston, Texas; and Summerlin, Nevada. Residential lots were designated for detached and attached single- and multi-family homes, ranging from entry-level to luxury homes. Commercial sales included parcels designated for retail, office, services and other for-profit activities, as well as those parcels designated for use by government, schools and other not-for-profit entities.
Revenues were derived primarily from the sale of finished lots, including infrastructure and amenities, and undeveloped property to both residential and commercial developers. Revenues and net operating income were affected by such factors including the availability to purchasers of construction and permanent mortgage financing at acceptable interest rates, regional economic conditions in the areas surrounding the projects, levels of homebuilder inventory, other factors affecting the homebuilder business and sales of residential properties generally, and our decisions to sell, develop or retain land. Old GGP's primary strategy in this segment was to develop and sell land in a manner that increased the value of the remaining land to be developed and sold and to provide current cash flows. The Master Planned Communities projects were owned by taxable REIT subsidiaries and, as a result, were subject to income taxes. Additionally, revenues from the sale of land at Summerlin were subject to the Contingent Stock Agreement as more fully described in Note 13.
The pace of land sales for standard residential lots had declined in recent periods in correlation to the decline in the housing market.
Up to the Effective Date, there had been 156 unit sales at the 215 unit Nouvelle at Natick residential condominium project. The Natick at Nouvelle property was transferred on the Effective Date to HHC pursuant to the Plan. The cumulative $64.7 million of unit sales proceeds received up to the Effective Date was recognized, along with the related costs of units sold, within the master planned community segment on a unit-by-unit basis starting in June 2010 when the cumulative unit sales threshold for such recognition was achieved.
Based on the results of Old GGP's evaluations for impairment (Note 2), Old GGP recognized aggregate impairment charges related to the Master Planned Communities and the Nouvelle at Natick project of $108.7 million in 2009 and $40.3 million in 2008. There were no such provisions deemed necessary in 2010. All impairments related to Master Planned Communities and the Nouvelle at Natick project have been reclassified to discontinued operations for all periods presented. In addition, as these projects were distributed to HHC on the Effective Date pursuant to the Plan, the carrying values of these projects, were included in the calculation of the aggregate $1.11 billion disposal group loss recognized on the HHC assets on the Effective Date (Note 4).
Our revenues are primarily received from tenants in the form of fixed minimum rents, Overage Rent and recoveries of operating expenses. We have presented the following discussion of our results of operations on a segment basis under the proportionate share method. Under the proportionate share method, our share of segment revenues and expenses of the Unconsolidated Properties are combined with the revenues and expenses of the Consolidated Properties. Other revenues are reduced by our consolidated non-controlling interest venture's share of real estate net operating income. In addition, to provide a more meaningful comparison between annual periods, we have aggregated the Predecessor operations results for 2010 with the Successor 2010 results. See Note 15 for additional information including reconciliations of our segment basis results to GAAP basis results.
Year Ended December 31, 2010 and 2009
Retail and Other Segment
The following table compares major revenue and expense items: