For the third quarter of 2010, Retail and Other Segment net operating income (NOI) was $581.8 million compared to $582.9 million for the third quarter of 2009. Loss per share was $0.73 in the third quarter of 2010 compared to a loss of $0.38 in the third quarter of 2009. Core Funds from Operations (Core FFO) were losses of $29.3 million in the third quarter of 2010 compared to a positive $88.9 million in the third quarter of 2009. Decreases in the third quarter of 2010 were primarily the result of net incremental reorganization expense items of approximately $79.9 million and incremental accrued interest expense (related to final consensual plans of reorganization which were approved on October 21, 2010) of approximately $83.7 million. During the quarter, tenant sales at comparable properties increased by 10.2% over the third quarter of 2009, building on the year-over-year sales growth momentum in the first and second quarter of 7.5% and 7.8% respectively.
A link to the schedule showing adjustments and non-comparable income and expense items and their impact on 2010 and 2009 NOI from the Retail and Other Segment is provided at the end of this release. Concurrent with this release, the Company has made available on this website its quarterly package of supplemental financial information, which provides additional operational result detail.
“GGP’s underlying operating performance continues to improve. We are particularly pleased with the improving retail sales performance of our malls,” said Adam Metz, chief executive officer of GGP. “Comparable tenant sales rose more than 10 percent in the quarter from the same quarter in 2009, which is evidence that our operational strategy is working. During the restructuring, GGP’s employees remained very focused on maintaining high standards at our properties to ensure that they continue to perform for our shoppers and retailers. I am happy to report that we accomplished that. We expect these sales results to drive rents on a long-term basis, which bodes well for the future performance of ‘new’ GGP once it emerges from bankruptcy early next month. As the next management team takes the helm, I am confident that GGP has a strong financial and operational foundation for a successful future.”
As previously announced on October 28, 2010, Sandeep Mathrani will become the chief executive officer of the “new” GGP at the beginning of 2011. Mr. Metz will step down as CEO at the end of the year.
CORE FFO, FFO AND EPS HIGHLIGHTS
• Core FFO for the third quarter of 2010 was a loss of $29.3 million, or a loss of $0.09 per fully diluted share, compared to a positive $88.9 million, or $0.28 per fully diluted share, for the third quarter of 2009. Core FFO excludes results from the Master Planned Communities segment and the (provision for) benefit from income taxes. FFO was a loss of $27.8 million in the third quarter of 2010 compared to $100.2 million in the third quarter of 2009, a decrease of approximately $128 million. The primary drivers for these quarterly decreases were an increase of approximately $79.9 million in net reorganization expense items in 2010 and the recognition of approximately $83.7 million of incremental accrued interest expense related to loans of debtors which have had their consensual plans of reorganization recently confirmed by the Bankruptcy Court. Such increases were partially offset by a reduction in aggregate provisions for impairment of approximately $56.3 million compared to third quarter 2009.
• EPS were a loss of $0.73 in the third quarter of 2010 compared to a loss of $0.38 in the third quarter of 2009. A substantial majority of the additional loss in EPS in 2010 was due to the items listed in the attached supplemental comparative schedule of matters affecting NOI, Core FFO and FFO described above.
During the third quarter of 2010, General Growth Properties, on behalf of certain of its Unconsolidated Joint Ventures, refinanced three individual secured mortgage loans totaling approximately $615 million at a weighted average interest rate of approximately 4.66% and at a weighted average term of approximately 10 years. Total net proceeds, at GGP’s share, were approximately $98.2 million and the weighted average loan to value ratio at closing was approximately 45%. Also during the quarter, General Growth Properties restructured a $260.0 million secured mortgage loan on behalf of another Unconsolidated Joint Venture, at an interest rate of approximately 6.65%. Total net proceeds, at GGP’s share, were approximately ($10.4 million) and the maturity date was extended an additional 5 years.
Retail and Other Segment
• Comparable tenant sales on a trailing 12 month basis increased to $426 per square foot or 3.6% compared to the same period last year. On a quarterly basis, comparable tenant sales rose a strong 10.2% year-over-year, with first half momentum growing in the third quarter.
• Retail Center occupancy increased to 91.4% at September 30, 2010, from 91.3% at September 30, 2009.
• NOI in this segment was $581.8 million for the third quarter of 2010 compared to $582.9 million for the third quarter of 2009. Excluding the items detailed in the attached schedule of significant items that impact comparability, NOI for the third quarter of 2010 declined 1.0% year-over-year primarily due to lower temporary tenant revenue and occupancy and lower NOI at GGP’s Special Consideration Properties (the 13 properties identified as underperforming assets as part of our bankruptcy emergence and loan restructuring process). At those properties, aggregate NOI decreased approximately $2.0 million in the third quarter of 2010 compared to the third quarter of 2009.
• Revenues from consolidated properties declined $1.9 million, or approximately 0.3%, for the third quarter of 2010 to $732.2 million from $734.0 million in the third quarter of 2009.
• Revenues from unconsolidated properties at the Company’s ownership share were $144.2 million for the third quarter of 2010, a decline from $147.6 million in 2009, primarily due to declines in temporary tenant rents.
GGP continues to strengthen its assets and operational performance in order to maximize value over the long term. GGP invests in its properties to enhance their positions in the market and their appeal to shoppers and tenants and is committed to fostering long-lasting relationships with its retail partners. During the third quarter, the company signed 1.8 million square feet of new and renewal leases.
• GGP continues to attract some of the nation’s leading retailers and new concept stores. In the third quarter, Forever 21 opened five new stores totaling more than 393,000 square feet, including three in Texas (Baybrook Mall and The Woodlands in Houston and North Star Mall in San Antonio). Luxury fashion designer Michael Kors opened five new stores at Oakbrook Center, Park Meadows, Towson Town Center, Staten Island Mall, and Tysons Galleria; and Australian-based retailer Cotton On signed leases to open seven new stores at California and Florida-based properties. The company also opened another new Apple store at Boise Towne Square in September.
Master Planned Communities Segment
GGP’s Master Planned Community segment includes The Woodlands and Bridgeland, both in the Houston metropolitan area; Summerlin in Las Vegas; and Columbia and Emerson in Maryland. This segment also includes the Nouvelle at Natick condominium project in Massachusetts. As a result of the confirmation of GGP’s plan of reorganization on October 21, 2010, the projects in this segment will be part of the assets included in The Howard Hughes Corporation (“THHC”), a new company that will be created upon GGP’s emergence from bankruptcy.
• During the quarter, GGP sold 24 units at its Nouvelle Natick condominium project and has executed sales contracts pending for an additional 7 units. Such unit sales yielded recognized revenues of approximately $10.3 million for the third quarter of 2010.
• Land sale revenues for the third quarter of 2010 were $10.0 million for consolidated master planned communities and $10.8 million (at the Company’s ownership share) for The Woodlands, the company’s unconsolidated community, compared to $7.4 million and $7.8 million, respectively, for the third quarter of 2009. Increases in land sale revenues for the consolidated master planned communities were largely a result of the collection of participation amounts on previous sales as lot sales to residential builders continue to reflect continued weak overall demand for individual lots. The increases in revenues at The Woodlands are predominantly due to increases in commercial acreage sold, with 11.3 acres sold in 2010 compared to 0.6 acres sold in 2009.
# NOI from the Master Planned Communities segment for the third quarter of 2010 was $0.5 million for consolidated properties and $2.7 million for the unconsolidated properties, as margins from lot or unit sales did not significantly exceed selling and community/property-specific general and administrative costs, which are largely fixed.
SUMMARY OF BANKRUPTCY EMERGENCE PLANS
On October 21, 2010, the U.S. Bankruptcy Court for the Southern District of New York confirmed the Company’s plan of reorganization. GGP expects to emerge from Chapter 11 restructuring on or around November 8th.
GGP will emerge from its financial restructuring with a strong balance sheet and substantially less debt, providing it with a solid financial foundation on which to execute its growth strategy. Upon emergence, GGP will have a significantly improved capital structure, having secured $6.8 billion in equity commitments from Brookfield Asset Management, Fairholme Funds, Pershing Square Capital Management, and The Teacher Retirement System of Texas (and Blackstone, if it elects, as anticipated, to subscribe to a portion of such $6.8 billion in equity).
As part of its plan of reorganization, GGP will split upon emergence into two separate publicly traded corporations, a reorganized GGP (“New GGP”) and The Howard Hughes Corporation (“THHC”), with current shareholders receiving common stock in both companies. New GGP will remain the second-largest shopping mall owner and operator in the country, with more than 185 regional malls in 43 states, and will focus on largely stable, income-producing shopping malls and other real estate assets. THHC, a spin-off company, will consist of GGP’s portfolio of master planned communities and other strategic real estate development opportunities. The plan of reorganization yields a substantial recovery to current common stockholders of GGP, who will as a group own a majority of the outstanding common stock of THHC and a significant minority of the outstanding common stock of New GGP upon emergence.
All pre-petition GGP creditors will be satisfied in full. The restructured loans provide for the repayment of such restructured secured mortgage debt without any prepayment penalties. In addition, the holders of $1.65 billion of certain corporate bonds have elected to either exchange their holdings for new, longer-dated bonds or be reinstated at existing rates, thereby providing the Company an even more attractive maturity profile while allowing the Company to forgo the more costly standby term debt facility it had arranged.
A key feature of the $6.8 billion of new capital to be received pursuant to the investment agreements is a clawback provision that provides GGP with the option to replace up to $2.15 billion of the capital being committed by Fairholme, Pershing Square and Teacher Retirement System of Texas with the proceeds of equity issuances at more advantageous pricing. New GGP has filed a registration statement on Form S-11 with the Securities and Exchange Commission to raise public equity shortly after emergence from Chapter 11.
The offering of equity shortly after emergence from Chapter 11 will be made only by means of a prospectus. A registration statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. The registration statement on Form S-11 may be accessed through the Securities and Exchange Commission’s website at sec.gov. This press release shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction.
NON-GAAP SUPPLEMENTAL FINANCIAL MEASURES AND DEFINITIONS
FUNDS FROM OPERATIONS AND CORE FFO
The Company, consistent with real estate industry and investment community preferences, uses FFO as a supplemental measure of operating performance for a Real Estate Investment Trust (REIT). The National Association of Real Estate Investment Trusts (NAREIT) defines FFO as net income (loss) attributable to common stockholders (computed in accordance with Generally Accepted Accounting Principles (GAAP)), excluding gains (or losses) from cumulative effects of accounting changes, extraordinary items and sales of properties, plus real estate related depreciation and amortization and including adjustments for unconsolidated partnerships and joint ventures.
The Company considers FFO a supplemental measure for equity REITs and a complement to GAAP measures because it facilitates an understanding of the operating performance of the Company’s properties. FFO does not give effect to real estate depreciation and amortization since these amounts are computed to allocate the cost of a property over its useful life. Since values for well-maintained real estate assets have historically increased or decreased based upon prevailing market conditions, the Company believes that FFO provides investors with a clearer view of the Company’s operating performance. However, the Company believes that FFO is a less meaningful supplemental measure for the Master Planned Communities segment of its business. FFO does not facilitate an understanding of the operating performance of the Master Planned Communities segment of its business as its primary strategy in this segment is to develop and sell land in a manner that increases the value of the remaining land. In addition, the Master Planned Communities segment of the Company’s business is operated within taxable REIT subsidiaries and therefore its (provision for) benefit from income tax expense is largely attributable to this segment of the business. To isolate these parts of the Company from the Retail and Other segment, for which FFO is a relevant measure of operating performance, the Company also uses Core FFO as an operating measure. Core FFO is defined as FFO excluding the NOI from the Master Planned Communities segment and the (provision for) benefit from income taxes.
In order to provide a better understanding of the relationship between Core FFO, FFO and GAAP net income (loss), a reconciliation of Core FFO and FFO to GAAP net income (loss) attributable to common stockholders has been provided. Neither Core FFO nor FFO represent cash flow from operating activities in accordance with GAAP, neither should be considered as an alternative to GAAP net income (loss) attributable to common stockholders and neither is necessarily indicative of cash available to fund cash needs. In addition, the Company has presented FFO on a consolidated and unconsolidated basis (at the Company’s ownership share) as the Company believes that given the significance of the Company’s operations that are owned through investments accounted for on the equity method of accounting, the detail of the operations of the Company’s unconsolidated properties provides important insights into the income and FFO produced by such investments for the Company as a whole.
REAL ESTATE PROPERTY NET OPERATING INCOME (NOI) AND COMPARABLE NOI
The Company believes that NOI is a useful supplemental measure of the Company’s operating performance. The Company defines NOI as operating revenues (rental income, land and condominium sales, tenant recoveries and other income) less property and related expenses (real estate taxes, land and condominium sales operating costs, property maintenance costs, marketing and other property expenses). As with FFO described above, NOI has been reflected on a consolidated and unconsolidated basis (at the Company’s ownership share). Other REITs may use different methodologies for calculating NOI, and accordingly, the Company’s NOI may not be comparable to other REITs.
Because NOI excludes general and administrative expenses, interest expense, retail investment property impairment or other non-recoverable development costs, depreciation and amortization, gains and losses from property dispositions, allocations to non-controlling interests, reorganization items, strategic initiatives and extraordinary items, it provides a performance measure that, when compared year over year, reflects the revenues and expenses directly associated with owning and operating commercial real estate properties and the impact on operations from trends in occupancy rates, rental rates, land values (with respect to the Master Planned Communities) and operating costs. This measure thereby provides an operating perspective not immediately apparent from GAAP operating or net income (loss) attributable to common stockholders. The Company uses NOI to evaluate its operating performance on a property-by-property basis because NOI allows the Company to evaluate the impact that factors such as lease structure, lease rates and tenant base, which vary by property, have on the Company’s operating results, gross margins and investment returns.
In addition, management believes that NOI provides useful information to the investment community about the Company’s operating performance. However, due to the exclusions noted above, NOI should only be used as an alternative measure of the Company’s financial performance. For reference, and as an aid in understanding management’s computation of NOI, a reconciliation of NOI to consolidated operating income (loss) as computed in accordance with GAAP has been presented.
Comparable retail and other segment NOI excludes from both years the NOI of properties with significant physical or merchandising changes and those properties acquired or opened during the relevant comparative accounting periods.
The Company has presented information on its consolidated and unconsolidated properties separately in the accompanying financial schedules. As a significant portion of the Company’s total operations are structured as joint venture arrangements which are unconsolidated, management of the Company believes that operating data with respect to all properties owned provides important insights into the income produced by such investments for the Company as a whole. In addition, the individual items of revenue and expense for the unconsolidated properties have been presented at the Company’s ownership share of such unconsolidated ventures. As substantially all of the management operating philosophies and strategies are the same regardless of ownership structure, an aggregate presentation of NOI and other operating statistics yields a more accurate representation of the relative size and significance of such elements of the Company’s overall operations.
The Company currently has ownership interest in more than 200 regional shopping malls in 43 states and internationally, as well as ownership in master planned community developments and commercial office buildings. The Company’s portfolio totals approximately 200 million square feet of retail space and includes over 24,000 retail stores nationwide. The Company’s common stock is currently traded on the New York Stock Exchange under the symbol GGP.
FORWARD LOOKING STATEMENTS
This press release contains forward-looking statements. Actual results may differ materially from the results suggested by these forward-looking statements, for a number of reasons, including, but not limited to, our ability to emerge from bankruptcy pursuant to our approved plan of reorganization, our ability to refinance, extend, restructure or repay our short and intermediate term debt, our substantial level of indebtedness, our ability to raise capital through equity issuances, asset sales or the incurrence of new debt, retail and credit market conditions, impairments, our liquidity demands and retail and economic conditions. Readers are referred to the documents filed by General Growth Properties, Inc. with the Securities and Exchange Commission, which further identify the important risk factors which could cause actual results to differ materially from the forward-looking statements in this release. The Company disclaims any obligation to update any forward-looking statements.