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ROUSE PROPERTIES, INC. – 10-Q – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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All references to numbered Notes are to specific footnotes to our Consolidated and Combined Financial Statements included in this Quarterly Report and which descriptions are incorporated into the applicable response by reference. The following discussion should be read in conjunction with such Consolidated and Combined Financial Statements and related Notes. Capitalized terms used, but not defined, in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") have the same meanings as in such Notes. Forward-looking information We may make forward-looking statements in this Quarterly Report and in other reports that we file with the Securities and Exchange Commission (the "SEC"). In addition, our senior management may make forward-looking statements orally to analysts, investors, creditors, the media and others.
Forward-looking statements include:
†Descriptions of plans or objectives for future operations †Projections of our revenues, net operating income ("NOI"), core net operating income ("Core NOI"), earnings per share, funds from operations ("FFO"), core funds from operations ("Core FFO"), capital expenditures, income tax and other contingent liabilities, dividends, leverage, capital structure or other financial items †Forecasts of our future economic performance †Descriptions of assumptions underlying or relating to any of the foregoing Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements often include words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "should," "would" or similar expressions. Forward-looking statements should not be unduly relied upon. They give our expectations about the future and are not guarantees. Forward-looking statements speak only as of the date they are made and we might not update them to reflect changes that occur after the date they are made. There are several factors, many beyond our control, which could cause results to differ materially from our expectations, some of which are described in Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2011 (our "Annual Report"). These factors are incorporated herein by reference. Any factor could by itself, or together with one or more other factors, adversely affect our business, results of operations or financial condition. Overview-Introduction Our portfolio consists of 31 regional malls in 19 states totaling approximately 22 million square feet of retail and ancillary space. We elected to be treated as a REIT in connection with the filing of our 2011 tax return and intend to maintain this status in future periods. The majority of the income from our properties is derived from rents received through long-term leases with retail tenants. These long-term leases generally require the tenants to pay base rent which is a fixed amount specified in the lease. The base rent is often subject to scheduled increases during the term of the lease. Our financial statements refer to this as "minimum rents." Certain of our leases also include a component which requires tenants to pay amounts related to all or substantially all of their share of real estate taxes and certain property operating expenses, including common area maintenance and insurance. The revenue earned attributable to real estate tax and operating expense recoveries are recorded as "tenant recoveries." Another component of income is overage rent. Overage rent is paid by a tenant when its sales exceed an agreed upon minimum amount. Overage rent is calculated by multiplying the tenant's sales in excess of the minimum amount by a percentage defined in the lease, the majority of which is typically earned in the fourth quarter. Our objective is to achieve growth in NOI, Core NOI, FFO and Core FFO (see "Non-GAAP Financial Measures") by leasing, operating and repositioning retail properties which are primarily the only dominant enclosed mall in a market or submarket. We plan to control costs within our portfolio of properties and to deliver an appropriate tenant mix, higher occupancy rates and increased sales productivity, resulting in higher minimum rent. We believe that the most significant operating factor affecting incremental cash flow, NOI, Core NOI, FFO and Core FFO is increased rents earned from tenants at our properties. We anticipate that rental revenue increases will primarily be achieved by:
†Increasing occupancy at the properties so that more space is generating rent;
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†Increasing tenant sales in which we participate through overage rent;
†Re-leasing existing space and renewing expiring leases at rates higher than expiring or existing rates; and
†Prudently investing capital into our properties.
Overview-Basis of Presentation
The accompanying consolidated and combined financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The consolidated balance sheet as ofSeptember 30, 2012 includes the accounts of Rouse, as well as all subsidiaries. The accompanying consolidated and combined statement of operations and comprehensive loss for the three months endedSeptember 30, 2012 includes the consolidated accounts of Rouse and for the nine months endedSeptember 30, 2012 the consolidated accounts of Rouse and the combined accounts of RPI Businesses. Accordingly, the results presented for the nine months endedSeptember 30, 2012 reflect the aggregate operations and changes in cash flows and equity on a carved-out basis for the period fromJanuary 1, 2012 throughJanuary 12, 2012 and on a consolidated basis fromJanuary 13, 2012 throughSeptember 30, 2012 . The accompanying financial statements for the periods prior to the Spin-Off Date are prepared on a carve-out basis from the consolidated financial statements of GGP using the historical results of operations and bases of the assets and liabilities of the transferred businesses and including allocations from GGP. All intercompany transactions have been eliminated in consolidation and combination as of and for the periods endedSeptember 30, 2012 and 2011, except end-of-period intercompany balances onDecember 31, 2011 and Spin-Off Date balances between GGP and RPI Businesses which have been considered elements of RPI Businesses' equity.
The consolidated and combined financial information included in this Quarterly Report does not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as a separate, publicly-traded company during the periods presented or those that we will achieve in the future.
Recent Developments OnAugust 10, 2012 , the Board of Directors declared a third quarter common stock dividend of$0.07 per share which was paid onOctober 29, 2012 to stockholders of record onOctober 15, 2012 . OnSeptember 28, 2012 , we renegotiated the Facilities (as defined below) and the interest rate of borrowings, effective that date, is LIBOR, with no LIBOR floor, plus 4.50%. Prior to renegotiating the Facilities the interest rate was LIBOR plus 5.00%, with a LIBOR floor of 1.00%. Operating Metrics During the three month period endedSeptember 30, 2012 , we leased 698,112 square feet bringing the total volume completed during 2012 to 1,479,803 square feet. AtSeptember 30, 2012 , the leased percentage was 89.3%, an increase of 160 basis points compared toDecember 31, 2011 and an increase of 90 basis points compared toJune 30, 2012 . While our leasing has been strong during the nine months endedSeptember 30, 2012 there is a time period between the date a lease is signed and the tenant occupies the space and begins paying rent. As a result, the impact of a majority of this leasing will contribute to an increase in our revenues during the second half of 2013. The following table summarizes selected operating metrics for the portfolio as ofSeptember 30, 2012 : In - Place Rent <10K Tenant Sales Occupancy % Leased (1) % Occupied (2) SF (3) PSF (4)
Cost (5) Total Portfolio 89.3 % 85.2 % $ 37.60 $ 295 12.7 %
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(1) Represents contractual obligations for space in regional malls and excludes traditional anchor stores.
(2) Represents tenants' physical or economic presence in regional malls and excludes traditional anchor stores.
(3) Weighted average rent of mall stores at
(4) Rolling twelve month tenant sales for mall stores less than 10,000 square feet.
(5) Represents tenants less than 10,000 square feet utilizing comparative tenant sales.
The following table summarizes leasing activity for the three months ended
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Table of Contents New Leases Number of Leases (1) Square Feet Term Initial Rent PSF (2) Average Rent PSF (3) Under 10,000 sq. ft. 39 88,126 9.7 $ 34.38 $ 38.46 Over 10,000 sq. ft. 8 200,595 11 12.46 13.43 Total New Leases 47 288,721 10.6 19.15 21.07 Renewal Leases Under 10,000 sq. ft. 54 150,100 4.5 $ 35.85 $ 38.59 Over 10,000 sq. ft. 8 163,125 4.9 18.04 18.21 Total Renewal Leases 62 313,225 4.7 $ 26.58 $ 27.98 Sub-Total 109 601,946 7.5 23.01 24.66 Percent in Lieu 19 96,166 n.a. n.a. n.a. Total Q3 2012 128 698,112 7.5 $ 23.01 $ 24.66 Total Q2 2012 137 551,146 Total Q1 2012 60 230,545 Total 2012 325 1,479,803
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(1) Excluding anchors and specialty leasing.
(2) Represents initial rent at time of rent commencement consisting of base minimum rent, common area costs, and real estate taxes.
(3) Represents average rent over the lease term consisting of base minimum rent, common area costs, and real estate taxes.
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Three Months Ended
For the three months ended September 30, 2012 2011 $ Change % Change Revenues: Minimum rents $ 38,458 $ 38,467 $ (9 ) - % Tenant recoveries 18,006 17,899 107 0.6 Overage rents 786 779 7 0.9 Other 1,213 1,410 (197 ) (14.0 ) Total revenues 58,463 58,555 (92 ) (0.2 ) Expenses: Real estate taxes 5,979 5,829 150 2.6 Property maintenance costs 2,916 2,731 185 6.8 Marketing 729 777 (48 ) (6.2 ) Other property operating costs 16,070 15,804 266 1.7 Provision for doubtful accounts 699 294 405 137.8 General and administrative 5,267 2,374 2,893 121.9 Depreciation and amortization 16,799 20,425 (3,626 ) (17.8 ) Other 1,512 240 1,272 530.0 Total expenses 49,971 48,474 1,497 3.1 Operating income 8,492 10,081 (1,589 ) (15.8 ) Interest income 253 6 247 4,116.7 Interest expense (21,712 ) (18,963 ) (2,749 ) 14.5 Loss before income taxes (12,967 ) (8,876 ) (4,091 ) 46.1 Provision for income taxes (89 ) (97 ) 8 (8.2 ) Net loss $ (13,056 ) $ (8,973 ) $ (4,083 ) 45.5 % Provision for doubtful accounts increased$0.4 million for the three months endedSeptember 30, 2012 as compared to the three months endedSeptember 30, 2011 primarily due to a recovery that was received in 2011 that was previously written off as bad debt expense. General and administrative increased$2.9 million for the three months endedSeptember 30, 2012 . The increase is due to the fact that we assumed responsibility for certain overhead costs which include costs related to property management, human resources, security, payroll and benefits, legal, corporate communications and information services. For the three months endedSeptember 30, 2011 , the$2.4 million of costs were charged or allocated to us based on GGP's corporate costs based on a number of factors, most significantly our percentage of GGP's adjusted revenue and assets and the number of properties. Depreciation and amortization decreased$3.6 million for the three months endedSeptember 30, 2012 primarily due to the decrease in amortization of in-place leases due to tenant lease expirations. Other expenses increased$1.3 million for the three months endedSeptember 30, 2012 primarily due to initial costs incurred by the Company during its first year of stand alone operations. These other costs primarily consist of$0.3 million in severance costs,$0.2 million in recruiting costs, and$0.8 million in temporary employee expenses. Interest expense increased$2.7 million for the three months endedSeptember 30, 2012 primarily due to deferred financing amortization and interest expense incurred. The Company incurred$1.8 million in amortization of deferred financing costs for the three months endedSeptember 30, 2012 as a result of the additional deferred financing costs associated with the refinancings completed by the Company during 2012 as compared to no amortization of deferred financing costs for the three 23
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months ended
Nine Months Ended
For the nine months ended September 30, 2012 2011 $ Change % Change Revenues: Minimum rents $ 113,742 $ 113,423 $ 319 0.3 % Tenant recoveries 51,517 53,837 (2,320 ) (4.3 ) Overage rents 2,890 2,541 349 13.7 Other 3,671 4,108 (437 ) (10.6 ) Total revenues 171,820 173,909 (2,089 ) (1.2 ) Expenses: Real estate taxes 17,544 17,943 (399 ) (2.2 ) Property maintenance costs 9,708 9,691 17 0.2 Marketing 1,850 2,351 (501 ) (21.3 ) Other property operating costs 45,386 43,395 1,991 4.6 Provision for doubtful accounts 1,413 806 607 75.3 General and administrative 15,726 8,100 7,626 94.1 Depreciation and amortization 51,846 58,911 (7,065 ) (12.0 ) Other 7,954 162 7,792 4,809.9 Total expenses 151,427 141,359 10,068 7.1 Operating income 20,393 32,550 (12,157 ) (37.3 ) Interest income 263 14 249 1,778.6 Interest expense (75,400 ) (54,285 ) (21,115 ) 38.9 Loss before income taxes (54,744 ) (21,721 ) (33,023 ) 152.0 Provision for income taxes (328 ) (385 ) 57 (14.8 ) Net loss $ (55,072 ) $ (22,106 ) $ (32,966 ) 149.1 % Marketing decreased$0.5 million for the nine months endedSeptember 30, 2012 as compared to the nine months endedSeptember 30, 2011 primarily due to expenses for national marketing programs that were higher when the properties were owned by GGP during 2011.
Provision for doubtful accounts increased
General and administrative increased$7.6 million for the nine months endedSeptember 30, 2012 . The increase is due to the fact that we assumed responsibility for certain overhead costs which include costs related to property management, human resources, security, payroll and benefits, legal, corporate communications and information services. For the nine months endedSeptember 30, 2011 , the$8.1 million of costs were charged or allocated to us based on GGP's corporate costs based on a number of factors, most significantly our percentage of GGP's adjusted revenue and assets and the number of properties. Depreciation and amortization decreased$7.1 million for the nine months endedSeptember 30, 2012 primarily due to the decrease in amortization of in-place leases due to tenant lease expirations. Other expenses increased$7.8 million for the nine months endedSeptember 30, 2012 primarily due to initial costs incurred by the Company during its first year of stand alone operations. These other costs include$1.2 million in signing bonuses,$1.8 million for severance expenses,$2.5 million for temporary employees and other one-time spin-off costs. 24 --------------------------------------------------------------------------------
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Interest expense increased$21.1 million for the nine months endedSeptember 30, 2012 primarily due to deferred financing amortization, write-off of deferred financing costs, write off of market rate adjustments and interest expense incurred. The Company incurred$5.5 million in amortization of deferred financing costs for the nine months endedSeptember 30, 2012 as a result of the additional deferred financing costs associated with the refinancings completed by the Company during 2012 as compared to no amortization of deferred financing costs for the nine months endedSeptember 30, 2011 . Furthermore, the Company incurred$1.8 million in write-off of deferred financing costs for the nine months endedSeptember 30, 2012 as a result of the write off of the Term Loan deferred financing costs associated with the Pierre Bossier and Southland Center Malls as compared to no write-off of deferred financing costs for the nine months endedSeptember 30, 2011 . The Company wrote off$9.0 million of market rate adjustments on loans that were paid off on the date of the spin-off. The remainder of the change was due to the increase in debt within the overall portfolio and a change in interest rates.
Liquidity and Capital Resources
Our primary uses of cash include payment of operating expenses, working capital, debt repayment, including principal and interest, reinvestment in properties, development and redevelopment of properties, tenant allowance, dividends and restructuring costs.
Our primary sources of cash are operating cash flows, borrowings under our Senior Facility, borrowings under our Subordinated Facility as described under "Financings" below and the proceeds of our rights offering.
The successful execution of our business strategy will require the availability of substantial amounts of operating and development capital both initially and over time. Sources of such capital could include bank, life insurance company, pension plan or institutional investor capital, commercial mortgage backed securities, public and private offerings of debt or equity, sale of certain assets and joint ventures. We have identified opportunities to invest significant capital to reposition and refresh certain of our properties, but we will sequence long-term redevelopment projects with leasing activity. We believe these capital investments will assist in increasing our revenues significantly and deliver solid net operating income growth over the medium term. For a discussion of factors that could have an impact on our ability to realize these goals, see "Forward-Looking Information." As ofSeptember 30, 2012 , our combined contractual debt, excluding non-cash debt market rate adjustments, was approximately$1.23 billion . The aggregate principal and interest payments on our outstanding indebtedness as ofSeptember 30, 2012 are approximately$21.3 million for the remainder of 2012 and approximately$140.3 million for the year endedDecember 31, 2013 . We believe that our current liquidity along with cash generated from operations will be sufficient to permit us to meet our debt service obligations, ongoing cost of operations, working capital needs, distribution requirements and capital expenditure requirements for at least the next 12 months. Our future financial and operating performance, ability to service or refinance our debt and ability to comply with the covenants and restrictions contained in our debt agreements will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. For a discussion of factors that could have an impact on our ability to realize these goals, see "Forward-Looking Information." Financings Senior Facility. OnJanuary 12, 2012 , we entered into a three year senior secured credit facility ("Senior Facility") with a syndicate of banks, as lenders, andWells Fargo Bank, National Association , as administrative agent, andWells Fargo Securities, LLC ,RBC Capital Markets, LLC andU.S. Bank National Association , as joint lead arrangers, that provides borrowings on a revolving basis of up to$50.0 million (the "Revolver"), and a senior secured term loan (the "Term Loan" and together with the Revolver, the "Facilities") that provided an advance of approximately$433.5 million . We used the proceeds of the Term Loan to refinance certain mortgage debt that was not assumed by us in connection with the spin-off and to pay other transaction fees and expenses. During the period endedSeptember 30, 2012 , the outstanding balance on the Term Loan decreased from$433.5 million to$325.1 million due to the repayments on the Term Loan concurrent with the refinancing of the Pierre Bossier and Southland Center Malls. The Senior Facility has affirmative and negative covenants that are customary for a real estate loan, including, without limitation, restrictions on incurrence of indebtedness and liens on the mortgage collateral; restrictions on pledges; restrictions on subsidiary distributions; with respect to the mortgage collateral, limitations on our ability to enter into transactions including mergers, consolidations, sales of assets for less than fair market value and similar transactions; conduct of business; restricted distributions; transactions with affiliates; and limitation on speculative hedge agreements. In addition, we are required to comply with financial maintenance covenants relating to the following: (1) net indebtedness to value ratio, (2) liquidity, (3) minimum fixed charge coverage ratio, (4) minimum tangible net worth, and (5) minimum portfolio debt yield. Failure to comply with the covenants in the Senior Facility could result in a default under the credit agreement governing these Facilities 25
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and, absent a waiver or an amendment from our lenders, permit the acceleration of all outstanding borrowings under the Senior Facility and would cross-default our Subordinated Facility (as described below). Property-Level Debt. We have individual Property-Level Debt (the "Property-Level Debt") on 16 of our 31 assets, representing approximately$903.5 million (excluding$41.2 million of market rate adjustments). The Property-Level Debt has a weighted average interest rate of 5.26% and an average remaining term of 4.2 years. The Property-Level Debt is stand-alone (not cross-collateralized) first mortgage debt and is non-recourse with the exception of customary contingent guarantees/indemnities. Subordinated Facility. OnJanuary 12, 2012 , we entered into a subordinated unsecured revolving credit facility with a wholly-owned subsidiary of Brookfield Asset Management Inc. that provides for borrowings on a revolving basis of up to$100.0 million (the "Subordinated Facility"). The Subordinated Facility does not have any affirmative covenants and has the following negative covenants: mergers, consolidations and sales of all or substantially all assets; modifications of organizational documents; no adverse modifications to the facilities; and no refinancing or replacement of the facilities without the Subordinated Facility lender's consent. There are cross-default provisions with the Senior Facility. If the Senior Facility is repaid or refinanced prior to the maturity of the Subordinated Facility, then the covenants (other than financial covenants and covenants related specifically to the mortgaged properties) from the Senior Facility shall be incorporated by reference into the Subordinated Facility. Summary of Cash Flows
Cash Flows from Operating Activities
Net cash provided by operating activities was$34.1 million for the nine months endedSeptember 30, 2012 compared to net cash provided by operating activities of$62.8 million for the nine months endedSeptember 30, 2011 . The decrease in cash provided by operating activities of$28.7 million was due primarily to the funding of the net loss and prepaid expenses and other assets. Our net loss increased$33.0 million for the nine months endedSeptember 30, 2012 compared to the nine months endedSeptember 30, 2011 .
Cash Flows from Investing Activities
Net cash used in investing activities was$213.4 million for the nine months endedSeptember 30, 2012 compared to$19.3 million for the nine months endedSeptember 30, 2011 . The increase in cash used in investing activities was primarily due to placing$150.0 million on deposit withBrookfield U.S. Holdings ,$19.3 million increase in restricted cash required for capital renovation and replacement reserves, and$10.0 million increase for the funding of a deposit for the future acquisition ofThe Mall at Turtle Creek . In addition, during the nine months endedSeptember 30, 2012 we paid approximately$16.5 million related to four anchor acquisitions at four malls within the portfolio, which increased our cash paid for the acquisition of real estate as compared to the nine months endedSeptember 30, 2011 .
Cash Flows from Financing Activities
Net cash provided by financing activities was$201.6 million for the nine months endedSeptember 30, 2012 compared to$45.0 million of cash used in financing activities for the nine months endedSeptember 30, 2011 . The increase of$246.6 million in net cash provided from financing activities was primarily due to$191.6 million in net proceeds related to our rights offering as well as$433.5 million provided by a term loan that was used primarily to pay down$391.3 million of debt at the time of the spin-off as well as provide working capital. 26
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Contractual Cash Obligations and Commitments
The following table aggregates our contractual cash obligations and commitments as ofSeptember 30, 2012 : 2012 2013 2014 2015 2016 Subsequent Total (In thousands) Long-term debt-principal (1) $ 5,537 $ 78,366 $ 255,598 $ 330,019 $ 216,682 $ 342,395 $ 1,228,597 Interest payments (2) 15,772 61,938 52,037 31,478 23,028 40,159 224,412 Operating lease obligations 269 1,102 1,182 1,185 1,188 5,820 10,746 Total $ 21,578 $ 141,406 $ 308,817 $ 362,682 $ 240,898 $ 388,374 $ 1,463,755
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(1) Excludes
(2) Based on rates as ofSeptember 30, 2012 . Variable rates are based on LIBOR rate of 0.22%. In order to calculate interest for future periods we utilized the interest rate onSeptember 30, 2012 of 4.72%. If we had increased the effective interest rate to 4.97% to calculate future interest on the variable debt, interest payments would have increased$0.2 million ,$0.8 million and$0.8 million for the remainder of 2012, 2013, and 2014, respectively.
Off-Balance Sheet Financing Arrangements
We do not have any off-balance sheet financing arrangements.
REIT Requirements In order to qualify as a REIT for federal income tax purposes, among other requirements, we must distribute or pay tax on 100% of our capital gains and we must distribute at least 90% of our ordinary taxable income to stockholders. To avoid current entity level U.S. federal income taxes, we plan to distribute 100% of our capital gains and ordinary income to our stockholders annually. We may not have sufficient liquidity to meet these distribution requirements. During the second quarter of 2012 our board of directors approved a quarterly dividend of$0.07 . The board will continue to evaluate the dividend policy on a regular basis. Seasonality Although we have a year-long temporary leasing program, occupancies for short-term tenants and, therefore, rental income recognized, are higher during the second half of the year. In addition, the majority of our tenants have December or January lease years for purposes of calculating annual overage rent amounts. Accordingly, overage rent thresholds are most commonly achieved in the fourth quarter. As a result, revenue production is generally highest in the fourth quarter of each year. Critical Accounting Policies Critical accounting policies are those that are both significant to the overall presentation of our financial condition and results of operations and require management to make difficult, complex or subjective judgments. Our critical accounting policies are discussed in our Annual Report and have not changed during 2012. Non-GAAP Financial Measures
Funds from Operations and Core Funds from Operations
Consistent with real estate industry and investment community practices, we use FFO, as defined by theNational Association of Real Estate Investment Trusts ("NAREIT"), as a supplemental measure of our operating performance. NAREIT defines FFO as net income (loss) (computed in accordance with current GAAP), excluding impairment write-downs on depreciable real estate, gains or losses from cumulative effects of accounting changes, extraordinary items and sales of depreciable properties, plus real estate related depreciation and amortization. We also include Core FFO as a supplemental measurement of operating performance. We define Core FFO as FFO excluding straight-line rent, amortization of above-and below-market tenant leases, amortization of above-and below-market ground rent expense, amortization of deferred financing costs, mark-to-market adjustments on debt, write-off of market rate adjustments on debt, debt extinguishment costs, other non-recurring costs and 27 --------------------------------------------------------------------------------
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provision for income taxes. Other real estate companies may use different methodologies for calculating FFO and Core FFO, and accordingly, our FFO and Core FFO may not be comparable to other real estate companies.
We consider FFO and Core FFO useful supplemental measures and a complement to GAAP measures because they facilitate an understanding of the operating performance of our properties. FFO does not include real estate depreciation and amortization required by GAAP because these amounts are computed to allocate the cost of a property over its useful life. Since values for well-maintained real estate assets have historically increased or decreased based upon prevailing market conditions, we believe that FFO provides investors with a clearer view of our operating performance, particularly with respect to our mall properties. Core FFO does not include certain items that are non-cash and certain non-comparable items. FFO and Core FFO are not measurements of our financial performance under GAAP and should not be considered as an alternative to revenues, operating income (loss), net income (loss) or any other performance measures derived in accordance with GAAP or as an alternative to cash flows from operating activities as a measure of our liquidity.
Net Operating Income and Core Net Operating Income
We present NOI and Core NOI, as defined below, in this Quarterly Report as supplemental measures of our performance that are not required by, or presented in accordance with GAAP. We believe that NOI and Core NOI are useful supplemental measures of our operating performance. We define NOI as operating revenues (minimum rents, including lease termination fees, tenant recoveries, overage rents, and other income) less property and related expenses (real estate taxes, repairs and maintenance, marketing, other property operating costs, and provision for doubtful accounts). We define Core NOI as NOI excluding straight-line rent and amortization of above and below-market tenant leases. Other real estate companies may use different methodologies for calculating NOI and Core NOI, and accordingly, our NOI and Core NOI may not be comparable to other real estate companies. Because NOI and Core NOI exclude general and administrative expenses, interest expense, depreciation and amortization, straight-line rent and above and below-market tenant leases, we believe that NOI and Core NOI provide performance measures that, when compared year over year, reflect the revenues and expenses directly associated with owning and operating regional shopping malls and the impact on operations from trends in occupancy rates, rental rates and operating costs. These measures thereby provide an operating perspective not immediately apparent from GAAP operating or net income. We use NOI and Core NOI to evaluate our operating performance on a property-by-property basis because NOI and Core NOI allow us to evaluate the impact that factors such as lease structure, lease rates and tenant base, which vary by property, have on our operating results, gross margins and investment returns.
Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures
The Company presents NOI and FFO as they are financial measures widely used in the REIT industry. In order to provide a better understanding of the relationship between our non-GAAP supplemental financial measures of NOI, Core NOI, FFO and Core FFO, reconciliations have been provided as follows: a reconciliation of GAAP net loss to FFO and Core FFO and a reconciliation of GAAP net loss to NOI and Core NOI. None of our non-GAAP supplemental financial measures represent cash flow from operating activities in accordance with GAAP, none should be considered as alternatives to GAAP net loss and none are necessarily indicative of cash available to fund cash needs. 28 --------------------------------------------------------------------------------
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The following table reconciles net loss to FFO and Core FFO:
For the three months ended For the nine months ended September 30, September 30, 2012 2011 2012 2011 (In Thousands) Net loss $ (13,056 ) $ (8,973 ) $ (55,072 ) $ (22,106 ) Depreciation and amortization 16,799 20,425 51,846 58,911 FFO 3,743 11,452 (3,226 ) 36,805 Provision for income taxes 89 97 328 385 Interest expense Mark-to-market adjustments on debt 2,535 4,931 7,919 8,601 Write-off of market rate debt adjustments - - 8,957 (1,489 ) Amortization of deferred financing costs 1,820 - 5,508 - Write-off of deferred financing costs - - 1,780 - Debt extinguishment costs - - - 1,475 Other 1,512 240 7,954 162 Above and below market ground rent expense, net 31 31 93 93 Above and below market tenant leases, net 5,508 5,925 18,518 18,575 Amortization of straight line rent (696 ) (1,548 ) (3,852 ) (5,313 ) Core FFO $ 14,542 $ 21,128 $ 43,979 $ 59,294
The following table reconciles net loss to NOI and Core NOI:
For the three months ended For the nine months ended September 30, September 30, 2012 2011 2012 2011 (In Thousands) Net loss $ (13,056 ) $ (8,973 ) $ (55,072 ) $ (22,106 ) Provision for income taxes 89 97 328 385 Interest expense 21,712 18,963 75,400 54,285 Interest income (253 ) (6 ) (263 ) (14 ) Other 1,512 240 7,954 162 Depreciation and amortization 16,799 20,425 51,846 58,911 General and administrative 5,267 2,374 15,726 8,100 NOI 32,070 33,120 95,919 99,723 Above and below market ground rent expense, net 31 31 93 93 Above and below market tenant leases, net 5,508 5,925 18,518 18,575 Amortization of straight line rent (696 ) (1,548 ) (3,852 ) (5,313 ) Core NOI $ 36,913 $ 37,528 $
110,678 $ 113,078
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RIVERSOURCE LIFE INSURANCE CO – 10-Q – MANAGEMENT’S NARRATIVE ANALYSIS
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