-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RPo0B+Qk23ewbURdTUhYhtjBnG+/6Z0XFdBtDZyoqTTVfrDHWFygns6n7/q4xI2u DRuBNbMYFxrgeyvbCq22LA== 0000950137-04-006277.txt : 20040805 0000950137-04-006277.hdr.sgml : 20040805 20040805165253 ACCESSION NUMBER: 0000950137-04-006277 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040805 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL GROWTH PROPERTIES INC CENTRAL INDEX KEY: 0000895648 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 421283895 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11656 FILM NUMBER: 04955278 BUSINESS ADDRESS: STREET 1: 110 N WACKER DRIVE STREET 2: STE 3100 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3129605000 MAIL ADDRESS: STREET 1: 110 N WACKER DRIVE STREET 2: STE 3100 CITY: CHICAGO STATE: IL ZIP: 60606 10-Q 1 c87340e10vq.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 Commission file number 1-11656 GENERAL GROWTH PROPERTIES, INC. ------------------------------- (Exact name of registrant as specified in its charter) Delaware 42-1283895 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 110 N. Wacker Dr., Chicago, IL 60606 ------------------------------------ (Address of principal executive offices, Zip Code) (312) 960-5000 -------------- (Registrant's telephone number, including area code) N / A ----- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO _______ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO _______ The number of shares of Common Stock, $.01 par value, outstanding on August 4, 2004 was 218,596,587. GENERAL GROWTH PROPERTIES, INC. INDEX
PAGE NUMBER ------ PART I FINANCIAL INFORMATION Item 1: Financial Statements Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003.................................... 3 Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2004 and 2003.................... 4 Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003.............................. 5 Notes to Consolidated Financial Statements................................... 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 30 Liquidity and Capital Resources of the Company............................... 36 Item 3: Quantitative and Qualitative Disclosures about Market Risk............... 42 Item 4: Controls and Procedures.................................................. 43 PART II OTHER INFORMATION. Item 4: Submission of Matters to a Vote of Security Holders...................... 43 Item 6: Exhibits and Reports on Form 8-K......................................... 44 SIGNATURE......................................................................... 45
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENERAL GROWTH PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003 (Dollars in thousands, except for per share and per unit amounts)
JUNE 30, 2004 DECEMBER 31, 2003 --------------- ------------------ ASSETS Investment in real estate: Land $ 1,488,769 $ 1,384,662 Buildings and equipment 9,529,278 8,121,270 Less accumulated depreciation (1,257,898) (1,100,840) Developments in progress 237,832 168,521 --------------- ------------------ Net property and equipment 9,997,981 8,573,613 Investment in and loans to/from Unconsolidated Real Estate Affiliates 755,816 630,613 --------------- ------------------ Net investment in real estate 10,753,797 9,204,226 Cash and cash equivalents 15,265 10,677 Tenant accounts receivable, net 150,074 148,485 Deferred expenses, net 145,727 140,701 Prepaid expenses and other assets 83,338 78,808 --------------- ------------------ $ 11,148,201 $ 9,582,897 =============== ================== LIABILITIES AND STOCKHOLDERS' EQUITY Mortgage notes and other debt payable $ 8,171,891 $ 6,649,490 Distributions payable 7,419 6,828 Accounts payable and accrued expenses 478,189 352,346 --------------- ------------------ 8,657,499 7,008,664 Minority interests: Preferred 403,506 495,211 Common 407,566 408,613 --------------- ------------------ 811,072 903,824 Commitments and contingencies - - Preferred Stock: $100 par value; 5,000,000 shares authorized; none of which were issued and outstanding at June 30, 2004 and December 31, 2003 - - Stockholders' Equity: Common stock: $.01 par value; 875,000,000 shares authorized; 218,578,639 and 217,293,976 shares issued and outstanding as of June 30, 2004 and December 31, 2003, respectively 2,186 2,173 Additional paid-in capital 1,936,737 1,913,447 Retained earnings (accumulated deficit) (240,792) (220,512) Notes receivable-common stock purchase (5,912) (6,475) Unearned compensation-restricted stock (2,451) (1,949) Accumulated other comprehensive loss (10,138) (16,275) --------------- ------------------ Total stockholders' equity 1,679,630 1,670,409 --------------- ------------------ $ 11,148,201 $ 9,582,897 =============== ==================
The accompanying notes are an integral part of these consolidated financial statements. 3 of 45 GENERAL GROWTH PROPERTIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED) (Dollars in thousands, except for per share and per unit amounts)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2004 2003 2004 2003 ------------- -------------- -------------- ------------- Revenues: Minimum rents $ 232,922 $ 173,682 $ 455,578 $ 343,403 Tenant recoveries 105,832 80,578 208,436 151,656 Overage rents 5,013 3,542 13,781 10,044 Management and other fees 20,163 20,278 38,864 40,601 Other 12,316 6,607 21,172 12,870 ------------- -------------- -------------- ------------- Total revenues 376,246 284,687 737,831 558,574 Expenses: Real estate taxes 29,043 20,497 57,356 40,617 Repairs and maintenance 25,496 18,560 50,353 36,269 Marketing 10,515 7,585 20,955 15,761 Other property operating costs 48,855 34,770 90,161 69,611 Provision for doubtful accounts 2,567 1,700 5,364 3,513 Property management and other costs 24,694 29,624 49,713 56,248 General and administrative 2,812 2,893 5,002 5,704 Depreciation and amortization 86,051 52,304 159,218 104,283 ------------- -------------- -------------- ------------- Total expenses 230,033 167,933 438,122 332,006 ------------- -------------- -------------- ------------- Operating income 146,213 116,754 299,709 226,568 Interest income 366 461 786 1,056 Interest expense (90,460) (64,225) (177,547) (124,968) Income allocated to minority interests (23,125) (23,111) (48,761) (46,765) Equity in income of unconsolidated affiliates 18,154 21,124 36,084 43,409 ------------- -------------- -------------- ------------- Income from continuing operations 51,148 51,003 110,271 99,300 Discontinued operations, net of minority interest: Income from operations - - - 222 Gain on disposition - - - 3,069 ------------- -------------- -------------- ------------- Net income $ 51,148 $ 51,003 $ 110,271 $ 102,591 ------------- -------------- -------------- ------------- Convertible preferred stock dividends - (6,953) - (13,030) ------------- -------------- -------------- ------------- Net income available to common stockholders $ 51,148 $ 44,050 $ 110,271 $ 89,561 ============= ============== ============== ============= Basic earnings per share: Continuing operations $ 0.23 $ 0.23 $ 0.51 $ 0.46 Discontinued operations - - - 0.02 ------------- -------------- -------------- ------------- Total $ 0.23 $ 0.23 $ 0.51 $ 0.48 ============= ============== ============== ============= Diluted earnings per share: Continuing operations $ 0.23 $ 0.23 $ 0.50 $ 0.45 Discontinued operations - - - 0.02 ------------- -------------- -------------- ------------- Total $ 0.23 $ 0.23 $ 0.50 $ 0.47 ============= ============== ============== ============= Distributions declared per share $ 0.30 $ 0.24 $ 0.60 $ 0.48 ============= ============== ============== ============= Net income $ 51,148 $ 51,003 $ 110,271 $ 102,591 Other comprehensive income, net of minority interest: Net unrealized gains (losses) on financial instruments 5,993 (1,603) 6,319 (1,524) Minimum pension liability adjustment (99) 136 (182) (27) ------------- -------------- -------------- ------------- Comprehensive income, net $ 57,042 $ 49,536 $ 116,408 $ 101,040 ============= ============== ============== =============
The accompanying notes are an integral part of these consolidated financial statements. 4 of 45 GENERAL GROWTH PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED) (Dollars in thousands)
SIX MONTHS ENDED JUNE 30, 2004 2003 ----------- ----------- Cash flows from operating activities: Net Income $ 110,271 $ 102,591 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Minority interests, including income from discontinued operations 48,761 47,804 Equity in income of unconsolidated affiliates (36,084) (43,409) Provision for doubtful accounts 5,364 3,513 Distributions received from unconsolidated affiliates 32,940 43,409 Depreciation 150,260 96,449 Amortization 14,577 11,912 Gain on disposition - (4,038) Net Changes: Tenant accounts receivable (6,954) (7,233) Prepaid expenses and other assets (1,808) (25,698) Deferred expenses (10,032) (15,717) Accounts payable and accrued expenses 33,903 28,787 ----------- ----------- Net cash provided by operating activities 341,198 238,370 ----------- ----------- Cash flows from investing activities: Acquisition/development of real estate and improvements and additions to properties (1,316,349) (554,918) Proceeds from sale of investment property - 14,978 Increase in investments in unconsolidated affiliates (143,052) (10,323) Distributions received from unconsolidated affiliates in excess of income 20,164 65,530 Proceeds from repayment of notes receivable for common stock purchases 563 563 Loans (repayments) from unconsolidated affiliates, net (8,884) (73,537) Net proceeds from sale of investments in marketable securities - 476 ----------- ----------- Net cash used in investing activities (1,447,558) (557,231) ----------- ----------- Cash flows from financing activities: Cash distributions paid to common stockholders (130,550) (90,167) Cash distributions paid to holders of Common Units (33,575) (28,217) Cash distributions paid to holders of Preferred Units and PIERS (20,012) (32,097) Proceeds from sale of common stock, net of issuance costs 13,716 18,924 Redemption of preferred minority interests: PDC Series A Perpetual Preferred Units (12,750) - Other preferred stock of consolidated subsidiaries (173) - Proceeds from issuance of mortgage notes and other debt payable 2,396,399 1,606,500 Principal payments on mortgage notes and other debt payable (1,095,900) (1,177,805) Increase in deferred expenses (6,207) (11,902) ----------- ----------- Net cash provided by financing activities 1,110,948 285,236 ----------- ----------- Net change in cash and cash equivalents 4,588 (33,625) Cash and cash equivalents at beginning of period 10,677 53,640 ----------- ----------- Cash and cash equivalents at end of period $ 15,265 $ 20,015 =========== =========== Supplemental disclosure of cash flow information: Interest paid $ 174,634 $ 118,890 Interest capitalized 3,602 2,979 Non-cash investing and financing activities: Common stock issued in exchange for PIERS $ - $ 5,832 Common stock issued in exchange for Operating Partnership Units 1,314 6,158 Common stock issued in exchange for convertible preferred units 8,956 - Assumption of debt in conjunction with acquisition of property 134,902 - Operating Partnership Units and common stock issued as consideration for purchase of real estate 25,132 - Distributions payable 7,419 73,053
The accompanying notes are an integral part of these consolidated financial statements. 5 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) NOTE 1 ORGANIZATION Readers of this quarterly report should refer to the Company's (as defined below) audited financial statements for the year ended December 31, 2003 which are included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (Commission File No. 1-11656), as certain footnote disclosures which would substantially duplicate those contained in the 2003 annual audited financial statements have been omitted from this report. Capitalized terms used, but not defined in this quarterly report have the same meanings as in the Company's 2003 Annual Report on Form 10-K. GENERAL General Growth Properties, Inc., a Delaware corporation ("General Growth"), was formed in 1986 to own and operate retail properties. All references to the "Company" in these Notes to Consolidated Financial Statements include General Growth and those entities owned or controlled by General Growth (including the Operating Partnership and the LLC as described below), unless the context indicates otherwise. The Company conducts substantially all of its business through GGP Limited Partnership (the "Operating Partnership" or "GGPLP"). Effective December 5, 2003, the Company amended (as approved by a vote of the holders of General Growth's common stock (the "Common Stock")) the Company's charter to effectuate a three-for-one split of its Common Stock, increase the number of authorized shares of Common Stock from 210 million to 875 million shares and change the par value of its Common Stock from $.10 per share to $.01 per share. In addition, the Operating Partnership currently has common units of limited partnership interest ("Units") outstanding that may be exchanged by their holders, under certain circumstances, for shares of Common Stock on a one-for-one basis as described below in this Note 1. These Units were also split on a three-for-one basis so that they continue to be exchangeable on a one-for-one basis into shares of Common Stock. In the accompanying consolidated financial statements, unless otherwise noted, all previous applicable share or per share disclosure amounts have been reflected on a post-split basis. As of June 30, 2004, the Company either directly or through the Operating Partnership and subsidiaries owned a controlling interest in 125 operating retail properties (regional malls and community centers), collectively, the "Consolidated Properties" as well as 100% of General Growth Management, Inc. ("GGMI") and other mixed-use commercial business properties and potential development sites. As of June 30, 2004, the Company holds ownership interests in various joint ventures, collectively, the "Unconsolidated Real Estate Affiliates", as described in Note 3. For the purposes of this report, the 44 regional mall shopping centers owned by the Unconsolidated Real Estate Affiliates are collectively referred to as the "Unconsolidated Properties" and, together with the Consolidated Properties, comprise the "Company Portfolio". BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of the Company and the Operating Partnership consisting of the Consolidated Properties, GGMI and the Unconsolidated Real Estate Affiliates (Note 3). Included in the consolidated financial statements are five joint ventures, which are jointly owned with non-controlling independent joint venturers. Income allocated to minority interests in these joint ventures includes the share of such properties' operations (generally computed as the respective joint venture partner ownership percentage) applicable to such non-controlling venturers. Acquisitions (Note 2) are accounted for utilizing the purchase method of accounting and accordingly, the results of operations are included in the Company's results of operations from the respective dates of acquisition. All significant intercompany balances and transactions have been eliminated. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods have been 6 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) included. The results for the interim periods ended June 30, 2004 are not necessarily indicative of the results to be obtained for the full fiscal year. PREFERRED AND COMMON STOCK During May 2003, General Growth called for redemption on July 15, 2003 all of its outstanding Depositary Shares, each representing 1/40 of a share of 7.25% Preferred Income Equity Redeemable Stock, Series A ("PIERS"). The Depositary Shares (and the related PIERS) were convertible into Common Stock at the rate of 1.8891 shares of Common Stock per Depositary Share. Through July 14, 2003, holders of 6,861,800 shares elected to convert their Depositary Shares and received a total of 12,963,357 shares of Common Stock. The Company redeemed the remaining 6,638,200 Depositary Shares on July 15, 2003. As a result of this redemption, an additional 12,540,186 shares of Common Stock were issued and approximately $17 was paid in cash to redeem fractional shares of PIERS. Other classes of preferred stock of General Growth have been created to permit the future potential conversion of certain equity interests assumed by the Company in conjunction with various acquisitions, into General Growth equity interests. As no such preferred stock has been issued and, for certain classes of such preferred stock, the conditions to allow such a conversion have not yet occurred, such additional classes of preferred stock have not been presented in the accompanying consolidated balance sheets as of June 30, 2004 and December 31, 2003. MINORITY INTEREST As of June 30, 2004, General Growth owned an approximate 80% general partnership interest in the Operating Partnership. The remaining approximate 20% minority interest in the Operating Partnership is held by limited partners that include trusts for the benefit of the families of the original stockholders of the Company and subsequent contributors of properties to the Company. These minority interests are represented by the Units. The Units can be exchanged at the option of the holders for cash or, at General Growth's election with certain restrictions, for shares of Common Stock on a one-for-one basis. The holders of the Units also share equally with General Growth's common stockholders in any distributions by the Operating Partnership on the basis that one Unit is equivalent to one share of Common Stock. Changes in outstanding Operating Partnership Units (excluding the Preferred Units) for the six months ended June 30, 2004 and for the year ended December 31, 2003, were as follows:
UNITS ---------- January 1, 2003 58,668,741 Exchanges for Common Stock (2,956,491) ---------- December 31, 2003 55,712,250 Redemption of Preferred Units 435,766 Exchanges for Common Stock (607,914) ---------- June 30, 2004 55,540,102 ==========
7 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) The following is a detailed listing of the components of minority interest-preferred at June 30, 2004 and December 31, 2003.
Carrying Amount Per Unit -------------------------- Coupon Issuing Number Liquidation Redeemable by June 30, December 31, Security Type Rate Entity of Units Preference Issuer 2004 2003 - ------------------------------------- ------ ------- --------- ----------- ------------- -------- ------------ Perpetual Preferred Units RPU 8.95% LLC 940,000 $ 250 (1) $235,000 $235,000 CPU 8.25% LLC 20,000 250 N/A 5,000 5,000 PDC Series A 8.75% PDC 510,000 25 (2) - 12,750 PDC Series B 8.95% PDC 3,800,000 25 (3) - 95,000 PDC Series C 8.75% PDC 320,000 25 May 2005 8,000 8,000 -------- -------- 248,000 355,750 -------- -------- Convertible Preferred Units Series B-JP Realty 8.50% GGPLP 1,426,393 50 N/A 71,320 71,320 Series C-Glendale Galleria 7.00% GGPLP 822,626 50 N/A 32,176 41,131 Series D-Foothills Mall (Note 2) 6.50% GGPLP 532,750 50 N/A 26,637 26,637 Series E-Four Seasons Town Centre 7.00% GGPLP 502,658 50 N/A 25,132 - (Note 2) -------- -------- 155,265 139,088 -------- -------- Other preferred stock of consolidated subsidiaries N/A various 373 1,000 (4) 241 373 -------- -------- Total Minority Interest-Preferred $403,506 $495,211 ======== ========
(1) $175,000 redeemable by issuer in May 2005 and $60,000 in April 2007. (2) Redeemed in April 2004. (3) Carrying amount of $95,000 reclassified to liabilities due to July 2004 redemption notice issued in June 2004. (4) Redeemable on demand, under certain circumstances. EARNINGS PER SHARE ("EPS") The following are the reconciliations of the numerators and denominators of basic and diluted EPS.
Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 ----------------- --------- ---------------- ---------- Numerators: Income from continuing operations $ 51,148 $ 51,003 $ 110,271 $ 99,300 Dividends on PIERS (preferred stock dividends) - (6,953) - (13,030) ----------------- --------- ---------------- ---------- Income from continuing operations available to common stockholders 51,148 44,050 110,271 86,270 Discontinued operations, net - - - 3,291 ----------------- --------- ---------------- ---------- Net income available to common stockholders - for basic and diluted EPS $ 51,148 $ 44,050 $ 110,271 $ 89,561 ================= ========= ================ ========== Denominators: Weighted average common shares outstanding (in thousands) - for basic EPS 218,075 188,623 217,814 188,206 Effect of dilutive securities - options 807 763 836 643 ----------------- --------- ---------------- ---------- Weighted average common shares outstanding (in thousands) - for diluted EPS 218,882 189,386 218,650 188,849 ================= ========= ================ ==========
8 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) Certain stock options outstanding were not included in the computation of diluted earnings per share either because the exercise price of the stock options was higher than the average market price of the Common Stock for the applicable periods and therefore, the effect would be anti-dilutive or because the conditions which must be satisfied prior to the issuance of any such shares were not achieved during the applicable periods. Such excluded options totaled approximately 1,813,000 for the three months ended June 30, 2004, 347,000 for the three months ended June 30, 2003, 1,405,000 for the six months ended June 30, 2004 and 170,000 for the six months ended June 30, 2003. The outstanding Units and the share of income attributable to such Units have also been excluded from the Company's calculation of diluted earnings per share as inclusion of such items would have no net effect on the reported EPS amounts. NOTES RECEIVABLE - OFFICERS During 1998, the Company made available to certain officers the ability to issue promissory notes in connection with their exercise of options to purchase shares of the Company's Common Stock. From April 9, 1998 to April 30, 2002 an aggregate of $24,997 in advances were made to such officers in connection with their exercise of options to purchase an aggregate of 2,703,000 shares of Common Stock. As of April 30, 2002, the Company's Board of Directors decided to terminate the availability of loans to officers to exercise options on the Common Stock. In conjunction with this decision, the Company and the officers restructured the terms of the promissory notes, including the approximately $2,823 previously advanced in the form of income tax withholding payments made by the Company on behalf of such officers. The previous notes, which bore interest at a rate equal to LIBOR plus 50 basis points, were full recourse to the officers, were collateralized by the shares of Common Stock issued upon exercise of such options, provided for quarterly payments of interest and were payable to the Company on demand. Each of the officers repaid no less than 60% of the principal and 100% of the interest due under such officer's note as of April 30, 2002 and the remaining amounts, approximately $10,141 as of April 30, 2002, were represented by amended and restated promissory notes. These amended and restated, fully recourse notes are payable in monthly installments of principal and interest (at a market rate which varies monthly computed at LIBOR (1.37% at June 30, 2004) plus 125 basis points per annum) until fully repaid in May 2009 (or within 90 days of the officer's separation from the Company, if earlier). As of June 30, 2004, the current outstanding balance under the promissory notes was $6,623, of which approximately $711 relating to income tax withholding payments has been reflected in prepaid expenses and other assets and approximately $5,912 has been reflected as a reduction of Stockholders' Equity. REVENUE RECOGNITION Minimum rent revenues are recognized on a straight-line basis over the term of the related leases. As of June 30, 2004, approximately $83,401 has been recognized as straight-line rents receivable (representing the current net cumulative rents recognized prior to when billed and collectible as provided by the terms of the leases), all of which is included in tenant accounts receivable, net in the accompanying consolidated balance sheet. Accretion related to the below-market leases at properties acquired as provided by SFAS 141 and 142 is included in minimum rents and totaled $12,034 for the six months ended June 30, 2004 and $6,655 for the six months ended June 30, 2003. In addition, amounts collected from tenants to allow the termination of their leases prior to their scheduled termination dates have been included in minimum rents and totaled $5,263 for the six months ended June 30, 2004 and $5,561 for the six months ended June 30, 2003. Recoveries from tenants are computed as a formula related to taxes, insurance and other shopping center operating expenses and are generally recognized as revenues in the period the related costs are incurred. Overage rents are recognized on an accrual basis once tenant sales revenues exceed contractual tenant lease thresholds. 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 the recovery experience of the Company. Management fees primarily represent GGMI management and 9 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) leasing fees and financing fees and other ancillary services performed by the Company for the benefit of its Unconsolidated Real Estate Affiliates and are recognized as revenues when earned. Fees recognized by the Company for services performed for the Unconsolidated Properties were $30,337 for the six months ended June 30, 2004 and $36,944 for the six months ended June 30, 2003. FINANCIAL INSTRUMENTS The Company uses derivative financial instruments to reduce risk associated with interest rate fluctuations. In some cases, a lender has required the Company to reduce volatility associated with interest rate risk exposure on variable-rate borrowings. In other instances, the Company chose to reduce its exposure to interest rate risk. In order to limit interest rate risk on variable-rate borrowings, the Company may enter into interest rate swap or interest rate cap agreements to hedge interest rate risks. The Company's only hedging activities are the cash flow hedges represented by its interest rate cap and swap agreements relating to its commercial mortgage-backed securities and unsecured term loans (Note 4). These agreements either place a limit on the effective rate of interest the Company will bear on such variable rate obligations or fix the effective interest rate on such obligations to a certain rate. The Company has concluded that these agreements are highly effective in achieving its objective of reducing its exposure to variability in cash flows relating to these variable rate obligations in any interest rate environment for loans subject to swap agreements and for loans with related cap agreements, when the applicable rates exceed the strike rates of the agreements. Current accounting standards require that the Company fair value the interest rate cap and swap agreements as of the end of each reporting period. In conjunction with the GGP MPTC financing (as defined and more fully described in Note 4), certain interest rate cap agreements were purchased and sold. These purchased and sold interest rate cap agreements do not qualify for hedge accounting and changes in the fair values of these agreements are reflected in interest expense. Finally, certain interest rate swap agreements were entered into with the objective of fixing the interest rates on portions of the Company's variable rate financing. These swap agreements have been designated as cash flow hedges on $725,000 of the Company's consolidated variable rate debt and $200,000 ($100,000 Company's share) of variable rate debt of Unconsolidated Real Estate Affiliates. The Company has recorded other comprehensive gains/(losses) due to increases/decreases in the current fair value of such swap agreements of $6,319 for the six months ended June 30, 2004 and ($1,524) for the six months ended June 30, 2003. COMPREHENSIVE INCOME Comprehensive income is a more inclusive financial reporting methodology that encompasses net income and all other changes in equity except those resulting from investments by and distributions to equity holders. Included in comprehensive income, but not net income, are unrealized gains or losses on financial instruments designated as cash flow hedges as described above and the change in the fair value of plan assets relating to a frozen pension plan of Victoria Ward (assumed by the Company upon acquisition of Victoria Ward in May 2002) of $182 for the six months ended June 30, 2004 and $27 for the six months ended June 30, 2003. BUSINESS SEGMENT INFORMATION The primary business of General Growth and its consolidated affiliates is owning and operating shopping centers. General Growth evaluates operating results and allocates resources on a property-by-property basis and does not distinguish or evaluate its consolidated operations on a geographic basis. Accordingly, General Growth has determined it has a single reportable segment. Further, all material operations are within the United States and no customer or tenant comprises more than 10% of consolidated revenues. 10 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) STOCK INCENTIVE PLANS General Growth has incentive stock plans designed to attract and retain officers and key employees. The Company's incentive stock plans provide for stock and option grants to employees in the following forms: - Restricted and unrestricted stock grants - Options that vest generally over a fixed period of time (generally, grants pursuant to the 2003 Incentive Stock Plan and the 1993 Stock Incentive Plan) - Threshold-vesting stock options ("TSOs") (generally, grants pursuant to the Company's 1998 Incentive Plan) During 2003, the 1993 Stock Incentive Plan expired as provided by its terms. Accordingly, the Company, as approved in May 2003 at the annual meeting of its stockholders, established a new incentive stock plan (the "2003 Incentive Stock Plan") to replace the 1993 Stock Incentive Plan. The terms of the 2003 Incentive Stock Plan are similar to those of the 1993 Stock Incentive Plan but provide for the issuance of up to 9,000,000 shares of Common Stock pursuant to the plan. Pursuant to the Company's stock incentive plans, the exercise price of the TSOs to be granted to a participant will be the Fair Market Value ("FMV") of a share of Common Stock on the date the TSO is granted. The threshold price (the "Threshold Price") which must be achieved in order for the TSO to vest will be determined by multiplying the FMV on the date of grant by the estimated annual growth rate (currently set at 7%) and compounding the product over a five-year period. Shares of the Common Stock must achieve and sustain the Threshold Price for at least 20 consecutive trading days at any time over the five years following the date of grant in order for the TSO to vest. All TSOs granted prior to 2004 have a ten year term. Any future TSOs granted must vest within five years of the grant date in order to avoid forfeiture. The TSOs granted in 2004 provide that, upon vesting, they must be exercised by the holder within 30 days after vesting. The aggregate number of shares of Common Stock which may be subject to TSOs issued pursuant to the 1998 Incentive Plan may not exceed 6,000,000, subject to certain customary adjustments to prevent dilution. The following is a summary of the TSOs that have been awarded through June 30, 2004:
TSO GRANT YEAR 2004 2003 2002 2001 2000 1999 ------------ ---------- ----------- ------------ ------------ ------------ Exercise price $ 30.94 $ 16.77 $ 13.58 $ 11.58 $ 9.99 $ 10.56 Threshold Vesting Stock Price $ 43.39 $ 23.52 $ 19.04 $ 16.23 $ 14.01 $ 14.81 Fair value of options on grant date $ 1.59 $ 1.31 $ 1.13 $ 0.74 $ 0.50 $ 0.45 Shares: Original Grant 1,031,480 900,000 779,025 989,988 913,047 941,892 Forfeited at June 30, 2004 (33,467) (57,384) (119,157) (147,225) (217,626) (281,985) Vested and exchanged for cash at June 30, 2004 - (549,594) (495,693) (610,011) (531,588) (460,623) Vested and exercised at June 30, 2004 - (125,637) (105,810) (168,651) (147,000) (189,381) ------------ ---------- ----------- ------------ ------------ ------------ 1998 Incentive Plan TSOs outstanding at June 30, 2004 998,013 167,385 58,365 64,101 16,833 9,903 ============ ========== =========== ============ ============ ============
Increases in the price of the Common Stock since the respective grant dates caused the TSOs granted in 1999, 2000 and 2001 to become vested in 2002 and the TSOs granted in 2002 and 2003 to become vested in 2003. The vesting of the TSOs resulted in the recognition of compensation expense of approximately $674 for the six months ended June 30, 2004 and $14,908 for the year ended December 31, 2003. 11 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) During the second quarter of 2002, the Company elected to adopt the fair value based employee stock-based compensation expense recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), prospectively. The Company had previously applied the intrinsic value based expense recognition provisions set forth in APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). SFAS 123 states that the adoption of the fair value based method is a change to a preferable method of accounting. The transition rules for adoption of SFAS 123 provide that prior grants of options, whether from the Company's 1993 Stock Incentive Plan (now expired) or the 1998 Incentive Plan, are accounted for under APB 25. Had compensation costs for such prior grants of options been recorded under SFAS 123, the Company's net income available to common stockholders and earnings per share would have been nominally reduced but there would have been no effect on reported basic or diluted earnings per share. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. For example, significant estimates and assumptions have been made with respect to useful lives of assets, capitalization of development and leasing costs, recoverable amounts of receivables and deferred taxes, initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to property acquisitions. Actual results could differ from those estimates. RECLASSIFICATIONS Certain amounts in the 2003 consolidated financial statements have been reclassified to conform to the current year presentation. NOTE 2 PROPERTY ACQUISITIONS, RENOVATIONS, EXPANSIONS AND DEVELOPMENTS 2003 ACQUISITIONS - On April 30, 2003, the Company acquired Peachtree Mall, an enclosed regional mall located in Columbus, Georgia. The purchase price was approximately $87,600, which was paid at closing with an acquisition loan of approximately $53,000 (bearing interest at a rate per annum of LIBOR plus 85 basis points and maturing in April 2008, assuming all no-cost extension options are exercised) and the balance from cash on hand and amounts borrowed under the Company's credit facilities. - On June 11, 2003, the Company acquired Saint Louis Galleria, an enclosed mall in St. Louis, Missouri. The aggregate consideration paid for Saint Louis Galleria was approximately $235,000. The consideration was paid from cash on hand, proceeds from refinancings of existing long-term debt, and an approximately $176,000 acquisition loan which bears interest at LIBOR plus 165 basis points. The loan requires monthly payments of interest-only and is scheduled to mature in June 2008 assuming all no-cost extension options are exercised. - On June 11, 2003, the Company acquired Coronado Center, an enclosed mall in Albuquerque, New Mexico. The aggregate consideration paid for Coronado Center was approximately $175,000. The consideration was paid in the form of cash borrowed under the Company's credit facilities and an 12 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) approximately $131,000 acquisition loan which initially bore interest at LIBOR plus 85 basis points. In September 2003, $30,000 was repaid under the acquisition loan and, pursuant to the original loan terms, the interest rate spread on the loan was reset to LIBOR plus 91 basis points. The loan requires monthly payments of interest-only and is scheduled to mature in October 2008 assuming all no-cost extension options are exercised. - On July 1, 2003, the Company acquired the 49% ownership interest in GGP Ivanhoe III, Inc. ("GGP Ivanhoe III") which was held by the Company's joint venture partner (an affiliate of Ivanhoe Cambridge, Inc. of Montreal, Canada ("Ivanhoe")), thereby increasing the Company's ownership interest to a full 100%. The aggregate consideration for the 49% ownership interest in Ivanhoe III was approximately $459,000. Approximately $268,000 of existing mortgage debt was assumed in connection with this acquisition with the balance of the aggregate consideration, or approximately $191,000, being funded from proceeds from the refinancing of existing long-term debt and new mortgage loans on previously unencumbered properties. Concurrently with this transaction, a new joint venture, GGP Ivanhoe IV, Inc., ("GGP Ivanhoe IV") was created between the Company and Ivanhoe to own Eastridge Mall, which previously had been owned by GGP Ivanhoe III. The Company's ownership interest in GGP Ivanhoe IV is 51% and Ivanhoe's ownership interest is 49%. - On August 27, 2003, the Company acquired Lynnhaven Mall, an enclosed mall in Virginia Beach, Virginia for approximately $256,500. The consideration was paid in the form of cash borrowed under an existing unsecured credit facility and a $180,000 interest-only acquisition loan. The acquisition loan currently bears interest at a rate per annum of LIBOR plus 125 basis points and is scheduled to mature in August 2008, assuming the exercise of all no-cost extension options. - On October 14, 2003, the Company acquired Sikes Senter, an enclosed mall located in Wichita Falls, Texas. The purchase price was approximately $61,000, which was paid at closing with an acquisition loan of approximately $41,500 (bearing interest at a rate per annum of LIBOR plus 70 basis points and scheduled to mature in November 2008, assuming all no-cost extension options are exercised) and the balance from cash on hand and amounts borrowed under the Company's credit facilities. - On October 29, 2003, the Company acquired The Maine Mall, an enclosed mall in Portland, Maine. The purchase price paid for The Maine Mall was approximately $270,000. The consideration was paid in the form of cash borrowed under the Company's credit facilities and an approximately $202,500 acquisition loan. During March 2004, a $40,500 paydown was made and the loan now bears interest at LIBOR plus 125 basis points. The loan requires monthly payments of interest-only and matures in October 2008, assuming exercise by the Company of all no-cost extension options. - On October 31, 2003, the Company acquired Glenbrook Square, an enclosed mall in Fort Wayne, Indiana. The purchase price paid for Glenbrook Square was approximately $219,000. The consideration was paid from cash on hand, proceeds from refinancings of existing long-term debt and by an approximately $164,250 acquisition loan which currently bears interest at LIBOR plus 108 basis points. The loan requires monthly payments of interest only and is scheduled to mature in April 2009 (assuming the exercise by the Company of all no-cost extension options). - On December 5, 2003, the Company acquired Foothills Mall and Shops, four adjacent shopping centers in Foothills, Colorado. The purchase price paid was approximately $100,500. The consideration was paid from cash on hand, including borrowings under an existing line of credit, approximately $45,750 in assumed debt and approximately $26,637 in new 6.5% convertible preferred units of Operating Partnership interests. The assumed debt requires monthly payments of principal and interest, bears interest at a weighted-average rate per annum of approximately 6.6% and matures in September 2008. The $26,637 of 6.5% preferred units are comprised of 532,750 preferred units which 13 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) are convertible, with certain restrictions, at any time by the holder to common units of the Operating Partnership (initially at the rate of 1.508 common units for each preferred unit). - On December 23, 2003, the Company acquired Chico Mall, an enclosed mall in Chico, California. The purchase price paid for Chico Mall was approximately $62,390. The consideration was paid in the form of cash borrowed under an existing unsecured revolving credit facility and the assumption of approximately $30,600 in existing long-term mortgage indebtedness that currently bears interest at a rate per annum of 7.0%. The loan requires monthly payments of principal and interest and is scheduled to mature in March 2005. - On December 23, 2003, the Company acquired Rogue Valley Mall, an enclosed mall in Medford, Oregon. The purchase price paid for Rogue Valley Mall was approximately $57,495. The consideration was paid from cash on hand, proceeds from borrowings under an existing unsecured revolving credit facility, and by the assumption of approximately $28,000 in existing long-term mortgage indebtedness that currently bears interest at a rate per annum of 7.85%. The loan requires monthly payments of principal and interest and is scheduled to mature in January 2011. 2004 ACQUISITIONS - On January 7, 2004, the Company acquired a 50% membership interest in a newly formed limited liability company ("Burlington LLC") which owns Burlington Town Center, an enclosed mall in Burlington, Vermont. The aggregate consideration for the 50% ownership interest in Burlington Town Center was approximately $10,250. Approximately $9,000 was funded in cash by the Company at closing with the remaining amounts to be funded in cash in 2004 as necessary. In addition, at closing the Company made a $31,500 mortgage loan to Burlington LLC to replace the existing mortgage financing which had been collateralized by the property. The new mortgage loan requires monthly payments of principal and interest, bears interest at a rate per annum of 5.5% and is scheduled to mature in January 2009. The Company has an annual preferential return of 10% on its investment and has an option to purchase the remaining 50% interest in Burlington LLC on or before January 2007 for approximately $10,250. - On January 16, 2004, the Company acquired Redlands Mall, an enclosed mall in Redlands, California. The purchase price paid for Redlands Mall (currently under redevelopment) was approximately $14,250. The consideration was paid from cash on hand and proceeds from borrowings under the Company's credit facilities. - On March 1, 2004 the Company acquired the remaining 50% general partnership interest in Town East Mall in Mesquite, Texas from its unaffiliated joint venture partner. The purchase price for the 50% ownership interest was approximately $44,500, which was paid in cash from cash on hand and proceeds from borrowings under the Company's credit facilities. - On March 5, 2004, the Company acquired Four Seasons Town Centre, an enclosed mall in Greensboro, North Carolina. The purchase price paid was approximately $161,000. The consideration was paid by the assumption of approximately $134,400 in existing long-term non-recourse mortgage debt (bearing interest at a rate per annum of approximately 5.6% and scheduled to mature in December 2013), approximately $25,100 in 7% preferred units of Operating Partnership interest and the remaining amounts in cash, primarily from amounts borrowed under the Company's credit facilities. Immediately following the closing, the Company prepaid approximately $22,400 of such assumed debt using cash on hand. The $25,100 of 7% preferred units are comprised of 502,658 preferred units which are convertible, with certain restrictions, at any time by the holder to common units of the Operating Partnership (initially at a rate of approximately 1.298 common units for each preferred unit). 14 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) - On April 30, 2004 the Company completed an agreement to form a joint venture to develop and subsequently own and manage a retail center in San Jose, Costa Rica. The venture, GSG de Costa Rica SRL ("GGP/Sambil Costa Rica"), is owned 33 1/3% by a wholly-owned subsidiary of the Operating Partnership and 33 1/3% each by two independent Latin American real estate investment and development firms. The Company has committed to invest approximately $12,217 in GGP/Sambil Costa Rica, of which approximately $9,700 has been paid and the remaining amounts will be drawn on a letter of credit provided by the Company as additional construction and development costs of the project are incurred. The Company's cash investments, the $16,000 of capital contributions made by the Latin American co-venture partners and construction financing to be arranged, are expected to be sufficient to complete the project, an approximately 500,000 square foot retail center. The center is expected to open in 2007. Although the Company has a preferred interest in GGP/Sambil Costa Rica with respect to approximately $5,533 of its cash investment, due to the Company's shared rights and duties with respect to this investment, the Company is accounting for this investment by the equity method. - On May 11, 2004 the Company completed the acquisition of a 50% interest in a joint venture (Hoover Mall Holding, L.L.C.) which owns, though a wholly-owned subsidiary, Riverchase Galleria, an enclosed regional mall in Birmingham, Alabama. The acquisition price for the 50% interest in the joint venture was approximately $166,000. In conjunction with the purchase, the existing loan collateralized by the property was refinanced with a new, non-recourse mortgage loan of $200,000. The new loan bears interest at a rate of LIBOR plus 88 basis points, requires monthly payments of interest only and, assuming all no-cost extension options are exercised, is scheduled to mature in June 2009. In addition, the Company has fixed the interest rate to be paid on this loan (initially 3.26% per annum with steps up to 5.99% per annum in 2007) through the use of interest rate swaps. - On May 12, 2004, the Company completed the acquisition of a 100% interest in Mall of Louisiana, an enclosed regional mall in Baton Rouge, Louisiana. The purchase price of $265,000 was paid with the proceeds of a new $185,000 acquisition loan that currently bears interest at LIBOR plus 58 basis points. The interest rate will increase in future periods (to a potential maximum of LIBOR plus 134 basis points) depending upon certain factors and certain options regarding the loan rates and maturities elected by the Company. The loan, which requires monthly payments of interest only, will mature in June 2009 if all no-cost options to extend are exercised. - On May 17, 2004, the Company completed the acquisition of the Grand Canal Shoppes in Las Vegas, Nevada. The purchase price of approximately $766,000 was funded by a new $427,000 non-recourse mortgage loan and a new unsecured term loan. The new mortgage loan bears interest at a rate per annum of 4.78%, provides for monthly payments of principal and interest and is scheduled to mature in May 2009. The new term loan, with an initial funding of $350,000 but with a total available capacity of up to $800,000, currently bears interest at a rate per annum of LIBOR plus 115 basis points on the current outstanding principal balance, requires monthly payments of interest only, and is scheduled to mature in May 2009. The interest rate on the term loan may vary in the future depending upon the Company's future leverage ratios, changes in LIBOR rates and the length of LIBOR contracts, and, with respect to the initial funding of the term loan, the Company has fixed the interest rate to be paid through the use of interest rate swaps to a rate of 3.435% per annum. All acquisitions completed through June 30, 2004 were accounted for utilizing the purchase method of accounting and accordingly, the results of operations are included in the Company's results of operations from the respective dates of acquisition. The purchase price for all property acquisitions are subject to certain prorations and adjustments. The Company has used estimates of future cash flows and other valuation techniques to allocate the purchase price of acquired property between land, buildings and improvements, tenant allowances, equipment and other identifiable debit and credit intangibles such as amounts related to in-place leases and acquired below-market 15 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) leases. Above-market and below-market in-place lease values for owned properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and the Company's estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above- and below-market lease values are amortized as adjustments to minimum rent revenues over the remaining non-cancelable terms of the respective leases. This allocation of purchase price has resulted in the recognition upon acquisition of additional consolidated intangible assets (acquired in-place leases) of approximately $107,167 and deferred credits (acquired below-market leases) of approximately $142,457 relating to real estate purchases in 2002, 2003 and 2004. Calculations for certain recent acquisitions may be subsequently revised as additional information becomes available. These intangible assets and liabilities, and similar assets and liabilities from the Company's Unconsolidated Real Estate Affiliates, are being amortized over the terms of the acquired leases which resulted in additional net income, including the Company's share of such items from its Unconsolidated Real Estate Affiliates, of approximately $10,741 for the six months ended June 30, 2004 and $5,215 for the six months ended June 30, 2003. Due to existing contacts and relationships with tenants at its currently owned properties and at properties currently managed for others, no significant value has been ascribed to tenant relationships at the acquired properties. In addition to the acquisitions discussed above, the Company has entered into a separate agreement (the "Phase II Agreement"), the Company also agreed to acquire the multi-level retail space that is planned to be part of The Palazzo (the working title of The Venetian's Phase II property), a new approximately 3,000 room hotel/casino that will be connected to the existing Venetian and the Sands Expo and Convention Center facilities (the "Phase II Acquisition"). The Palazzo is currently under development and is expected to be completed by late 2006 or early 2007. If completed as specified under the terms of the Phase II Agreement, the Company will purchase, payable upon grand opening, the Phase II Acquisition retail space at a price computed on a 6% capitalization rate on the net operating income of the Phase II retail space, as defined by the Phase II Agreement ("Phase II NOI"), up to $38,000 and on a capitalization rate of 8% on Phase II NOI in excess of $38,000, all subject to a minimum purchase price of $250,000. Based on current preliminary plans and estimated rents, the actual purchase price would be more than double the minimum purchase price. The Phase II Acquisition is expected to be funded by a combination of cash on hand, available funds from credit facilities of the Company and from proceeds of new and replacement long term loans to be obtained and collateralized by new and currently-owned properties and unsecured term loans. The Phase II Agreement is subject to the satisfaction of separate and customary closing conditions. On July 30, 2004, the Company finalized a contract to acquire a United States enclosed regional mall. The purchase price is expected to be approximately $312,000 (subject to certain prorations and adjustments). Assuming the parties satisfy all of the requisite customary closing conditions, the transaction could close as early as mid-August 2004. The purchase price is expected to be paid through a combination of cash on hand, borrowings on the Company's credit facilities and approximately $220,000 in the form of a variable rate loan collateralized by the property. On July 30, 2004, the Company formed a joint venture to own, manage and develop retail properties in Brazil. The Company has committed to invest up to approximately $32,000 for a 50% membership interest in the joint venture ("GGP/NIG Brazil") of which approximately $7,000 was funded at closing. The remaining funds will be invested by the Company (upon the decision of both partners) to acquire additional interests in the properties currently owned or to acquire interests in other retail centers. The other 50% member in GGP/NIG Brazil contributed to the joint venture upon formation a 29% interest in an existing retail center in Salvador, Bahia, a 16.25% interest in an existing retail center in Sao Paulo, Sao Paulo and a 66.25% interest in an existing retail property management firm. The property management firm currently manages nine existing retail centers, the 16 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) two centers partially owned by GGP/NIG Brazil and seven other existing retail centers in various urban areas of Brazil for the other member of GGP/NIG Brazil and other independent owners. RENOVATIONS AND EXPANSIONS The Company has an ongoing program of renovations and expansions at its properties including significant projects (projected expenditure in excess of $10,000) currently under construction at the following centers: - Ala Moana Center in Honolulu, Hawaii - Alderwood Mall in Lynnwood (Seattle), Washington (owned by GGP/Homart II) - Altamonte Mall in Altamonte Springs (Orlando), Florida (owned by GGP/Homart II) - Baybrook Mall in Friendswood, Texas - Boulevard Mall in Las Vegas, Nevada - Clackamas Town Center in Portand, Oregon (owned by GGP/Teachers) - Crossroads Center in Saint Cloud, Minnesota - Eastridge Mall in San Jose, California (owned by GGP Ivanhoe IV) - First Colony Mall in Sugar Land (Houston), Texas (owned by GGP/Homart II) - Grand Teton Mall in Idaho Falls, Idaho - Kenwood Towne Centre in Cincinnati, Ohio (owned by GGP/Teachers) - Mayfair Mall in Wauwatosa (Milwaukee), Wisconsin - NewPark Mall in Newark, California (owned by Homart I) - River Falls Mall in Clarksville, Indiana - Ward Village Shops in Honolulu, Hawaii The above listed projects represent a total projected expenditure (including the aggregate amount of projected expenditures of the Unconsolidated Properties at the Company's ownership percentage) of approximately $650,000, of which approximately $140,000 has been incurred as of June 30, 2004. DEVELOPMENTS During 1998, the Company formed the Circle T joint venture to develop a regional mall in Westlake (Dallas), Texas as further described in Note 3 below. As of June 30, 2004, the Company has made capital contributions of approximately $18,356 to the project for pre-development costs. The Company is currently obligated to fund additional pre-development costs of approximately $808. Total development costs are not finalized or committed but are anticipated to be funded from a construction loan that is expected to be obtained. The retail site, part of a planned community which is expected to contain a resort hotel, a golf course, luxury homes and corporate offices, is currently planned to contain up to 1.3 million square feet of tenant space including up to nine anchor stores, an ice rink and a multi-screen theater. The construction project is currently anticipated to be completed in 2007. In August 2004, the Company opened Jordan Creek Town Center in West Des Moines, Iowa. This project is situated on a 200-acre site and currently contains 2.0 million square feet of tenant space and three anchor stores. As of June 30, 2004, the Company had invested approximately $120,334 in the project, including land costs. Total development costs will be approximately $200,000 and have been funded from operating cash flow and borrowings under current unsecured revolving credit facilities. During April 2004, the Company formed GGP/Sambil Costa Rica to subsequently own and manage a retail center in Costa Rica. The Company has committed to invest approximately $12,217 in GGP/Sambil Costa Rica, of which approximately $9,700 has been paid and the remaining amounts will be drawn on a letter of credit provided by the Company as additional construction and development costs of the project are incurred. 17 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) The Company's cash investments, the $16,000 of capital contributions made by the Latin American co-venture partners and construction financing to be arranged, are expected to be sufficient to complete the project, an approximately 500,000 square foot retail center. The center is expected to open in 2007. The Company also owns and/or is investigating certain other potential development sites (representing a net investment of approximately $50,000), including sites in Toledo, Ohio; Rogers, Arkansas; Redlands, California and South Sacramento, California but there can be no assurance that development of these sites will proceed. NOTE 3 INVESTMENTS IN AND LOANS FROM UNCONSOLIDATED REAL ESTATE AFFILIATES The Unconsolidated Real Estate Affiliates constitute the Company's investment in real estate joint ventures that own and/or develop shopping centers and other retail and investment property. The Company uses these joint ventures to limit its risk associated with individual properties and to reduce its capital requirements. The joint venture ownership structure is common in the real estate industry. Since the Company has joint interest and control of the properties with its venture partners, accounting principles generally accepted in the United States of America require that the Company account for these joint ventures using the equity method. Unconsolidated Real Estate Affiliates include the following as of June 30, 2004:
NUMBER OF VENTURE REGIONAL MALL SHOPPING COMPANY OWNERSHIP STRUCTURE AND LEGAL NAME NAME CENTERS PERCENTAGE - -------------------------------- --------------------- ---------------------- -------------------------------- GGP/Homart, Inc. GGP/Homart 22* 50% common stock GGP/Homart II L.L.C. GGP/Homart II 10 50% LLC membership interest GGP-TRS L.L.C. GGP/Teachers 5 50% LLC membership interest GGP Ivanhoe, Inc. GGP Ivanhoe 2 51% common stock GGP Ivanhoe IV, Inc. GGP Ivanhoe IV 1 51% common stock Dayjay Associates Quail Springs 1 50% general partnership interest Westlake Retail Associates, Ltd. Circle T 1** 50% general partnership interest Hoover Mall Holding, L.L.C. Riverchase 1 50% LLC membership interest GSG de Costa Rica SRL GGP/Sambil Costa Rica 1** 33 1/3% membership interest ----- Total 44 =====
* Including 3 regional mall shopping centers owned jointly with venture partners. ** Not operational as currently under development. GGP/HOMART The Company holds 50% of the common stock of GGP/Homart with the remaining ownership interest held by New York State Common Retirement Fund ("NYSCRF"), the Company's co-investor in GGP/Homart II (described below). GGP/Homart has elected to be taxed as a REIT for income tax purposes. The Company shares in the profits and losses, cash flows and other matters relating to GGP/Homart in accordance with its 50% ownership percentage. NYSCRF has an exchange right under the GGP/Homart Stockholders' 18 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) Agreement which permits it to convert its ownership interest in GGP/Homart to shares of Common Stock of General Growth. If such exchange right is exercised, the Company may alternatively satisfy such exchange in cash. GGP/HOMART II GGP/Homart II, is a Delaware limited liability company which is owned equally by the Company and NYSCRF. Certain of the malls were contributed to the joint venture subject to existing financing, as modified by certain replacement financing ("Retained Debt"), in order to balance the net equity values of the malls contributed by each of the venture partners. Such contribution arrangements between the Company and NYSCRF have the effect of the Company having an additional contingent obligation to fund any shortfalls GGP/Homart II may incur if the non-recourse debt (approximately $109,785 at June 30, 2004 with a current maturity of January 2007 assuming all no-cost extension options are exercised) related to Natick Mall is not funded by proceeds from any subsequent sales or refinancing of Natick Mall. According to the membership agreement between the venture partners, the Company and NYSCRF share in the profits and losses, cash flows and other matters relating to GGP/Homart II in accordance with their respective 50% ownership percentages. GGP/TEACHERS GGP/Teachers, is a limited liability company owned 50% by the Company and 50% by Teachers' Retirement System of the State of Illinois ("Illinois Teachers"). According to the operating agreement between the venture partners, the Company and Illinois Teachers generally share in the profits and losses, cash flows and other matters relating to GGP/Teachers in accordance with their respective 50% ownership percentages. Also pursuant to the operating agreement, and in exchange for a reduced initial cash contribution by the Company, certain debt (approximately $19,337 at June 30, 2004) related to the properties was deemed to be Retained Debt and therefore, solely attributable to the Company. The Company is obligated to fund shortfalls, if any, of any subsequent sale or refinancing proceeds of the properties against their respective loan balances to the extent of such Retained Debt. GGP IVANHOE III On July 1, 2003, as described in Note 2, the Company completed a transaction to acquire the 49% ownership interest in GGP Ivanhoe III held by Ivanhoe, bringing the Company's ownership to 100%. Concurrent with this transaction, ownership of Eastridge Mall was transferred to GGP Ivanhoe IV, a newly-established joint venture owned 51% by the Company and 49% by Ivanhoe. Accordingly, GGP Ivanhoe III, which as of July 1, 2003 held a 100% ownership in seven enclosed regional malls, was fully consolidated in the Company's consolidated financial statements and GGP Ivanhoe IV, the owner of the Eastridge Mall, became an Unconsolidated Real Estate Affiliate. GGP IVANHOE IV On July 1, 2003, concurrent with the Ivanhoe III transaction described above, the ownership of the Eastridge Mall was transferred to a new joint venture, GGP Ivanhoe IV. GGP Ivanhoe IV, which will elect to be taxed as a REIT, is owned 51% by the Company and 49% by Ivanhoe. The Company and Ivanhoe share in the profits and losses, cash flows and other matters relating to GGP Ivanhoe IV in accordance with their respective ownership percentages except that certain major operating and capital decisions (as defined in the stockholders' agreement) require the approval of both stockholders. Additionally, the stockholders' agreement provides that during the 30-day period following June 30, 2006 or the 30-day period following June 30, 2009, Ivanhoe shall have the right to require the Company to purchase all of the GGP Ivanhoe IV common stock held by Ivanhoe for a purchase price equal to the value of such GGP Ivanhoe IV common stock. The Company can satisfy this obligation in any combination of cash or Common Stock. Also in exchange for a reduced cash 19 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) portion of the total purchase price paid by the Company in connection with the acquisition of Ivanhoe's interest in GGP Ivanhoe III, certain debt related to the property (approximately $39,060 at June 30, 2004) was deemed to be Retained Debt, and therefore, solely attributable to the Company. Following the acquisition of Ivanhoe's interest in GGP Ivanhoe III, the Company became obligated to fund all amounts related to such Retained Debt including any shortfalls of any subsequent sale or refinancing proceeds of the property against the respective loan balance to the extent of such Retained Debt. GGP IVANHOE The Company owns a 51% common stock ownership interest in GGP Ivanhoe and Ivanhoe owns the remaining 49% ownership interest. Other than the absence of a right of Ivanhoe to require the Company to acquire the ownership interest of Ivanhoe, the terms of the stockholders' agreement are similar to those of the GGP Ivanhoe IV stockholders' agreement. QUAIL SPRINGS / TOWN EAST The Company owns a 50% general partnership interest in a joint venture which owns Quail Springs Mall in Oklahoma City, Oklahoma and prior to March 1, 2004, owned a 50% general partnership interest in a joint venture which owns Town East Mall, located in Mesquite, Texas. On March 1, 2004 the Company acquired the remaining 50% general partnership interest in Town East from its unaffiliated joint venture partner for approximately $44,500, which was paid from cash on hand and proceeds from borrowings under the Company's credit facilities. The Company shared in the profits and losses, cash flows and other matters relating to Town East until March 1, 2004 in accordance with its ownership percentage of 50%. The Company continues to share in the profits and losses, cash flows and other matters relating to Quail Springs in accordance with its 50% ownership percentage. CIRCLE T The Company, through a wholly-owned subsidiary, owns a 50% general partnership interest in Westlake Retail Associates, Ltd. ("Circle T"). AIL Investment, L.P., an affiliate of Hillwood Development Company ("Hillwood"), is the limited partner of Circle T. Circle T is currently developing the Circle T Ranch Mall, a regional mall in Dallas, Texas, scheduled for completion in 2007 as discussed in Note 2. Development costs are expected to be funded by a construction loan to be obtained by the joint venture and capital contributions by the joint venture partners. As of June 30, 2004, the Company has made contributions of approximately $18,356 to the project for pre-development costs (and is currently obligated to fund approximately $808 of additional specified pre-development costs) and Hillwood has contributed approximately $11,200, mostly in the form of land costs and related pre-development costs. As certain major decisions concerning Circle T must be made jointly by the Company and Hillwood, the Company is accounting for Circle T using the equity method. RIVERCHASE Riverchase is a limited liability company owned 50% by the Company. The Company acquired its ownership interest in May 2004 (Note 2). According to the operating agreement, the venture partners generally share in the profits and losses, cash flows and other matters relating to Riverchase in accordance with their respective ownership percentages. 20 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) GGP/SAMBIL COSTA RICA GGP/Sambil Costa Rica, which is a joint venture owned 33 1/3% by the Company and 33 1/3% each by two independent Latin American real estate investment and development firms, was formed in April 2004 (Note 2) to develop and subsequently own and manage a retail center in San Jose, Costa Rica. Although the Company has a preferred interest in GGP/Sambil Costa Rica with respect to a portion of its initial cash investment, due to the Company's shared rights and duties with respect to this investment, the Company is accounting for this investment by the equity method. CONDENSED COMBINED FINANCIAL INFORMATION OF UNCONSOLIDATED REAL ESTATE AFFILIATES The following is condensed financial information for the Company's Unconsolidated Real Estate Affiliates as of June 30, 2004 and December 31, 2003 and for the three and six month periods ended June 30, 2004 and 2003. 21 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) BALANCE SHEETS - UNCONSOLIDATED REAL ESTATE AFFILIATES
JUNE 30, 2004 DECEMBER 31, 2003 ------------------ ----------------- Assets: Land $ 533,858 $ 532,036 Buildings and equipment 4,853,994 4,698,197 Less accumulated depreciation (652,278) (600,431) Developments in progress * 155,569 100,197 ------------------ ---------------- Net property and equipment 4,891,143 4,729,999 Investment in unconsolidated joint ventures 12,466 11,876 ------------------ ---------------- Net investment in real estate 4,903,609 4,741,875 Cash and cash equivalents 41,400 107,214 Tenant accounts receivable, net 74,857 82,091 Deferred expenses, net 119,207 120,159 Prepaid expenses and other assets 69,658 99,042 ------------------ ---------------- Total assets $ 5,208,731 $ 5,150,381 ================== ================ Liabilities and Owners' Equity: Mortgage notes and other debt payable $ 3,528,987 $ 3,542,173 Accounts payable and accrued expenses 223,730 232,120 Minority interest 117 117 Owners' Equity 1,455,897 1,375,971 ------------------ ---------------- Total liabilities and owners' equity $ 5,208,731 $ 5,150,381 ================== ================
* Developments in progress include assets of Circle T Joint Venture of $23,910 and Costa Rica of $17,017 as of June 30, 2004 and assets of Circle T Joint Venture of $29,481 as of December 31, 2003. COMPANY INVESTMENT IN AND LOANS TO/FROM UNCONSOLIDATED REAL ESTATE AFFILIATES Owners' equity $ 1,455,897 $ 1,375,971 Less joint venture partners' equity (756,798) (794,402) Loans and other, net 56,717 49,044 ------------- ---------------- Company investment in and loans to/from Unconsolidated Real Estate Affiliates $ 755,816 $ 630,613 ============= ================
22 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) STATEMENTS OF OPERATIONS - UNCONSOLIDATED REAL ESTATE AFFILIATES
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2004 2003 2004 2003 --------------- ---------- -------------- ---------- Revenues: Minimum rents $ 127,946 $ 145,303 $ 253,145 $ 290,074 Tenant recoveries 59,705 73,258 121,329 145,967 Overage rents 1,323 2,165 3,720 4,173 Other 3,979 2,440 6,952 5,156 --------------- --------- -------------- --------- Total revenues 192,953 223,166 385,146 445,370 Expenses: Real estate taxes 17,070 21,414 35,027 42,615 Repairs and maintenance 14,008 16,493 28,448 33,525 Marketing 6,400 7,471 12,787 14,775 Other property operating costs 27,594 31,845 53,556 61,244 Provision for doubtful accounts 1,054 939 2,436 1,301 Property management and other costs 11,068 12,163 22,102 24,764 General and administrative 766 1,031 1,051 1,273 Depreciation and amortization 39,095 44,386 77,622 86,793 --------------- --------- -------------- --------- Total expenses 117,055 135,742 233,029 266,290 Operating income 75,898 87,424 152,117 179,080 Interest income 675 2,475 1,522 3,706 Interest expense (40,381) (45,494) (81,361) (92,824) Equity in income of unconsolidated joint ventures 1,125 668 2,264 1,731 --------------- ---------- -------------- --------- Net income $ 37,317 $ 45,073 $ 74,542 $ 91,693 =============== ========== ============== =========
COMPANY EQUITY IN INCOME OF UNCONSOLIDATED AFFILIATES
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2004 2003 2004 2003 -------------- --------- ---------------- ---------- Total income of Unconsolidated Real Estate Affiliates $ 37,317 $ 45,073 $ 74,542 $ 91,693 Joint venture partners' share of income of Unconsolidated Real Estate Affiliates (19,111) (22,897) (38,292) (46,526) Amortization of capital or basis differences (52) (232) (149) (806) Elimination of Unconsolidated Real Estate Affiliate loan interest - (820) (17) (952) -------------- --------- ---------------- ---------- Company equity in income of Unconsolidated Real Estate Affiliates $ 18,154 $ 21,124 $ 36,084 $ 43,409 ============== ========= ================ ==========
23 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) NOTE 4 MORTGAGE NOTES AND OTHER DEBT PAYABLE Mortgage notes and other debt payable reflected in the accompanying consolidated balance sheets at June 30, 2004 and December 31, 2003 consisted of the following:
JUNE 30, 2004 DECEMBER 31, 2003 Fixed-rate mortgage notes and other debt payable $ 5,145,537 $ 4,052,244 Variable-Rate debt:* Collateralized mortgage-backed securities 363,093 495,746 Mortgage notes collateralized by individual properties 1,179,250 1,176,750 Credit facilities 929,011 789,000 Unsecured term loans 555,000 135,750 --------------- ------------------ Total Variable-Rate debt* 3,026,354 2,597,246 --------------- ------------------ Total $ 8,171,891 $ 6,649,490 =============== ==================
* The Company has entered into certain cash flow hedges as described below related to approximately $725,000 of this variable rate debt at June 30, 2004 and $375,000 at December 31, 2003. The effect of these arrangements has not been reflected in the above segregation of variable versus fixed-rate debt. FIXED-RATE MORTGAGE NOTES AND OTHER DEBT PAYABLE Mortgage notes and other debt payable consist primarily of fixed rate non-recourse notes collateralized by individual or groups of properties and equipment. Also included in mortgage notes and other debt payable are $100,000 of ten-year senior unsecured notes, bearing interest at a fixed rate of 7.29% per annum, which were issued by PDC in March 1998 and were assumed by the Company in conjunction with the acquisition of JP Realty in 2002. Interest payments on these notes are due semi-annually on March 11 and September 11 of each year and principal payments of $25,000 are due annually beginning March 2005. The fixed-rate mortgage notes and other debt payable bear interest ranging from 1.81% to 10.00% per annum (weighted-average rate of 6.42% per annum), and require monthly payments of principal and/or interest. Certain properties are pledged as collateral for the related mortgage notes. Substantially all of the mortgage notes at June 30, 2004 are non-recourse to the Company. Certain mortgage notes payable may be prepaid but are generally subject to a prepayment penalty equal to a yield-maintenance premium or a percentage of the loan balance. Certain loans have cross-default provisions and are cross-collateralized. Under certain cross-default provisions, a default under any mortgage notes included in a cross-defaulted package may constitute a default under all such mortgage notes in the package and may lead to acceleration of the indebtedness due on each property within the collateral package. In general, the cross-defaulted properties are under common ownership. However, GGP Ivanhoe debt collateralized by two GGP Ivanhoe centers (totaling $125,000) is cross-defaulted and cross-collateralized with debt (totaling $435,000) collateralized by eleven Consolidated Properties. VARIABLE-RATE DEBT The variable-rate debt bears interest at a rate per annum equal to LIBOR plus 60 to 250 basis points. 24 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) COMMERCIAL MORTGAGE-BACKED SECURITIES In early December 2001, the Operating Partnership and certain Unconsolidated Real Estate Affiliates completed the placement of $2,550,000 of non-recourse commercial mortgage pass-through certificates (the "GGP MPTC"). The GGP MPTC was initially collateralized by 27 malls and one office building, including 19 malls then owned by certain Unconsolidated Real Estate Affiliates. At June 30, 2004, the GGP MPTC has a current outstanding balance of approximately $1,200,000 ($495,500 by Unconsolidated Real Estate Affiliates) and is collateralized by 12 malls and one office building, including 7 malls owned by Unconsolidated Real Estate Affiliates. The GGP MPTC is comprised of both variable rate and fixed rate notes which require monthly payments of principal and interest. The certificates represent beneficial interests in three loan groups made by three sets of borrowers (the Operating Partnership, GGP/Homart and GGP/Homart II, and GGP Ivanhoe III). The original principal amount of the GGP MPTC was comprised of $1,235,000 attributed to the Operating Partnership, $900,000 to GGP/Homart and GGP/Homart II and $415,000 to GGP Ivanhoe III. The terms of the notes comprising the GGP MPTC are as follows:
Weighted-Average Initial Maturity Interest Term Interest Rate Interest Rate - ---------------- ------------- ------------- ------------- 36 months (1) Variable LIBOR plus 60 to 235 basis points LIBOR plus 79 basis points 51 months (2) Variable LIBOR plus 70 to 250 basis points LIBOR plus 103 basis points 5 years Fixed 5.01 to 6.18% 5.38%
(1) With two no-cost 12-month extension options. (2) With two no-cost 18-month extension options. The extension options with respect to the variable rate notes are subject to obtaining extensions of the interest rate protection agreements which were required to be obtained in conjunction with the GGP MPTC. The GGP MPTC yielded approximately $470,000 (including amounts attributed to the Unconsolidated Real Estate Affiliates) which were utilized for loan repayments on other properties and temporary investments in cash equivalents and marketable securities. CREDIT FACILITIES In April 2003, the Company reached an agreement with a group of banks to establish a new revolving credit facility and term loan (the "2003 Credit Facility") with initial borrowing availability of approximately $779,000 (which was subsequently increased to approximately $1,250,000). The 2003 Credit Facility has a term of three years and provides for partial amortization of the principal balance of the term loan in the second and third years. The amount outstanding on the 2003 Credit Facility at June 30, 2004 was approximately $929,011. As of June 30, 2004, the weighted-average interest rate on the 2003 Credit Facility was 2.46%. INTEREST RATE SWAPS Concurrent with the issuance of the GGP MPTC certificates, the Company purchased interest rate protection agreements (structured to limit the Company's exposure to interest rate fluctuations), and simultaneously an equal amount of interest rate protection agreements were sold to fully offset the effect of these agreements and to recoup a substantial portion of the cost of such agreements. Further, to achieve a more desirable balance between fixed and variable rate debt, the Company initially entered into certain swap agreements (notional amount equal to $666,933). Approximately $575,000 of such swap agreements were with independent financial services firms. The notional amounts of such swap agreements decline over time to an aggregate of $25,000 at maturity of the 51-month variable-rate loans (assuming both 18-month no-cost 25 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) extension options are exercised). As of June 30, 2004, $375,000 of swap agreements related to the GGP MPTC were outstanding. As of June 30, 2004, the Company has additional outstanding swap agreements with a notional value of $350,000 on other variable rate debt. The Company's swap agreements fix the interest rate that it is required to pay on $725,000 of variable rate debt to approximately 3.86% per annum. Such swap agreements have been designated as cash flow hedges and are intended to hedge the Company's exposure to future interest payments on the related variable-rate debt. INTERIM FINANCING During August 2002, the Company, through Victoria Ward, arranged for an aggregate of $150,000 in loans from two separate groups of banks. On August 23, 2002, the Company borrowed an initial $80,000 and, on September 19, 2002, the Company borrowed an additional $70,000. As of June 30, 2004, all amounts outstanding ($135,750 at December 31, 2003) have been repaid. During June 2003, the Company obtained two new acquisition loans totaling approximately $307,000 for the purchases of Saint Louis Galleria and Coronado Center as described in Note 2. The $176,000 loan collateralized by Saint Louis Galleria currently bears interest at a rate per annum of LIBOR plus 165 basis points and the loan collateralized by Coronado Center (approximately $101,250 as of June 30, 2004) currently bears interest at a rate per annum of LIBOR plus 91 basis points. Both loans require monthly payments of interest only and are scheduled to mature in June 2008 assuming the exercise by the Company of all no-cost extension options on each of the loans. In addition and as described in Note 2, the Company obtained a $185,000 acquisition loan for the purchase of the Mall of Louisiana in May 2004 and four new acquisition loans totaling approximately $588,250 for the purchases of Lynnhaven Mall, Sikes Senter, The Maine Mall and Glenbrook Square in 2003. The loans initially bear interest at LIBOR plus a range of 70 to 125 basis points and generally mature in five years assuming the exercise by the Company of all no-cost extension options. CONSTRUCTION LOAN In connection with the acquisition of JP Realty, the Company assumed a $47,340 construction loan of Spokane Mall Development Company Limited Partnership and a $50,000 construction loan of Provo Mall Development Company, Ltd., in both of which PDC is the general partner. The loans, which bore interest at a rate per annum of LIBOR plus 150 basis points, were scheduled to mature in July 2003 but were replaced in January 2003 with a new long-term non-recourse mortgage loan. The new loan, allocated $53,000 to the Provo Mall and $42,000 to the Spokane Mall, is collateralized by the two malls, bears interest at a rate per annum of 4.42% and matures in February 2008. LETTERS OF CREDIT The Operating Partnership had outstanding letters of credit of approximately $10,830 as of June 30, 2004 and $11,830 as of December 31, 2003, primarily in connection with special real estate assessments, construction obligations and insurance requirements. As of June 30, 2004, the Company also has an outstanding letter of credit of approximately $2,855 in connection with future capital contributions to GGP/Sambil Costa Rica primarily related to additional construction and development costs. 26 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) NOTE 5 COMMON AND PREFERRED DISTRIBUTIONS The following is a chart of the common and preferred distributions for the Company paid in 2004 and 2003. Since the most recent dividend declaration occurred subsequent to June 30, 2004, the amount paid on July 30, 2004 has not been accrued in the accompanying consolidated balance sheet.
COMMON DISTRIBUTIONS - ------------------------------------------------------------------------------------------------------- GENERAL OPERATING GROWTH PARTNERSHIP DECLARATION AMOUNT PER RECORD PAYMENT STOCKHOLDERS LIMITED PARTNERS DATE SHARE DATE DATE AMOUNT AMOUNT - ----------- ---------- -------- -------- ------------ ---------------- 07/02/04 $ 0.30 07/15/04 07/30/04 $ 65,575 $ 16,662 04/05/04 0.30 04/15/04 04/30/04 65,357 16,704 01/05/04 0.30 01/15/04 01/30/04 65,193 16,714 10/01/03 0.30 10/15/03 10/31/03 64,402 17,423 06/09/03 0.24 07/07/03 07/31/03 45,417 13,980 03/14/03 0.24 04/03/03 04/30/03 45,230 13,994 12/12/02 0.24 01/06/03 01/31/03 44,937 14,080
PREFERRED DISTRIBUTIONS - ---------------------------------------------- RECORD PAYMENT AMOUNT PER DATE DATE SHARE - -------- -------- ---------- 07/10/03 07/15/03 $ 0.5252* 04/03/03 04/15/03 0.4531 01/06/03 01/15/03 0.4531
*Final distribution as described in Note 1. NOTE 6 COMMITMENTS AND CONTINGENCIES In the normal course of business, from time to time, the Company is involved in legal actions relating to the ownership and operations of its properties. In management's opinion, the liabilities if any, that may ultimately result from such legal actions are not expected to have a material adverse effect on the consolidated financial statements of the Company. The Company leases land or buildings at certain properties from third parties. Consolidated rental expense including participation rent related to these leases was $1,400 for the six months ended June 30, 2004 and $1,355 for the six months ended June 30, 2003. The leases generally provide for a right of first refusal in favor of the Company in the event of a proposed sale of the property by the landlord. The Company periodically enters into contingent agreements for the acquisition of properties. Each acquisition is subject to satisfactory completion of due diligence and, in the case of property acquired under development, completion of the project. NOTE 7 DISCONTINUED OPERATIONS - MCCRELESS MALL On March 31, 2003, the Company sold McCreless Mall in San Antonio, Texas for aggregate consideration of $15,000 (which was paid in cash at closing). The Company recorded a gain of approximately $4,000 for financial reporting purposes on the sale of the mall. Pursuant to SFAS 144, the Company has reclassified the operations of McCreless Mall (approximately $859 in revenues and $292 in net income in the six months 27 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) ended June 30, 2003) to discontinued operations in the 2003 consolidated financial statements and has reflected such amounts net of minority interests. NOTE 8 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In January 2004, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities" ("VIEs"), to improve financial reporting of special purpose and other entities. The Company has adopted FIN 46 as of December 31, 2003. Certain VIEs that are qualifying special purpose entities ("QSPEs") will not be required to be consolidated under the provisions of FIN 46. In addition, FIN 46 expands the disclosure requirements for the beneficiary of a significant or a majority of the variable interests to provide information regarding the nature, purpose and financial characteristics of the entities. The Company has certain special purpose entities, primarily created to facilitate the issuance of its commercial mortgage-backed securities (Note 4) and other securitized debt or to facilitate the tax-increment financing of certain improvements at its properties. Because these special purpose entities are QSPEs, which are exempted from consolidation, these special purpose entities are not required to be consolidated in the Company's consolidated financial statements. In addition, the Company's Unconsolidated Real Estate Affiliates constitute businesses (as defined in FIN 46) or have operating agreements granting the independent third-party joint venturers substantive participating rights, the implementation of FIN 46 did not result in the consolidation of any previously unconsolidated affiliates. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability. The effective date of a portion of the Statement has been indefinitely postponed by the FASB. The Company did not enter into new financial instruments subsequent to May 2003 which would fall within the scope of this statement. No transactions, arrangements or financial instruments of the Company have been identified that appear to meet the criteria for liability recognition in accordance with paragraphs 9 and 10 under SFAS 150 due to the indefinite life of the Company's joint venture arrangements. Accordingly, even if the effectiveness of the measurement and classification provision of these paragraphs is no longer postponed, the Company does not expect that it will be required to reclassify the liquidation amounts of such minority interests to liabilities. NOTE 9 PRO FORMA FINANCIAL INFORMATION The following pro forma financial information has been presented as a result of acquisitions made during 2003 and 2004 as described in Note 2. The pro forma condensed consolidated statements of operations for the six months ended June 30, 2004 include adjustments for the acquisitions made during 2004 as if such transactions had occurred on January 1, 2004. The pro forma condensed consolidated statements of operations for the six months ended June 30, 2003 include adjustments for the acquisitions made during 2004 and 2003, as if such transactions had occurred on January 1, 2003. The pro forma information is based upon the historical consolidated statements of operations excluding extraordinary items and income from discontinued operations and does not purport to present what actual results would have been had the acquisitions, and related transactions, in fact, occurred at the previously mentioned dates, or to project results for any future period. 28 of 45 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) PRO FORMA INFORMATION
Six Months Ended June 30, 2004 2003 ---------- ---------- Revenues: Minimum rent $ 488,559 $ 485,335 Tenant charges 242,597 237,000 Other 59,888 56,381 ---------- ---------- Total revenues 791,044 778,716 ---------- ---------- Expenses: Real estate taxes 59,802 58,967 Other property operating 237,764 246,939 Depreciation and amortization 173,315 154,822 ---------- ---------- Total Expenses 470,881 460,728 ---------- ---------- Operating Income 320,163 317,988 Interest expense, net (195,572) (183,157) Income allocated to minority interests (49,704) (53,986) Equity in income of unconsolidated affiliates 36,913 34,382 ---------- ---------- Pro forma income from continuing operations (a) 111,800 115,227 Pro forma convertible preferred stock dividends - (13,030) ---------- ---------- Pro forma income from continuing operations available to common stockholders (a) $ 111,800 $ 102,197 ========== ========== Pro forma earnings from continuing operations per share - basic (b) $ 0.51 $ 0.54 Pro forma earnings from continuing operations per share - diluted (b) $ 0.51 $ 0.54
(a) The pro forma adjustments include management fee and depreciation modifications and adjustments to give effect to the acquisitions activity described above. (b) Pro forma basic earnings per share are based upon weighted average common shares of approximately 218,075,000 for 2004 and 188,206,000 for 2003. Pro forma diluted per share amounts are based on the weighted average common shares and the effect of dilutive securities outstanding of approximately 218,650,000 for 2004 and 188,849,000 for 2003. 29 of 45 GENERAL GROWTH PROPERTIES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All references to numbered Notes are to specific footnotes to the Consolidated Financial Statements of the Company 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 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 have the same meanings as in such Notes. FORWARD-LOOKING INFORMATION Certain statements contained in this Quarterly Report on Form 10-Q may include certain forward-looking information statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including (without limitation) statements with respect to anticipated future operating and financial performance, growth and acquisition opportunities and other similar forecasts and statements of expectation. Words such as "expects", "anticipates", "intends", "plans", "will", "believes", "seeks", "estimates", and "should" and variations of these words and similar expressions, are intended to identify these forward-looking statements. Forward-looking statements made by the Company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions. Representative examples of these factors include (without limitation): - general industry and economic conditions - acts of terrorism - interest rate trends - cost of capital requirements - availability of real estate properties - inability to consummate acquisition opportunities - competition from other companies and venues for the sale/distribution of goods and services - changes in retail rental rates in the Company's markets - shifts in customer demands - tenant bankruptcies or store closures - changes in vacancy rates at the Company's properties - changes in operating expenses, including employee wages, benefits and training - governmental and public policy changes - changes in applicable laws, rules and regulations (including changes in tax laws) - the ability to obtain suitable equity and/or debt financing - the continued availability of financing in the amounts and on the terms necessary to support the Company's future business MANAGEMENT'S CONTEXTUAL OVERVIEW & SUMMARY The Company's primary business is the ownership, management, leasing and development of retail rental property. Management of the Company believes the most significant operating factor affecting incremental cash flow and net income is increased rents (either base rental revenue or overage rents) earned from tenants 30 of 45 GENERAL GROWTH PROPERTIES, INC. at the Company's properties. These rental revenue increases are primarily achieved by re-leasing existing space at higher current rents, increasing occupancy at the properties so that more space is generating rent and sales increases of the tenants, in which the Company participates through overage rents. Therefore, certain operating statistics of the properties owned by the Company are presented to indicate the trends of these factors. Readers of this management analysis of operations of the Company should focus on trends in such rental revenues as tenant expense recoveries and net management fees and expenses are not as significant in terms of major net indicators of trends in cash flow or net income. In addition, management of the Company considers changes in interest rates to be the most significant external factor in determining trends in the Company's cash flow or income from continuing operations. As detailed in our discussion of economic conditions and market risk, interest rates have recently risen and may rise again in future months, which could adversely impact the Company's future cash flow and net income. Finally, the following discussion of management's analysis of operations focuses on the consolidated financial statements presented in this Quarterly Report. Trends in Funds from Operations ("FFO") as defined by The National Association of Real Estate Investment Trusts ("NAREIT") have not been presented in this management discussion and analysis of operations, as FFO, under current SEC reporting guidelines, can only be considered a supplemental measure of Company operating performance. Another significant factor for overall increases in the Company's cash flow and net income is the acquisition of additional properties. During 2003, the Company acquired 100% interests in 10 regional malls and additional ownership interests in 7 regional malls, for total consideration of approximately $2.0 billion. Through June 2004, the Company acquired 100% interests in 4 retail properties, the remaining 50% interest in one retail property, a 50% interest in two retail properties and a 33 1/3% ownership interest in a property to be developed in Costa Rica, all for an aggregate consideration of approximately $1.4 billion. Readers of this management analysis of operations should note that, as described in the results of operations discussion below, the major portion of increases in cash flow and net income versus prior years are due to the continued acquisition of property. SEASONALITY The business of our tenants and the Company's business are both seasonal in nature. Our tenants' stores typically achieve higher sales levels during the fourth quarter because of the holiday selling season, and with lesser, though still significant, sales fluctuations associated with the Easter holiday and back-to-school events. Although the Company has a year-long temporary leasing program, a significant portion of the rents received from short-term tenants are collected during the months of November and December. 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 and recorded in the Company's fourth quarter. Thus, occupancy levels and revenue production are generally higher in the later part of each year as opposed to the early part of each year. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates for a variety of reasons, certain of which are described below. CRITICAL ACCOUNTING POLICIES Critical accounting policies are those that are both significant to the overall presentation of the Company's financial condition and results of operations and require management to make difficult, complex or subjective 31 of 45 GENERAL GROWTH PROPERTIES, INC. judgments. For example, significant estimates and assumptions have been made with respect to useful lives of assets, capitalization of development and leasing costs, recoverable amounts of receivables and deferred taxes and initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to property acquisitions, as further discussed below. The Company's critical accounting policies have not changed since December 31, 2003. CERTAIN INFORMATION ABOUT THE COMPANY PORTFOLIO At June 30, 2004, the Company owned the Consolidated Properties (125 operating regional malls and community centers) and the following investments in Unconsolidated Real Estate Affiliates:
NUMBER OF REGIONAL MALL SHOPPING COMPANY OWNERSHIP VENTURE NAME CENTERS PERCENTAGE - ----------------------- ------------- ----------------- GGP/Homart 22* 50% GGP/Homart II 10 50% GGP/Teachers 5 50% GGP Ivanhoe 2 51% GGP Ivanhoe IV 1 51% Quail Springs 1 50% Circle T 1** 50% Riverchase 1 50% GGP/Sambil Costa Rica 1** 33 1/3% --- Total 44 ===
* Including 3 regional mall shopping centers owned jointly with venture partners. ** Not operational as currently under development. For the purposes of this report, the 44 regional mall shopping centers listed above are collectively referred to as the "Unconsolidated Properties" and, together with the Consolidated Properties, comprise the "Company Portfolio". Reference is made to Notes 1 and 3 for a further discussion of such Consolidated Properties and investments in Unconsolidated Real Estate Affiliates. The Company has presented certain information on its Consolidated and Unconsolidated Properties separately in charts and tables containing financial data and operating statistics. As a significant portion of the Company's total operations are structured as joint venture arrangements which are generally unconsolidated for GAAP purposes since the Company only has an approximate 50% interest in such properties through such joint ventures, management of the Company believes that financial information and operating statistics with respect to all properties owned provide important insights into the income produced by such investments for the Company as a whole. Since GGMI, a wholly-owned subsidiary of the Company, provides on-site management and other services to the Unconsolidated Properties, the management operating philosophies and strategies are generally the same whether the properties are consolidated or unconsolidated. As a result, a presentation of certain financial information for Consolidated and Unconsolidated Properties on a stand-alone basis as well as operating statistics on a stand-alone and weighted-average basis depicts the relative size and significance of these elements of the Company's overall operations. 32 of 45 GENERAL GROWTH PROPERTIES, INC. COMPANY PORTFOLIO DATA AS OF/OR FOR THE SIX MONTHS ENDED JUNE 30, 2004
Consolidated Unconsolidated Company Properties Properties Portfolio (b) ------------ -------------- ------------- OPERATING STATISTICS (a) Space leased at centers not under redevelopment (as a %) 90.8% 90.6% 90.7% Trailing 12 month total tenant sales per sq. ft. (c) $ 357 $ 394 $ 369 % change in total sales (c) 6.8% 10.7% 8.1% % change in comparable sales (c) 5.2% 6.7% 5.7% Mall and Freestanding gross leaseable retail space ("GLA") excluding space under redevelopment (in sq. ft.) 30,907,849 14,701,901 45,609,750 CERTAIN FINANCIAL INFORMATION Average annualized in place rent per sq. ft $ 30.22 $ 33.51 Average rent per sq. ft. for new/renewal leases (excludes 2004 acquisitions) $ 32.40 $ 35.27 Average rent per sq. ft. for leases expiring in 2004 (excludes 2004 acquisitions) $ 25.69 $ 32.35
(a) Data is for 100% of the Mall GLA in each portfolio, including those centers that are owned in part by unconsolidated affiliates. Data excludes properties currently being redeveloped and/or remerchandised and miscellaneous (non-mall) properties. (b) Data includes weighted-average amounts. (c) Due to tenant sales reporting timelines, data is as of May. Company revenues are primarily derived from tenants in the form of fixed minimum rents, overage rents and recoveries of operating expenses. In addition, the consolidated results of operations of the Company were impacted by the following acquisitions:
ACQUISITION DATE ----------- 2004 A 50% ownership interest in Burlington Town Center January 7 Redlands Mall January 16 The remaining 50% ownership interest in Town East Mall March 1 Four Seasons Town Centre March 5 A 33 1/3% ownership interest in GGP/Sambil Costa Rica April 30 A 50% ownership interest in Riverchase Galleria May 11 Mall of Louisiana May 12 The Grand Canal Shoppes May 17 2003 Peachtree Mall April 30 Saint Louis Galleria June 11 Coronado Center June 11 The remaining 49% ownership interest in GGP Ivanhoe III July 1 Lynnhaven Mall August 27 Sikes Senter October 14 The Maine Mall October 29 Glenbrook Square October 31 Foothills Mall December 5 Chico Mall December 23 Rogue Valley Mall December 23
33 of 45 GENERAL GROWTH PROPERTIES, INC. Because the Company's consolidated financial statements reflect the use of the equity method to account for its investments in Unconsolidated Real Estate Affiliates, the discussion of results of operations of the Company below relates primarily to the revenues and expenses of the Consolidated Properties and GGMI. RESULTS OF OPERATIONS OF THE COMPANY THREE MONTHS ENDED JUNE 30, 2004 AND 2003 The following chart shows the change and percentage change for major items of revenue and expense:
(DOLLARS IN THOUSANDS) 2004 2003 $ CHANGE % CHANGE - ---------------------- --------- --------- --------- -------- Total Revenues $ 376,246 $ 284,687 $ 91,559 32% Minimum rents 232,922 173,682 59,240 34% Tenant recoveries 105,832 80,578 25,254 31% Overage rents 5,013 3,542 1,471 42% Management and other fees 20,163 20,278 (115) (1%) Total Expenses 230,033 167,933 62,100 37% Real estate taxes 29,043 20,497 8,546 42% Repairs and maintenance 25,496 18,560 6,936 37% Other property operating costs 48,855 34,770 14,085 41% Marketing 10,515 7,585 2,930 39% Property management and other costs 24,694 29,624 (4,930) (17%) Depreciation and amortization 86,051 52,304 33,747 65% Interest Expense 90,460 64,225 26,235 41% Equity in income of unconsolidated affiliates 18,154 21,124 (2,970) (14%)
Total revenues increased $96.5 million as a result of new acquisitions and decreased $4.9 million as a result of lower tenant recoveries which were partially offset by higher overage rents and other revenues. Minimum rents increased as a result of acquisitions. Minimum rents also include the effect of below-market lease rent accretion pursuant to SFAS 141 and 142 (Note 1) of $9.5 million in 2004 and $7.0 million in 2003. Tenant recoveries increased $32.0 million as a result of acquisitions and decreased $6.7 million due to lower recoverable expenses at various centers. Overage rents increased $1.0 million as a result of acquisitions and $0.5 million as a result of higher tenant sales. Management and other fees were comparable to 2003. The Company acquired the remaining 49% interest in GGP/Ivanhoe III from its joint venture partner in July, 2003 and the remaining 50% interest in Town East in March, 2004. As these joint ventures are now consolidated in the results of operations of the Company, it no longer receives a fee for managing these properties. These decreases were substantially offset by increased development fees resulting from renovations at Unconsolidated Properties. Total expenses increased $54.9 million as a result of acquisitions and $7.2 million as a result of higher depreciation which was partially offset by lower property management costs, primarily due to lower costs in 2004 as the TSOs granted in 2002 vested in June 2003 (Note 1). Real estate taxes increased $9.1 million as a result of acquisitions and decreased $0.6 million as a result of substantially reduced property taxes at certain of our centers. Repairs and maintenance increased due to acquisitions. Property operating costs increased $12.9 million as a result of acquisitions and $1.2 million as a result of various operating costs. Real estate taxes, repairs and maintenance and other property operating expenses are generally recoverable from tenants and the increases in these expenses are generally consistent with the increase in tenant recovery revenues. 34 of 45 GENERAL GROWTH PROPERTIES, INC. Marketing increased due to acquisitions. Depreciation and amortization increased $22.0 million as a result of acquisitions and $11.7 million as a result of additional depreciation on completed developments and other capitalized building and equipment costs. Interest expense increased $22.9 million as a result of acquisitions and $3.3 million as a result of higher debt levels primarily for redevelopment and other working capital requirements. Equity in income of unconsolidated affiliates decreased primarily due to the acquisition of the remaining interests in certain joint ventures. The Company acquired the remaining 49% interest in GGP/Ivanhoe III from its joint venture partner in July, 2003 and the remaining 50% interest in Town East in March, 2004. As a result, these joint ventures are now consolidated in the results of operations of the Company. These decreases were partially offset by increases resulting from the Company's share of the Riverchase joint venture due to an acquisition of an interest in the venture in May 2004. RESULTS OF OPERATIONS OF THE COMPANY SIX MONTHS ENDED JUNE 30, 2004 AND 2003 The following chart shows the change and percentage change for major items of revenue and expense:
(DOLLARS IN THOUSANDS) 2004 2003 $ CHANGE % CHANGE - ---------------------- --------- --------- --------- -------- Total Revenues $ 737,831 $ 558,574 $ 179,257 32% Minimum rents 455,578 343,403 112,175 33% Tenant recoveries 208,436 151,656 56,780 37% Overage rents 13,781 10,044 3,737 37% Management and other fees 38,864 40,601 (1,737) (4%) Total Expenses 438,122 332,006 106,116 32% Real estate taxes 57,356 40,617 16,739 41% Repairs and maintenance 50,353 36,269 14,084 39% Other property operating costs 90,161 69,611 20,550 30% Marketing 20,955 15,761 5,194 33% Property management and other costs 49,713 56,248 (6,535) (12%) Depreciation and amortization 159,218 104,283 54,935 53% Interest Expense 177,547 124,968 52,579 42% Equity in income of unconsolidated affiliates 36,084 43,409 (7,325) (17%)
Total revenues increased primarily as a result of new acquisitions. Minimum rents increased as a result of acquisitions. Minimum rents also include the effect of below-market lease rent accretion pursuant to SFAS 141 and 142 (Note 1) of $17.2 million in 2004 and $13.0 million in 2003. Tenant recoveries increased $59.6 million as a result of acquisitions and decreased $2.8 million due to lower recoverable expenses at various centers. Overage rents increased $2.8 million as a result of acquisitions and $0.9 million as a result of higher tenant sales. Management and other fees declined as a result of joint venture partnership interest acquisitions. The Company acquired the remaining 49% interest in GGP/Ivanhoe III from its joint venture partner in July, 2003 and the remaining 50% interest in Town East in March, 2004. As these joint ventures are now consolidated in the results of operations of the Company, it no longer receives a fee for managing these properties. These decreases were partially offset by increased development fees resulting from renovations at Unconsolidated Properties. 35 of 45 GENERAL GROWTH PROPERTIES, INC. Total expenses, including depreciation and amortization, increased $101.4 million as a result of acquisitions and $4.7 million as a result of higher depreciation which was partially offset by lower property management and other costs. The decrease in property management and other costs is primarily the result of TSOs granted in 2002 which vested in June 2003 (Note 1). Real estate taxes increased $17.4 million as a result of acquisitions and decreased $0.7 million as a result of substantially reduced property taxes at certain of our centers. Repairs and maintenance increased $13.0 million due to acquisitions and $1.1 million due to miscellaneous increases across substantially all of our properties. Property operating costs increased $25.1 million as a result of acquisitions and decreased $4.5 million as a result of lower electrical and other operating costs. Real estate taxes, repairs and maintenance and other property operating expenses are generally recoverable from tenants and the increases in these expenses are generally consistent with the increase in tenant recovery revenues. Marketing increased due to acquisitions. Depreciation and amortization increased $38.5 million as a result of acquisitions and $16.4 million as a result of additional depreciation on completed developments and other capitalized building and equipment costs. Interest expense increased $42.0 million as a result of acquisitions and $10.6 million as a result of higher debt levels primarily for redevelopment and other working capital requirements. Equity in income of unconsolidated affiliates decreased primarily due to joint venture acquisitions. The Company acquired the remaining 49% interest in GGP/Ivanhoe III from its joint venture partner in July, 2003 and the remaining 50% interest in Town East in March, 2004. As a result, these joint ventures are now consolidated in the results of operations of the Company. These decreases were partially offset by increased management fees resulting from the Riverchase joint venture acquisition in May 2004. LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY As of June 30, 2004, the Company held approximately $15.3 million of unrestricted cash and cash equivalents. The liquidity of the Company is derived primarily from its leases that generate positive net cash flow from operations and distributions from Unconsolidated Real Estate Affiliates. The Company uses operating cash flow as the principal source of internal funding for short-term liquidity and capital needs such as tenant construction allowances and minor improvements made to individual properties that are not recoverable through common area maintenance charges to tenants. External funding alternatives for longer-term capital needs such as acquisitions, new development, expansions and major renovation programs at individual centers include: - Construction loans - Mini-permanent loans - Long-term project financing - Joint venture financing with institutional partners - Operating Partnership level or Company level equity investments - Unsecured Company level debt - Secured loans collateralized by individual shopping centers In this regard, in March 2003 the Company arranged the 2003 Credit Facility (Note 4) to replace a previously existing unsecured credit facility. The 2003 Credit Facility was finalized in April 2003 with initial borrowing availability of approximately $779 million (which was subsequently increased to approximately $1.25 billion). The 2003 Credit Facility has a term of three years and provides for partial amortization of the principal balance of the term loan in the second and third years. Borrowings under the 2003 Credit Facility totaled $929 million at June 30, 2004 and $789 million at December 31, 2003. 36 of 45 GENERAL GROWTH PROPERTIES, INC. As of June 30, 2004, the Company believed it was in compliance with any restrictive covenants contained in its various financing arrangements. Also, in order to maintain its access to the public equity and debt markets, the Company has a currently effective shelf registration statement under which up to $2 billion in equity or debt securities may be issued from time to time. Changes in the current market price of the Common Stock would change the actual number of shares of Common Stock that would be sold to yield a desired amount of stock sale proceeds. As of June 30, 2004, the Company had consolidated debt of approximately $8.2 billion. In addition, the Company's share (in general, calculated at the Company's respective ownership interests) of the debt of the Unconsolidated Real Estate Affiliates was approximately $1.9 billion. Except in instances where certain Consolidated Properties are cross-collateralized with the Unconsolidated Properties, or the Company has retained a portion of the debt of a property when such property was contributed to an Unconsolidated Real Estate Affiliate (Note 3), the Company has not otherwise guaranteed the debt of the Unconsolidated Real Estate Affiliates. The following table reflects the maturity dates of the Company's debt and the related interest rates, after giving effect to the current swap agreements of the Company as described in Note 4. MATURITY AND CURRENT AVERAGE INTEREST RATES ON OUTSTANDING DEBT AS OF JUNE 30, 2004 (Dollars in Thousands)
UNCONSOLIDATED PROPERTIES ------------------------------------------------ TOTAL COMPANY SHARE OF CONSOLIDATED UNCONSOLIDATED UNCONSOLIDATED PROPERTIES(a) PROPERTIES PROPERTIES DEBT (b) ----------------------- ----------------------- ----------------------- CURRENT CURRENT CURRENT AVERAGE AVERAGE AVERAGE MATURING INTEREST MATURING INTEREST MATURING INTEREST YEAR AMOUNT(c) RATE (d) AMOUNT(c) RATE (d) AMOUNT(c) RATE (d) - -------- ----------- --------- ------------ --------- ----------- --------- 2004 $ 194,184 6.64% $ 55,800 6.64% $ 28,458 6.64% 2005 305,600 4.65% 247,963 5.99% 125,711 6.01% 2006 1,324,671 4.24% 297,015 8.89% 153,018 8.79% 2007 921,816 4.49% 845,201 2.40% 486,119 2.31% 2008 1,703,657 4.00% 592,095 4.16% 281,047 4.03% Subsequent 3,693,002 5.00% 1,685,807 5.11% 810,147 5.07% ----------- ---- ----------- ---- ----------- ----- Total $ 8,142,930(e) 4.63% $ 3,723,881 4.73% $ 1,884,500 4.59% =========== ==== =========== ==== =========== ===== Variable Rate $ 2,301,354 2.64% $ 933,264 2.32% $ 523,895 2.25% Fixed Rate 5,841,576 5.42% 2,790,617 5.53% 1,360,605 5.49% ----------- ---- ----------- ---- ----------- ----- Total $ 8,142,930(e) 4.63% $ 3,723,881 4.73% $ 1,884,500 4.59% =========== ==== =========== ==== =========== =====
(a) The debt collateralized by Provo Mall and Spokane Mall is reflected at 75% of the total loan balance on this schedule because these two centers are owned through joint ventures with 25% minority partners. (b) Unconsolidated Properties debt reflects the Company's share of debt (either retained (Note 3) or based on its respective equity ownership interests in the Unconsolidated Real Estate Affiliates) relating to the properties owned by the Unconsolidated Real Estate Affiliates. (c) Excludes principal amortization. (d) For variable rate loans, the interest rate reflected is the actual annualized weighted-average rate for the variable-rate debt outstanding during the six months ended June 30, 2004. (e) Excludes a market value purchase price adjustment of approximately $5.2 million related to the JP Realty acquisition in July 2002. 37 of 45 GENERAL GROWTH PROPERTIES, INC. Reference is made to Note 4 and Item 3 of this Form 10-Q and Note 5 and Items 2 and 7A of the Company's Annual Report on Form 10-K for additional information regarding the Company's debt and the potential impact on the Company of interest rate fluctuations. The following summarizes certain significant investment and financing transactions of the Company currently planned or completed since December 31, 2003: ACQUISITIONS As discussed below, during the first six months of 2004, the Company acquired 100% interests in 4 retail properties, the remaining 50% interest in one retail property, a 50% interest in two retail properties and a 33 1/3% ownership interest in a property to be developed in Costa Rica, all for an aggregate consideration of approximately $1.4 billion. Consideration for the acquisitions included $1.1 billion of new debt, $134.4 million of assumed debt, $25.1 million of preferred units in the Operating Partnership and $149.3 million from cash on hand or proceeds from borrowings under the Company's credit facilities. - On January 7, 2004, the Company acquired a 50% membership interest in a newly formed limited liability company ("Burlington LLC") which owns Burlington Town Center, an enclosed mall in Burlington, Vermont, for $10.25 million (subject to certain prorations and adjustments). Approximately $9 million was funded in cash by the Company at closing with the remaining amounts to be funded in cash in 2004 as necessary. In addition, at closing the Company made a $31.5 million mortgage loan to Burlington LLC to replace the existing mortgage financing which had been collateralized by the property. The new mortgage loan requires monthly payments of principal and interest, bears interest at a rate per annum of 5.5% and is scheduled to mature in January 2009. - On January 16, 2004, the Company acquired Redlands Mall, an enclosed mall in Redlands, California (currently under redevelopment) for approximately $14.25 million (subject to certain prorations and adjustments). The consideration was paid from cash on hand and proceeds from borrowings under the Company's credit facilities. - On March 1, 2004, the Company acquired the remaining 50% general partnership interest in Town East Mall in Mesquite, Texas from its unaffiliated joint venture partner. The purchase price was approximately $44.5 million and was paid from cash on hand and proceeds from borrowings under the Company's credit facilities. - On March 5, 2004, the Company acquired Four Seasons Town Centre, an enclosed mall in Greensboro, North Carolina for approximately $161 million (subject to certain prorations and adjustments). The consideration was paid by the assumption of approximately $134.4 million in existing long-term non-recourse mortgage debt (bearing interest at a rate per annum of approximately 5.6% and is scheduled to mature in December 2013), approximately $25.1 million in 7% preferred units of Operating Partnership interest and the remaining amounts in cash, primarily from amounts borrowed under the Company's credit facilities. Immediately following the closing, the Company prepaid approximately $22.4 million of such assumed debt using cash on hand. - On April 30, 2004 the Company completed an agreement to form a joint venture to develop and subsequently own and manage a retail center in San Jose, Costa Rica. The venture, GSG de Costa Rica SRL ("GGP/Sambil Costa Rica"), is owned 33 1/3% by a wholly-owned subsidiary of the Operating Partnership and 33 1/3% each by two independent Latin American real estate investment and development firms. The Company has committed to invest approximately $12.2 million in GGP/Sambil Costa Rica, of which approximately $9.7 million has been paid and the remaining amounts will be drawn on a letter of credit provided by the Company as additional construction and development costs of the project are incurred. The Company's cash investments, the $16.0 million of capital contributions 38 of 45 GENERAL GROWTH PROPERTIES, INC. made by the Latin American co-venture partners and construction financing to be arranged, are expected to be sufficient to complete the project, an approximately 500,000 square foot retail center. - On May 11, 2004, the Company completed the acquisition of a 50% interest in a joint venture (Hoover Mall Holding, L.L.C.) which owns, through a wholly-owned subsidiary, Riverchase Galleria, an enclosed mall in Birmingham, Alabama for approximately $166 million. In conjunction with the purchase, the existing loan collateralized by the property was refinanced with a new, non-recourse mortgage loan of $200 million. The new loan bears interest at a rate of LIBOR plus 88 basis points, requires monthly payments of interest only and, assuming all no-cost extension options are exercised, is scheduled to mature in June 2009. In addition, the Company has fixed the interest rate to be paid on this loan (initially 3.26% per annum with steps to 5.99% per annum in 2007) through the use of interest rate swaps. - On May 12, 2004, the Company completed the acquisition of a 100% interest in Mall of Louisiana, an enclosed regional mall in Baton Rouge, Louisiana for approximately $265 million. A portion of the purchase price was paid with the proceeds of a new $185 million acquisition loan that currently bears interest at LIBOR plus 58 basis points. The interest rate will increase in future periods (to a potential maximum of LIBOR plus 134 basis points) depending upon certain options regarding the loan rates and maturities elected by the Company. The loan, which requires monthly payments of interest only, has four no-cost options to extend and, if all such options are exercised, will mature in June 2009. - On May 17, 2004, the Company completed the acquisition of The Grand Canal Shoppes in Las Vegas, Nevada. The purchase price of approximately $766 million was funded by a new $427 million non-recourse mortgage loan and a new unsecured term loan. The new mortgage loan bears interest at a rate per annum of 4.78%, provides for monthly payments of principal and interest and is scheduled to mature in May 2009. The new term loan, with an initial funding of $350 million, but with a total available capacity of up to $800 million, currently bears interest at a rate per annum of LIBOR plus 115 basis points on the current outstanding principal balance, requires monthly payments of interest only, and is scheduled to mature in May 2009. The interest rate on the term loan may vary in the future depending upon the Company's future leverage ratios, changes in LIBOR rates and the length of LIBOR contracts, and, with respect to the initial funding of the term loan, the Company has fixed the interest rate to be paid through the use of interest rate swaps. Subsequent to June 30, 2004, the Company completed the following acquisitions: - On July 30, 2004, the Company finalized a contract to acquire a United States enclosed regional mall. The purchase price is expected to be approximately $312,000 (subject to certain prorations and adjustments). Assuming the parties satisfy all of the requisite customary closing conditions, the transaction could close as early as mid-August 2004. The purchase price is expected to be paid through a combination of cash on hand, borrowings on the Company's credit facilities and approximately $220,000 in the form of a variable rate loan collateralized by the property. - On July 30, 2004, the Company formed a joint venture to own, manage and develop retail properties in Brazil. The Company has committed to invest up to approximately $32 million for a 50% membership interest in the joint venture ("GGP/NIG Brazil") of which $7 million was funded at closing. The remaining funds will be invested by the Company (upon decision of both partners) to acquire additional interests in the properties currently owned or to acquire interests in other retail centers. 39 of 45 GENERAL GROWTH PROPERTIES, INC. RENOVATIONS, EXPANSIONS AND DEVELOPMENTS The Company has an ongoing program of renovations and expansions at its properties. As of June 30, 2004, projected expenditures for such renovations and expansions which are currently under construction totaled $650 million, of which approximately $140 million has been incurred. In August 2004, the Company opened Jordan Creek Town Center in West Des Moines, Iowa. As of June 30, 2004, total construction costs incurred for this new development totaled $120 million and are expected to approximate $200 million upon completion. The Company, along with its joint venture partners when applicable, is in various stages of development at a number of properties as described in Note 2. Future contractual obligations as of the date of this report are not significant and future construction costs have not been finalized. Renovation, expansion and development costs are expected to be funded from operating cash flow, borrowings under current unsecured revolving credit facilities and/or future project loans. NEW FINANCINGS, REFINANCINGS AND PAYDOWNS In addition to the previously discussed acquisitions, the Company completed the following transactions during the first six months of 2004: - During the six months ended June 30, 2004, the Company refinanced $385 million of mortgage notes collateralized by individual properties. The weighted-average interest rate on the refinanced debt was 3.02%. Proceeds from the new debt, approximately $654 million, were used to repay previously outstanding debt, for redevelopment projects and for acquisitions. The refinancings converted $280 million of previously variable-rate debt to fixed-rate debt. The new debt bears interest at a weighted-average rate of 4.14% and matures at various dates between March 2009 and March 2014. - Debt paydowns, excluding refinancings, totaled $102.5 million during the six months ended June 30, 2004. The debt was paid down with cash on hand resulting from positive net cash flows from operations as well as excess proceeds from refinancings. In addition, GGP/Homart, an Unconsolidated Real Estate Affiliate, completed refinancing, new debt issuances and paydowns which resulted in a net decrease to its debt of $11 million. The new debt bears interest at a weighted-average rate of 4.20% and matures at various dates from March 2009 to April 2014. The following table aggregates the future maturities of the Company's contractual obligations and commitments as of June 30, 2004:
(DOLLARS IN THOUSANDS) 2004 2005 2006 2007 2008 SUBSEQUENT TOTAL - ---------------------- ---- ---- ---- ---- ---- ---------- ----- Long-term debt-principal $ 233,442 $ 330,088 $ 2,122,223 $ 452,403 $ 1,477,397 $ 3,556,338 $ 8,171,891 Retained debt-principal 1,495 6,586 29,914 119,077 199 10,911 168,182(1) Ground lease payments 1,295 2,520 2,450 2,445 2,445 88,638 99,793 Committed real estate acquisition contracts (Note 2) - 250,000 - - - 250,000(2) Purchase obligations 28,043 - - - - - 28,043(3) Other long-term liabilities - - - - - - -(4) --------- --------- ----------- --------- ----------- ----------- ----------- Total $ 264,275 $ 339,194 $ 2,404,587 $ 573,925 $ 1,480,041 $ 3,655,887 $ 8,717,909 ========= ========= =========== ========= =========== =========== ===========
(1) As separately detailed in Note 3. (2) Reflects $250 million related to the Palazzo. 40 of 45 GENERAL GROWTH PROPERTIES, INC. (3) Reflects accrued and incurred construction costs payable. Routine trade payables have been excluded. Other construction costs related to current development projects of approximately $90 million and redevelopment projects of approximately $510 million are expected in future years as detailed in Note 2. (4) Other long-term liabilities related to interest expense on long-term debt or ongoing real estate taxes have not been included in the table as such amounts depend upon future amounts outstanding and future applicable real estate tax and interest rates. Interest expense was $278.5 million in 2003 and $219.0 million in 2002. Real estate tax expense was $89.0 million in 2003 and $61.1 million in 2002. Not included in contractual obligations and commitments as of June 30, 2004 are a $312 million commitment to acquire a United States enclosed regional mall which was finalized on July 30, 2004 and a committed investment of up to $32 million in GGP/NIG Brazil which was finalized in July 2004. Approximately $7 million of the GGP/NIG Brazil commitment has been funded. Although agreements to refinance debt maturing in 2004 and 2005 have not yet been reached, the Company anticipates that all of its debt will be repaid or refinanced on a timely basis. Other than as previously discussed or in conjunction with possible future new developments or acquisitions, there are no current plans to incur additional debt, increase the amounts available under the Company's credit facilities or raise equity capital. Net cash provided by operating activities was $341.2 million in the first six months of 2004, an increase of $102.8 million from $238.4 million in the same period in 2003, primarily due to increased earnings (excluding depreciation and amortization in 2004) as a result of properties acquired in 2004. Net cash used in investing activities was $1.4 billion in the first six months of 2004 compared to $557.2 million in the first six months of 2003. Cash flows used by investing activities reflect the higher volume of acquisition and development activity for the Consolidated Properties in the first six months of 2004 as compared to the first six months in 2003 as further described in Note 2. Net cash provided by financing activities was $1.1 billion in the first six months of 2004, compared to $285.2 million in the first six months of 2003. Financing from mortgages and other debt, net of repayments of principal on mortgage debt, including the higher volume of acquisition and development activity in 2004, was the primary reason for the increase. In order to remain qualified as a real estate investment trust for federal income tax purposes, General Growth must distribute or pay tax on 100% of capital gains and at least 90% of its ordinary taxable income to stockholders. The following factors, among others, will affect operating cash flow and, accordingly, influence the decisions of the Board of Directors regarding distributions: - Scheduled increases in base rents of existing leases - Changes in minimum base rents and/or overage rents attributable to replacement of existing leases with new or renewal leases - Changes in occupancy rates at existing properties and procurement of leases for newly developed centers - General Growth's share of distributions of operating cash flow generated by the Unconsolidated Real Estate Affiliates, less oversight costs and debt service on additional loans that have been or will be incurred. General Growth anticipates that its operating cash flow, and potential new debt or equity from future offerings, new financings or refinancings will provide adequate liquidity to conduct its operations, fund general and administrative expenses, fund operating costs and interest payments and allow distributions to General Growth preferred and common stockholders in accordance with the requirements of the Internal Revenue Service. 41 of 45 GENERAL GROWTH PROPERTIES, INC. ECONOMIC CONDITIONS During 2003, the retail sector improved modestly and the 2003 holiday season was the strongest since 1999. In 2004, further improvements to the sector prospects were predicted by economists. Despite these favorable trends, some economists remain cautious about prospects for continued improvements in retail markets. Growth in retail markets would lead to stronger demand for leaseable space, ability to increase rents to tenants with stronger sales performance and increased rents computed as a percentage of tenant sales. The Company and its affiliates currently have interests in 167 operating retail properties in the United States. The Portfolio Centers are diversified both geographically and by property type (both major and middle market properties) and this may mitigate the impact of any economic decline at a particular property or in a particular region of the country. In addition, the diverse combination of the Company's tenants is important because no single tenant (by trade name) comprises more than 10% of the Company's annualized total rents. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS As described in Note 8, the FASB, has issued certain statements which are effective for the current year. There has not been a significant impact on the Company's reported operations due to the application of such new statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has not entered into any transactions using derivative commodity instruments. At June 30, 2004, $3.0 billion of the Company's consolidated debt bears interest at rates that vary with the market. However, approximately $725 million of such variable-rate consolidated debt is subject to interest rate swap agreements, the effect of which is to fix the interest rate the Company is required to pay on such debt to approximately 3.86% per annum. Although the majority of the remaining variable-rate debt is subject to interest rate cap agreements pursuant to the loan agreements and financing terms, such interest rate caps generally limit the Company's interest rate exposure only if LIBOR exceeds a rate per annum significantly higher (generally above 8% per annum) than current LIBOR rates. Therefore, a 25 basis point movement in the interest rate on the remaining approximately $2.3 billion of variable-rate debt would result in an approximately $5.8 million annualized increase or decrease in consolidated interest expense and operating cash flows. The Company's remaining consolidated debt outstanding at June 30, 2004 bears interest at a fixed rate. In addition, the Company is subject to interest rate exposure as a result of the variable-rate debt collateralized by the Unconsolidated Real Estate Affiliates for which interest rate swap agreements have not been obtained. The Company's share (based on the Company's respective equity ownership interests in the Unconsolidated Real Estate Affiliates) of such remaining variable-rate debt was approximately $523.9 million at June 30, 2004. A similar 25 basis point annualized movement in the interest rate on the variable-rate debt of the Unconsolidated Real Estate Affiliates would result in approximately $1.3 million annualized increase or decrease in the Company's equity in the income and operating cash flows from Unconsolidated Real Estate Affiliates. The Company is further subject to interest rate risk with respect to its fixed-rate financing in that changes in interest rates will impact the fair value of the Company's fixed-rate financing. To determine the fair market value, the fixed-rate debt is discounted at a rate based on an estimate of current lending rates, assuming the debt is outstanding through maturity and considering the note's collateral. At June 30, 2004, the fair value of the fixed-rate debt, including variable-rate debt converted to fixed-rate debt through interest rate swaps is estimated to be $5.9 billion compared to the carrying value of $5.8 billion. If LIBOR were to increase by 25 basis points, the fair value of the $5.8 billion principal amount of outstanding fixed-rate debt would decrease by approximately $24.9 million and the fair value of our swap agreements would increase by $2.8 million. 42 of 45 GENERAL GROWTH PROPERTIES, INC. The Company has an ongoing program of refinancing its consolidated and unconsolidated variable and fixed rate debt and believes that this program allows it to vary its ratio of fixed to variable-rate debt and to stagger its debt maturities to respond to changing market rate conditions. Reference is made to the above discussions of Liquidity and Capital Resources of the Company and Note 4 for additional debt information. ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on that evaluation, the CEO and the CFO have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. There have been no significant changes in the Company's internal controls during the Company's most recently completed fiscal quarter that has materially affected or is reasonably likely to materially affect the Company's internal control over financial reporting. GENERAL GROWTH PROPERTIES, INC. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Stockholders held on May 5, 2004, the stockholders voted upon the election of John Bucksbaum, Alan Cohen and Anthony Downs as Directors of the Company, each for a term of three years, and the ratification of the selection of Deloitte & Touche LLP as the Company's independent auditors for the year ending December 31, 2004. Matthew Bucksbaum, Bernard Freibaum, Robert A. Michaels, Frank S. Ptak, John T. Riordan, and Beth Stewart all continue as directors of the Company. A total of 217,756,631 shares were eligible to vote on each matter presented at the Annual Meeting and each matter received by the following votes of the stockholders:
NUMBER OF MATTER SHARES FOR WITHHELD - ------------------------------------------------------------------ 1. (a) Election of John Bucksbaum 187,057,171 6,927,763 (b) Election of Alan Cohen 191,931,771 2,053,163 (b) Election of Anthony Downs 181,231,153 2,753,781
NUMBER OF NUMBER OF SHARES NUMBER OF MATTER SHARES FOR AGAINST SHARES ABSTAIN - --------------------------------------------------------------------------------------------------------- 2. Ratification of the selection of Deloitte & 179,035,927 14,869,852 79,155 Touche LLP as the Company's independent auditors for the year ending December 31, 2004
43 of 45 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31. Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32. Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b), (c) Reports on Form 8-K and proforma information. The following reports on Form 8-K have been filed by the Company during the quarter covered by this report. 1. Current report on Form 8-K dated April 14, 2004, filing with the SEC under Item 5 additional information about tax fees that General Growth Properties, Inc. reported in its proxy statement for its 2004 Annual Meeting of Stockholders. 2. Current Report on Form 8-K dated April 26, 2004, filing with the SEC under Items 5, 7 and 9 the description of the contracts to acquire The Grand Canal Shoppes, Riverchase Galleria and the Mall of Louisiana and under item Item 9, the press release describing these contracts. 3. Current report on Form 8-K dated April 28, 2004, filing with the SEC under Items 7, 9 and 12 the press release describing the Company's results of operations for its first quarter ended March 31, 2004. 4. Current report on Form 8-K dated May 25, 2004, filing with the SEC under Items 2 and 7 completion of the acquisitions of The Grand Canal Shoppes, Riverchase Galleria and the Mall of Louisiana. 44 of 45 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. GENERAL GROWTH PROPERTIES, INC. (Registrant) Date: August 4, 2004 by: /s/: Bernard Freibaum ------------------------------------------- Bernard Freibaum Executive Vice President and Chief Financial Officer (Principal Accounting Officer) 45 of 45 EX-31 2 c87340exv31.txt SECTION 302 CERTIFICATIONS Exhibit 31 CERTIFICATIONS I, John Bucksbaum, certify that: 1. I have reviewed this quarterly report on Form 10-Q of General Growth Properties, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 4, 2004 /s/:John Bucksbaum ------------------------------ John Bucksbaum Chief Executive Officer I, Bernard Freibaum, certify that: 1. I have reviewed this quarterly report on Form 10-Q of General Growth Properties, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 4, 2004 /s/: Bernard Freibaum -------------------------------- Bernard Freibaum Executive Vice President and Chief Financial Officer EX-32 3 c87340exv32.txt SECTION 906 CERTIFICATIONS Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of General Growth Properties, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John Bucksbaum, in my capacity as Chief Executive Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/: John Bucksbaum - ------------------------- John Bucksbaum Chief Executive Officer August 4, 2004 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of General Growth Properties, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Bernard Freibaum, in my capacity as Chief Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/: Bernard Freibaum - ---------------------------- Bernard Freibaum Chief Financial Officer August 4, 2004 -----END PRIVACY-ENHANCED MESSAGE-----