10-Q 1 q2-06301310xq.htm 10-Q Q2-06.30.13 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2013 
or
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the Transition Period from                 to                 
 
COMMISSION FILE NUMBER 001-35287
 
ROUSE PROPERTIES, INC.
(Exact name of registrant as specified in its charter) 
Delaware
 
90-0750824
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification Number)
1114 Avenue of the Americas, Suite 2800, New York, NY
 
10036
(Address of principal executive offices)
 
(Zip Code)
(212) 608-5108
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes  o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
 
Large accelerated filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  x No
 
The number of shares of Common Stock, $0.01 par value, outstanding on August 1, 2013 was 49,637,556.


Rouse Properties Inc.
Index
 
 
 
PAGE
NUMBER
Part I
FINANCIAL INFORMATION
 
 
Item I:
Consolidated and Combined Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
Item 2:
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
Liquidity and Capital Resources
 
 
Item 3:
Quantitative and Qualitative Disclosures about Market Risk
 
Item 4:
Controls and Procedures
 
 
 
 
Part II
OTHER INFORMATION
 
 
Item 1:
Legal Proceedings
 
Item 1A:
Risk Factors
 
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3:
Defaults Upon Senior Securities
 
Item 4:
Mine Safety Disclosures
 
Item 5:
Other Information
 
Item 6:
Exhibits
 
SIGNATURE
 
EXHIBIT INDEX



2




ROUSE PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 


June 30,
2013

December 31,
2012
 

(In thousands)
Assets:

 


 

Investment in real estate:

 


 

Land

$
305,641


$
339,988

Buildings and equipment

1,283,552


1,312,767

Less accumulated depreciation

(137,002
)

(116,336
)
Net investment in real estate

1,452,191


1,536,419

Cash and cash equivalents

17,663


8,092

Restricted cash
 
50,248

 
44,559

Demand deposit from affiliate
 
45,039

 
150,163

Accounts receivable, net

27,312


25,976

Deferred expenses, net

39,054


40,406

Prepaid expenses and other assets, net

78,764


99,458

Total assets

$
1,710,271


$
1,905,073








Liabilities:

 


 

Mortgages, notes and loans payable

$
1,133,695


$
1,283,491

Accounts payable and accrued expenses, net

80,604


88,686

Total liabilities

1,214,299


1,372,177








Commitments and contingencies

—


—

 
 
 
 
 
Equity:

 


 

Preferred stock: $0.01 par value; 50,000,000 shares authorized, 0 issued and outstanding at June 30, 2013 and December 31, 2012
 
—

 
—

Common stock: $0.01 par value; 500,000,000 shares authorized, 49,641,716 issued and 49,637,556 outstanding at June 30, 2013 and 49,246,087 issued and 49,235,528 outstanding at December 31, 2012

497


493

Class B common stock: $0.01 par value; 1,000,000 shares authorized, 0 and 359,056 issued and 0 and 359,056 outstanding at June 30, 2013 and December 31, 2012

—


4

Additional paid-in capital

577,115


588,668

Accumulated deficit

(81,751
)

(56,380
)
Total stockholders' equity

495,861


532,785

Non-controlling interest

111


111

Total equity

495,972


532,896

Total liabilities and equity

$
1,710,271


$
1,905,073


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


3

ROUSE PROPERTIES, INC.

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED) 

For the three months ended
 
For the six months ended
 
June 30, 2013
 
June 30, 2012
 
June 30, 2013
 
June 30, 2012
 
(In thousands, except per share amounts)
Revenues:
 

 
 

 
 
 
 
Minimum rents
$
39,834

 
$
36,505

 
$
78,563

 
$
72,271

Tenant recoveries
16,155

 
16,000

 
32,335

 
31,573

Overage rents
841

 
649

 
2,291

 
2,013

Other
1,551

 
1,268

 
2,685

 
2,332

Total revenues
58,381

 
54,422

 
115,874

 
108,189

Expenses:
 

 
 

 
 
 
 
Real estate taxes
6,069

 
5,424

 
11,784

 
11,257

Property maintenance costs
2,925

 
3,161

 
6,203

 
6,428

Marketing
660

 
625

 
1,312

 
1,051

Other property operating costs
14,210

 
14,075

 
27,817

 
27,615

Provision for doubtful accounts
350

 
405

 
499

 
646

General and administrative
5,248

 
5,240

 
10,099

 
10,384

Depreciation and amortization
15,563

 
16,032

 
31,670

 
33,163

Other
969

 
1,983

 
1,467

 
6,442

Total expenses
45,994

 
46,945

 
90,851

 
96,986

Operating income
12,387

 
7,477

 
25,023

 
11,203




 


 
 
 
 
Interest income
125

 
8

 
326

 
9

Interest expense
(21,659
)
 
(22,008
)
 
(41,303
)
 
(50,320
)
Loss before income taxes and discontinued operations
(9,147
)
 
(14,523
)
 
(15,954
)
 
(39,108
)
Provision for income taxes
(219
)
 
(173
)
 
(254
)
 
(239
)
Loss from continuing operations
(9,366
)
 
(14,696
)
 
(16,208
)
 
(39,347
)
Discontinued operations:
 
 
 
 
 
 
 
Loss from discontinued operations
(513
)
 
(1,244
)
 
(23,158
)
 
(2,670
)
Gain on extinguishment of debt
13,995

 
—

 
13,995

 
—

Discontinued operations, net
13,482

 
(1,244
)
 
(9,163
)
 
(2,670
)
Net income (loss)
$
4,116

 
$
(15,940
)
 
$
(25,371
)
 
$
(42,017
)



 


 
 
 
 
Loss from continuing operations per share- Basic and Diluted
$
(0.19
)
 
$
(0.30
)
 
$
(0.33
)
 
$
(0.91
)
 
 
 
 
 
 
 
 
Net income (loss) per share - Basic and Diluted
$
0.08

 
$
(0.32
)
 
$
(0.51
)
 
$
(0.98
)
 
 
 
 
 
 
 
 
Dividends declared per share
$
0.13

 
$
0.07

 
$
0.26

 
$
0.07

 
 
 
 
 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
4,116

 
$
(15,940
)
 
$
(25,371
)
 
$
(42,017
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Net unrealized gain (loss) on financial instrument
—

 
65

 
—

 
(65
)
Comprehensive income (loss)
$
4,116

 
$
(15,875
)
 
$
(25,371
)
 
$
(42,082
)

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

4

ROUSE PROPERTIES, INC.

CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY
(UNAUDITED)
 
Common
Stock (shares)
 
Class B
Common
Stock (shares)
 
Common
Stock
 
Class B
Common
Stock
 
Additional
Paid-In
Capital
 
GGP Equity
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Loss
 
Non-controlling Interest
 
Total
Equity
 
                                        (In thousands, except share amounts)
Balance at December 31, 2011
—

 
—

 
$
—

 
$
—

 
$
—

 
$
426,328

 
$
—

 
$
—

 
$
—

 
$
426,328

Net loss
—

 
—

 
—

 
—

 
—

 
(12,279
)
 
(29,738
)
 
—

 
—

 
(42,017
)
Comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(65
)
 
—

 
(65
)
Distributions to GGP prior to spin-off
—

 
—

 
—

 
—

 
—

 
(8,394
)
 
—

 
—

 
—

 
(8,394
)
Contributions from noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
111

 
111

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

 
359,056

 
356

 
4

 
405,295

 
(405,655
)
 
—

 
—

 
—

 
—

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

 
—

 
133

 
—

 
199,867

 
—

 
—

 
—

 
—

 
200,000

Offering costs
—

 
—

 
—

 
—

 
(8,392
)
 
—

 
—

 
—

 
—

 
(8,392
)
Dividends
—

 
—

 
—

 
—

 
(3,471
)
 
—

 
—

 
—

 
—

 
(3,471
)
Issuance and amortization of stock compensation
344,751

 
—

 
4

 
—

 
1,015

 
—

 
—

 
—

 
—

 
1,019

 Balance at June 30, 2012
49,225,133

 
359,056

 
$
493

 
$
4

 
$
594,314

 
$
—

 
$
(29,738
)
 
$
(65
)
 
$
111

 
$
565,119

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Balance at December 31, 2012
49,235,528

 
359,056

 
$
493

 
$
4

 
$
588,668

 
$
—

 
$
(56,380
)
 
$
—

 
$
111

 
$
532,896

Net loss
—

 
—

 
—

 
—

 
—

 
—

 
(25,371
)
 
—

 
—

 
(25,371
)
Conversion of Class B share to common shares
359,056

 
(359,056
)
 
4

 
(4
)
 
—

 
—

 
—

 
—

 
—

 
—

Offering costs
—

 
—

 
—

 
—

 
(324
)
 
—

 
—

 
—

 
—

 
(324
)
Dividends
—

 
—

 
—

 
—

 
(12,913
)
 
—

 
—

 
—

 
—

 
(12,913
)
Issuance and amortization of stock compensation
36,573

 
—

 
—

 
—

 
1,497

 
—

 
—

 
—

 
—

 
1,497

Forfeited restricted shares
(4,160
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Sale of treasury stock
10,559

 
—

 
—

 
—

 
187

 
—

 
—

 
—

 
—

 
187

 Balance at June 30, 2013
49,637,556

 
—

 
$
497

 
$
—

 
$
577,115

 
$
—

 
$
(81,751
)
 
$
—

 
$
111

 
$
495,972


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

5

ROUSE PROPERTIES, INC.

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Six Months Ended June 30,
 
2013
 
2012
 
(In thousands)
Cash Flows from Operating Activities:
 

 
 

Net loss
$
(25,371
)
 
$
(42,017
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Provision for doubtful accounts
500

 
714

Depreciation
29,733

 
31,747

Amortization
2,700

 
3,300

Amortization/write-off of deferred finance costs
5,081

 
5,468

Amortization/write-off of debt market rate adjustments
4,679

 
14,342

Amortization of above/below market leases and tenant inducements
9,151

 
13,009

Straight-line rent amortization
(1,866
)
 
(3,156
)
Provision for impairment
21,661

 
—

Gain on extinguishment of debt
(14,324
)
 
—

Stock based compensation
1,497

 
1,019

Net changes:
 

 
 

Accounts receivable
(730
)
 
(211
)
Prepaid expenses and other assets
2,322

 
(60
)
Deferred expenses
(5,280
)
 
(3,390
)
Restricted cash
(323
)
 
(2,256
)
Accounts payable and accrued expenses
(2,441
)
 
5,692

Net cash provided by operating activities
26,989

 
24,201

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Acquisition/development of real estate and property additions/improvements
(25,800
)
 
(20,113
)
Demand deposit from affiliate
105,000

 
(29,989
)
Deposit for acquisition
(1,000
)
 
—

Restricted cash
(9,279
)
 
(18,749
)
Net cash provided by (used in) investing activities
68,921

 
(68,851
)
 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Proceeds received from rights offering
—

 
200,000

Payments for offering costs
(324
)
 
(8,062
)
Sale of treasury stock
187

 
—

Contributions from noncontrolling interests
—

 
111

Change in GGP investment, net
—

 
(8,394
)
Proceeds from refinance/issuance of mortgages, notes and loans payable
204,500

 
560,750

Borrowing under revolving line of credit
—

 
10,000

Principal payments on mortgages, notes and loans payable
(277,947
)
 
(510,795
)
Repayment under revolving credit line
—

 
(10,000
)
Dividends paid
(9,930
)
 
—

Deferred financing costs
(2,825
)
 
(25,865
)
Net cash provided by (used in) financing activities
(86,339
)
 
207,745

 
 
 
 
Net change in cash and cash equivalents
9,571

 
163,095

Cash and cash equivalents at beginning of period
8,092

 
204

Cash and cash equivalents at end of period
$
17,663

 
$
163,299

 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 

 
 

Interest paid, net of capitalized interest
$
31,523

 
$
34,748

 
 
 
 
Non-Cash Transactions:
 

 
 

Change in accrued capital expenditures included in accounts payable and accrued expenses
$
(126
)
 
$
96

Dividends declared, not yet paid
6,453

 
3,471

Assumption of mortgage related to the acquisition of a property
—

 
62,000

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

6

ROUSE PROPERTIES, INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 
NOTE 1                            ORGANIZATION

Readers of this Quarterly Report should refer to the Company’s (as defined below) audited Consolidated and Combined Financial Statements for the year ended December 31, 2012 which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (the “Annual Report”), as certain footnote disclosures which would substantially duplicate those contained in the Annual Report have been omitted from this Quarterly Report.  Capitalized terms used, but not defined in this Quarterly Report, have the same meanings as in the Annual Report.

General

Rouse Properties, Inc. is a Delaware corporation that was created to hold certain assets and liabilities of General Growth Properties, Inc ("GGP"). Prior to January 12, 2012, Rouse Properties, Inc. and its subsidiaries ("Rouse" or the "Company") was a wholly-owned subsidiary of GGP Limited Partnership (“GGP LP”). GGP distributed the assets and liabilities of 30 of its wholly-owned properties (“RPI Businesses”) to Rouse on January 12, 2012 (the “Spin-Off Date”). Before the spin-off, the Company had not conducted any business as a separate company and had no material assets or liabilities. The operations, assets and liabilities of the business were transferred to us by GGP on the Spin-Off Date and are presented as if the transferred business was our business for all historical periods described. As such, the Company's assets and liabilities on the Spin-Off Date are reflective of GGP's respective carrying values. Unless the context otherwise requires, references to “we”, “us” and “our” refer to Rouse from January 12, 2012 through June 30, 2013 and RPI Businesses before January 12, 2012. Before the Spin-Off Date, RPI Businesses were operated as subsidiaries of GGP, which operates as a real estate investment trust (“REIT”). After the Spin-Off Date, the Company elected to continue to operate as a REIT.
 
Principles of Combination and Consolidation and Basis of Presentation
 
The accompanying consolidated and combined financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  The consolidated balance sheets as of June 30, 2013 and December 31, 2012 include the accounts of Rouse, as well as all subsidiaries of Rouse.  The accompanying consolidated and combined statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2013 and 2012 include the consolidated accounts of Rouse and for the six months ended June 30, 2012 include the consolidated accounts of Rouse and the combined accounts of RPI Businesses. The accompanying financial statements for the periods prior to the Spin-Off Date are prepared on a carve out basis from the consolidated financial statements of GGP using the historical results of operations and bases of the assets and liabilities of the transferred businesses and including allocations from GGP. Accordingly, the results presented for the six months ended June 30, 2012 reflect the aggregate operations and changes in cash flows and equity on a carved-out basis for the period from January 1, 2012 through January 12, 2012 and on a consolidated basis from January 13, 2012 through June 30, 2012.  All intercompany transactions have been eliminated in consolidation and combination as of and for the three and six months ended June 30, 2013 and 2012 except end-of-period intercompany balances on the Spin-Off Date between GGP and RPI Businesses which have been considered elements of RPI Businesses' equity. 
  
The Company operates in a single reportable segment referred to as its retail segment, which includes the operation, development and management of regional malls. Each of the Company's operating properties is considered a separate operating segment, as each property earns revenues and incurs expenses, individual operating results are reviewed and discrete financial information is available. All operations are within the United States, no customer or tenant comprises more than 10% of consolidated and combined revenues, and the properties have similar economic characteristics. As a result, the Company’s operating properties are aggregated into a single reportable segment.

NOTE 2                            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Properties

Acquisition accounting was applied to real estate assets within the Rouse portfolio either when GGP emerged from bankruptcy in November 2010 or upon any subsequent acquisition. After acquisition accounting is applied, the real estate assets are carried at the cost basis less accumulated depreciation. Real estate taxes and interest costs incurred during development periods are capitalized. Capitalized interest costs are based on qualified expenditures and interest rates in place during the development period. Capitalized real estate taxes and interest costs are amortized over lives which are consistent with the developed assets.


7

ROUSE PROPERTIES, INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


Pre-development costs, which generally include legal and professional fees and other directly-related third party costs, are capitalized as part of the property being developed. In the event a development is no longer deemed to be probable, the costs previously capitalized are expensed.

Tenant improvements, either paid directly or in the form of construction allowances paid to tenants, are capitalized and depreciated over the shorter of the useful life or applicable lease term. Maintenance and repair costs are expensed when incurred. Expenditures for significant betterments and improvements are capitalized. In leasing tenant space, the Company may provide funding to the lessee through a tenant allowance. In accounting for a tenant allowance, the Company determines whether the allowance represents funding for the construction of leasehold improvements and evaluates the ownership of such improvements. If the Company is considered the owner of the leasehold improvements for accounting purposes, it capitalizes the amount of the tenant allowance and depreciates it over the shorter of the useful life of the leasehold improvements or the related lease term. If the tenant allowance represents a payment for a purpose other than funding leasehold improvements, or in the event that the Company is not considered the owner of the improvements for accounting purposes, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue on a straight-line basis.

Depreciation or amortization expense is computed using the straight-line method based upon the following estimated useful lives:
 
 
Years
Buildings and improvements
40
Equipment and fixtures
5 - 10
Tenant improvements
Shorter of useful life or applicable lease term

Impairment
 
Operating properties and intangible assets
 
Accounting for the impairment or disposal of long-lived assets require that if impairment indicators exist and the undiscounted cash flows expected to be generated by an asset are less than its carrying amount, an impairment provision should be recorded to write down the carrying amount of such asset to its fair value. The Company reviews all real estate assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment indicators are assessed separately for each property and include, but are not limited to, significant decreases in real estate property net of operating income and occupancy percentages. Impairment indicators for pre-development costs, which are typically costs incurred during the beginning stages of a potential development and developments in progress, are assessed by project and include, but are not limited to, significant changes to the Company’s plans with respect to the project, significant changes in projected completion dates, revenues or cash flows, development costs, market factors and sustainability of development projects.

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

During the six months ended June 30, 2013, the Company determined there were events and circumstances which changed management's estimated holding period for the Boulevard Mall. During 2013, the servicer of the loan on the Boulevard Mall placed the loan into special servicing status and communicated to the Company that they would be unwilling to extend the term and discount the loan. As a result of this and the continued decline in operating results of the property, management concluded that it was in the best interest of the Company to convey the property to the lender. As the Company intended on conveying the property to the lender during 2013, the Company revised its intended hold period of this property to less than one year. The change in the hold period adjusted the undiscounted cash flows utilized in the impairment analysis and the Company concluded that the property was not recoverable. Subsequently, the Company recorded an impairment charge on the property of $21.7 million during the first quarter of 2013, as the aggregate carrying value was less than the fair value of the property. This impairment charge is included

8

ROUSE PROPERTIES, INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


in Loss from discontinued operations on the Company's Consolidated and Combined Statements of Operations and Comprehensive Income (Loss). No impairment charges were recorded for the three months ended June 30, 2013 or the three and six months ended June 30, 2012.

During the three and six months ended June 30, 2013, the Company conveyed its interest in the property to the lender, which resulted in a gain on extinguishment of debt of $14.0 million, which is recorded in Discontinued operations, net on the Company's Consolidated and Combined Statements of Operations and Comprehensive Income (Loss) (see Note 6).

Cash and Cash Equivalents
The Company considers all demand deposits with a maturity of three months or less, at the date of purchase, to be cash equivalents.
Restricted Cash
 
Restricted cash consists of security deposits and cash escrowed under loan agreements for debt service, real estate taxes, property insurance, tenant improvements, capital renovations and capital improvements. 

Revenue Recognition and Related Matters
 
Minimum rent revenues are recognized on a straight-line basis over the terms of the related leases. Minimum rent revenues also include amounts collected from tenants to allow the termination of their leases prior to their scheduled termination dates as well as the amortization related to above and below-market tenant leases on acquired properties. Minimum rent revenues also includes amortization of lease inducements and percentage rents in lieu of minimum rent from those leases where we receive a percentage of tenant revenues. The following is a summary of amortization of straight-line rent, lease termination income, net amortization related to above and below-market tenant leases, amortization of tenant inducements, and percentage rent in lieu of minimum rent for the three and six months ended June 30, 2013 and 2012:
 
 
 
For the three months ended June 30,
 
For the six months ended June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(In thousands)
Straight-line rent amortization
 
$
879

 
$
1,613

 
$
1,823

 
$
3,015

Lease termination income
 
218

 
70

 
253

 
217

Net amortization of above and below-market tenant leases
 
(4,114
)
 
(6,105
)
 
(8,413
)
 
(11,799
)
Amortization of lease inducement
 
(250
)
 
—

 
(500
)
 
—

Percentage rents in lieu of minimum rent
 
1,381

 
2,032

 
3,486

 
3,936


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

 
June 30, 2013
 
December 31, 2012
 
(In thousands)
Straight-line rent receivables, net
$
10,980

 
$
9,694


The Company provides an allowance for doubtful accounts against the portion of accounts receivable, including straight-line rents, which is estimated to be uncollectible. Such allowances are reviewed periodically based upon our recovery experience. The Company also evaluates the probability of collecting future rent which is recognized currently under a straight-line methodology. This analysis considers the long term nature of our leases, as a certain portion of the straight-line rent currently recognizable will not be billed to the tenant until future periods. The Company's experience relative to unbilled straight-line rent receivables is that a certain portion of the amounts recorded as straight-line rental revenue are never collected from (or billed to) tenants due to early lease terminations.

9

ROUSE PROPERTIES, INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


For that portion of the recognized deferred rent that is not deemed to be probable of collection, an allowance for doubtful accounts has been provided. Accounts receivable are shown net of an allowance for doubtful accounts of $3.0 million and $2.5 million as of June 30, 2013 and December 31, 2012, respectively.
 
Overage rent is paid by a tenant when its sales exceed an agreed-upon minimum amount. Overage rent is calculated by multiplying the sales in excess of the minimum amount by a percentage defined in the lease. Overage rent is recognized on an accrual basis once tenant sales exceed contractual tenant lease thresholds. Recoveries from tenants are established in the leases or computed based upon a formula related to real estate taxes, insurance and other shopping center operating expenses and are generally recognized as revenues in the period the related costs are incurred. The Company makes certain assumptions and judgments in estimating the reimbursements at the end of each reporting period. The Company does not expect the actual results to materially differ from the estimated reimbursement. Other revenues generally consist of amounts earned by the Company for vending, advertising, and marketing revenues earned at our malls and is recognized on an accrual basis over the related service period.

Income (Loss) Per Share
 
Basic net income (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per share reflects potential dilution of securities by adding other potential shares of common stock, including stock options and nonvested restricted stock, to the weighted-average number of shares of common stock outstanding for a period, if dilutive. For the three and six months ended June 30, 2013 and 2012, there were 2,594,165 and 1,652,486 stock options outstanding that potentially could be converted into shares of common stock, respectively, and 288,408 and 339,655 shares of nonvested restricted stock, respectively. These stock options and shares of restricted stock have been excluded from this computation, as their effect is anti-dilutive. The Company had the following weighted-average shares outstanding:
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2013
 
2012
 
2013
 
2012
Weighted average shares - basic and diluted
49,342,013
 
49,242,014
 
49,337,110
 
43,013,900


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

The Company's financial instruments are short term in nature and as such their fair values approximate their carrying amount in our consolidated and combined financial statements except for debt. As of June 30, 2013 and December 31, 2012, management’s required estimates of fair value are presented below. The Company estimated the fair value of the debt using a future discounted cash flow analysis based on the use and weighting of multiple market inputs being considered. Based on the frequency and availability of market data, the inputs used to measure the estimated fair value of debt are Level 3 inputs. The primary sensitivity in these calculations is based on the selection of appropriate discount rates. 


10

ROUSE PROPERTIES, INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


 
June 30, 2013
 
December 31, 2012
 
Carrying Amount
 
Estimated Fair
Value
 
Carrying Amount
 
Estimated Fair
Value
 
(In thousands)
Fixed-rate debt
$
879,249

 
$
881,257

 
$
995,545

 
$
1,040,964

Variable-rate debt
254,446

 
257,714

 
287,946

 
287,946

Total mortgages, notes and loans payable
$
1,133,695

 
$
1,138,971

 
$
1,283,491

 
$
1,328,910

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

 
Gross Asset
 
Accumulated
Amortization
 
Net Carrying
Amount
 
(In thousands)
June 30, 2013
 

 
 

 
 

Deferred lease costs
$
35,567

 
$
(11,355
)
 
$
24,212

Deferred financing costs
24,095

 
(9,253
)
 
14,842

Total
$
59,662

 
$
(20,608
)
 
$
39,054

 
 
 
 
 
 
December 31, 2012
 

 
 

 
 

Deferred lease costs
$
31,397

 
$
(9,162
)
 
$
22,235

Deferred financing costs
25,068

 
(6,897
)
 
18,171

Total
$
56,465

 
$
(16,059
)
 
$
40,406

 

























11

ROUSE PROPERTIES, INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


Intangible Assets and Liabilities

The following table summarizes our intangible assets and liabilities as a result of the application of acquisition accounting:

 
Gross Asset
(Liability)
 
Accumulated
(Amortization)/
Accretion
 
Net Carrying
Amount
 
(In thousands)
June 30, 2013
 

 
 

 
 

Tenant leases:
 

 
 

 
 

In-place value
$
93,069

 
$
(45,461
)
 
$
47,608

Above-market
139,380

 
(68,647
)
 
70,733

Below-market
(49,770
)
 
21,048

 
(28,722
)
Ground leases:
 

 
 

 
 

Below-market
2,173

 
(328
)
 
1,845

 
 
 
 
 
 
December 31, 2012
 

 
 

 
 

Tenant leases:
 

 
 

 
 

In-place value
$
97,887

 
$
(39,681
)
 
$
58,206

Above-market
151,936

 
(62,529
)
 
89,407

Below-market
(53,558
)
 
18,490

 
(35,068
)
Ground leases:
 

 
 

 
 

Below-market
2,173

 
(267
)
 
1,906

 
The gross asset balances of the in-place value of tenant leases are included in buildings and equipment on the Company's Consolidated Balance Sheets. Acquired in-place tenant leases are amortized over periods that approximate the related lease terms. The above-market tenant and below-market ground leases are included in prepaid expenses and other assets, and below-market tenant leases are included in accounts payable and accrued expenses as detailed in Notes 3 and 5, respectively. Above and below-market lease values are amortized to revenue over the non-cancelable terms of the respective leases (averaging approximately five years for tenant leases and approximately 35 years for ground leases).
 
Amortization of these intangible assets and liabilities decreased the Company's income by $8.1 million and $12.0 million for the three months ended June 30, 2013 and 2012, respectively. Amortization of these intangible assets and liabilities decreased the Company's income by $17.7 million and $25.6 million for the six months ended June 30, 2013 and 2012, respectively.
 
Future amortization of our intangible assets and liabilities is estimated to decrease income by an additional $15.0 million for the remainder of 2013, $18.2 million in 2014, $17.6 million in 2015, $12.6 million in 2016, $8.4 million in 2017, and $4.4 million in 2018.
Asset Retirement Obligations
The Company evaluated any potential asset retirement obligations, including those related to disposal of asbestos containing materials and environmental remediation liabilities. The Company recognizes the fair value of such obligations in the period incurred if a reasonable estimate of fair value can be determined. As of June 30, 2013 and December 31, 2012, the Company recorded a preliminary estimate of the cost of the environmental remediation liability of approximately $4.6 million and $4.5 million, respectively, which is included in accounts payable and accrued expenses on the accompanying Consolidated Balance Sheets. The ultimate cost of remediation to be incurred by the Company in the future may differ from the estimates as of June 30, 2013.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts

12

ROUSE PROPERTIES, INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


of revenues and expenses during the reporting periods. For example, estimates and assumptions have been made with respect to fair values of assets and liabilities for purposes of applying the acquisition method of accounting, the useful lives of assets, capitalization of development and leasing costs, recoverable amounts of receivables, initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to acquisitions, impairment of long-lived assets and fair value of debt. Actual results could differ from these and other estimates.

Reclassification

Certain prior period amounts included on the Company's Consolidated and Combined Statements of Operations and Comprehensive Income (Loss) and related notes that are associated with the property that the Company disposed of, have been reclassified to discontinued operations for all periods presented.

NOTE 3                                                    PREPAID EXPENSES AND OTHER ASSETS, NET

The following table summarizes the significant components of prepaid expenses and other assets, net:
 
June 30,
2013
 
December 31,
2012
 
(In thousands)
Above-market tenant leases, net (Note 2)
$
70,733

 
$
89,407

Deposits
1,728

 
796

Below-market ground leases, net (Note 2)
1,845

 
1,906

Prepaid expenses
3,746

 
3,563

Other
712

 
3,786

Total prepaid expenses and other assets, net
$
78,764

 
$
99,458



NOTE 4                                                    MORTGAGES, NOTES AND LOANS PAYABLE
 
Mortgages, notes and loans payable are summarized as follows:
 
June 30,
2013
 
December 31,
2012
 
(In thousands)
Fixed-rate debt:
 

 
 

Collateralized mortgages, notes and loans payable
$
879,249

 
$
995,545

Variable-rate debt:
 

 
 

Collateralized mortgages, notes and loans payable
254,446

 
287,946

Total mortgages, notes and loans payable (1)
$
1,133,695

 
$
1,283,491


Explanatory Note:

(1) Net of $13.6 million and $33.8 million of non-cash debt market rate adjustments as of June 30, 2013 and December 31, 2012, respectively.

On the Spin-Off Date, the Company entered into a senior secured credit facility (“Senior Facility”) with a syndicate of banks, as lenders, and Wells Fargo Bank, National Association, as administrative agent, and Wells Fargo Securities, LLC, RBC Capital Markets, LLC, and U.S. Bank National Association, as joint lead arrangers, that provided borrowings on a revolving basis of up to $50.0 million (the “Revolver”) and a senior secured term loan (the “Term Loan” and, together with the Revolver, the “Facilities”), which provided an advance of approximately $433.5 million and is a direct obligation of the Company. The Facilities closed concurrently with the consummation of the spin-off and have a term of three years. During 2012, the outstanding balance on the Term Loan decreased from $433.5 million to $287.9 million due to the repayments on the Term Loan concurrent with the refinancing of the Pierre Bossier, Southland Center, and Animas Valley Malls. In addition, during 2012, the interest rate was renegotiated from LIBOR plus 5.0% (with a LIBOR floor of 1.0%) to LIBOR plus 4.5% (with no LIBOR floor). In January 2013, in order to maintain the same level of liquidity, the Company paid down an additional $100.0 million on the Term Loan and increased the

13

ROUSE PROPERTIES, INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


Revolver from $50.0 million to $150.0 million. As of June 30, 2013, the outstanding balance on the Term Loan was $187.9 million and no amounts were drawn on the Revolver.

The Company is required to pay an unused fee related to the Revolver equal to 0.30% per year if the aggregate unused amount is greater than or equal to 50% of the Revolver or 0.25% per year if the aggregate unused amount is less that 50% of the Revolver. 
 
The Senior Facility has affirmative and negative covenants that are customary for a real estate loan, including, without limitation, restrictions on incurrence of indebtedness and liens on the mortgage collateral; restrictions on pledges; restrictions on subsidiary distributions; with respect to the mortgage collateral, limitations on our ability to enter into transactions including mergers, consolidations, sales of assets for less than fair market value and similar transactions; conduct of business; restricted distributions; transactions with affiliates; and limitation on speculative hedge agreements. In addition, we are required to comply with financial maintenance covenants relating to the following: (1) net indebtedness to value ratio, (2) liquidity, (3) minimum fixed charge coverage ratio, (4) minimum tangible net worth, and (5) minimum portfolio debt yield. Failure to comply with the covenants in the Senior Facility would result in a default under the credit agreement governing the Facilities and, absent a waiver or an amendment from our lenders, permit the acceleration of all outstanding borrowings under the Senior Facility, which would also result in a cross-default of our Subordinated Facility (as described below).  The Company is in compliance with these financial covenants as of June 30, 2013.
 
During 2012, the Company also entered into a subordinated unsecured revolving credit facility with a wholly-owned subsidiary of Brookfield Asset Management, Inc., a related party, that provides borrowings on a revolving basis of up to $100.0 million (the “Subordinated Facility”). The Subordinated Facility has a term of three years and six months and will bear interest at LIBOR (with a LIBOR floor of 1%) plus 8.50%. The default interest rate following a payment event of default under the Subordinated Facility will be 2.00% more than the then-applicable interest rate. Interest will be payable monthly.  In addition, the Company is required to pay a semiannual revolving credit fee of $0.3 million. As of June 30, 2013, no amounts have been drawn from the Subordinated Facility.

The Company has individual Property-Level Debt (the “Property-Level Debt”) on 17 of its 31 assets, representing approximately $959.4 million (excluding $13.6 million of market rate adjustments) as of June 30, 2013. The Property-Level Debt has a weighted average interest rate of 5.1% and an average remaining term of 4.9 years. The Property-Level Debt is stand-alone (not cross-collateralized) first mortgage debt and is non-recourse with the exception of customary contingent guarantees/indemnities.

On March 6, 2013, the Company placed a new non-recourse mortgage loan on the Lakeland Mall located in Lakeland, FL for $65.0 million. The loan bears interest at a fixed rate of 4.17%, is amortizing, and has a term of ten years. This loan replaced a $50.3 million loan that had a fixed rate of 5.12% and was the only mortgage in its portfolio that was due in October 2013. Net proceeds to the Company after related closing costs and defeasance was approximately $13.4 million.

On March 21, 2013, the loan associated with the Lakeland Mall was increased by $5.0 million in order to partially fund the acquisition of an anchor previously owned by a third property. The additional $5.0 million loan has the same terms as the Lakeland Mall loan that closed on March 6, 2013.

On May 10, 2013, the Company placed a new non-recourse mortgage loan on the NewPark Mall located in Newark, CA for $71.5 million, with an initial funding of $66.5 million. The loan provides for an additional subsequent funding of $5.0 million upon achieving certain conditions. The loan amortizes over 30 years, bears interest at a floating rate of LIBOR plus 405 basis points, and has a term of four years with a one year extension subject to certain conditions being met. This loan replaced a $62.9 million loan that had a fixed rate of 7.45%. Net proceeds to the Company after related closing costs were approximately $1.1 million.

On June 19, 2013, the Company placed a new non-recourse mortgage loan on the Valley Hills Mall located in Hickory, NC for $68.0 million. The loan bears interest at a fixed rate of 4.47% , has a term of 10 years, and amortizes over 30 years. This loan replaced a $51.4 million loan that had a fixed rate of 4.73%. Net proceeds to the Company after related closing and defeasance costs were approximately $15.0 million.

On June 21, 2013, the Company conveyed the Boulevard Mall located in Las Vegas, NV to the lender of the loan related to the property in full satisfaction of the loan. The loan had a net outstanding balance of approximately $81.3 million and the Company recorded a gain on extinguishment of debt of $14.0 million for the three and six months ended June 30, 2013 (see Notes 2 and 6).


14

ROUSE PROPERTIES, INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


As of June 30, 2013, $1,569.1 million of land, buildings and equipment (before accumulated depreciation) have been pledged as collateral for our mortgages, notes and loans payable. Certain mortgage notes payable may be prepaid but are generally subject to a prepayment penalty equal to a yield-maintenance premium, defeasance or a percentage of the loan balance. The weighted-average interest rate on our collateralized mortgages, notes and loans payable was approximately 5.1% and 5.2%, respectively, as of June 30, 2013 and December 31, 2012. As of June 30, 2013, the average remaining term was 4.4 years.

Interest Rate of Caps

The Company entered into a hedge transaction related to a portion of its Term Loan at a cost of approximately $0.1 million during 2012.  This hedge transaction was for an interest rate cap with a notional amount of $110.0 million and caps the daily LIBOR at 1%. The interest rate cap expired on January 12, 2013.

Also, on May 10, 2013, the Company entered into a hedge transaction related to the non-recourse mortgage loan on NewPark Mall for approximately $0.1 million. This hedge transaction was for an interest rate cap with a notional amount of $66.5 million and caps the daily LIBOR at 4.5%.

NOTE 5                                                    ACCOUNTS PAYABLE AND ACCRUED EXPENSES, NET
 
The following table summarizes the significant components of accounts payable and accrued expenses, net:
 
June 30, 2013
 
December 31, 2012
 
(In thousands)
Below-market tenant leases, net (Note 2)
$
28,722

 
$
35,068

Accounts payable and accrued expenses
10,719

 
12,696

Accrued interest
3,805

 
3,546

Accrued real estate taxes
9,527

 
9,894

Accrued dividend
6,453

 
3,479

Deferred income
2,435

 
3,201

Accrued payroll and other employee liabilities
3,046

 
1,230

Construction payable
9,458

 
9,979

Tenant and other deposits
1,460

 
1,629

Asset retirement obligation liability
4,630

 
4,503

Other
349

 
3,461

Total accounts payable and accrued expenses, net
$
80,604

 
$
88,686


NOTE 6                                                   DISPOSITIONS, DISCONTINUED OPERATIONS AND GAINS (LOSSES) ON DISPOSITIONS OF INTEREST IN OPERATING PROPERTIES

The Company's disposition and gain on extinguishment of debt, for the periods presented, are included in discontinued operations in our Consolidated and Combined Statements of Operations and Comprehensive Income (Loss) and are summarized in the table set forth below.

During the three and six months ended June 30, 2013, the Company conveyed its interest in the Boulevard Mall to the lender of the loan related to the property. The property had been transferred to special servicing in January 2013 and was conveyed to the lender in June 2013 in full satisfaction of the debt. This resulted in a gain on extinguishment of debt of $14.0 million for the three and six months ended June 30, 2013. Additionally, the conveyance of the property was structured as a reverse like-kind exchange transaction under Internal Revenue Code of 1986 (IRC) Section 1031 for income tax purposes.
 

15

ROUSE PROPERTIES, INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


 
 
For the three months ended June 30,
 
For the six months ended June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(In thousands)
Total revenues
 
$
2,425

 
$
2,527

 
$
4,812

 
$
5,168

Operating expenses including depreciation and amortization
 
1,402

 
2,080

 
3,082

 
4,470

Provision for impairment
 
—

 
—

 
21,661

 
—

  Total expenses
 
1,402

 
2,080

 
24,743

 
4,470

 
 
 
 
 
 
 
 
 
  Operating income (loss)
 
1,023

 
447

 
(19,931
)
 
698

Interest expense
 
(1,536
)
 
(1,691
)
 
(3,227
)
 
(3,368
)
Net loss from discontinued operations
 
(513
)
 
(1,244
)
 
(23,158
)
 
(2,670
)
Gain on extinguishment of debt
 
13,995

 
—

 
13,995

 
—

Net income (loss) from discontinued operations
 
$
13,482

 
$
(1,244
)
 
$
(9,163
)
 
$
(2,670
)
Net income (loss) from discontinued operations per share- Basic and Diluted
 
$
0.27

 
$
(0.03
)
 
$
(0.19
)
 
$
(0.06
)


NOTE 7                                                   INCOME TAXES
 
RPI Businesses historically operated under GGP’s REIT structure. The Company has elected to be taxed as a REIT in connection with the filing of its tax return for the 2011 fiscal year. Subject to its ability to meet the requirements of a REIT, the Company intends to maintain this status in future periods. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including requirements to distribute at least 90% of our ordinary taxable income and to either distribute capital gains to stockholders, or pay corporate income tax on the undistributed capital gains. In addition, the Company is required to meet certain asset and income tests.
 
As a REIT, the Company will generally not be subject to corporate level federal income tax on taxable income that it distributes currently to our stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates, including any applicable alternative minimum tax, and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on our income or property, and to federal income and excise taxes on our undistributed taxable income.

The Company has a subsidiary that it elected to treat as a taxable REIT subsidiary (TRS), which is subject to federal and state income taxes. For each of the three months ended June 30, 2013 and 2012, the Company incurred approximately $0.02 million in taxes associated with the TRS subsidiary. For each of the six months ended June 30, 2013 and 2012, the Company incurred approximately $0.04 million in taxes associated with the TRS subsidiary.

NOTE 8                                                    COMMON STOCK
 
On January 12, 2012, GGP distributed the assets and liabilities of RPI Businesses to Rouse. Pursuant to the spin-off, the Company received certain of the assets and liabilities of GGP. Upon this spin-off the Company issued 35,547,049 shares of our common stock to the existing GGP shareholders. In connection therewith $405.3 million of GGP’s equity was converted to paid-in capital. The GGP shareholders received approximately 0.0375 shares of Rouse common stock for every share of GGP common stock owned as of the record date of December 31, 2011. The Company also issued 359,056 shares of our Class B common stock, par value $0.01 per share, to GGP LP.  The Class B common stock has the same rights as the Rouse common stock, except the holders of Class B common stock do not have any voting rights. On February 6, 2013, the 359,056 shares of our Class B common stock were converted into 359,056 shares of our common stock, at the request of the stockholder.

On March 26, 2012, the Company completed a rights offering and backstop purchase. Under the terms of the rights offering and backstop purchase, the Company issued 13,333,333 shares of our common stock at a subscription price of $15.00 per share. Net proceeds of the rights offering and backstop purchase approximated $191.6 million.


16

ROUSE PROPERTIES, INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


Brookfield Asset Management, Inc. and its affiliates and co-investors (collectively, “Brookfield”) own approximately 54.38% of the Company as of June 30, 2013.

On March 26, 2013, the Company sold 10,559 shares of the Company's common stock that were held as treasury stock at a stock price of $17.91 per share.

Dividends

On February 28, 2013, the Company's Board of Directors declared a first quarter common stock dividend of $0.13 per share which was paid on April 29, 2013 to stockholders of record on April 15, 2013.

On May 2, 2013, the Company's Board of Directors declared a second quarter common stock dividend of $0.13 per share which was paid on July 31, 2013 to stockholders of record on July 15, 2013.

On August 1, 2013, the Company's Board of Directors declared a third quarter common stock dividend of $0.13 per share which will be paid on October 31, 2013 to stockholders of record on October 15, 2013.


NOTE 9                                                    STOCK BASED COMPENSATION PLANS
 
Incentive Stock Plans
 
In January 2012, the Company adopted the Rouse Properties, Inc. 2012 Equity Incentive Plan (the “Equity Plan”).  The number of shares of common stock reserved for issuance under the Equity Plan is 4,887,997. The Equity Plan provides for grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, other stock-based awards and performance-based compensation (collectively, the “Awards”). Directors, officers, other employees and consultants of Rouse and its subsidiaries and affiliates are eligible for Awards.  No participant may be granted more than 2,500,000 shares.  The Equity Plan is not subject to the Employee Retirement Income Security Act of 1974, as amended.
 
Stock Options
 
Pursuant to the Equity Plan, the Company granted stock options to certain employees of the Company.  The vesting terms of these grants are specific to the individual grant.  In general, participating employees are required to remain employed for vesting to occur (subject to certain limited exceptions).  In the event that a participating employee ceases to be employed by the Company, any options that have not vested will generally be forfeited. Stock options generally vest annually over a five year period.
 
The following tables summarize stock option activity for the Equity Plan for the six months ended June 30, 2013 and 2012:
 
 
2013
 
2012
 
Shares
 
Weighted Average Exercise Price
 
Shares
 
Weighted Average Exercise Price
Stock options outstanding at January 1
1,945,643

 
$
14.64

 
—

 
$
—

Granted
695,900

 
16.48

 
1,652,486

 
14.70

Exercised
—

 
—

 
—

 
—

Forfeited
(47,378
)
 
14.41

 
—

 
—

Expired
—

 
—

 
—

 
—

Stock options outstanding at June 30,
2,594,165

 
$
15.14

 
1,652,486

 
$
14.70

 

17

ROUSE PROPERTIES, INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


 
 
Stock Options Outstanding (1)
Issuance
 
Shares
 
Weighted Average Remaining Contractual Term (in years)
 
Weighted Average Exercise Price
March 2012
 
1,542,708

 
8.75
 
$
14.72

May 2012
 
21,900

 
8.92
 
13.71

August 2012
 
36,400

 
9.17
 
13.75

October 2012
 
297,257

 
9.33
 
14.47

February 2013
 
695,900

 
9.67
 
16.48

Stock options outstanding at June 30, 2013
 
2,594,165

 
9.07
 
$
15.14


Explanatory Note:

(1) During the three and six months ended June 30, 2013, 4,380 and 319,477, respectively, of stock options became fully vested. The intrinsic value of these options that vested during the three and six months ended June 30, 2013 was $0.03 million and $1.6 million, respectively.

The Company recognized $0.4 million and $0.1 million in compensation expense related to the stock options for the three months ended June 30, 2013 and 2012, respectively. The Company recognized $0.7 million and $0.4 million in compensation expense related to the stock options for the six months ended June 30, 2013 and 2012, respectively.

Restricted Stock
 
Pursuant to the Equity Plan, the Company granted restricted stock to certain employees and non-employee directors.  The vesting terms of these grants are specific to the individual grant, and are generally three to four year periods. In general, participating employees are required to remain employed for vesting to occur (subject to certain limited exceptions).  In the event that a participating employee ceases to be employed by the Company, any shares that have not vested will generally be forfeited. Dividends are paid on restricted stock and are not returnable, even if the underlying stock does not ultimately vest.
 
The following table summarizes restricted stock activity for the six months ended June 30, 2013 and 2012:

 
2013
 
2012
 
Shares
 
Weighted Average Grant Date Fair Value
 
Shares
 
Weighted Average Grant Date Fair Value
Nonvested restricted stock grants outstanding at January 1
263,669

 
$
14.69

 
—

 
$
—

Granted
36,573

 
16.48

 
344,751

 
14.69

Forfeited
(4,160
)
 
14.72

 
—

 
—

Cancelled
—

 
—

 
—

 
—

Vested
(7,674
)
 
15.56

 
(5,096
)
 
14.72

Nonvested restricted stock grants outstanding at June 30
288,408

 
$
14.87

 
339,655

 
$
14.69


The 4,160 shares of restricted stock that were forfeited during the six months ended June 30, 2013 will be held in treasury for future restricted stock or option issuances.

The weighted average remaining contractual term (in years) of granted, nonvested awards as of June 30, 2013 was 1.5 years.
 
The Company recognized $0.4 million and $0.2 million in compensation expense related to the restricted stock for the three months ended June 30, 2013 and 2012, respectively. The Company recognized $0.8 million and $0.6 million in compensation expense related to the restricted stock for the six months ended June 30, 2013 and 2012, respectively.
 
Other Disclosures
 
The estimated values of options granted in the table above are based on the Black-Scholes pricing model using the assumptions in the table below.  The estimate of the risk-free interest rate is based on the average of a 5- and 10-year U.S. Treasury note on the date the options were granted.  The estimate of the dividend yield and expected volatility is based on a review of publicly-traded

18

ROUSE PROPERTIES, INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


peer companies.  The expected life is computed using the simplified method as the Company does not have historical share option data. The fair value of each option grant is estimated on the date of grant using the Black-Scholes pricing model with the following 2013 weighted-average assumptions:
 
Risk-free interest rate
1.10
%
Dividend yield
4.25
%
Expected volatility
26.00
%
Expected life (in years)
6.5

 
As of June 30, 2013, total compensation expense which had not yet been recognized related to nonvested options and restricted stock grants was $9.5 million. Of this total, $1.5 million is expected to be recognized in 2013, $3.1 million in 2014, $2.5 million in 2015, $1.7 million in 2016, $0.6 million in 2017, and $0.1 million in 2018.  These amounts may be impacted by future grants, changes in forfeiture estimates or vesting terms, and actual forfeiture rates differing from estimated forfeiture rates.


NOTE 10                                            NON-CONTROLLING INTEREST

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


NOTE 11                                             RELATED PARTY TRANSACTIONS

Transition Services Agreement with GGP
 
The Company has entered into a transition services agreement with GGP whereby GGP or its subsidiaries provide to us, on a transitional basis, certain specified services for various terms not exceeding 18 months following the spin-off. The services that GGP provides to the Company include, among others, payroll, human resources and employee benefits, financial systems management, treasury and cash management, accounts payable services, telecommunications services, information technology services, asset management services, legal and accounting services and various other corporate services. The charges for the transition services generally are intended to allow GGP to fully recover the costs directly associated with providing the services, plus a level of profit consistent with an arm’s length transaction together with all out-of-pocket costs and expenses. The charges of each of the transition services are generally based on an hourly fee arrangement and pass-through out-of-pocket costs. The Company may terminate certain specified services by giving prior written notice to GGP of any such termination.  For the three months ended June 30, 2013 and 2012, costs associated with the transition services agreement were $0.02 million and $0.4 million, respectively, and for the six months ended June 30, 2013 and 2012 the costs associated were $0.1 million and $1.0 million, respectively. Approximately $0.03 million of these costs were outstanding and payable as of June 30, 2013.
 
Office Lease with Brookfield
 
Upon its spin-off from GGP, the Company assumed a 10-year lease agreement with Brookfield, as landlord, for office space for our corporate office in New York City. Costs associated with the office lease were $0.3 million for the three months ended June 30, 2013 and 2012 and $0.5 million for the six months ended June 30, 2013 and 2012. There are no outstanding amounts payable as of June 30, 2013.  In addition, the landlord completed the build out of the Company's office space during 2012 for $1.7 million of which $0.2 million was payable as of June 30, 2013. The costs associated with the build out of the Company's office space were capitalized in buildings and equipment.

During 2012, the Company entered into a 5-year lease agreement with Brookfield, as landlord, for office space for our regional office in Dallas, Texas. The lease commenced in October 2012 with no payments due for the first 12 months. During April 2013,

19

ROUSE PROPERTIES, INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


the Company amended the lease and expanded its current space with no payments due under the amended lease until December 2013 and no outstanding amounts payable as of June 30, 2013.
 
Subordinated Credit Facility with Brookfield
 
The Company entered into a Subordinated Facility with a wholly-owned subsidiary of Brookfield, as lender, for a $100.0 million revolving credit facility.  The Company paid a one time upfront fee of $0.5 million related to this facility in 2012. In addition, the Company is required to pay a semi-annual revolving credit fee of $0.3 million related to this facility. As of June 30, 2013, no amounts have been drawn on this Subordinated Facility and $0.3 million are payable related to the revolving credit fee.
 
Business Infrastructure Costs

Upon its spin-off from GGP, the Company commenced the development of its information technology platform. The development of this platform requires us to purchase, design and create various information technology applications and infrastructure. Brookfield Corporate Operations, LLC ("BCO") has been engaged to assist in the project development and to procure the various applications and infrastructure of the Company. As of June 30, 2013 and December 31, 2012, the Company incurred $7.6 million and $5.2 million, respectively, of infrastructure costs which are capitalized in buildings and equipment, of which $0.5 million of these costs were outstanding and payable as of June 30, 2013.


Financial Service Center

During 2013, the Company engaged BCO's financial service center to manage certain administrative services of Rouse, such as accounts payable and receivable, employee expenses, lease administration, and other similar types of services. Approximately $0.3 million and $0.6 million in costs were incurred for the three and six months ended June 30, 2013, respectively. Approximately, $0.1 million of these costs were outstanding and payable as of June 30, 2013.

The Company was also required to pay a monthly information technology services fee to BCO. Approximately $0.5 million and $0.9 million in costs were incurred for the three and six months ended June 30, 2013, of which $0.2 million of these costs were outstanding and payable as of June 30, 2013.

Demand Deposit from Brookfield U.S. Holdings

In August 2012, the Company entered into an agreement with Brookfield U.S. Holdings (U.S. Holdings) to place funds into an interest bearing account which earns interest at LIBOR plus 1.05% per annum. The demand deposit is secured by a note from U.S. Holdings and guaranteed by Brookfield Asset Management Inc. The demand deposit had an original maturity of February 14, 2013 and was extended to August 14, 2013. However, the Company may demand the funds earlier by providing U.S. Holdings with three days' notice. The Company earned approximately $0.1 million and $0.3 million in interest income for the three and six months ended June 30, 2013. No interest income was earned for the three and six months ended June 30, 2012. As of June 30, 2013, the Company has $45.0 million on deposit with Brookfield, which is recorded as a demand deposit from affiliate on the Company's Consolidated Balance Sheets.

NOTE 12                                       SUBSEQUENT EVENTS

On July 24, 2013, the Company acquired the Greenville Mall, located in Greenville, NC, for a total purchase price of approximately $50.3 million. As part of the acquisition, the Company assumed a $41.7 million, 5.29% fixed rate mortgage due in December 2015. The Greenville Mall totals approximately 460,000 square feet, and is anchored by Belk Ladies, Belk Men & Home, jcpenney and Dunham's Sports (opening late 2013) and generates inline shop sales of approximately $375 per square foot. As the only enclosed regional mall within a 40 mile radius, it serves a multi-county trade area of over 400,000 people and features leading national retailers such as Victoria's Secret, Buckle, American Eagle, Aeropostale, Bath and Body Works and Footlocker.

On August 1, 2013, the Company's Board of Directors declared a third quarter common stock dividend of $0.13 per share which will be paid on October 31, 2013 to stockholders of record on October 15, 2013.



20

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All references to numbered Notes are to specific footnotes to our Consolidated and Combined Financial Statements included in this Quarterly Report and which descriptions are incorporated into the applicable response by reference.  The following discussion should be read in conjunction with such Consolidated and Combined Financial Statements and related Notes.  Capitalized terms used, but not defined, in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) have the same meanings as in such Notes.
 
Forward-looking information
 
We may make forward-looking statements in this Quarterly Report and in other reports that we file with the Securities and Exchange Commission (the "SEC"). In addition, our senior management may make forward-looking statements orally to analysts, investors, creditors, the media and others.
 
Forward-looking statements include:
 
•
Descriptions of plans or objectives for future operations
•
Projections of our revenues, net operating income (“NOI”), core net operating income (“Core NOI”), earnings per share, funds from operations (“FFO”), core funds from operations (“Core FFO”), capital expenditures, income tax and other contingent liabilities, dividends, leverage, capital structure or other financial items
•
Forecasts of our future economic performance
•
Descriptions of assumptions underlying or relating to any of the foregoing
 
Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements often include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “would” or similar expressions. Forward-looking statements should not be unduly relied upon. They give our expectations about the future and are not guarantees. Forward-looking statements speak only as of the date they are made and we might not update them to reflect changes that occur after the date they are made.
 
There are several factors, many beyond our control, which could cause results to differ materially from our expectations, some of which are described in "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012 .  These factors are incorporated herein by reference. Any factor could by itself, or together with one or more other factors, adversely affect our business, results of operations or financial condition.
Overview—Introduction
As of June 30, 2013, our portfolio consisted of 31 regional malls in 19 states totaling over 21 million square feet of retail and ancillary space which are 89.9% leased and 86.5% occupied. We elected to be treated as a REIT in connection with the filing of our federal income tax return for the 2011 taxable year. Subject to our ability to meet the requirements of a REIT, we intend to maintain this status in future periods.
The majority of the income from our properties is derived from rents received through long-term leases with retail tenants. These long-term leases generally require the tenants to pay base rent which is a fixed amount specified in the lease. The base rent is often subject to scheduled increases during the term of the lease. Our financial statements refer to this as "minimum rents." Certain of our leases also include a component which requires tenants to pay amounts related to all or substantially all of their share of real estate taxes and certain property operating expenses, including common area maintenance and insurance. The revenue earned attributable to real estate tax and operating expense recoveries are recorded as "tenant recoveries." Another component of income is overage rent. Overage rent is paid by a tenant when its sales exceed an agreed upon minimum amount. Overage rent is calculated by multiplying the tenant's sales in excess of the minimum amount by a percentage defined in the lease, the majority of which is typically earned in the fourth quarter.
Our objective is to achieve high growth in NOI, Core NOI, FFO and Core FFO by leasing, operating and repositioning retail properties with locations that are either market dominant (the only mall within an extended distance) or trade area dominant (positioned to be the premier mall serving the defined regional consumer). We plan to continue to control costs and to deliver an appropriate tenant mix, higher occupancy rates and increased sales productivity, resulting in higher minimum rents.
We believe that the most significant operating factor affecting incremental cash flow, NOI, Core NOI, FFO and Core FFO is increased rents earned from tenants at our properties. These rental revenue increases are primarily achieved by:

21

•
Increasing occupancy at the properties so that more space is generating rent;
•
Increasing tenant sales in which we participate through overage rent;
•
Re-leasing existing space and renewing expiring leases at rates higher than expiring or existing rates; and
•
Prudently investing capital into our properties.
Overview—Basis of Presentation
We were formed in August 2011 for the purpose of holding certain assets and assuming certain liabilities of GGP. Following the distribution of these assets and liabilities to us on January 12, 2012, we began operating our business as a stand-alone owner and operator of regional malls. The financial information included in this Quarterly Report has been presented on a consolidated basis for the period after the Spin-Off Date. The financial information is presented on a combined basis prior to the Spin-Off Date as the entities were under common control and ownership, and reflects the allocation of certain overhead items within property management and other costs in the accompanying combined financial statements.
Recent Developments

On May 2, 2013, the Board of Directors declared a second quarter common stock dividend of $0.13 per share. The dividend was paid on July 31, 2013 to stockholders of record on July 15, 2013.

On May 10, 2013, we placed a new non-recourse mortgage loan on the NewPark Mall located in Newark, CA for $71.5 million, with an initial funding of $66.5 million. The loan provides for an additional subsequent funding of $5.0 million upon achieving certain conditions. The loan amortizes over 30 years, bears interest at a floating rate of LIBOR plus 405 basis points, and has a term of four years with a one year extension subject to certain conditions being met. This loan replaced a $62.9 million loan that had a fixed rate of 7.45%. Net proceeds to us after related closing costs were approximately $1.1 million.
 
On June 19, 2013, we placed a new non-recourse mortgage loan on the Valley Hills Mall located in Hickory, NC for $68.0 million. The loan bears interest at a fixed rate of 4.47%, has a term of ten years and amortizes over 30 years. This loan replaced a $51.4 million loan that had a fixed rate of 4.73%. Net proceeds to us after related closing and defeasance costs were approximately $15.0 million.

On June 21, 2013, we conveyed the Boulevard Mall located in Las Vegas, NV to the lender of the loan related to the property in full satisfaction of the loan. The loan had a net outstanding balance of approximately $81.3 million and we recorded a gain on extinguishment of debt of $14.0 million for the three and six months ended June 30, 2013.

Results of Operations
As of June 30, 2013, our total portfolio consists of 31 properties (which excludes the Boulevard Mall, which was disposed of during the three months ended June 30, 2013). Properties that were owned and in operation during the entire year for 2012 and for the three and six months ended June 30, 2013 are referred to as the Same Property portfolio, which currently consists of 29 properties. The following table presents our property acquisitions and dispositions during 2012 and 2013 (which properties are excluded from the Same Property portfolio):
Property
 
Location
 
Date Acquired / Disposed
Acquisitions:
 
 
 
 
Grand Traverse Mall
 
Traverse City, MI
 
February 21, 2012
The Mall at Turtle Creek
 
Jonesboro, AR
 
December 28, 2012
 
 
 
 
 
Dispositions:
 
 
 
 
The Boulevard Mall
 
Las Vegas, NV
 
June 21, 2013






22

Three Months Ended June 30, 2013 compared to the Three Months Ended June 30, 2012

 
June 30,
2013
 
June 30,
2012
 
$ Change
 
% Change
 
(In thousands)
 
 
Revenues:
 
 
 
 
 
 
 
 
Minimum rents
 
$
39,834

 
$
36,505

 
$
3,329

 
9.1
 %
Tenant recoveries
 
16,155

 
16,000

 
155

 
1.0

Overage rents
 
841

 
649

 
192

 
29.6

Other
 
1,551

 
1,268

 
283

 
22.3

Total revenues
 
58,381

 
54,422

 
3,959

 
7.3

Expenses:
 
 

 
 

 
 
 
 
Real estate taxes
 
6,069

 
5,424

 
645

 
11.9

Property maintenance costs
 
2,925

 
3,161

 
(236
)
 
(7.5
)
Marketing
 
660

 
625

 
35

 
5.6

Other property operating costs
 
14,210

 
14,075

 
135

 
1.0

Provision for doubtful accounts
 
350

 
405

 
(55
)
 
(13.6
)
General and administrative
 
5,248

 
5,240

 
8

 
0.2

Depreciation and amortization
 
15,563

 
16,032

 
(469
)
 
(2.9
)
Other
 
969

 
1,983

 
(1,014
)
 
(51.1
)
Total expenses
 
45,994

 
46,945

 
(951
)
 
(2.0
)
Operating income
 
12,387

 
7,477

 
4,910

 
65.7


 
 
 
 
 
 
 
 
Interest income
 
125

 
8

 
117

 
>100.0

Interest expense
 
(21,659
)
 
(22,008
)
 
349

 
1.6

Loss before income taxes and discontinued operations
 
(9,147
)
 
(14,523
)
 
5,376

 
37.0

Provision for income taxes
 
(219
)
 
(173
)
 
(46
)
 
(26.6
)
Loss from continuing operations
 
(9,366
)
 
(14,696
)
 
5,330

 
36.3
 %
Loss from discontinued operations
 
(513
)
 
(1,244
)
 
731

 
58.8
 %
Gain on extinguishment of debt
 
13,995

 
—

 
13,995

 
100.0
 %
Discontinued operations, net
 
13,482

 
(1,244
)
 
14,726

 
>100%

Net income (loss)
 
$
4,116

 
$
(15,940
)
 
$
20,056

 
>100%

Revenues
Total revenues increased $4.0 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 . The 2012 property acquisitions of Grand Traverse Mall and The Mall at Turtle Creek increased revenue by $2.8 million. The remaining $1.2 million is due to additional revenues from net leasing activities in various malls within the Same Property portfolio, during the three months ended June 30, 2013 and 2012.
Operating Expenses
Property operating expenses increased $0.5 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. Property operating expenses include real estate taxes, property maintenance costs, marketing, other property operating costs, and provision for doubtful accounts. The 2012 property acquisitions of Grand Traverse Mall and The Mall at Turtle Creek contributed a $0.3 million increase in property operating expenses. The remainder of the increase is primarily related to an increase in real estate taxes from the Same Property portfolio for the three months ended June 30, 2013 and 2012.
Depreciation and amortization decreased $0.5 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The change is primarily due to the decrease in amortization of in-place leases due to tenant lease expirations, offset by the 2012 property acquisitions of Grand Traverse Mall and The Mall at Turtle Creek.

23

Other expenses decreased $1.0 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 primarily due to initial costs incurred by the Company during its first year of stand alone operations. The reduction is primarily due to a $1.0 million decrease in temporary employee expenses.
Other Income and Expenses
Interest income increased $0.1 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The increase is due to the interest income earned on the demand deposit from Brookfield U.S. Holdings. See Note 10 to our Consolidated and Combined Financial Statements.
Interest expense decreased $0.3 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The decrease is primarily related to lower average outstanding balances on our loans, offset by an increase of $2.0 million in defeasance fees and the write-off of deferred financing costs related to the refinancing of Valley Hill Mall and NewPark Mall.
Discontinued operations, net increased for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. We conveyed our interest in the Boulevard Mall to the lender of the loan related to the property, which resulted in a net gain of discontinued operations of $13.5 million for the three months ended June 30, 2013. No assets were disposed of during the three months ended June 30, 2012.
Six Months Ended June 30, 2013 compared to the Six Months Ended June 30, 2012

 
June 30,
2013
 
June 30,
2012
 
$ Change
 
% Change
 
(In thousands)
 
 
Revenues:
 
 
 
 
 
 
 
 
Minimum rents
 
$
78,563

 
$
72,271

 
$
6,292

 
8.7
 %
Tenant recoveries
 
32,335

 
31,573

 
762

 
2.4

Overage rents
 
2,291

 
2,013

 
278

 
13.8

Other
 
2,685

 
2,332

 
353

 
15.1

Total revenues
 
115,874

 
108,189

 
7,685

 
7.1

Expenses:
 
 

 
 

 
 
 
 
Real estate taxes
 
11,784

 
11,257

 
527

 
4.7

Property maintenance costs
 
6,203

 
6,428

 
(225
)
 
(3.5
)
Marketing
 
1,312

 
1,051

 
261

 
24.8

Other property operating costs
 
27,817

 
27,615

 
202

 
0.7

Provision for doubtful accounts
 
499

 
646

 
(147
)
 
(22.8
)
General and administrative
 
10,099

 
10,384

 
(285
)
 
(2.7
)
Provision for impairment
 
—

 
—

 
—

 
100.0

Depreciation and amortization
 
31,670

 
33,163

 
(1,493
)
 
(4.5
)
Other
 
1,467

 
6,442

 
(4,975
)
 
(77.2
)
Total expenses
 
90,851

 
96,986

 
(6,135
)
 
(6.3
)
Operating income
 
25,023

 
11,203

 
13,820

 
>100.0


 
 
 
 
 
 
 
 
Interest income
 
326

 
9

 
317

 
>100.0

Interest expense
 
(41,303
)
 
(50,320
)
 
9,017

 
17.9

Loss before income taxes and discontinued operations
 
(15,954
)
 
(39,108
)
 
23,154

 
59.2

Provision for income taxes
 
(254
)
 
(239
)
 
(15
)
 
(6.3
)
Loss from continuing operations
 
(16,208
)
 
(39,347
)
 
23,139

 
58.8

Loss from discontinued operations
 
(23,158
)
 
(2,670
)
 
(20,488
)
 
>(100.0)

Gain on extinguishment of debt
 
13,995

 
—

 
13,995

 
100.0

Discontinued operations, net
 
(9,163
)
 
(2,670
)
 
(6,493
)
 
>(100.0)

Net income (loss)
 
$
(25,371
)
 
$
(42,017
)
 
$
16,646

 
39.6



24

Revenues
Total revenues increased $7.7 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The increase of $6.2 million is primarily related to the 2012 property acquisitions of Grand Traverse Mall and The Mall at Turtle Creek. The remaining increase is related to additional revenue from the net leasing in various malls included in the Same Property portfolio during the six months ended June 30, 2013 and 2012.
Operating Expenses
Property operating expenses increased $0.6 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. Property operating expenses include real estate taxes, property maintenance costs, marketing, other property operating costs, and provision for doubtful accounts. The Same Property portfolio decreased approximately $0.7 million for the six months ended June 30, 2013 and 2012 due to a reduction in repairs and maintenance expense. The 2012 property acquisitions of Grand Traverse Mall and The Mall at Turtle Creek increased property operating expenses by approximately $1.3 million.
Depreciation and amortization decreased $1.5 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The change is primarily due to the decrease in amortization of in-place leases due to tenant lease expirations, offset by the 2012 acquisitions of Grand Traverse and The Mall at Turtle Creek.
Other expenses decreased $5.0 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 primarily due to initial costs incurred by the Company during its first year of stand alone operations. The decrease in these costs include $1.5 million in severance expenses, $1.3 million for temporary employees, $1.2 million in signing bonuses, and other formation costs of the Company.
Other Income and Expenses
Interest income increased $0.3 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The increase is due to the interest income earned on the demand deposit from Brookfield U.S. Holdings. See Note 10 to our Consolidated and Combined Financial Statements.
Interest expense decreased $9.0 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The decrease is primarily related to the $9.0 million write-off of market rate adjustments that was incurred in January 2012 upon the spin-off of the Company and the refinancing of various loans.
Discontinued operations, net increased for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. We conveyed our interest in the Boulevard Mall to the lender of the loan related to the property, which resulted in a net loss of discontinued operations of $9.2 million for the six months ended June 30, 2013. No assets were disposed of during the six months ended June 30, 2012
























25

Operating Metrics

The following table presents select leasing information pertaining to leases signed during the three months ended June 30, 2013:
2013 Leasing Activity(1)(2)(3)(4)
 
No. of Leases
 
Square Feet
 
Term (in years)
 
Initial Rent PSF
 
Average Rent PSF
New Leases
 
 
 
 
 
 
 
 
 
 
Under 10,000 sq. ft.
 
16

 
53,822

 
8.6

 
$25.93
 
$28.67
Over 10,000 sq. ft.
 
11

 
221,048

 
11.8

 
14.72

 
15.52

Total New Leases
 
27

 
274,870

 
11.1

 
16.92

 
18.09

 
 
 
 
 
 
 
 
 
 
 
Renewal Leases
 
 
 
 
 
 
 
 
 
 
Under 10,000 sq. ft.
 
56

 
180,531

 
2.6

 
$25.44
 
$25.93
Over 10,000 sq. ft.
 
4

 
93,235

 
2.5

 
8.05

 
8.05

Total Renewal Leases
 
60

 
273,766

 
2.6

 
19.51

 
19.84

 
 
 
 
 
 
 
 
 
 
 
Sub-Total
 
87

 
548,636

 
6.9

 
18.21

 
18.96

 
 
 
 
 
 
 
 
 
 
 
Percent in Lieu
 
15


61.369

 
 n.a.

 
 n.a.

 
 n.a.

 
 
 
 
 
 
 
 
 
 
 
Total Q2 2013
 
102

 
610,005

 
6.9

 
$18.21
 
$18.96
Explanatory Notes:

(1) Excludes anchors and specialty leasing.
(2) Represents signed leases as of June 30, 2013.
(3) Represents signed leases for malls and excludes traditional anchor stores.
(4) The total aggregate tenant allowances granted for these leases were approximately $5.3 million and total leasing commissions were approximately $2.5 million. There were no material tenant concessions with respect to the leases that we signed during the three months ended June 30, 2013.

The following table represents our weighted average in-place rent for freestanding and mall space that is less than 10,000 square feet as of June 30, 2013:
 
In-Place Rent < 10k SF (1)
 
June 30, 2013
Freestanding
$19.03
Mall
$38.61
Total Same Property Portfolio
$36.79


Explanatory Note:

(1) Rent is presented on a cash basis and consists of base minimum rent, common area costs, and real estate taxes.















26

The following table presents leasing spread information for renewals and new leases that we signed during the three months ended June 30, 2013, as compared to the rents of the expiring leases:

New and Renewal Lease Spread (1)









 

 

Number of Leases
Square Feet
Term (in years)
Initial Rent PSF (2)
Average Rent PSF (3)

Expiring Rent PSF (4)

Initial Rent Spread

Average Rent Spread
Total Q2 2013
53
267,233

4.1
$
18.73

$
19.42


$
17.27


$1.46
8.5%

$2.15
12.4%

Explanatory Notes:

(1) Excludes anchors, percent in lieu, and specialty leasing.
(2) Represents initial rent per square foot at time of rent commencement, with rent consisting of base minimum rent, common area costs, and real estate taxes.
(3) Represents average rent per square foot over the lease term, with rent consisting of base minimum rent, common area costs, and real estate taxes.
(4) Represents expiring rent per square foot at end of lease, with rent consisting of base minimum rent, common area costs, and real estate taxes.

Same Property Material Trends
•
Percentage leased increased to 89.9% as of June 30, 2013 from 89.0% as of June 30, 2012 in our Same Property portfolio. This increase is the result of signing leases at higher levels compared to lease expirations since June 30, 2012.

•
Average in-place rents for mall spaces that are less than 10,000 square feet increased by 1.6% to $38.63 as of June 30, 2013 from $38.01 as of June 30, 2012 in our Same Property portfolio. The increase is attributable to higher rents on new and renewal leases as compared to the existing rents of the Same Property portfolio.

•
Same Property Core NOI was $33.9 million and $33.9 million for the three months ended June 30, 2013 and 2012 and $68.3 million and $67.7 million for the six months ended June 30, 2013 and 2012. Core NOI has increased for the six months ended as a result of the increased percentage occupied and higher average in-place rents over the respective period. Core NOI is a non-GAAP financial measure. See "—Non-GAAP Financial Measures" for a discussion of Core NOI and a reconciliation of Same Property Core NOI and Core NOI from the consolidated and combined net income (loss) as computed in accordance with GAAP.

Liquidity and Capital Resources
Our primary uses of cash include payment of operating expenses, working capital, capital expenditures, debt repayment, including principal and interest, reinvestment in properties, development and redevelopment of properties, acquisitions, tenant allowances, and dividends.
Our primary sources of cash are operating cash flow, refinancings of existing loans, equity previously raised from our rights offering, borrowings under our Revolver and borrowings under our Subordinated Facility and the funds from our demand deposit.
Our short-term (less than one year) liquidity requirements include recurring operating costs, capital expenditures, debt service requirements, and dividend requirements on our shares of common stock. We anticipate that these needs will be met with cash flows provided by operations and funds available under our Revolver.
Our long-term (greater than one year) liquidity requirements include scheduled debt maturities, capital expenditures to maintain, renovate and expand existing malls, property acquisitions, and development projects. Management anticipates that net cash provided by operating activities, the funds available under our Revolver and Subordinated Facility (as each is described below) and funds from our demand deposit will provide sufficient capital resources to meet our long-term liquidity requirements.
As of June 30, 2013, our combined contractual debt, excluding non-cash debt market rate adjustments, was approximately $1.1 billion. The aggregate principal and interest payments due on our outstanding indebtedness as of June 30, 2013 is approximately $40.7 million for the year ending 2013 and approximately $234.5 million for the year ending 2014.
Financings
Senior Secured Credit Facility- On the Spin-Off Date, we entered into a senior secured credit facility (“Senior Facility”) with a syndicate of banks, as lenders, and Wells Fargo Bank, National Association, as administrative agent, and Wells Fargo Securities, LLC, RBC Capital Markets, LLC, and U.S. Bank National Association, as joint lead arrangers, that provided borrowings on a revolving basis of up to $50.0 million (the “Revolver”) and a senior secured term loan (the “Term Loan” and, together with the Revolver, the “Facilities”), which provided an advance of approximately $433.5 million and is a direct obligation to us. The

27

Facilities closed concurrently with the consummation of the spin-off and have a term of three years. During 2012, the outstanding balance on the Term Loan decreased from $433.5 million to $287.9 million due to the repayments on the Term Loan concurrent with the refinancing of the Pierre Bossier, Southland Center, and Animas Valley Malls. In addition, during 2012, the interest rate was renegotiated from LIBOR plus 5.0% (with a LIBOR floor of 1.0%) to LIBOR plus 4.5% (with no LIBOR floor). In January 2013, in order to maintain the same level of liquidity, we paid down an additional $100.0 million on the Term Loan and increased the Revolver from $50.0 million to $150.0 million. As of June 30, 2013, the outstanding balance on the Term Loan was $187.9 million and no amounts were drawn on the Revolver.

We are required to pay an unused fee, paid quarterly in arrears, related to the Revolver equal to 0.30% per year if the aggregate unused amount is greater than or equal to 50% of the Revolver or 0.25% per year if the aggregate unused amount is less that 50% of the Revolver. 

The Senior Facility has affirmative and negative covenants that are customary for a real estate loan, including, without limitation, restrictions on incurrence of indebtedness and liens on the mortgage collateral; restrictions on pledges; restrictions on subsidiary distributions; with respect to the mortgage collateral, limitations on our ability to enter into transactions including mergers, consolidations, sales of assets for less than fair market value and similar transactions; conduct of business; restricted distributions; transactions with affiliates; and limitation on speculative hedge agreements. In addition, we are required to comply with financial maintenance covenants relating to the following: (1) net indebtedness to value ratio, (2) liquidity, (3) minimum fixed charge coverage ratio, (4) minimum tangible net worth, and (5) minimum portfolio debt yield. Failure to comply with the covenants in the Senior Facility would result in a default under the credit agreement governing the Facilities and, absent a waiver or an amendment from our lenders, permit the acceleration of all outstanding borrowings under the Senior Facility, which would also result in a cross-default of our Subordinated Facility. As of June 30, 2013, we were in compliance with these financial covenants.
 
Subordinated Revolving Credit Facility- On the Spin-Off Date we also entered into a subordinated unsecured revolving credit facility with a wholly-owned subsidiary of Brookfield Asset Management, Inc., a related party, that provides borrowings on a revolving basis of up to $100.0 million (the “Subordinated Facility”). The Subordinated Facility has a term of three years and six months and will bear interest at LIBOR (with a LIBOR floor of 1%) plus 8.50%. The default interest rate following a payment event of default under the Subordinated Facility will be 2.00% more than the then-applicable interest rate. Interest will be payable monthly.  In addition, we are required to pay a semi-annual revolving credit fee of $0.25 million. As of June 30, 2013, no amounts have been drawn from the Subordinated Facility.

Property-Level Debt- We have individual Property-Level Debt (the “Property-Level Debt”) on 17 of our 31 assets, representing approximately $959.4 million (excluding $13.6 million of market rate adjustments). The Property-Level Debt has a weighted average interest rate of 5.11% and an average remaining term of 4.9 years. The Property-Level Debt is stand-alone (not cross-collateralized) first mortgage debt and is non-recourse with the exception of customary contingent guarantees/indemnities.

On June 21, 2013, we conveyed the Boulevard Mall located in Las Vegas, NV to the lender of the loan related to the property in full satisfaction of the loan. The loan had a net outstanding balance of approximately $81.3 million and we recorded a gain on extinguishment of debt of $14.0 million for the three and six months ended June 30, 2013 (see Notes 2 and 6 to our Notes to Consolidated and Combined Financial Statements).

Redevelopment

We continue to evaluate and execute in the redevelopment of various malls within our portfolio. A component of our business strategy is to identify value creation initiatives for our properties and to then invest significant capital to reposition and refresh our properties. These redevelopment opportunities are typically completed in conjunction with leasing activity for that respective space. We anticipate funding our redevelopment projects with the net cash provided by operating activities, borrowings under our Revolver, borrowings under our Subordinated Facility and the funds of our demand deposit.












28

The table below describes our current redevelopment projects, which commenced during 2013 (dollars in thousands):

Property
 
Description
 
Total Project Square Feet
 
Total Estimated Project Cost
 
Cost to Date
Silver Lake Mall
 
Convert anchor space and unproductive inline space to Jo-Ann Fabrics and The Sports Authority
 
62,300
 
$4,420
 
$4,420
 Coeur D'Alene, ID
 
 
 
 
 
 
 
 
Lakeland Square
 
Convert anchor space and unproductive inline space to Cinemark Theater and The Sports Authority
 
89,000
 
$13,000
 
$7,551
Lakeland, FL
 
 
 
 
 
 
 
 
Bayshore Mall
 
Convert unproductive space to accomodate new tenants including: TJ Maxx, Ulta, and The Sports Authority
 
60,000
 
$8,300
 
$557
 Eureka, CA
 
 
 
 
 
 
 
 
Lansing Mall
 
Replace vacant anchor space with Regal Cinema and add multiple outparcels
 
66,000
 
$14,900
 
$144
Lansing, MI
 
 
 
 
 
 
 
 
Summary of Cash Flows
Six Months Ended June 30, 2013 compared to the Six Months Ended June 30, 2012
Cash Flows from Operating Activities
Net cash provided by operating activities was $27.0 million for the six months ended June 30, 2013, compared to $24.2 million for the six months ended June 30, 2012. The increase in cash available from operations is primarily related to the additional proceeds generated by our acquisitions of Grand Traverse Mall and The Mall at Turtle Creek in February 2012 and December 2012.
Cash Flows from Investing Activities
Net cash provided by (used in) investing activities was $68.9 million for the six months ended June 30, 2013, compared to $(68.9) million for the six months ended June 30, 2012. During the six months ended June 30, 2013, we reduced our demand deposit by $105.0 million with Brookfield U.S. Holdings in order to pay down $100.0 million on our Term Loan. Cash used for acquisition/development of real estate and property additions/improvements was $25.8 million for the six months ended June 30, 2013 compared to $20.1 million for the same period in 2012.
Cash Flows from Financing Activities
Net cash provided by (used in) financing activities was $(86.3) million for the six months ended June 30, 2013, compared to $207.8 million for the six months ended June 30, 2012.
The decrease of $294.1 million in net cash provided by financing activities was primarily due to $191.9 million in proceeds related to our rights offering that occurred during the six months ended June 30, 2012. Principal payments were $277.9 million for the six months ended June 30, 2013, compared to $510.8 million for the six months ended June 30, 2012. During the six months ended June 30, 2013, we received $204.5 million in proceeds from refinancings / issuances of mortgage, notes, and loans payable as a result of our refinancing of the Lakeland Mall, NewPark Mall and Valley Hills Mall. This is compared to the $560.8 million that we received during the six months ended June 30, 2012, which included proceeds provided by the Term Loan, as well as refinancings on Pierre Bossier Mall and Southland Center.








29

Contractual Cash Obligations and Commitments
The following table aggregates our contractual cash obligations and commitments as of June 30, 2013:
 
 
2013
 
2014
 
2015
 
2016
 
2017
 
Subsequent
 
Total
 
 
(In thousands)
Long-term debt-principal(1)
 
$
11,557

 
$
181,750

 
$
205,855

 
$
245,607

 
$
208,465

 
$
294,089

 
$
1,147,323

Interest payments(2)
 
29,175

 
52,770

 
41,293

 
32,225

 
18,251

 
64,588

 
238,302

Operating lease obligations
 
538

 
1,217

 
1,221

 
1,235

 
1,261

 
4,524

 
9,996

Total
 
$
41,270

 
$
235,737

 
$
248,369

 
$
279,067

 
$
227,977

 
$
363,201

 
$
1,395,621


Explanatory Notes:

(1) Excludes $13.6 million of non-cash debt market rate adjustments.
(2) Based on rates as of June 30, 2013. Variable rates are based on LIBOR rate of 0.19%.
We lease land or buildings at certain properties from third parties. The leases generally provide us with a right of first refusal in the event of a proposed sale of the property by the landlord. Rental payments are expensed as incurred and have, to the extent applicable, been straight-lined over the term of the lease.
Off-Balance Sheet Financing Arrangements
We do not have any off-balance sheet financing arrangements.
REIT Requirements
In order to maintain our qualification as a real estate investment trust for federal income tax purposes, among other requirements, we must distribute or pay tax on 100% of our capital gains and we must distribute at least 90% of our ordinary taxable income to stockholders. To avoid current entity level U.S. federal income taxes, we plan to distribute 100% of our capital gains and ordinary income to our stockholders annually. We may not have sufficient liquidity to meet these distribution requirements. We have no present intention to pay any dividends on our common stock in the future other than in order to maintain our REIT status, of which dividends our board of directors may decide to pay in the form of cash, common stock or a combination of cash and common stock.
Seasonality
Although we have a year-long temporary leasing program, occupancies for short-term tenants and, therefore, rental income recognized, are higher during the second half of the year. In addition, the majority of our tenants have December or January lease years for purposes of calculating annual overage rent amounts. Accordingly, overage rent thresholds are most commonly achieved in the fourth quarter. As a result, revenue production is generally highest in the fourth quarter of each year.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. For example, estimates and assumptions have been made with respect to fair values of assets and liabilities for purposes of applying the acquisition method of accounting, the useful lives of assets, capitalization of development and leasing costs, recoverable amounts of receivables, initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to acquisitions, impairment of long-lived assets, fair value of debt, and valuation of stock options granted. Actual results could differ from these and other estimates.
Critical Accounting Policies
Critical accounting policies are those that are both significant to the overall presentation of our financial condition and results of operations and require management to make difficult, complex or subjective judgments. Our critical accounting policies are discussed in our Annual Report and have not changed during 2013.




30

Non-GAAP Financial Measures
Real Estate Property Net Operating Income and Core Net Operating Income
We present NOI and Core NOI, as defined below, in this Quarterly Report as supplemental measures of our performance that are not required by, or presented in accordance with GAAP. We believe that NOI and Core NOI are useful supplemental measures of our operating performance. We define NOI as operating revenues (minimum rents, including lease termination fees, tenant recoveries, overage rents, and other income) less property and related expenses (real estate taxes, repairs and maintenance, marketing, other property expenses, and provision for doubtful accounts). We define Core NOI as NOI excluding straight-line rent, amortization of tenant inducements, amortization of above and below-market tenant leases, and amortization of above and below-market ground rent expense. Other real estate companies may use different methodologies for calculating NOI and Core NOI and, accordingly, our NOI and Core NOI may not be comparable to other real estate companies.
Because NOI and Core NOI exclude general and administrative expenses, interest expense, depreciation and amortization, impairment, reorganization items, strategic initiatives, provision for income taxes, gain on extinguishment of debt, straight-line rent, above and below-market tenant leases, and above and below-market ground leases, we believe that NOI and Core NOI provide performance measures that, when compared year over year, reflect the revenues and expenses directly associated with owning and operating regional shopping malls and the impact on operations from trends in occupancy rates, rental rates and operating costs. These measures thereby provide an operating perspective not immediately apparent from GAAP operating income (loss) or net income (loss). We use NOI and Core NOI to evaluate our operating performance on a property-by-property basis because NOI and Core NOI allow us to evaluate the impact that factors such as lease structure, lease rates and tenant base, which vary by property, have on our operating results, gross margins and investment returns.
In addition, management believes that NOI and Core NOI provide useful information to the investment community about our operating performance. However, due to the exclusions noted above, NOI and Core NOI should only be used as supplemental measures of our financial performance and not as an alternative to GAAP operating income (loss) or net income (loss). For reference, and as an aid in understanding management's computation of NOI and Core NOI, a reconciliation from the consolidated and combined net income (loss) as computed in accordance with GAAP to NOI and Core NOI is presented below.
 
 
For the three months ended June 30,
 
 
2013
 
2012
 
 
Consolidated
 
Discontinued Operations
 
Total
 
Consolidated
 
Discontinued Operations
 
Total
 
 
(In thousands)
Net income (loss)
 
$
4,116

 
$
—

 
$
4,116

 
$
(15,940
)
 
$
—

 
$
(15,940
)
Gain on extinguishment of debt
 
(13,995
)
 
—

 
(13,995
)
 
—

 
—

 
—

Loss from discontinued operations
 
513

 
(513
)
 
—

 
1,244

 
(1,244
)
 
—

Provision for income taxes
 
219

 
—

 
219

 
173

 
—

 
173

Interest expense
 
21,659

 
1,536

 
23,195

 
22,008

 
1,691

 
23,699

Interest income
 
(125
)
 
—

 
(125
)
 
(8
)
 
—

 
(8
)
Other
 
969

 
—

 
969

 
1,983

 
—

 
1,983

Depreciation and amortization
 
15,563

 
195

 
15,758

 
16,032

 
741

 
16,773

General and administrative
 
5,248

 
—

 
5,248

 
5,240

 
—

 
5,240

NOI
 
34,167

 
1,218

 
35,385

 
30,732

 
1,188

 
31,920

Above and below market ground rent expense, net
 
30

 
—

 
30

 
31

 
—

 
31

Above and below market tenant leases, net
 
4,114

 
(145
)
 
3,969

 
6,105

 
469

 
6,574

Amortization of tenant inducements
 
250

 
—

 
250

 
—

 
—

 
—

Amortization of straight line rent
 
(879
)
 
(10
)
 
(889
)
 
(1,613
)
 
(44
)
 
(1,657
)
Core NOI
 
$
37,682

 
$
1,063

 
$
38,745

 
$
35,255

 
$
1,613

 
36,868

Acquisitions and dispositions
 
(3,572
)
 
(1,063
)
 
(4,635
)
 
(1,298
)
 
(1,613
)
 
(2,911
)
Termination income
 
(218
)
 
—

 
(218
)
 
(70
)
 
—

 
(70
)
Same Property Core NOI
 
$
33,892

 
$
—

 
$
33,892

 
$
33,887

 
$
—

 
$
33,887




31


 
 
For the six months ended June 30,
 
 
2013
 
2012
 
 
Consolidated
 
Discontinued Operations
 
Total
 
Consolidated
 
Discontinued Operations
 
Total
 
 
(In thousands)
Net income (loss)
 
$
(25,371
)
 
$
—

 
$
(25,371
)
 
$
(42,017
)
 
$
—

 
$
(42,017
)
Gain on extinguishment of debt
 
(13,995
)
 
—

 
(13,995
)
 
—

 
—

 
—

Loss from discontinued operations
 
23,158

 
(23,158
)
 
—

 
2,670

 
(2,670
)
 
—

Provision for income taxes
 
254

 
—

 
254

 
239

 
—

 
239

Interest expense
 
41,303

 
3,227

 
44,530

 
50,320

 
3,368

 
53,688

Interest income
 
(326
)
 
—

 
(326
)
 
(9
)
 
—

 
(9
)
Other
 
1,467

 
—

 
1,467

 
6,442

 
—

 
6,442

Provision for impairment
 
—

 
21,661

 
21,661

 
—

 
—

 
—

Depreciation and amortization
 
31,670

 
763

 
32,433

 
33,163

 
1,884

 
35,047

General and administrative
 
10,099

 
—

 
10,099

 
10,384

 
—

 
10,384

NOI
 
68,259

 
2,493

 
70,752

 
61,192

 
2,582

 
63,774

Above and below market ground rent expense, net
 
61

 
—

 
61

 
62

 
—

 
62

Above and below market tenant leases, net
 
8,413

 
176

 
8,589

 
11,799

 
1,210

 
13,009

Amortization of tenant inducements
 
500

 
—

 
500

 
—

 
—

 
—

Amortization of straight line rent
 
(1,823
)
 
(30
)
 
(1,853
)
 
(3,015
)
 
(141
)
 
(3,156
)
Core NOI
 
$
75,410

 
$
2,639

 
78,049

 
$
70,038

 
$
3,651

 
$
73,689

Acquisitions and dispositions
 
(6,881
)
 
(2,639
)
 
(9,520
)
 
(2,110
)
 
(3,651
)
 
(5,761
)
Termination income
 
(253
)
 
—

 
(253
)
 
(217
)
 
—

 
(217
)
Same Property Core NOI
 
$
68,276

 
$
—

 
68,276

 
$
67,711

 
$
—

 
$
67,711


Funds from Operations and Core Funds from Operations
Consistent with real estate industry and investment community practices, we use FFO, as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), as a supplemental measure of our operating performance. NAREIT defines FFO as net income (loss) (computed in accordance with GAAP), excluding impairment write-downs on depreciable real estate, gains or losses from cumulative effects of accounting changes, extraordinary items and sales of depreciable properties, plus real estate related depreciation and amortization. We also include Core FFO as a supplemental measurement of operating performance. We define Core FFO as FFO excluding straight-line rent, amortization of tenant inducements, amortization of above-and below-market tenant leases, amortization of above-and below-market ground rent expense, reorganization items, amortization of deferred financing costs, mark-to-market adjustments on debt, write-off of market rate adjustments on debt, write-off of deferred financing costs, debt extinguishment costs, provision for income taxes, gain on extinguishment of debt, and other costs. Other real estate companies may use different methodologies for calculating FFO and Core FFO, and accordingly, our FFO and Core FFO may not be comparable to other real estate companies.
We consider FFO and Core FFO useful supplemental measures and a complement to GAAP measures because they facilitate an understanding of the operating performance of our properties. FFO does not include real estate depreciation and amortization required by GAAP because these amounts are computed to allocate the cost of a property over its useful life. Since values for well-maintained real estate assets have historically increased or decreased based upon prevailing market conditions, we believe that FFO provides investors with a clearer view of our operating performance, particularly with respect to our mall properties. Core FFO does not include certain items that are non-cash and certain non-comparable items. FFO and Core FFO are not measurements of our financial performance under GAAP and should not be considered as an alternative to revenues, operating income (loss), net income (loss) or any other performance measures derived in accordance with GAAP or as an alternative to cash flows from operating activities as a measure of our liquidity.

32

For reference, and as an aid in understanding management's computation of FFO and Core FFO, a reconciliation from the consolidated and combined net income (loss) as computed in accordance with GAAP to FFO and Core FFO is presented below:
 
 
For the three months ended June 30,
 
 
2013
 
2012
 
 
Consolidated
 
Discontinued Operations
 
Total
 
Consolidated
 
Discontinued Operations
 
Total
 
 
(In thousands)
Net income (loss)
 
$
4,116

 
$
—

 
$
4,116

 
$
(15,940
)
 
$
—

 
$
(15,940
)
Depreciation and amortization
 
15,563

 
195

 
15,758

 
16,032

 
741

 
16,773

Loss from discontinued operations
 
513

 
(513
)
 
—

 
1,244

 
(1,244
)
 
—

Gain on extinguishment of debt
 
(13,995
)
 
—

 
(13,995
)
 
—

 
—

 
—

FFO
 
6,197

 
(318
)
 
5,879

 
1,336

 
(503
)
 
833

Provision for income taxes
 
219

 
—

 
219

 
173

 
—

 
173

Interest expense
 
 
 
 
 

 
 
 
 
 

Amortization and write-off of market rate adjustments
 
2,252

 
541

 
2,793

 
2,107

 
554

 
2,661

Amortization and write-off of deferred financing costs
 
2,853

 
49

 
2,902

 
3,746

 
54

 
3,800

Debt extinguishment costs
 
1,026

 
—

 
1,026

 
—

 
—

 
—

Amortization of straight line rent for corporate and regional offices
 
63

 
—

 
63

 
—

 
—

 
—

Other
 
969

 
—

 
969

 
1,983

 
—

 
1,983

Above and below market ground rent expense, net
 
30

 
—

 
30

 
31

 
—

 
31

Above and below market tenant leases, net
 
4,114

 
(145
)
 
3,969

 
6,105

 
469

 
6,574

Amortization of tenant inducements
 
250

 
—

 
250

 
—

 
—

 
—

Amortization of straight line rent
 
(879
)
 
(10
)
 
(889
)
 
(1,613
)
 
(44
)
 
(1,657
)
Core FFO
 
$
17,094

 
$
117

 
$
17,211

 
$
13,868

 
$
530

 
$
14,398


33

 
 
For the six months ended June 30,
 
 
2013
 
2012
 
 
Consolidated
 
Discontinued Operations
 
Total
 
Consolidated
 
Discontinued Operations
 
Total
 
 
(In thousands)
Net income (loss)
 
$
(25,371
)
 
$
—

 
$
(25,371
)
 
$
(42,017
)
 
$
—

 
$
(42,017
)
Depreciation and amortization
 
31,670

 
763

 
32,433

 
33,163

 
1,884

 
35,047

Provision for impairment
 
—

 
21,661

 
21,661

 
—

 
—

 
—

Loss from discontinued operations
 
23,158

 
(23,158
)
 
—

 
2,670

 
(2,670
)
 
—

Gain on extinguishment of debt
 
(13,995
)
 
—

 
(13,995
)
 
—

 
—

 
—

FFO
 
15,462

 
(734
)
 
14,728

 
(6,184
)
 
(786
)
 
(6,970
)
Provision for income taxes
 
254

 
—

 
254

 
239

 
—

 
239

Interest expense
 
 
 
 
 

 
 
 
 
 

Amortization and write-off of market rate adjustments
 
3,548

 
1,131

 
4,679

 
13,246

 
1,096

 
14,342

Amortization and write-off of deferred financing costs
 
4,978

 
103

 
5,081

 
5,369

 
99

 
5,468

     Debt extinguishment costs
 
1,886

 
—

 
1,886

 
—

 
—

 
—

Amortization of straight line rent for corporate and regional offices
 
94

 
—

 
94

 
—

 
—

 
—

Other
 
1,467

 
—

 
1,467

 
6,442

 
—

 
6,442

Above and below market ground rent expense, net
 
61

 
—

 
61

 
62

 
—

 
62

Above and below market tenant leases, net
 
8,413

 
176

 
8,589

 
11,799

 
1,210

 
13,009

Amortization of tenant inducements
 
500

 
—

 
500

 
—

 
—

 
—

Amortization of straight line rent
 
(1,823
)
 
(30
)
 
(1,853
)
 
(3,015
)
 
(141
)
 
(3,156
)
Core FFO
 
$
34,840

 
$
646

 
$
35,486

 
$
27,958

 
$
1,478

 
$
29,436


ITEM 3      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
There have been no material changes in the market risks described in our Annual Report.

ITEM 4      CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
Our Chief Executive Officer and Chief Financial Officer participated in an evaluation by our management of the effectiveness of our disclosure controls and procedures as of the end of our fiscal quarter that ended on June 30, 2013. Based on their participation in that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of June 30, 2013 to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and to ensure that information required to be disclosed in our reports filed or furnished under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.

Our CEO and CFO also participated in an evaluation by our management of any changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2013. That evaluation did not identify any changes that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting during the quarter ended June 30, 2013.






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PART II OTHER INFORMATION

ITEM 1       LEGAL PROCEEDINGS
 
In the ordinary course of our business, we are from time to time involved in legal proceedings related to the ownership and operations of our properties. We are not currently involved in any legal or administrative proceedings that we believe are likely to have a materially adverse effect on our business, results of operations or financial condition.

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

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 26, 2012, we completed a rights offering and backstop purchase. Under the terms of the rights offering and backstop purchase, we issued 13,333,333 shares of our common stock, $0.01 par value per share, at a subscription price of $15.00 per share, generating gross proceeds of $200.0 million. The rights offering was effected through a Registration Statement (Registration No. 333-177465) on Form S-11 that was declared effective by the SEC on February 8, 2012. The rights offering commenced on February 13, 2012. Of the 13,333,333 shares of common stock issued, 6,979,321 shares were issued in the rights offering pursuant to the Registration Statement. The remaining 6,354,012 shares were sold to affiliates of Brookfield in accordance with the terms of our backstop purchase agreement with Brookfield, and such sale was made in reliance on the exemption from registration under Section 4(2) of the Securities Act of 1933. There was no managing or soliciting dealer for the offering and we did not pay any kind of fee for the solicitation of the exercise of the rights. Pursuant to the backstop purchase agreement with Brookfield, we paid Brookfield a fee of $6.0 million as consideration for providing the backstop commitment. Net proceeds of the rights offering and backstop purchase approximated $191.6 million, after deducting an aggregate of $8.4 million in expenses incurred in connection with the rights offering and backstop purchase. We used the net proceeds of the offering for general operating, working capital and other corporate purposes, as described in the prospectus comprising a part of the Registration Statement referenced above. As of June 30, 2013, we have used $151.6 million (net of $8.4 million of costs as described above) of the net proceeds of the offering as follows:

•
Used approximately $29.6 million on property acquisitions and anchor acquisitions at properties within our existing portfolio;
•
Used approximately $22.0 million to fund portions of the Company's capital expenditures, leasing commissions, and tenant improvement costs, and
•
Used $100.0 million to pay down our Term Loan and simultaneously increased the Revolver by $100.0 million in order to maintain our current level of liquidity.

As of June 30, 2013, $40.0 million remains for general working capital purposes, including funding future acquisitions, capital expenditures, tenant improvements, and leasing commissions.
There has been no material change in our planned use of proceeds from the rights offering and backstop purchase as described in the final prospectus filed with the SEC pursuant to Rule 424(b).
Issuer Purchases of Equity Securities
Period
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
April 1- April 30, 2013
—

 
$
—

 
—

 
—

May 1- May 31, 2013
—

 
—

 
—

 
—

June 1 - June 30, 2013
980

(1) 
$
20.81

 
—

 
—

Total
980

 
$
20.81

 
—

 
—

Explanatory Note:

(1) Consists of the repurchase of 980 shares of our common stock in open-market transactions with the vesting of restricted shares of our common stock.
We expended approximately $0.02 million to repurchase these shares.


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ITEM 3  DEFAULTS UPON SENIOR SECURITIES
 
None

ITEM 4  MINE SAFETY DISCLOSURES
 
Not Applicable

ITEM 5   OTHER INFORMATION
 
None

ITEM 6   EXHIBITS
 
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2 
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101
The following financial information from Rouse Properties, Inc.’s. Quarterly Report on Form 10-Q for the three and six months ended June 30, 2013 has been filed with the SEC on August 5, 2013, formatted in XBRL (Extensible Business Reporting Language): (1) Consolidated Balance Sheets, (2) Consolidated and Combined Statements of Operations and Comprehensive Income (Loss), (3) Consolidated and Combined Statements of Equity, (4) Consolidated and Combined Statements of Cash Flows and (5) Notes to Consolidated and Combined Financial Statements, tagged as blocks of text.  Pursuant to Rule 406T of Regulation S-T, this information is deemed not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and is not otherwise subject to liability under these sections.

Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the registrant has not filed debt instruments relating to long-term debt that is not registered and for which the total amount of securities authorized thereunder does not exceed 10% of total assets of the registrant and its subsidiaries on a consolidated basis as of June 30, 2013.  The registrant agrees to furnish a copy of such agreements to the SEC upon request.

36


SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
ROUSE PROPERTIES, INC.
 
 
(Registrant)
 
 
 
 
 
 
Date:
August 5, 2013
By:
/s/ John Wain
 
 
 
John Wain
 
 
 
Chief Financial Officer
 
 
 
(on behalf of the Registrant and as Principal Financial Officer)




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Exhibit Index
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101
The following financial information from Rouse Properties, Inc’s. Quarterly Report on Form 10-Q for the three and six months ended June 30, 2013 has been filed with the SEC on August 5, 2013, formatted in XBRL (Extensible Business Reporting Language): (1) Consolidated Balance Sheets, (2) Consolidated and Combined Statements of Operations and Comprehensive Income (Loss), (3) Consolidated and Combined Statements of Equity, (4) Consolidated and Combined Statements of Cash Flows and (5) Notes to Consolidated and Combined Financial Statements, tagged as blocks of text. Pursuant to Rule 406T of Regulation S-T, this information is deemed not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and is not otherwise subject to liability under these sections.



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