ITEM 1. BUSINESS
GENERAL
General Growth Properties, Inc. (the "Company") was formed in 1986 by Martin Bucksbaum and Matthew Bucksbaum. On April 15, 1993, an initial public offering (the "IPO") of the common stock (the "Common Stock") of the Company and certain related transactions were completed. During May 1995, the Company completed a follow-on stock offering of 4,500,000 shares of Common Stock. In connection with the IPO, the Company and Messrs. Bucksbaum, members of their family and trusts for the benefit of them and their families (collectively, the "Bucksbaums") formed GGP Limited Partnership (the "Operating Partnership"). As a result of the IPO and related transactions, the Company and the Operating Partnership owned 1% and 99%, respectively, of eighteen property partnerships, each of which owned an enclosed mall shopping center. The Operating Partnership also owned 100% of three additional shopping centers. At December 31, 1996, the Company and the Operating Partnership owned 1% and 99%, respectively, of twenty-five property partnerships, and the Operating Partnership owned 100% of five additional shopping centers and a 50% interest in Quail Springs Mall (the thirty-one centers are the "Original Centers"). Currently, the Company owns a 63% general partnership interest in the Operating Partnership, and various minority interests, primarily the Bucksbaums, own the remaining 37% limited partnership interest. The Company, as general partner of the Operating Partnership, is engaged in the ownership, operation, management, leasing, acquisition, development, expansion and financing of enclosed mall shopping centers. See the Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report on Form 10-K for certain financial information required by this Item 1.
On February 11, 1994, the Company, through the Operating Partnership, acquired 40% of the outstanding stock of CenterMark Properties, Inc. ("CenterMark"). CenterMark owned interests in sixteen enclosed regional shopping centers and three power centers (collectively, the "CenterMark Centers") and other real estate, including fourteen free-standing department stores net leased to May Company and a 116-unit apartment project in LaJolla, California. On December 19, 1995, the Company sold 25% of its 40% interest in CenterMark for $72.5 million and granted the buyer an option to purchase its remaining interest. On June 28, 1996, the option was exercised by the buyer to purchase the remaining interest in two transactions. See "Recent Developments - CenterMark Acquisition and Disposition" below.
On December 22, 1995 the Company, through the Operating Partnership's ownership of stock in GGP/Homart, Inc. ("GGP/Homart") acquired a 38.2% interest in substantially all of the regional mall assets and liabilities that were owned by Homart Development Co., an indirect wholly-owned subsidiary of Sears, Roebuck & Co. GGP/Homart currently owns interests in twenty-six shopping centers (the "Homart Centers") and one property under development. Together, the Original Centers, the CenterMark Centers and the Homart Centers comprise the Operating Partnership portfolio ("the "Portfolio Centers").
During 1996, the Operating Partnership, acting through GGP Management, Inc., acquired General Growth Management, Inc. ("GGMI"). GGMI is an affiliate of the Company and is currently the largest third party owned regional mall management company in the United States. See "Acquisition of GGMI" below.
RECENT DEVELOPMENTS
CENTERMARK ACQUISITION AND DISPOSITION
On February 11, 1994, the Company, through the Operating Partnership, together with Westfield U.S. Investments Pty. Limited ("Westfield") and five real estate investment funds sponsored by Goldman Sachs & Co. acquired all of the outstanding stock of CenterMark (the "CenterMark Stock") for approximately $1 billion (including both assumption of existing and new mortgage indebtedness aggregating approximately $542 million). On December 19, 1995, the Company sold 25% of its 40% interest in CenterMark to Westfield for $72.5 million, and also granted Westfield an option which was exercisable on or before September 30, 1996, to purchase its remaining CenterMark stock for $217.5 million. On June 28, 1996, Westfield exercised its option to acquire the remaining 30% of the outstanding CenterMark Stock. The first payment of $87 million was received on July 1, 1996, and the second payment of $130.5 million was received on January 2, 1997. The aggregate financial statement gain from the sale transactions approximated $143 million.
HOMART REGIONAL MALL PORTFOLIO ACQUISITION
On December 22, 1995, the Company through the Operating Partnership, jointly with four other investors formed GGP/Homart to acquire Homart Development Company from Sears, Roebuck & Co. The Company acquired 38.2% of the stock of GGP/Homart for approximately $179 million including certain transaction costs. The Company also committed to invest up to an additional $30.6 million to fund new projects as well as certain redevelopment costs. As of December 31, 1996, the Company had contributed $17.2 million of the additional equity. On January 21, 1997, an additional $5.7 million of capital was contributed to GGP/Homart by the Company. GGP/Homart holds interests in twenty-six regional shopping malls and one property currently under development in Waterbury, Connecticut. On October 2, 1996, GGP/Homart opened West Oaks Mall, a new development, located in Ocoee, (Orlando) Florida. The Company obtained a $125 million interim loan to facilitate the acquisition of its interest in GGP/Homart. On January 31, 1996, the interim loan was reduced to $75 million with $50 million of excess proceeds from a $340 million refinancing. The remaining $75 million was repaid in July, 1996, with the proceeds from the sale of the Company's interest in CenterMark.
PROPERTY ACQUISITIONS AND DEVELOPMENTS
ACQUISITIONS
During the fourth quarter of 1996, the Company acquired 100% ownership in five properties, Park Mall, Sooner Fashion Mall, Lakeview Square, Lansing Mall and Westwood Mall, and a 50% interest in Quail Springs Mall. Park Mall in Tucson, Arizona was acquired on October 4, 1996, for 1,000,000 shares of newly issued common stock and $24 million in cash. Sooner Fashion Mall and 50% of Quail Springs Mall, in Norman and Oklahoma City, Oklahoma, respectively, were acquired on November 27, 1996, for 895,928 newly issued common shares, the assumption of $8.6 million of mortgage debt and the payment of $16.7 million in cash. On December 6, 1996, the Company acquired Lakeview Square, Lansing Mall and Westwood Mall, all located in south central Michigan, for an aggregate purchase price of $132.2 million which consisted of $92.4 million of mortgage debt assumption ($4.4 million of which was retired at closing) and 1,445,000 newly issued Operating Partnership Units.
DEVELOPMENTS
During 1996, the Company acquired two new development sites located in Iowa City, Iowa and Grand Rapids, Michigan. The Iowa City site is currently under development and is scheduled to open in July 1998. In February of 1996, the Company opened Eagle Ridge Mall in Winterhaven, Florida, which had previously been under development.
ACQUISITION OF GGMI
On December 22, 1995, the Company formed GGP Management, Inc. ("GGP Management") to manage, lease, develop and operate enclosed malls. In August 1996, the Operating Partnership, acting through GGP Management, completed the acquisition of General Growth Management, Inc. for approximately $51.5 million. The Operating Partnership issued 453,791 Operating Partnership Units (approximately $11.6 million) and sold 1,555,855 shares of common stock it acquired from the Company (approximately $39.9 million) to GGP Management in connection with the acquisition of GGMI. The Operating Partnership extended a loan to GGP Management to purchase the Company's common stock. This loan bears interest at a rate of 14% per annum and is reflected on the consolidated balance sheet. In connection with the acquisition, GGP Management was merged into GGMI at closing. GGMI currently manages, leases, and performs various other services for the Original Centers, GGP/Homart and other properties owned by unaffiliated parties.
THE SHOPPING CENTER BUSINESS
Success in the highly competitive real estate shopping center business depends upon many factors, including general economic conditions, increases or decreases in operating expenses and interest rates, changes in demographics, and competitive pressures. The Portfolio Centers compete with numerous shopping alternatives in seeking to attract retailers to lease space as retailers themselves face increasing competition from discount shopping centers, outlet malls, discount shopping clubs, direct mail and telemarketing. Management believes that the shopping center business is evolving from having primarily a development-orientation to one which has more of a operations-oriention. This evolution necessitates the implementation of new approaches to shopping center management and
leasing. Management's strategies include the integration of mass merchandise retailers with traditional department stores, specialty leasing, entertainment-oriented tenants, proactive property management and leasing, strategic expansions and acquisitions, and selective new shopping center developments. These approaches should enable the Company to operate and grow successfully in today's value-oriented environment. Most of the Original Centers are strategically located nationwide in middle markets where they have strong competitive positions. The Original Centers' geographic diversification should mitigate the effects of regional economic conditions and local factors. The CenterMark Centers and the Homart Centers are primarily concentrated in areas not served by the Original Centers. In addition, most of the CenterMark Centers and Homart Centers are located in major markets which further diversify the Portfolio Centers in terms of geographic region and market type of the Company's enclosed mall shopping centers.
As used herein, the term "GLA" refers to gross retail space, including anchors and mall tenant areas; the term "Mall GLA" refers to gross retail space, excluding anchors; the term "Anchor" refers to a department store or other large retail store; the term "Mall Stores" refers to stores (other than anchors) that are typically specialty retailers who lease space in shopping centers; and the term "Freestanding GLA" means gross leasable area of freestanding retail stores or convenience stores located along the perimeter of a center's parking area.
BUSINESS OF THE COMPANY
The Portfolio Centers currently consist of the Original Centers, a portfolio of thirty-one enclosed mall shopping centers in twenty states and the twenty-six Homart Centers located in fifteen states and through January 2, 1997, the nineteen CenterMark centers located in eight states. Thirty-two of the fifty-seven Original Centers and Homart Centers have been expanded, renovated or developed since 1990 and several other centers are currently being redeveloped and/or expanded. In addition, over $350 million was spent by the former owners of the CenterMark Centers from 1989 to 1993 to modernize, redevelop, expand and remerchandise many of the properties.
The Company is the asset manager of the Original Centers, making all key strategic decisions. It retains final authority over all operating matters and supervises GGMI, the property manager of the Original Centers. GGMI performs day-to-day property management functions including leasing, construction management, data processing, maintenance, accounting, marketing, promotion and security at the Original Centers pursuant to the management agreement.
The Company, along with its stockholders in GGP/Homart, makes all key strategic decisions for the Homart Centers. The Company is the asset manager of the Homart Centers, executing the strategic plans and overseeing the day-to-day activites performed by GGMI. GGMI is currently the property manager for twenty-one of the Homart Centers, and the joint venture partners manage the other five Homart Centers.
The goal for each Portfolio Center is to maximize the sales of their retail tenants, thereby increasing both the potential to receive both percentage rents from existing tenants and higher minimum rents from new tenants. Management believes that sales will be maximized by maintaining a quality relationship with retailers, generating high customer traffic and incorporating new strategies such as the use of entertainment tenants, theaters, ice rinks and museums.
Company management believes that per share growth in its "Funds from Operations", which is defined as net income (loss) before non-cash expenses and certain gains or losses on sales and investments, is the key factor in enhancing stockholder value. It is management's objective to achieve growth in Funds from Operations through development of new shopping centers, acquisition of additional shopping centers, expansions, renovations, leasing vacant space, and proactive management to increase cash flow in the exisiting Portfolio Centers. Funds from Operations can also be affected by external factors, such as inflation or increases in disposable consumer income.
CENTERMARK'S BUSINESS
CenterMark is engaged in owning, operating, managing, leasing, expanding and redeveloping regional shopping centers and power centers and other related properties. CenterMark currently owns interests in the nineteen CenterMark Centers, fourteen separate department store properties net leased to The May Company and certain other real estate investments.
The CenterMark Centers are located primarily in major metropolitan areas, including suburbs of Los Angeles and San Diego, California; Hartford, Connecticut; Portland, Oregon; St. Louis, Missouri; and Washington D.C. The
CenterMark Centers contain approximately 15.8 million square feet of total GLA, including approximately 60 Anchors operating under 17 trade names and more than 1,800 Mall Stores operating under approximately 960 trade names.
GGP/HOMART'S BUSINESS
GGP/Homart is primarily engaged in owning, operating, expanding and redeveloping regional shopping centers. GGP/Homart currently owns interests in twenty-six existing centers and one center under construction in Waterbury, Connecticut.
The Homart Centers are located primarily in major metropolitan areas, including suburbs of San Diego and San Francisco, California; Phoenix, Arizona; Houston and Dallas - Fort Worth, Texas; Philadelphia, Pennsylvania; Miami/Ft. Lauderdale, Florida; and Washington, D.C. The Homart Centers contain approximately 22.7 million square feet of total GLA and approximately 7.9 million square feet of Mall Stores. There are approximately 109 Anchors and more than 2,500 Mall Stores in the Homart Centers.
As of December 31, 1996, GGP/Homart owned 100% of sixteen Homart Centers and varying percentages of the other eleven Homart Centers.
THE PORTFOLIO CENTERS
Sixty-one of the seventy-five Portfolio Centers are enclosed mall shopping centers with at least two major department stores as Anchors and a wide variety of smaller Mall Stores. At most of the Portfolio Centers, additional Freestanding Stores are located along the perimeter of the parking area. Each Portfolio Center provides ample surface parking for shoppers. The Portfolio Centers:
- range in size between approximately 340,000 and 1,373,000 square feet of total GLA and between approximately 125,000 and 530,000 square feet of Mall and Freestanding GLA. The smallest Portfolio Center has approximately 40 stores, and the largest has over 175 stores;
- have approximately 287 Anchors, operating under approximately 64 trade names; and
- have approximately 7,000 Mall and Freestanding Stores.
The average size of the 75 Portfolio Centers is approximately 795,000 square feet of GLA, including all Anchors, Mall Stores and Freestanding Stores. The average Mall and Freestanding GLA per Portfolio Center is approximately 310,000 square feet.
As of December 31, 1996, the Original Centers contain approximately 20.9 million square feet of GLA consisting of Anchors (whether owned or leased), Mall Stores and Freestanding Stores. The CenterMark Centers and the Homart Centers contain GLA of approximately 15.8 million square feet and 22.7 million square feet, respectively.
The Company's share of total revenues from the Portfolio Centers and GGMI increased from $229.1 million in 1995 to $363.4 million in 1996. No single Portfolio Center generated more than 8% of the Company's total 1996 pro rata revenues. In 1996, total Mall Store sales at all of the Portfolio Centers increased by approximately 4.7%. The Portfolio Centers weighted average Mall Store rent per square foot from leases that expired in 1996 was $18.79. As a result of market rents being higher than the rents under many of the expiring leases, the weighted average Mall Store rent per square foot on new and renewal leases during 1996 was $23.71, or $4.92 per square foot more than the above-indicated average for expiring leases.
Total mortgage debt on the Original Centers including 50% of Quail Springs' debt at December 31, 1996 was approximately $1,177.1 million. Of this amount, $401.7 million was variable rate debt, and the remaining $775.4 million was fixed rate debt. The weighted average interest rate on the Company's debt was approximately 7.18% as of December 31, 1996. The Company's share of mortgage debt on the Homart Centers (38.2% of the debt on centers owned entirely by GGP/Homart and 38.2% of GGP/Homart's share of debt on joint venture properties) was approximately $324.4 million at December 31, 1996. $110.4 million was variable rate debt, and $214.0 million was fixed rate debt. The weighted average interest rate of the Company's share of debt attributable to the Homart Centers was approximately 7.51% as of December 31, 1996. The Company's pro rata share of total consolidated
debt was $1,501.5 million as of December 31, 1996, and its weighted average interest rate was approximately 7.25%.
In most cases, the land underlying the Portfolio Centers is owned in fee; however, in five of the Original Centers, all or part of the underlying land is owned by a third party that leases the land pursuant to a ground lease. The Company leases the land under Knollwood Mall and Rio West Mall. It also leases a portion of the Fallbrook Mall land and a portion of the SouthShore and Bayshore parking areas. The leases contain various purchase options in favor of the Company and typically 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. In addition, Prince Kuhio Plaza, one of the Homart Centers, is located on land leased pursuant to a long-term ground lease.
ANCHORS
Anchors have traditionally been a major factor in the public's image of an enclosed shopping center. Anchors are generally department stores whose merchandise appeals to a broad range of shoppers. Anchors either own their stores, the land under them and adjacent parking areas, or enter into long-term leases at rates that are generally lower than the rents charged to Mall Store tenants. Although the Portfolio Centers receive a smaller percentage of their operating income from Anchors than from Mall Stores, strong Anchors play an important part in maintaining customer traffic and making the Portfolio Centers desirable locations for Mall Store tenants. Anchors accounted for approximately 6% of the Portfolio Centers' pro rata consolidated minimum rent during 1996.
The following table indicates the parent company of each Anchor and sets forth the number of stores and square feet owned or leased by each Anchor at the Original Centers and the Homart Centers as of December 31, 1996.
GENERAL GROWTH PROPERTIES, INC. PORTFOLIO ANCHORS(1) As of December 31, 1996
MALL AND FREESTANDING STORES
The Portfolio Centers have an aggregate of approximately 7,000 Mall and Freestanding Stores. As of December 31, 1996, national or regional chains leased approximately 91% of the space occupied in the Portfolio Centers consisting of Mall Stores and Freestanding Stores. Among the retailers with the largest representation in Mall and Freestanding Stores are: The Limited, Limited Express, Lerner, Lane Bryant, Victoria's Secret, Structure, Payless Shoesource, Kay-Bee Toys, Wilson's Leather, Thom McAnn, Casual Corner, LensCrafters, Kinney, Foot Locker, Northern Reflections, Champs.
The Portfolio Centers derived approximately 92% of their 1996 revenues from Mall and Freestanding Stores, which comprise approximately 40% of the Portfolio Centers' total GLA. No single retailer accounted for more than 8% of leased Mall and Freestanding GLA or more than 8% of the 1996 annualized base rent.
Current Mall and Freestanding Store leases have an average remaining term of approximately seven years. Generally, they provide for tenants to pay rent comprised of two elements: minimum and percentage rent. Minimum or base rent is often subject to increases according to a schedule agreed upon at the time of lease inception. In many cases, the base rent is adjusted for inflation by increases tied to changes in the Consumer Price Index. Percentage rent is additional rent based on a percentage of the tenants' sales over certain stated levels. In some cases, tenants pay only a fixed minimum rent, and in a few cases, tenants pay only percentage rents. Most leases for Mall Stores contain provisions that allow the Portfolio Centers to recover their costs for common area maintenance, property taxes and other expenditures related to day-to-day operations. Some Anchors also contribute to the recovery of these costs.
EXPANSIONS AND RENOVATIONS
Most of the Portfolio Centers were designed to allow for expansion and growth through the addition of new Anchors or Mall and Freestanding Stores. Six Original Centers and five Homart Centers are in the process of an expansion, Anchor addition or renovation. The expansion and renovation of a Portfolio Center often increases customer traffic, trade area penetration and typically improves the competitive position of the property.
ACQUISITIONS
The Company continues to seek desirable properties for acquisition. In 1996, the Company also acquired interests in six other properties for approximately $230 million. The Company's management believes that it, together with the Operating Partnership, have the following competitive advantages and reasons to acquire enclosed shopping malls:
- The funds necessary for a cash acquisition of a shopping center can be obtained by the Company and the Operating Partnership from a combination of sources, including mortgage or unsecured financing or the issuance of public debt or equity.
- The Company and the Operating Partnership have the flexibility to pay for an acquisition with a combination of cash, Common Stock or limited partnership units in the Operating Partnership. This creates the opportunity for tax-advantaged transactions for sellers.
- Management's expertise allows it to evaluate proposed acquisitions for their increased profit potential. Additional profit can originate from many sources including expansions, remodeling, remerchandising, and more efficient management of the property.
DEVELOPMENT
The Company, through the Operating Partnership, intends to pursue development when warranted by the potential financial returns. During 1996, the Company acquired 100% of two new development sites located in Iowa City, Iowa and Grand Rapids, Michigan. The Company and its affiliates are currently developing an enclosed shopping center in Waterbury, Connecticut and completing predevelopment work on the site recently acquired in Iowa City, Iowa. Brass Mill Mall, a 950,000 square foot enclosed regional mall and Brass Mill Commons, a 200,000 square foot power center, located in Waterbury Connecticut are scheduled to open in the fall of 1997. Coral Ridge Mall, a 1,000,000 square foot enclosed regional mall located in Iowa City, Iowa, is scheduled to open in the summer of 1998.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on such property. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to promptly remediate such substances, may adversely affect the owner's ability to sell such real estate or to borrow using such real estate as collateral. In connection with its ownership and operation of the Portfolio Centers, the Company, the Operating Partnership or the relevant Property Partnership, may be potentially liable for such costs.
All of the Portfolio Centers have been subject to Phase I environmental assessments, which are intended to discover information regarding, and to evaluate the environmental condition of, the surveyed and surrounding properties. The Phase I assessments included an historical review, a public records review, a preliminary investigation of the site and surrounding properties, screening for the presence of asbestos, polychlorinated biphenyls ("PCBs") and underground storage tanks and the preparation and issuance of a written report, but do not include soil sampling or subsurface investigations. Where the Phase I assessment so recommended, a Phase II assessment was conducted to further investigate any issues raised by the Phase I assessment. In each case where Phase I and/or Phase II assessments resulted in specific recommendations for remedial actions, management has either taken or scheduled the recommended action.
Neither the Phase I nor the Phase II assessments have revealed any environmental liability that the Company believes would have a material effect on the Company's business, assets or results of operations, nor is the Company aware of any such liability. Nevertheless, it is possible that these assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which the Company is unaware. Moreover, no assurances can be given that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of the Portfolio Centers will not be affected by tenants and occupants of the Portfolio Centers, by the condition of properties in the vicinity of the Portfolio Centers (such as the presence of underground storage tanks) or by third parties unrelated to the Operating Partnership or the Company.
EMPLOYEES
As of March 25, 1997, the Company and GGMI had approximately 3,000 full-time employees. None of the employees are subject to a collective bargaining agreement and the Company has not experienced a labor-related work stoppage.
QUALIFICATION AS A REAL ESTATE INVESTMENT TRUST AND TAXABILITY OF DISTRIBUTIONS
The Company currently qualifies as a real estate investment trust pursuant to the requirements contained under Sections 856-858 of the Internal Revenue Code of 1986, as amended (the "Code"). If, as the Company contemplates, such qualification continues, the Company will not be taxed on its real estate investment trust taxable income. During 1996, the Company distributed (or was deemed to have distributed) 100% of its taxable income to stockholders. Cash distributions in the amount of $1.72 per share were paid in 1996. Of that amount, $.808 (47.0%) was ordinary income, based on the taxable income of the Company and $.912 (53.0%) was a long-term capital gain from the sale of a portion of the CenterMark stock.
ITEM 2.
ITEM 2. PROPERTIES
The Company's investment in real estate as of December 31, 1996 consisted of its interests in the Portfolio Centers, development in progress and certain other real estate . As described elsewhere herein, as of December 22, 1995, the Company acquired, through the Operating Partnership, 38.2% of GGP/Homart. GGP/Homart owns interests in the Homart Centers and certain other real estate assets. The Company completed the sale of its remaining interest in CenterMark on January 2, 1997. As a result of the sale, the Company no longer has an ownership interest in the CenterMark Centers.
The following tables set forth certain information regarding the Original Centers and the Homart Centers as of December 31, 1996. The first table depicts the Original Centers and the second table depicts the Homart Centers.
ORIGINAL CENTERS
ORIGINAL CENTERS
(1) In some cases, where a center's location is part of a larger metropolitan area, the metropolitan area is identified in parentheses.
(2) The Company owns 50% of Quail Springs Mall.
HOMART CENTERS
HOMART CENTERS
(1) In cases where a Center's location is part of a larger metropolitan area, the metropolitan area is identified in parenthesis. (2) Includes square footage added in redevelopment/expansion projects. (3) GGP/Homart's participation is subordinated to certain preferred returns to its Joint Venture Partners.
For other information concerning the Original Centers and the Homart Centers see "Item 1 - Business - Business of the Company" and "Item 1 - Business - GGP/Homart's Business", and for information concerning the mortgage debt encumbering the Original Centers see Note 7 to the Consolidated Financial Statements appearing in Item 8 of this Annual Report on Form 10-K.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company, the Operating Partnership and the Property Partnerships are not currently involved in any material litigation nor, to the Company's knowledge, is any material litigation currently threatened against the Company, the Operating Partnership, the Property Partnerships or their properties, CenterMark, or GGP/Homart other than routine litigation arising in the ordinary course of business, most of which is expected to be covered by liability insurance. For information about certain environmental matters, see "Item 1 - Business - Environmental Matters."
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's stockholders during the fourth quarter of fiscal 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is listed on the New York Stock Exchange ("NYSE") and trades under the symbol "GGP". As of March 25, 1997, the 30,789,185 outstanding shares of Common Stock were held by approximately 965 stockholders of record. The closing price per share of Common Stock on the NYSE on such date was $30.75 per share.
Set forth below are the high and low sales prices per share of Common Stock as reported on the composite tape, and the distributions per share of Common Stock declared for each such period.
Set forth below is certain information about sales made by the Company and/or the Operating Partnership of securities during the fourth quarter of 1996, which sales were not registered under the Securities Act of 1933, as amended. The sales were all made in connection with the acquisition of the malls and interests therein indicated below, were effected in reliance upon the exemption contained in Section 4 (2) of the Securities Act pf 1933, as amended and/or Regulation D promulgated thereunder, and were not underwritten offerings.
SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth selected financial data for the Company and should be read in conjunction with the Consolidated Financial Statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this Annual Report.
(1) Current minority holders (primarily the Bucksbaums) who were previously the sole stockholders of the Company.
(2) Represents net income (loss) before minority interest excluding straight line rent plus real estate depreciation and amortization and adjusted for equity in net income (loss) of unconsolidated affiliates (including related depreciation and amortization). Funds From Operations does not represent cash flow from operations as defined by Generally Accepted Accounting Principles (GAAP) and is not necessarily indicative of cash available to fund all cash requirements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto appearing later in this Annual Report.
CERTAIN INFORMATION ABOUT THE PORTFOLIO CENTERS
As of December 31, 1996, the Company owned 100% of thirty enclosed regional shopping centers and 50% of Quail Springs Mall (the "Original Centers") and, through the Operating Partnership, owned 14% of the stock of CenterMark Properties, Inc. and 38.2% of the stock of GGP/Homart, Inc. CenterMark owns interests in nineteen shopping centers (the "CenterMark Centers") and other properties. GGP/Homart owns interests in twenty-six shopping centers (the "Homart Centers") and one center under development. Together, the Original Centers, the CenterMark Centers and the Homart Centers comprise the operating partnership portfolio (the "Portfolio Centers"). Virtually all of the Company's revenues are derived from fixed minimum rents, percentage rents and recoveries of operating expenses from its tenants.
On December 31, 1996, the Portfolio Centers were approximately 85.4% leased. Excluding certain shopping centers that are currently undergoing redevelopment, the occupancy of the remaining centers on December 31, 1996, was approximately 86.3%.
Comparable mall store sales averaged $260 per square foot at the Portfolio Centers in 1996. In 1996, total mall store sales at the Portfolio Centers increased by 4.7% over 1995, and comparable mall store sales increased by 2.2% over 1995.
After appropriate weighting based upon the relative contributions to total 1996 portfolio net operating income made by each of the Original Centers, the Homart Centers and the CenterMark Centers, the average Mall Store rent per square foot from leases that expired in 1996 was $18.79. The Portfolio Centers benefited from increasing rents inasmuch as the weighted average mall store rent per square foot on new and renewal leases executed during 1996 was $23.71, or $4.92 per square foot above the average for expiring leases.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Total 1996 revenues increased by $50.0 million or 29.9% to $217.4 million from $167.4 million in 1995. Of this increase, $44.4 million was generated from increased minimum rents, tenant recoveries, percentage rents and other income. A majority of the increases came from new developments that were placed in service during 1995 and five properties that were acquired in 1996. The remaining $5.6 million was generated by straight line rents of $1.9 million and fee revenue of $3.7 million. The fee revenue was primarily generated by asset management services performed for GGP/Homart.
Total 1996 operating expenses, including depreciation and amortization, increased by $20.9 million or 22.1% to $115.8 million in 1996 compared to $94.8 million in 1995. This increase consists of $3.0 million of real estate taxes and management fees, $8.9 million of depreciation expense, $1.7 million increase in provision for doubtful accounts and $7.3 million of property operating and general and administrative expenses from all properties, including five properties acquired during the fourth quarter of 1996.
Net interest expense increased by $20.1 million or 43.4% to $66.4 million in 1996 compared to $46.3 million in 1995. The acquisitions and development of new properties, net of interest cost savings as a result of the use of the CenterMark sale proceeds, accounted for a $27.7 million increase. Additional interest cost savings due to lower interest rates reduced net interest expense by $4.3 million. Interest income increased by $3.3 million of which $2.8 million was interest income from GGMI.
Equity in net income of unconsolidated affiliates increased by $8.3 million, from $9.3 million in 1995 to $17.6 million in 1996, or an 89% increase. Approximately $8.7 million of the increase is attributable to the Company's 38.2% interest in GGP/Homart's net income. The increase of $0.8 million in CenterMark's net income
was due to changing from the equity method to the cost method of accounting as a result of the Company's reduced ownership interest in CenterMark (see Note 3 of notes to consolidated financial statements). The Company's investment in Quail Springs Mall accounted for a $0.1 million increase and GGMI accounted for a decrease of approximately $1.3 million. In addition, the Company had a gain of $43.8 million on the sale of a portion of its interest in CenterMark on July 1, 1996. As of that date, the Company's interest in CenterMark was reduced to 14%.
Net income increased by $16.6 million in 1996 to $59.7 million from $43.1 million in 1995. The increase resulted from a larger gain on CenterMark in the amount of $6.6 million (net of minority interest share) and a combination of the aforementioned items.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
Total 1995 revenues increased by $14.8 million or 9.7% to $167.4 million compared to $152.6 million in 1994. Of this increase, $8.9 million or 6.0% came from increased revenues generated by twenty-one of the Original Centers that were owned throughout the two-year period. Of this increase, $5.8 million was generated by higher minimum rents, $2.3 million was derived from additional costs recovered from tenants, and the remaining $0.8 million was from higher percentage rents and other income. The remaining $5.9 million increase in total revenues, or 3.7% came from new acquisitions, developments and other sources for 1995. Of this increase from new sources, $5.1 million was generated from minimum rents, tenant recoveries, percentage rents and other income from Piedmont Mall, West Valley Mall and Natick Mall. The other $0.8 million of revenues from new sources were primarily gross fees received for other asset management, property management and other services performed for GGP/Homart, Inc.
Total 1995 operating expenses, including depreciation and amortization, increased by $3.5 million or 3.8% to $94.8 million in 1995 compared to $91.3 million in 1994. Of this increase, $0.9 million or 1% was from higher expenses for twenty-one of the Original Centers that were owned throughout the two-year period. The $0.9 million net increase was from a combination of $0.7 million of increased real estate taxes, $1.7 million of increased property operating expenses and $2.1 million of higher depreciation expense, less a $1.9 million reduction in management fees and a $1.7 million reduction in the provision for doubtful accounts. The remaining $2.6 million increase in total expenses, or 2.8%, was from expenses on properties added in 1995 (Piedmont, West Valley and Natick) and from incremental general and administrative expenses for providing services. The $2.6 million increase consists of $0.3 million of real estate taxes and management fees, $0.5 million of depreciation expense and $1.8 million of additional property operating and general and administrative expenses.
Net interest expense for 1995 was $46.3 million, an increase of $3.3 million or 7.7% over 1994 net interest expense of $43.0 million. $1.4 million or 3.2% of the increase was attributable to new borrowings for Piedmont, West Valley and Natick Malls, which were not owned in 1994. The other $1.9 million or 4.5% of increased interest expense was primarily from higher interest rates on variable rate loans of approximately $1.5 million. The remaining $0.4 million of increased interest expense was from interest on new financing used to acquire GGP/Homart near the end of 1995.
Equity in net income of unconsolidated affiliates increased by $3.2 million, from $6.1 million in 1994 to $9.3 million in 1995, or a 52% increase. $2.5 million, or 41% of the increase was from higher earnings from CenterMark, and the remaining $0.6 million, or 9% of the increase was the Company's 38.2% share of net income from GGP/Homart which was purchased near the end of 1995. In addition, the Company had a gain of $33.4 million on the sale of 25% of its interest in CenterMark on December 19, 1995. As of that date, the Company's interest in CenterMark was reduced to 30%.
Net income increased by $28.9 million in 1995, to $43.1 million from $14.2 million in 1994. The increase resulted from the gain of $20.7 million (net of minority interest share) plus an $8.2 million net increase resulting from a combination of the aforementioned items.
COMPANY PORTFOLIO RESULTS AND FUNDS FROM OPERATIONS
In order to portray the sources of the Company's Funds from Operations in a more meaningful and useful manner, the Company Portfolio results and funds from operations depicted below reflect 100% of the revenues and expenses of the Original Centers and GGMI combined with the Company's share of CenterMark's and GGP/Homart's portfolio results. The Company Portfolio results are a line item pro rata consolidation of 100% of the revenues and expenses of the Original Centers and GGMI, with the Company's share of the comparable revenue and expenses of the wholly owned CenterMark Centers and GGP/Homart Centers and the Company's share of CenterMark's and GGP/Homart's various percentage interests of the revenues and expenses of the centers that are owned in part by unaffiliated joint venture partners. Interest expense and general and administrative costs that relate to the acquisition, management and oversight of the Company's ownership of CenterMark and GGP/Homart are charged entirely against the Company's direct operations. These expenses cannot be charged on CenterMark's and GGP/Homart's books because the other stockholders in CenterMark and GGP/Homart are not affiliated with the Company.
The Company's share of CenterMark's and GGP/Homart's Funds from Operations does not represent the net effective incremental contribution to the Company made by the CenterMark and GGP/Homart centers. Accordingly, management believes the following schedule of the relative share of Company Portfolio net operating income (basically Funds from Operations before interest expense) contributed by each of the Original Centers, the CenterMark Centers and the GGP/Homart Centers provides a better indication of the significance of each portfolio to the Company's overall funds from operations. The net operating income from the Company's Portfolio is essentially equivalent to earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA from the Company's property management affiliate is included below with the Original Centers.
(a) Reflects the Company's share of CenterMark's Net Operating Income. (b) Reflects the Company's share of GGP/Homart's Net Operating Income.
The Company Portfolio results and Funds from Operations reflected below for the three and twelve months ended December 31, 1996 and 1995 do not purport to project results for any future period.
COMPANY PORTFOLIO RESULTS AND FUNDS FROM OPERATIONS FOR THE THREE MONTHS AND YEAR ENDED DECEMBER 31, 1996 AND 1995 (In thousands, except for per share amounts - Unaudited)
COMPANY PORTFOLIO RECONCILIATION OF FUNDS FROM OPERATIONS TO NET INCOME (Dollars in thousands - Unaudited)
(a) Excluding straight-line rents for the three and twelve months ended December 31, 1996 and 1995, of $1,633 and $6,195 and $645 and $2,997, respectively.
(b) Excluding depreciation and amortization of capitalized real estate costs other than financing fees/costs.
(c) Charges related to early retirement of debt.
BREAKDOWN OF COMPANY PORTFOLIO RESULTS AND FUNDS FROM OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 (In thousands, except for per share amounts - Unaudited)
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 (In thousands, except for per share amounts - Unaudited)
(a) Excluding straight-line rent of $1,633 and $6,195 for the three and twelve months ended December 31, 1996.
(b) Excluding depreciation and amortization of capitalized real estate costs other than financing fees/costs.
OTHER COMPANY PORTFOLIO DATA AS OF AND/OR FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 (In thousands, except for per square foot amounts - Unaudited)
TOTAL PORTFOLIO DEBT MATURITY AND CURRENT AVERAGE INTEREST RATE SUMMARY AS OF DECEMBER 31, 1996 (Dollars in Thousands - Unaudited)
COMPANY PORTFOLIO RESULTS AND FUNDS FROM OPERATIONS (FFO) FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
In order to portray the sources of the Operating Partnership's FFO in a more meaningful and expansive manner, the Company portfolio results depicted below reflect 100% of the revenues and expenses of the thirty properties which are wholly-owned by the Operating Partnership combined with the operating results of GGMI, 38.2% of GGP/Homart's portfolio results, the Company's share (see Note 3) of CenterMark's portfolio results and 50% of Quail Springs Mall, all from the respective dates of acquisition. In effect, the Company portfolio results are a line item pro rata consolidation of 100% of the revenues and expenses from its wholly-owned properties, GGMI, 38.2% of the comparable revenues and expenses of the wholly-owned GGP/Homart properties, its share of GGP/Homart's various percentage interests in the revenues and expenses of its unconsolidated affiliates, the Company's share of the comparable revenues and expenses of the wholly-owned CenterMark properties and the Company's share of CenterMark's various percentage interests in the revenues and expenses of its unconsolidated affiliates and 50% of the revenues and expenses of Quail Springs Mall.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of funding for development, acquisitions, expansion, and renovation programs at the Portfolio Centers have historically been funds from operations, construction loans, intermediate and permanent debt financing and proceeds from equity offerings.
On April 15, 1993, the Company completed its IPO, resulting in net cash proceeds to the Company of approximately $383 million, most of which was used to repay outstanding debt. In January 1994, the Operating Partnership established a $208.5 million line of credit, and approximately $140 million of it was used, in addition to $42 million of cash on hand, to acquire 40% of the stock of CenterMark.
On May 23, 1995, the Company completed a follow-on stock offering of 4.5 million shares of its Common Stock at $20.75 per share. Net proceeds after underwriting discounts and other costs were approximately $88 million. On July 1, 1995, the Operating Partnership issued an additional 832,936 units in connection with the acquisition of Piedmont Mall. During 1996, 1,833,949 additional units were issued as consideration (net of conversions from operating partnership units to common stock). The Bucksbaums received an additional 453,791 units when the Company purchased GGMI. On December 6, 1996, 1,445,000 units were issued as a portion of the purchase price for Lakeview Square, Lansing Mall and Westwood Mall (see Note 5 of notes to consolidated financial statements). During 1996, 64,842 units that were issued during 1995 in connection with the acquisition of Piedmont Mall, were converted to a like amount of shares of Common Stock.
The Company issued a total of 3,516,625 common shares during 1996. During the year 64,842 units were converted to common shares and 1,555,855 and 1,895,928 common shares were issued in connection with the acquisition of GGMI and ownership interests in two malls. After these transactions, there were 30,789,185 shares of common stock outstanding and 17,934,410 units outstanding as of December 31, 1996. Assuming full conversion of the Operating Partnership units into shares of the Company, there would be 48,723,595 shares of common stock outstanding.
During 1995, the Company opened a $120 million construction loan facility to complete the development of new malls in Tracy, California (West Valley Mall) and Winter Haven, Florida (Eagle Ridge Mall). Approximately $111.7 million of this facility was drawn as of December 31, 1996. The remaining available loan proceeds will be sufficient to fund the additional leasing costs for both projects.
On December 19, 1995, the Operating Partnership sold 25% of its interest in CenterMark for $72.5 million. Concurrently with the sale of stock, the Operating Partnership granted the buyer an option to purchase its remaining CenterMark stock for $217.5 million. On June 28, 1996, the buyer's option to purchase the Operating Partnership's remaining interest in CenterMark was exercised. The first payment of $87 million was received in July and was used to retire the interim loan arranged as part of the GGP/Homart acquisition. The second installment of $130.5 million was received on January 2, 1997, and was used to pay down existing loans (see Note 7 of notes to consolidated financial statements).
Effective on December 22, 1995, the Operating Partnership purchased a 38.2% interest in GGP/Homart and 100% of Natick Mall. The equity investment made for both acquisitions was approximately $261 million. In addition, a $183 million 7 year loan with interest at 6% was obtained for Natick Mall. There were three sources of funds for the $261 million of year-end investments, namely a $125 million interim bank loan, a $63.5 million draw on the Company's line of credit and the $72.5 million of proceeds from the sale of CenterMark stock. On January 31, 1996, the interim loan was reduced to $75 million when the Company closed on a $340 million permanent nonrecourse loan on nine properties. Existing loans on the properties totaled $290 million, and the $50 million of excess loan proceeds were used to reduce the aforementioned interim loan.
On October 15, 1996, approximately $200 million of mortgage debt on seven of the Original Centers matured. These mortgages were replaced with a $250 million short term, floating rate loan at LIBOR plus 100 basis points. The excess proceeds were used to pay down a credit facility arranged by the Company during 1996.
The GGP/Homart and Quail Springs Mall investments are accounted for on the equity method. Accordingly, indebtedness on the books of those entities is not reflected on the Company's balance sheet. The Operating Partnership's 38.2% share of GGP/Homart's debt at December 31, 1996, was approximately $324 million and its 50% share of Quail Springs Mall debt at December 31, 1996, was $8.6 million. Accordingly, together with its direct mortgage debt of $1,169 million, total "consolidated pro rata debt" at December 31, 1996, was approximately $1,502 million. At December 31, 1996, the stock market value of the common stock and partnership units outstanding (48,723,595 x $32.25 share) was approximately $1,571 million.
The Company is comfortable with this level of debt given that a substantial majority of the financing is (or is presently expected to be converted to) long-term fixed rate debt. EBITDA to interest expense coverage is expected to be at least 2.0 times, leaving a substantial cushion for unanticipated costs. There are no current plans to raise additional equity capital. However, if additional capital is required, the Company believes that it will be able to obtain an interim bank loan, obtain mortgage financing on unencumbered assets or raise additional equity capital. The Company will continue to constantly monitor its capital structure and plans to make new investments if they can be acquired and financed in a manner that is likely to increase stockholder value.
In order to remain qualified as a real estate investment trust for federal income tax purposes, the Company must distribute 100% of capital gains and at least 95% of its taxable income to stockholders. The following factors, among others, will affect funds from operations and, accordingly, influence the decisions of the Board of Directors regarding distributions: (i) scheduled increases in base rents of existing leases; (ii) changes in minimum base rents and/or percentage rents attributable to replacement of existing leases with new or replacement leases; and (iii) changes in occupancy rates at existing Portfolio Centers and procurement of leases for newly developed Portfolio Centers. The Company anticipates that its funds from operations, together with existing loan facilities and additional borrowing capacity, will provide adequate liquidity to conduct its operations, fund administrative and operating costs and interest payments and allow distributions to the Company's stockholders in accordance with the Internal Revenue Code's requirements for qualification as a real estate investment trust and to avoid any Company or entity level federal income or excise tax.
During 1996, the Company distributed approximately 70% of its funds from operations. Of the distributions paid to Company stockholders in 1996, approximately 47.0% were taxable as ordinary income and approximately 53.0% were taxable as long-term capital gain, due to the sale of a portion of the CenterMark stock. The Company currently plans to maintain its policy of increasing its distributions at a slower rate of growth than increases, if any, in Funds from Operations. Despite this general policy, the Company's Board of Directors will continue to evaluate the level of distributions on a quarterly basis and will typically consider increasing the quarterly distribution after the results of each year's operations have been reviewed. Given the critical importance of the holiday selling season, the Board of Directors plans to make its typical annual evaluation of a possible distribution increase on or about the end of the first quarter of each year, after the results of the previous year's holiday selling season have been thoroughly analyzed.
ECONOMIC CONDITIONS
Since April 1993, inflation has been relatively low and has not had a significant detrimental impact on the Company. Should inflation rates increase in the future, substantially all of the tenants' leases contain provisions designed to mitigate the negative impact of inflation. Such provisions include clauses enabling the Company to receive percentage rents based on tenants' gross sales, which generally increase as prices rise, and/or escalation clauses, which generally increase rental rates during the terms of the leases. In addition, many of the leases are for terms of less than 10 years which may enable the Company to replace or renew expiring leases with new leases at higher base and/or percentage rents, if rents of the existing leases are below the then-existing market rates. Finally, most of the leases require the tenants to pay their share of certain operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation.
A number of local, regional and national retailers filed for bankruptcy protection during the last three years. During 1996, more stores closed due to bankruptcy and/or poor performance than in the prior year. Most of the bankrupt retailers reorganized their operations and/or sold stores to stronger operators. Although some leases were terminated by virtue of the lease cancellation rights afforded by the bankruptcy laws, the
impact on Company earnings was negligible. Over the last three years, the provision for doubtful accounts has averaged only $1.8 million per year, which represents approximately 1% of average total revenues of $179 million. The difficult retail sales climate has probably contributed to the relatively flat average occupancy. The Company may be able to increase earnings if retail sales improve, market rental rates rise and currently vacant space can be leased.
At the end of 1996, the Company had approximately $1.5 billion of consolidated pro rata debt (including the Company's share of GGP/Homart's debt). The weighted average interest rate on the consolidated pro rata debt was approximately 7.25% at year end, a 50 basis point reduction from the prior year. During 1996, the Company decreased its ratio of floating rate debt to total debt by approximately 10% to 34%. The Company continues to seek fixed rate loans in an effort to capitalize on the relatively low current fixed interest rate environment. Approximately $512 million of the total consolidated pro rata debt at year end bears interest at various floating rates. Construction financing accounts for $137 million of the $512 million of floating rate debt. On January 2, 1997, the Company retired $110 million of the floating rate debt with the proceeds from the CenterMark transaction (see Note 3 of notes to consolidated financial statements). The Company is in the process of arranging permanent fixed rate financing for approximately half of the remaining floating rate debt.
On December 22, 1995, the Company acquired 38.2% of GGP/Homart which currently has interests in twenty-six malls and one under development. The Company currently has an interest in 75 shopping centers. The Company's portfolio has been diversified both geographically and by property type (both major and middle market properties) and this may mitigate the impact of a potential downturn at a particular property or in a particular region of the country.
The shopping center business is still seasonal in nature. Mall stores typically achieve higher sales levels during the fourth quarter because of the holiday selling season. Although the Company has a year-long temporary leasing program, most of the rents received from short-term tenants are collected during the months of November and December. Thus, occupancy levels and revenue production are generally highest in the fourth quarter of each year and lower during the first and second quarters of each year. Total sales reported by retailers at the Company's properties increased by almost 3.4% in 1995 and 4.7% in 1996, indicating that the centers are maintaining their respective share of sales dollars in the finite retail market.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the Index to Financial Statements and Financial Statement Schedules for the required information.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
There is hereby incorporated by reference the information which appears under the captions "Election of Directors" and "Executive Officers" in the Company's definitive proxy statement for its 1997 Annual Meeting of Stockholders.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information which appears under the caption "Compensation of Executive Officers" in the Company's definitive proxy statement for its 1997 Annual Meeting of Stockholders;
provided, however, that neither the Report of the Compensation Committee of the Board of Directors on Executive Compensation nor the Performance Graph set forth therein shall be incorporated by reference herein, in any of the Company's previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or in any of the Company's future filings.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information which appears under the captions "Common Stock Ownership of Certain Beneficial Owners" and "Common Stock Ownership of Management" in the Company's definitive proxy statement for its 1997 Annual Meeting of Stockholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information which appears under the caption "Compensation Committee Interlocks and Insider Participation" in the Company's definitive proxy statement for its 1997 Annual Meeting of Stockholders.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules.
The financial statements and schedules listed in the accompanying Index to Consolidated Financial Statements and Financial Statement Schedules are filed as part of this Annual Report on Form 10-K.
(b) Exhibits.
See Exhibit Index on page S-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Matthew Bucksbaum ------------------------------------- Matthew Bucksbaum, Chairman of the Board and Chief Executive Officer
Date: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ----
/s/ Robert Michaels President and Director March 27, 1997 - -------------------------- Robert Michaels
/s/ John Bucksbaum Executive Vice President - March 27, 1997 - -------------------------- Director John Bucksbaum
/s/ Bernard Freibaum Executive Vice President - March 27, 1997 - -------------------------- Chief Financial Officer and Bernard Freibaum Principal Accounting Officer
/s/ Anthony Downs Director March 27, 1997 - -------------------------- Anthony Downs
/s/ Morris Mark Director March 27, 1997 - -------------------------- Morris Mark
/s/ Beth Stewart Director March 27, 1997 - -------------------------- Beth Stewart
/s/ Lorne Weil Director March 27, 1997 - --------------------------- A. Lorne Weil
INDEX TO CONSOLIDATED FINANCIAL STATEMENT AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
The following financial statements and financial statement schedule are included in Item 8 of this Annual Report on Form 10-K:
General Growth Properties, Inc.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders General Growth Properties, Inc.
We have audited the accompanying consolidated balance sheets of General Growth Properties, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects the consolidated financial position of General Growth Properties, Inc. as of December 31, 1996 and 1995 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
Chicago, Illinois Coopers & Lybrand L.L.P. February 11, 1997
GENERAL GROWTH PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands, except for Per Share Amounts)
ASSETS
GENERAL GROWTH PROPERTIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Thousands, except for Per Share Amounts)
GENERAL GROWTH PROPERTIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in Thousands, except for Per Share Amounts)
GENERAL GROWTH PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)
GENERAL GROWTH PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except Per Share Amounts)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
General Growth Properties, Inc. (the "Company"), a Delaware corporation, was formed in 1986 to own and operate enclosed mall shopping centers. On April 15, 1993, the Company completed its initial public offering of 18,975,000 shares of common stock and a business combination involving entities under varying common ownership. Proceeds from the initial public offering were used to acquire a majority interest in GGP Limited Partnership (the "Operating Partnership") which was formed to succeed to substantially all of the interests in eighteen enclosed mall general partnerships (the "Property Partnerships") owned and controlled by the Company and its original stockholders, Martin and Matthew Bucksbaum, and trusts established for the benefit of the stockholders' families (the "Bucksbaums"). The proceeds were used to repay existing indebtedness and acquire three additional centers (the "IBM Centers").
In May of 1995, the Company completed a follow-on stock offering of 4,500,000 common shares. Net proceeds were used to reduce the outstanding balance of the Company's credit facility.
OPERATING PARTNERSHIP
The Operating Partnership commenced operations on April 15, 1993 and at December 31, 1996, owned a 99% general partnership interest in the eighteen Property Partnerships, two recently developed properties, Natick Mall and four properties acquired during 1996 (see Note 5). In addition, the Operating Partnership owned the three IBM Centers, Piedmont Mall and Park Mall (see Note 5). At December 31, 1996, the Operating Partnership also owned a 14% interest in CenterMark Properties, Inc. (see Note 3), a 38.2% interest in GGP/Homart, Inc. (see Note 4), a 100% economic interest in General Growth Management, Inc. (see Note 6) and a 50% interest in Quail Springs Mall (see Note 5). At December 31, 1996, the Company owned a 63% general partnership interest in the Operating Partnership and various minority interests own the remaining 37% limited partnership interest.
The minority interest in the Operating Partnership is held primarily by trusts for the benefit of families of the original stockholders which initially owned and controlled the Company and is represented by units of limited partnership interests ("Units"). The Units can be exchanged, with certain restrictions, for shares of the Company on a one-for-one basis. The Bucksbaum's Units can be exchanged for cash, at the Company's election, if the Bucksbaums own 25% or more of the outstanding common stock of the Company at the time of the exchange. The Unitholders also share equally with the stockholders on a per share basis in any distributions by the Operating Partnership.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except Per Share Amounts)
Changes in Operating Partnership Units for the three years ending December 31, 1996, are as follows:
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the Company and the Operating Partnership consisting of the twenty-five Property Partnerships, five directly owned centers and the unconsolidated investments in CenterMark Properties, Inc., GGP/Homart, Inc., General Growth Management, Inc. and Quail Springs Mall.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Minimum rent revenues are recognized on an accrual basis over the terms of the related leases which approximates a straight-line basis. Percentage rents are recognized on an accrual basis. Recoveries from tenants for taxes, insurance and other shopping center operating expenses are recognized as revenues in the period the applicable costs are incurred.
The Company provides an allowance for doubtful accounts against the portion of accounts receivable which is estimated to be uncollectible. Accounts receivable in the accompanying consolidated balance sheets are shown net of an allowance for doubtful accounts of $5,117 and $2,259 as of December 31, 1996 and 1995, respectively.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements, the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The carrying amount approximates fair value due to the short maturity of these investments.
DEFERRED EXPENSES
Deferred expenses consist principally of financing fees and leasing commissions which are amortized over the terms of the respective agreements. Deferred expenses in the accompanying consolidated balance sheets are shown net of accumulated amortization of $21,996 and $20,827 as of December 31, 1996 and 1995, respectively.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except Per Share Amounts)
PROPERTIES
Real estate assets are stated at cost. Interest and real estate taxes incurred during construction periods are capitalized and amortized on the same basis as the related assets. Statement of Financial Accounting Standards No. 121, "Accounting for the impairment of long-lived assets and for long-lived assets to be disposed of" was issued in 1995 and requires the real estate assets of the Company to be reviewed for impairment. Based principally on a review of cash flows, management has determined that the fair value of its real estate assets exceeds their carrying value. Depreciation expense is computed using the straight-line method based upon the following estimated useful lives:
Construction allowances paid to tenants are capitalized and depreciated over the average lease term. Maintenance and repairs are charged to expense when incurred. Expenditures for improvements are capitalized.
INVESTMENT IN AFFILIATES
The Company acquired a 40% interest in CenterMark Properties, Inc. ("CenterMark") in February 1994 and a 38.2% interest in GGP/Homart, Inc. ("GGP/Homart") in December 1995. In December 1995, and July 1996 the Company sold 25% and 40%, respectively, of its 40% interest in CenterMark resulting in a 14% interest at December 31, 1996. During 1996, the Company acquired a 95% non-voting preferred stock interest in General Growth Management, Inc. ("GGMI") and a 50% interest in Quail Springs Mall. The Company accounts for its investment in affiliates using the equity method whereby the cost of an investment is adjusted for the Company's share of equity in net income or loss from the date of acquisition and reduced by distributions received. Due to currently unpaid and accrued preferences on the preferred stock, the Operating Partnership was entitled to 100% of the earnings and cash flow generated by GGMI in 1996. Subsequent to the July 1996 sale, the investment in CenterMark is accounted for using the cost method whereby distributions received are included in income instead of its share of equity in net income or loss.
INCOME TAXES
The Company elected to be taxed as a real estate investment trust under sections 856-860 of the Internal Revenue Code of 1986, commencing with its taxable year beginning January 1, 1993. In order to qualify as a real estate investment trust, the Company is required to distribute at least 95% of its ordinary taxable income and 100% of capital gains to stockholders and to meet certain asset and income tests as well as certain other requirements. As a real estate investment trust, the Company will generally not be liable for Federal income taxes, provided it satisfies the necessary requirements. As a result, Federal income taxes on the net income of the Company are payable personally by the stockholders of the Company. Accordingly, the consolidated statements of operations do not reflect a provision for income taxes. State income taxes are not significant. The Property Partnerships were not liable for Federal income taxes, as each partner recognized its proportionate share of the Property Partnerships' income or loss in its tax return.
During 1996, the Operating Partnership acquired control of GGMI, a taxable subchapter C Corporation. As a result, state and Federal income taxes on its net taxable income are payable by GGMI.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except Per Share Amounts)
EARNINGS PER SHARE
Per share amounts are based on the weighted average of common and common equivalent shares (stock options) outstanding of 28,145,091 for 1996, 25,521,875 for 1995 and 22,772,560 for 1994.
ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles 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.
MINORITY INTEREST
Income before minority interest is allocated to the limited partners (the "Minority Interest") based on their ownership percentage of the Operating Partnership. The ownership percentage is determined by dividing the numbers of Operating Partnership Units held by the Minority Interest by the total Operating Partnership Units outstanding. The issuance of additional shares of common stock or Operating Partnership Units changes the percentage ownership of both the Minority Interest and the Company. Since a Unit is convertible into common stock and thus equivalent to a common share, such transactions are treated as capital transactions and result in an allocation between stockholders' equity and Minority Interest in the balance sheet to account for the change in the ownership of the underlying equity in the Operating Partnership.
3. CENTERMARK ACQUISITION AND DISPOSITION
On February 11, 1994, the Company, jointly with two other unaffiliated parties, acquired 100% of the stock of CenterMark from The Prudential Insurance Company of America. The Company and Westfield U.S. Investments Pty. Limited each acquired 40% of the stock of CenterMark and several real estate investment funds sponsored by Goldman Sachs & Co. acquired the remaining 20%. The Company's portion of the cash purchase price for the CenterMark stock, including certain transaction costs, was approximately $182,000. CenterMark elected real estate investment trust status for income tax purposes. The CenterMark portfolio includes interests in several major regional shopping malls and power centers.
The Company sold 25% of its interest in CenterMark on December 19, 1995, to Westfield U.S. Investments Pty. Limited for a purchase price of $72,500. As a result of the sale, the Company's ownership was reduced to 30% of the outstanding CenterMark stock. Concurrently with the sale of the stock, the Company also granted Westfield U.S. Investments Pty. Limited an option to purchase the remainder of the Company's CenterMark stock ("Option Stock") for $217,500.
On June 28, 1996, Westfield U.S. Investments, Pty. Limited exercised its option to acquire the remaining 30% of the outstanding CenterMark stock in two transactions. The first payment in the amount of $87,000 was received on July 1, 1996, and the second payment in the amount of $130,500 was received on January 2, 1997. Proceeds from the first payment were used to repay the remaining balance outstanding on the Company's interim loan facility that was utilized in connection with the acquisition of GGP/Homart (see Note 4). The proceeds received from the second payment were primarily used to repay existing indebtedness (see Note 7) in 1997 and will result in a gain of approximately $66,000.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except Per Share Amounts)
4. GGP/HOMART ACQUISITION
On December 22, 1995, the Company jointly with four other investors acquired 100% of the stock of GGP/Homart, Inc. ("GGP/Homart") from Sears, Roebuck and Co. The other investors in GGP/Homart are the New York State Common Retirement Fund, the Equitable Life Insurance Company of Iowa, USG Annuity & Life Company and The Trustees of the University of Pennsylvania. The Company acquired 38.2% of GGP/Homart for approximately $179,000 including certain transaction costs. The stockholders of GGP/Homart agreed to contribute up to $80,000 of additional capital as required, through the end of 1997. As of December 31, 1996, the stockholders had contributed $45,000 of additional capital. On January 21, 1997, an additional $15,000 of capital was contributed by the stockholders. GGP/Homart owns interests in twenty-six regional shopping malls and one property currently under development. The Operating Partnership arranged a $125,000 interim loan facility in conjunction with the acquisition of GGP/Homart. On July 1, 1996, the interim loan facility was retired with proceeds from the sale of a portion of the CenterMark stock (see Note 3). GGP/Homart elected real estate investment trust status for income tax purposes.
On October 2, 1996, GGP/Homart opened West Oaks Mall, a new development, located in Ocoee, (Orlando) Florida. GGP/Homart currently has one property under development, Brass Mill Center and Commons. Brass Mill Center is located in Waterbury, Connecticut, and is scheduled to open in the fall of 1997.
The following is summarized financial information for GGP/Homart since the date of acquisition.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except Per Share Amounts)
5. PROPERTY ACQUISITIONS AND DEVELOPMENTS
ACQUISITIONS
During the fourth quarter of 1996, the Company acquired 100% ownership in five properties, Park Mall, Sooner Fashion Mall, Lakeview Square, Lansing Mall and Westwood Mall, and a 50% interest in Quail Springs Mall. On October 4, 1996, Park Mall in Tucson, Arizona was acquired for one million shares of newly issued common stock and the payment of $23,995 in cash. Sooner Fashion Mall and 50% of Quail Springs Mall, in Norman and Oklahoma City, Oklahoma, respectively, were acquired on November 27, 1996, for 895,928 newly issued common shares, the assumption of $8,636 of mortgage debt and the payment of $16,695 in cash. On December 6, 1996, the Company acquired Lakeview Square, Lansing Mall and Westwood Mall, all located in south central Michigan for an aggregate purchase price of $132,148. The purchase price consisted of $92,411 of mortgage debt assumption, of which $4,436 was retired at closing, and 1,445,000 newly issued Operating Partnership Units.
During 1995, the Operating Partnership acquired 100% ownership interests in two enclosed regional malls, Piedmont Mall in Danville, Virginia and Natick Mall in Natick, Massachusetts. Piedmont Mall was acquired on July 1, 1995, by assuming $19,650 of mortgage debt, issuing $17,908 (832,936 Units) of Operating Partnership Units and the payment of approximately $1,700 in cash. Natick Mall was acquired on December 22, 1995, in conjunction with the GGP/Homart transaction, for an aggregate purchase price of approximately $265,000 consisting of $82,000 in cash and a mortgage loan for $183,000.
The acquisitions were accounted for utilizing the purchase method and accordingly, are included in the Operating Partnership's results of operations from the dates of acquisition.
DEVELOPMENTS
During 1996, the Company acquired two new development sites located in Iowa City, Iowa, and Grand Rapids, Michigan. The Iowa City site is currently under development and is scheduled to open in the summer of 1998.
The Company had two properties under development during 1995, West Valley Mall in Tracy, California and Eagle Ridge Mall in Winter Haven, Florida. West Valley opened during the fourth quarter of 1995 and Eagle Ridge opened in February of 1996. In September of 1995, the Company arranged a $120,000 construction loan facility for both developments, collateralized in part by mortgages on West Valley and Eagle Ridge.
6. ACQUISITION OF GENERAL GROWTH MANAGEMENT, INC.
On December 22, 1995, the Company formed GGP Management, Inc. to manage, lease, develop and operate enclosed malls. In August 1996, the Operating Partnership, acting through GGP Management, completed the acquisition of GGMI for approximately $51,500. The Operating Partnership issued approximately $11,600 (453,791 Units) of Operating Partnership Units and sold $39,900 of common stock (1,555,855 shares) to GGP Management in order to acquire GGMI. A loan from the Operating Partnership to GGP Management to purchase the Company's common stock bears interest and is reflected on the consolidated balance sheet. In connection with the acquisition, GGP Management was merged into GGMI at closing. GGMI manages, leases, and performs various other services for the Original Centers, GGP/Homart and other properties owned by unaffiliated parties.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except Per Share Amounts)
7. MORTGAGE NOTES PAYABLE
Mortgage notes payable at December 31, 1996 and 1995, consisted of the following:
(a) Bellis Fair is cross collateralized with the properties in notes (n) and (o). (b) The loan requires payments of interest only through February 15, 2001. After this date payments of principal and interest are required through maturity. (c) Amount represents the monthly payment of interest plus principal. (d) Each of these two properties has a $60,000 construction loan. (e) The interest rate is 150 basis points above LIBOR (LIBOR was 5.375% at December 31, 1996). (f) The loan requires monthly payments of interest only. (g) Note is due and payable when a construction loan is arranged for the project. (h) This mortgage consists of two notes: one with an original principal balance of $16,175 that bears interest at 9.75% and a second note with an original principal balance of $1,500 that bears interest at 10.375%. (i) The loan requires monthly payments of $915 of interest for the first five years and payments of $1,179 of principal and interest for the remaining two years. (j) The bond requires monthly payments of $94 of interest through 11/30/16, the principal amount will amortize over the last 12 months. (k) The bond requires monthly payments of interest and principal that vary from $13 to $32. (l) Seven properties are cross collateralized for the non recourse facility; Colony Square, Columbia, Fallbrook, Fox River, Lockport, Rio West and SouthShore. (m) The interest rate is 100 basis points above LIBOR (LIBOR was 5.375% at December 31, 1996). (n) The three properties are Chapel Hills, Grand Traverse and Pines Mall. The loans are cross-collateralized with the properties in notes (a) and (o). (o) The five properties are Bayshore, Capital, Gateway, Greenwood and River Falls Mall. The loans are cross- collateralized with the properties in notes (a) and (n).
GENERAL GROWTH PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except Per Share Amounts)
Based on borrowing rates available to the Company at the end of 1996 for mortgage loans with similar terms and maturities, the fair value of the mortgage notes payable approximates carrying value at December 31, 1996 and 1995.
Principal amounts due under mortgage notes payable mature as follows:
Land, buildings and equipment related to such mortgages, with an aggregate cost as of December 31, 1996, of approximately $1,527,754, have been pledged as collateral for the above debt. Certain property partnership assets are cross-collateralized or cross-defaulted pursuant to certain mortgage notes.
CREDIT FACILITY
In January 1994, the Operating Partnership arranged a $208,500 credit facility collateralized in part by six original centers, with an initial term of two years and two one-year extension options. Approximately $140,000 was borrowed as the initial draw on this facility to fund a portion of the cash purchase price paid by the Operating Partnership for its interest in CenterMark (see Note 3). In May 1995, the outstanding balance of the credit facility was reduced with the proceeds of the Operating Partnership's follow-on stock offering. The facility was retired on January 31, 1996 with the proceeds from a permanent mortgage financing. In December 1995, the Operating Partnership arranged a $125,000 interim loan facility to complete the GGP/Homart transaction. The interim loan facility was retired during 1996 with a permanent mortgage financing and proceeds of the CenterMark sale (see Note 3).
CONSTRUCTION LOAN FACILITY
In September 1995, the Operating Partnership closed a $120,000 construction loan facility collateralized in part by two new developments in Winter Haven, Florida and Tracy, California. The loan proceeds will be used to pay for construction and all other development costs of both projects.
PERMANENT MORTGAGE FINANCING
On January 31, 1996, the Operating Partnership closed a $340,000 multi-property loan package with Principal Mutual Life Insurance Company. The financing is non recourse and consists of cross collateralized first mortgages on nine wholly owned Original Centers as described in notes (a), (n) and (o) in the above table. The five year loans can be extended for five additional years. Proceeds were used to repay $340,000 of floating rate debt, consisting of approximately $290,000 of existing loans related to the credit facility, Gateway and River Falls mortgages, and $50,000 of interim financing which was used in connection with the acquisition of GGP/Homart.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except Per Share Amounts)
UNSECURED LINE OF CREDIT
In August 1996, the Operating Partnership established a short-term revolving line of credit of $40,000. The unsecured line of credit was arranged for new developments, expansions, working capital and potential acquisitions.
NON RECOURSE BRIDGE LOAN FACILITY
On October 15, 1996, the Operating Partnership arranged a $250,000 one year bridge loan facility from Goldman Sachs Mortgage Company. The proceeds from this loan were used to pay off approximately $197,000 of maturing loans on seven wholly owned properties and to pay down the Operating Partnership's unsecured line of credit. The Operating Partnership is in the process of arranging a permanent loan to replace the bridge loan prior to its maturity on October 15, 1997.
SUBSEQUENT FINANCING ACTIVITY
On January 2, 1997, the Operating Partnership received $130,500 of proceeds from the sale of CenterMark (see Note 3). The proceeds were used to payoff and/or reduce a $12,597 mortgage collateralized by Westwood Mall, the unsecured line of credit balance of $40,000 and $70,000 of the $250,000 non recourse bridge facility. The remaining proceeds were used for working capital.
8. NOTES AND CONTRACTS PAYABLE
Notes and contracts payable as of December 31, 1996, consist of notes totaling $971 payable in connection with certain real estate tax special assessments. The special assessment notes require periodic payment of interest at rates between 6% and 12.75% and mature at varying dates between 1997 and 2004. The special assessment notes and land contract represent insignificant amounts, and it is not practical to estimate the fair value due to lack of market information.
As of December 31, 1996 and 1995, the Operating Partnership had outstanding letters of credit of $6,200 and $6,247, respectively, in connection with special assessments and liability insurance requirements.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except Per Share Amounts)
9. RENTALS UNDER OPERATING LEASES
The Company receives rental income from the leasing of retail shopping center space under operating leases. The minimum future rentals based on operating leases held as of December 31, 1996, are as follows:
Minimum future rentals do not include amounts which may be received from certain tenants based upon a percentage of their gross sales or as reimbursement of shopping center operating expenses.
No single tenant collectively accounts for more than 10% of the Company's total revenues. The tenant base includes national and regional retail chains and local retailers, and consequently the Company's credit risk is concentrated in the retail industry.
10. TRANSACTIONS WITH AFFILIATE
GGMI has been contracted to provide management, leasing, development and construction management services to the property partnerships. In addition, certain shopping center advertising and payroll costs of the property partnerships are paid by GGMI and reimbursed by the Company. Total costs included in the consolidated financial statements related to agreements with GGMI are as follows:
Interest paid and accrued to GG Development, including amounts capitalized, was $1,169 for the year ended December 31, 1994. In December 1996, the Operating Partnership acquired a development site located in Grand Rapids, Michigan from GG Development for $11,441. GG Development was liquidated subsequent to the acquisition.
11. GROUND LEASES
The Company leases the Knollwood Mall land, Rio West Mall land, a portion of the Fallbrook Mall building and land and a portion of the SouthShore and Bayshore parking areas from third parties. The leases generally require fixed annual payments plus participation rentals. Rental expense including participation rent related to these leases was $590, $526 and $525 for the years ended December 31, 1996, 1995 and 1994, respectively. The leases 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.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except Per Share Amounts)
12. STOCK INCENTIVE PLAN
The Company's Stock Incentive Plan provides incentives to attract and retain officers and key employees. The Stock Incentive Plan originally consisted of 1,000,000 shares of common stock available for grant. On May 21, 1996, the number of shares under the plan were increased to 2,000,000. Options are granted by the Compensation Committee of the Board of Directors at an exercise price of not less than 100% of the fair market value of the Common Stock on the date of grant. The term of the option is fixed by the Compensation Committee, but no option shall be exercisable more than 10 years after the date of the grant. Options granted to employee-officers are for 10-year terms and are exercisable in either 33 1/3% or 20% annual increments from the date of the grants. Options granted to non-employee directors are exercisable in full commencing on the date of grant and expire on the tenth anniversary of the date of the grant.
A summary of the status of the Company's stock options as of December 31, 1996, 1995 and 1994 and changes during the year ended on those dates is presented below.
The fair value of each option grant for 1996 and 1995 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
GENERAL GROWTH PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except Per Share Amounts)
The following table summarizes information about stock options outstanding at December 31, 1996:
The Company has applied Accounting Principles Board Opinion 25 and selected interpretations in accounting for its plan. Accordingly, no compensation costs have been recognized. Had compensation costs for the Company's Plan been determined based on the fair value at the grant date for options granted in 1996 and 1995 in accordance with the method required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net income and net income per share would have been reduced to the pro forma amounts as follows:
GENERAL GROWTH PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except Per Share Amounts)
13. EXTRAORDINARY ITEMS
The extraordinary items resulted from prepayment costs and unamortized deferred financing costs related to the early extinguishment of mortgage notes payable.
14. DISTRIBUTIONS PAYABLE
On December 17, 1996, the Company declared a cash distribution of $.43 per share payable January 31, 1997, to stockholders of record on December 31, 1996, totaling $13,239. In addition, a distribution of $7,505 will be paid to the limited partners of the Operating Partnership.
On December 15, 1995, the Company declared a cash distribution of $.43 per share payable January 31, 1996, to stockholders of record on December 29, 1995, totaling $11,727. In addition, a distribution of $6,923 was paid to the limited partners of the Operating Partnership.
On December 30, 1994, the Company declared a cash distribution of $.41 per share payable January 31, 1995, to stockholders of record on January 17, 1995, totaling $9,337. In addition, a distribution of $6,259 was paid to the limited partners of the Operating Partnership.
The allocations of the distributions declared and paid for income tax purposes are as follows:
15. 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 materially adverse effect on the consolidated financial position, results of operations or liquidity of the Company.
The Company has entered into several contingent agreements for the acquisition of properties. Each acquisition is subject to satisfactory completion of due diligence and, in the case of developments, completion and occupancy of the project.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except Per Share Amounts)
16. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Due to the impact of the acquisition of 100% of Lakeview Square Mall, Lansing Mall, Westwood Mall, Park Mall, and Sooner Mall and 50% of Quail Springs Mall, which occurred in the fourth quarter of 1996, the follow-on stock offering in 1995, acquisitions of Natick Mall and 38.2% of GGP/Homart in 1995, the acquisition of 40% of CenterMark in 1994 and the sale of 25% and 40% of the Company's interest in CenterMark during 1995 and 1996, historical results of operations may not be indicative of future results of operations. The pro forma condensed consolidated statements of operations for 1996 include adjustments for the acquisition of 100% of the five operating properties, 50% of Quail Springs Mall and the disposition of 40% of the original 40% interest in CenterMark Properties as if they had occurred on January 1, 1996. The pro forma condensed consolidated statements of operations for 1995 include adjustments for the acquisition of 100% of the five operating properties, 50% of Quail Springs Mall, GGP/Homart, the follow-on stock offering, Natick Mall and the disposition of 65% of the original 40% interest in CenterMark Properties as if they had occurred on January 1, 1995. The pro forma condensed consolidated statements of operations for 1994 include adjustments for the follow-on stock offering, the acquisitions of Natick Mall, 38.2% of GGP/Homart and the sale of 25% of the Company's interest in CenterMark as if these transactions had occurred on January 1, 1994. The pro forma information is based upon the historical consolidated statements of operations and does not purport to present what actual results would have been had the offerings, acquisitions, sale and related transactions, in fact, occurred at the previously mentioned dates, or to project results for any future period.
(a) The pro forma adjustments include management fee and depreciation modifications and acquisition and disposition activity described in the above paragraph. The equity income from CenterMark reflects the reductions in ownership interest offset by the change from the equity method of accounting to the cost method in 1996 and 1995. Pro forma net income is before extraordinary item. (b) Earnings per share are based upon 29,717,353, 29,168,488 and 27,272,560 pro forma average shares of common stock outstanding for the years ended December 31, 1996, 1995 and 1994, respectively.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(a) Earnings per share for the four quarters do not add up to the annual earnings per share due to the issuance of additional stock and the gain on the sale of a portion of CenterMark stock in the third quarter.
(b) Earnings per share for the four quarters do not add up to the annual earnings per share due to the issuance of additional stock and the gain on the sale of a portion of CenterMark stock in the fourth quarter.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders General Growth Properties, Inc.
Our report on the consolidated financial statements of General Growth Properties, Inc. is included as page of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the Index to Consolidated Financial Statements on page of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
Chicago, Illinois Coopers & Lybrand L.L.P. February 11, 1997
General Growth Properties, Inc. Schedule III - Real Estate and Accumulated Depreciation As of December 31, 1996
General Growth Properties, Inc. Schedule III - Real Estate and Accumulated Depreciation As of December 31, 1996
General Growth Properties, Inc. Notes to Schedule III (Dollars in Thousands)
(a) See description of mortgage notes payable in Note 7 of Notes to Consolidated Financial Statements. (b) Initial cost for constructed malls is cost at end of first complete calendar year subsequent to opening. (c) Carrying costs consists of capitalized construction-period interest and taxes. (d) The aggregate cost of land, buildings and equipment for federal income tax purposes is approximately $1 billion.
(f) Depreciation is computed based upon the following estimated lives:
Buildings, improvements and carrying costs 40 years Tenant allowances 10-40 years Equipment and fixtures 10 years
EXHIBIT INDEX
2(a) Amended and Restated Stock Purchase Agreement, dated as of October 16, 1995, by and among Sears, Roebuck and Co., Homart Development Co., Homart Newco One, Inc. and GGP/Homart, Inc.(1)
2(b) Amendment No. 1 to Amended and Restated Stock Purchase Agreement, dated as of December 22, 1995, by and among Sears, Roebuck and Co., Homart Development Co., Homart Newco One, Inc. and GGP/Homart, Inc.(1)
2(c) Real Estate Purchase Agreement, dated as of July 31, 1995, by and among Sears, Roebuck and Co., Homart Development Co. and GGP/Homart, Inc.(1)
2(d) Amendment No. 1 to Real Estate Purchase Agreement, dated as of October 16, 1995, by and among Sears, Roebuck and Co., Homart Development Co. and GGP/Homart, Inc.(1)
2(e) Amendment No. 2 to Real Estate Purchase Agreement, dated as of December 22, 1995, by and among Sears, Roebuck and Co., Homart Development Co. and GGP/Homart, Inc. (1)
2(f) Mall Purchase Agreement, dated as of December 22, 1995, by and among Sears, Roebuck and Co., Homart Development Co. and General Growth Properties-Natick Limited Partnership.(1)
2(g) Contribution Agreement dated December 6, 1996, between Forbes/Cohen Properties, a Michigan general partnership, and GGP Limited Partnership, a Delaware limited partnership.(2)
2(h) Contribution Agreement dated December 6, 1996, between Lakeview Square Associates, a Michigan general partnership, and GGP Limited Partnership, a Delaware limited partnership.(2)
2(i) Contribution Agreement dated December 6, 1996, between Jackson Properties, a Michigan general partnership, and GGP Limited Partnership, a Delaware limited partnership.(2)
3(a) Amended and Restated Certificate of Incorporation of the Company.(3)
3(b) Amendment to Amended and Restated Certificate of Incorporation of the Company.(5)
3(c) Certificate to Amended and Restated Certificate of Incorporation of the Company filed on December 21, 1995.
3(d) Bylaws of the Company.(5)
3(e) Amendment to Bylaws of the Company.(5)
4(a) Redemption Rights Agreement, dated July 13, 1995, by and among GGP Limited Partnership, General Growth Properties, Inc. and the persons listed on the signature pages thereof.(8)
4(b) Redemption Rights Agreement dated December 6, 1996, among GGP Limited Partnership, a Delaware corporation, Forbes/Cohen Properties, a Michigan general partnership, Lakeview Square Associates, a Michigan general partnership, and Jackson Properties, a Michigan general partnership.(2)
10(a) Amended and Restated Agreement of Limited Partnership of the Operating Partnership.(6)
10(b) First Amendment to Amended and Restated Agreement of Limited Partnership.(5)
10(c) Second Amendment to Amended and Restated Agreement of Limited Partnership.(5)
10(d) Third Amendment to Amended and Restated Agreement of Limited Partnership.(9)
10(e) Fourth Amendment to Amended and Restated Agreement of Limited Partnership.(9)
10(f) Fifth Amendment to Amended and Restated Agreement of Limited Partnership.(9)
S-1
10(g) Sixth Amendment to Amended and Restated Agreement of Limited Partnership.(9)
10(h) Seventh Amendment to Amended and Restated Agreement of Limited Partnership.(9)
10(i) Eighth Amendment to Amended and Restated Agreement of Limited Partnership.(9)
10(j) Rights Agreement between the Company and the Limited Partners of the Operating Partnership.(6)
10(k) Agreement Concerning Indemnification between the Company, the Operating Partnership and the Limited Partners of the Operating Partnership.(6)
10(l) Agreement of Limited Partnership of GG Development.(3)
10(m) Letter Agreement dated December 30, 1992, among the partners of GG Development with respect to assignment of interests to the Operating Partnership.(3)
10(n) Form of Management Agreement between the Property Manager and a Property Partnership.(3)
10(o) Form of Management Agreement between the Property Manager and the Operating Partnership.(3)
10(p) Real Estate Management Agreement dated July 1, 1996, between General Growth Management, Inc. and GGP Limited Partnership.
10(q)* General Growth Properties, Inc. 1993 Stock Incentive Plan, as amended.(5)
10(r) Forms of Cash Flow Support Agreements between the Operating Partnership and the partners of GG Development.(3)
10(s) Form of Amended and Restated Agreement of Partnership for each of the Property Partnerships.(3)
10(t) Sale-Purchase Agreement dated as of December 30, 1992, by and between Equitable and the Company.(3)
10(u) Sale-Purchase Agreement dated as of December 30, 1992, by and between GG Development and the Company.(3)
10(v) Form of Indemnification Agreement between the Company and its directors and officers.(3)
10(w) Form of Indemnification Agreement between the Operating Partnership, Martin Bucksbaum, Matthew Bucksbaum, Mall Investment L.P. and M. Bucksbaum Company.(3)
10(x) Form of Registration Rights Agreement between the Company and the Bucksbaums.(3)
10(y) Form of Registration Rights Agreement between the Company and certain trustees for the IBM Retirement Plan.(3)
10(z) Form of Incidental Registration Rights Agreement between the Company, Equitable, Frank Russell and Wells Fargo.(3)
10(aa) Form of Letter Agreements restricting sale of certain shares of Common Stock.(3)
S-2 10(bb) Stock Purchase Agreement, as amended, by and among The Prudential Insurance Company of America, GGP Limited Partnership, Westfield U.S. Investment, Pty. Limited and Whitehall Street Real Estate Limited Partnership III dated as of December 13, 1993.(7)
10(cc)* Letter Agreement dated October 14, 1993, between the Company and Bernard Freibaum.(6)
10(dd) Form of Stock Purchase Agreement by and among GGP Limited Partnership, Westfield U.S. Investments Pty. Limited and Westfield Corporation, Inc.(2)
10(ee) Form of GGP Option Agreement by and among GGP Limited Partnership, Westfield U.S. Investments Pty. Limited and CenterMark Properties, Inc.(2)
10(ff) GGP Agreement, dated May 13, 1996, by and among GGP Limited Partnership, Westfield U.S. Investments Pty. Limited and CenterMark Properties, Inc.(4)
10(gg)* Form of Option Agreement between the Company and certain executive officers.
21 List of Subsidiaries.
23 Consent of Coopers & Lybrand L.L.P. - Independent Accountants.
24 Powers of Attorney
27 Financial Data Schedule
*A compensatory plan or arrangement required to be filed.
(1) Previously filed as an exhibit to the Company's Current Report on Form 8-K dated January 5, 1996.
(2) Previously filed as an exhibit to the Company's Current Report on Form 8-K dated January 3, 1996.
(3) Previously filed as an exhibit to the Company's Registration Statement on Form S-11 (No. 33-56640), incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Current Report on Form 8-K dated July 16, 1996.
(5) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1994.
(6) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1993.
(7) Previously filed as an exhibit to the Company's Current Report on Form 8-K dated February 25, 1994.
(8) Previously filed as an exhibit to the Company's Current Report on Form 8-K dated July 17, 1996.
(9) Previously filed as an exhibit to the Company's Registration Statement on Form S-3 (No. 33-23035), incorporated herein by reference.
S-3