Washington, D.C. 20549
Rouse Properties, Inc.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Rouse Properties, Inc.
New York, New York
We have audited the accompanying Historical Summaries of Gross Income and Direct Operating Expenses of Chesterfield Towne Center (the “Property”) for the year ended December 31, 2012 and the related notes (the “historical summaries”).
Management's Responsibility for the Historical Summaries
Management is responsible for the preparation and fair presentation of the historical summaries in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the historical summaries that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on the historical summaries based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 involves performing procedures to obtain audit evidence about the amounts and disclosures in the historical summaries. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the historical summaries, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Property's preparation and fair presentation of the historical summaries in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Property’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the historical summaries.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the historical summaries referred to above present fairly, in all material respects, the gross income and direct operating expenses described in Note 2 of the Property for the year ended December 31, 2012, in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matter
We draw attention to Note 2 to the historical summaries, which describes that the accompanying historical summaries were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission and are not intended to be a complete presentation of the Property’s revenues and expenses. Our opinion is not modified with respect to this matter.
/s/ Deloitte & Touche LLP
February 13, 2014
CHESTERFIELD TOWNE CENTER
Historical Summaries of Gross Income and
Direct Operating Expenses
| | | Nine Months ended September 30, 2013 (Unaudited) | | Year Ended December 31, 2012 |
| Gross income: | | | | |
| | | | | | | | | |
| Minimum rents | | $ | 8,459,853 | | | $ | 11,061,388 | |
| | | | | | | | | |
| Tenant recoveries | | 4,635,899 | | | 5,829,016 | |
| | | | | | | |
| Overage rents | | 23,449 | | | 149,532 | |
| | | | | | | |
| Other | | 299,131 | | | 614,118 | |
| | | | | | | |
| Total gross income | | 13,418,332 | | | 17,654,054 | |
| | | | | | | |
| Direct operating expenses: | | | | |
| | | | | |
| Real estate taxes | | 877,963 | | | 1,164,092 | |
| | | | | | | |
| Property operating expenses | | 3,190,361 | | | 4,293,029 | |
| | | | | | | |
| Interest | | 3,958,121 | | | 1,536,853 | |
| | | | | | | |
| Total direct operating expenses | | 8,026,445 | | | 6,993,974 | |
| | | | | | | |
| Excess of gross income over direct operating expenses | | $ | 5,391,887 | | | $ | 10,660,080 | |
See accompanying notes to historical summaries of gross income and direct operating expenses.
CHESTERFIELD TOWNE CENTER
Notes to the Historical Summaries of Gross Income and
Direct Operating Expenses
Chesterfield Towne Center (the "Property") is located in Richmond, Virgina. The Property has approximately 1,016,000 square feet (unaudited) of gross leasable area of retail space and was approximately 91.9% occupied (unaudited) at December 31, 2012. Rouse Properties, Inc. (“Rouse”), through the wholly owned subsidiary RPI Chesterfield LLC ("RPI Chesterfield"), acquired the Property on December 11, 2013 from Macerich Chesterfield LLC ("Macerich Chesterfield").
| (2) | Basis of Presentation |
The Historical Summaries of Gross Income and Direct Operating Expenses ("Historical Summaries") have been prepared for the purpose of complying with Rule 3-14 of the Securities and Exchange Commission (SEC) Regulation S‑X promulgated under the Securities Act of 1933, as amended, and is not intended to be a complete presentation of the Property's revenues and expenses. The Historical Summaries have been prepared on the accrual basis of accounting, which requires management of the Property to make estimates and assumptions that affect the reported amounts of the revenues and expenses during the reporting period. Actual results may differ from those estimates.
The Property leases retail space under various lease agreements with its tenants. All leases are accounted for as operating leases. The leases include provisions under which the Property is reimbursed for real estate tax, and property operating expenses. Revenue related to these reimbursed expenses is recognized on a gross basis as the Property is generally the primary obligor. Furthermore, the revenue is recorded in the period the applicable expenses are incurred and billed to tenants pursuant to the lease agreements. Certain leases contain renewal options at various periods at various rental rates.
Although certain leases may provide for tenant occupancy during periods for which no rent is due and/or increases exist in minimum lease payments over the term of the lease, rental income accrues for the full period of occupancy on a straight‑line basis. Related adjustments impacted base rental income by $325,530 (unaudited) for the period ended September 30, 2013 and $324,696 for the year ended December 31, 2012.
Minimum rents to be received from retail tenants under operating leases, with remaining lease terms ranging through 2050, as of December 31, 2012, are as follows:
| Year | | Amount |
| 2013 | | | $ | 9,395,779 | |
| 2014 | | | 7,858,468 | |
| 2015 | | | 6,434,558 | |
| 2016 | | | 6,181,643 | |
| 2017 | | | 5,595,807 | |
| Thereafter | | 15,262,976 | |
| Total | | $ | 50,729,231 | |
| (4) | Direct Operating Expenses |
Direct operating expenses include only those expenses expected to be comparable to the proposed future operations of the Property. Repairs and maintenance expenses are charged to operations as incurred. Expenses such as depreciation, amortization, and professional fees are excluded from the Historical Summaries.
CHESTERFIELD TOWNE CENTER
Notes to the Historical Summaries of Gross Income and
Direct Operating Expenses
| (5) | Related-Party Transactions |
Macerich Property Management Company ("Manager"), an affiliate of Macerich Chesterfield LLC, provided property management services to the Property. Manager established an agreement with the Property in which the Property would pay a management fee of 1.5% of gross receipts. The Property incurred management fees of $121,422 (unaudited) and $163,463, which are included in property operating expenses, for the period ended September 30, 2013 and the year ended December 31, 2012, respectively.
Through the acquisition of the Property, Rouse assumed the mortgage loan secured by the Property. Macerich Chesterfield obtained this mortgage loan in September 2012. The loan had an original balance of $110.0 million and an outstanding balance of approximately $109.7 million at the time of the acquisition. As of September 30, 2013 and December 31, 2012, the outstanding balance was $110.0 million and $110.0 million, respectively. The loan bears an interest rate of 4.75%, and has a maturity date of October 1, 2022. The mortgage loan has the following scheduled amortization payments as of December 31, 2012 and for the next five years and thereafter:
| Year | | Amount |
| 2013 | | | $ | 277,593 | |
| 2014 | | | 1,712,366 | |
| 2015 | | | 1,795,408 | |
| 2016 | | | 1,882,477 | |
| 2017 | | | 1,973,770 | |
| Thereafter | | 102,358,386 | |
| Total | | $ | 110,000,000 | |
(7) Commitments and Contingencies
Litigation
The Property may be subject to legal claims in the ordinary course of business. Rouse is not aware of any pending legal proceedings of which the outcome is reasonably possible to have a material effect on the Property’s results of operations.
Environmental Matters
In connection with the ownership and operation of real estate, the Property may be potentially liable for costs and damages related to environmental matters. Rouse has not been notified by any governmental authority of any non-compliance, liability, or other claim. Rouse is not aware of any other environmental matters which it believes is reasonably possible to have a material effect on the Property’s results of operations.
(8) Subsequent Events
| | Subsequent to December 31, 2012 and through February 13, 2014, the date through which management evaluated subsequent events and on which date the Historical Summaries were issued, management did not identify any subsequent events requiring additional disclosure. |
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Rouse Properties, Inc.
New York, New York
We have audited the accompanying Historical Summaries of Gross Income and Direct Operating Expenses of The Centre at Salisbury (the “Property”) for the year ended December 31, 2012 and the related notes (the “historical summaries”).
Management's Responsibility for the Historical Summaries
Management is responsible for the preparation and fair presentation of the historical summaries in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the historical summaries that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on the historical summaries based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 involves performing procedures to obtain audit evidence about the amounts and disclosures in the historical summaries. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the historical summaries, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Property's preparation and fair presentation of the historical summaries in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Property’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the historical summaries.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the historical summaries referred to above present fairly, in all material respects, the gross income and direct operating expenses described in Note 2 of the Property for the year ended December 31, 2012, in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matter
We draw attention to Note 2 to the historical summaries, which describes that the accompanying historical summaries were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission and are not intended to be a complete presentation of the Property’s revenues and expenses. Our opinion is not modified with respect to this matter.
/s/ Deloitte & Touche LLP
February 13, 2014
THE CENTRE AT SALISBURY
Combined Historical Summaries of Gross Income and
Direct Operating Expenses
| | | Nine Months ended September 30, 2013 (Unaudited) | | Year Ended December 31, 2012 |
| Gross income: | | | | |
| | | | | |
| Minimum rents | | $ | 6,953,552 | | | $ | 9,507,562 | |
| | | | | | | | | |
| Tenant recoveries | | 3,549,223 | | | 4,824,362 | |
| | | | | | | |
| Overage rents | | 35,259 | | | 180,484 | |
| | | | | | | |
| Other | | 229,210 | | | 379,344 | |
| | | | | | | |
| Total gross income | | 10,767,244 | | | 14,891,752 | |
| | | | | | | |
| Direct operating expenses: | | | | |
| | | | | |
| Real estate taxes | | 1,368,334 | | | 1,734,672 | |
| | | | | | | |
| Property operating expenses | | 2,462,659 | | | 3,356,734 | |
| | | | | | | |
| Interest | | 5,048,490 | | | 6,768,306 | |
| | | | | | | |
| Total direct operating expenses | | 8,879,483 | | | 11,859,712 | |
| | | | | | | |
| Excess of gross income over direct operating expenses | | $ | 1,887,761 | | | $ | 3,032,040 | |
See accompanying notes to the combined historical summaries of gross income and direct operating expenses.
THE CENTRE AT SALISBURY
Notes to the Combined Historical Summaries of Gross Income and
Direct Operating Expenses
The Centre at Salisbury (the “Property”) is located in Salisbury, Maryland. The Property has approximately 862,000 square feet (unaudited) of gross leasable area of retail space and was approximately 96.3% occupied (unaudited) at December 31, 2012. Rouse Properties, Inc. (“Rouse”), through the wholly owned subsidiaries RPI Salisbury Mall, LLC (“Salisbury Mall”) and RPI Salisbury Borrower, LLC (“Salisbury Borrower”), acquired the Salisbury Mall and assumed its respective mortgage on December 11, 2013 from Macerich Salisbury GL, LLC and Macerich Salisbury B, LCC.
| (2) | Basis of Presentation |
The Combined Historical Summaries of Gross Income and Direct Operating Expenses ("Historical Summaries") have been prepared for the purpose of complying with Rule 3‑14 of the Securities and Exchange Commission (SEC) Regulation S‑X promulgated under the Securities Act of 1933, as amended, and is not intended to be a complete presentation of the Property's revenues and expenses. The Historical Summaries include the combined accounts of Macerich Salisbury GL, LLC and Macerich Salisbury B, LLC. The Historical Summaries have been prepared on the accrual basis of accounting, which requires management of the Property to make estimates and assumptions that affect the reported amounts of the revenues and expenses during the reporting period. Actual results may differ from those estimates.
The Property leases retail space under various lease agreements with its tenants. All leases are accounted for as operating leases. The leases include provisions under which the Property is reimbursed for real estate tax and property operating expenses. Revenue related to these reimbursed expenses is recognized on a gross basis as the Property is generally the primary obligor. Furthermore, the revenue is recorded in the period the applicable expenses are incurred and billed to tenants pursuant to the lease agreements. Certain leases contain renewal options at various periods at various rental rates.
Although certain leases may provide for tenant occupancy during periods for which no rent is due and/or increases exist in minimum lease payments over the term of the lease, rental income accrues for the full period of occupancy on a straight‑line basis. Related adjustments impacted base rental income by $(1,203) (unaudited) for the period ended September 30, 2013 and $62,549 for the year ended December 31, 2012.
Minimum rents to be received from retail tenants under operating leases, with remaining lease terms ranging through 2023, as of December 31, 2012, are as follows:
| Year | | Amount |
| 2013 | | | $ | 8,855,864 | |
| 2014 | | | 7,596,974 | |
| 2015 | | | 6,630,024 | |
| 2016 | | | 5,237,922 | |
| 2017 | | | 3,651,593 | |
| Thereafter | | 7,955,534 | |
| Total | | $ | 39,927,911 | |
| (4) | Direct Operating Expenses |
Direct operating expenses include only those expenses expected to be comparable to the proposed future operations of the Property. Repairs and maintenance expenses are charged to operations as incurred. Expenses such as depreciation, amortization, and professional fees are excluded from the Historical Summaries.
THE CENTRE AT SALISBURY
Notes to the Combined Historical Summaries of Gross Income and
Direct Operating Expenses
| (5) | Related-Party Transactions |
Macerich Property Management Company ("Manager"), an affiliate of Macerich Salisbury GL, LLC provided property management services to the Property. Manager established an agreement with the Property in which the Property would pay a management fee of 1.5% of gross receipts. The Property incurred management fees of $104,821 (unaudited) and $144,361, which are included in property operating expenses, for the period ended September 30, 2013 and the year ended December 31, 2012, respectively.
Through the acquisition of the Property, Rouse assumed the mortgage loan secured by the Property. This mortgage loan had an original balance of $115.0 million and an outstanding balance of approximately $115.0 million at the time of the acquisition. As of December 31, 2012, the outstanding balance was approximately $115.0 million. The loan bears an interest rate of 5.79%, is interest-only through maturity, and has a maturity date of May 1, 2016.
| (7) | Commitments and Contingencies |
The Property may be subject to legal claims in the ordinary course of business. Rouse is not aware of any pending legal proceedings of which the outcome is reasonably possible to have a material effect on the Property’s results of operations.
Environmental Matters
In connection with the ownership and operation of real estate, the Property may be potentially liable for costs and damages related to environmental matters. Rouse has not been notified by any governmental authority of any non-compliance, liability, or other claim. Rouse is not aware of any other environmental matters which it believes is reasonably possible to have a material effect on the Property’s results of operations.
| | Subsequent to December 31, 2012 and through February 13, 2014, the date through which management evaluated subsequent events and on which date the Historical Summaries were issued, management did not identify any subsequent events requiring additional disclosure. |
ROUSE PROPERTIES, INC.
Pro Forma Consolidated Balance Sheet
September 30, 2013
(Unaudited)
The following unaudited Pro Forma Consolidated Balance Sheet is presented as if the acquisitions and financings had occurred on September 30, 2013.
This unaudited Pro Forma Consolidated Balance Sheet is not necessarily indicative of what the actual financial position would have been at September 30, 2013, nor does it purport to represent our future financial position. Pro forma adjustments have been made for the significant properties that were purchased and associated financings subsequent to September 30, 2013. The pro forma adjustments were made for the acquisitions of Chesterfield Towne Center, the The Centre at Salisbury, and the draw on our corporate revolver.
ROUSE PROPERTIES, INC.
Pro Forma Consolidated Balance Sheet
September 30, 2013
(Unaudited)
| | | Historical (A) | | Pro Forma Adjustments (B) | | Pro Forma |
| | | (In thousands) |
| Assets: | | | | | | |
| | | | | | | |
| Investment in real estate: | | | | | | |
| | | | | | | |
| Land | | $ | 314,728 | | | $ | 42,126 | | | $ | 356,854 | |
| | | | | | | | | | | | | |
| Buildings and equipment (C) | | 1,334,746 | | | 251,525 | | | 1,586,271 | |
| | | | | | | | | | |
| Less accumulated depreciation | | (135,229 | ) | | — | | | (135,229 | ) |
| | | | | | | | | | |
| Net investment in real estate | | 1,514,245 | | | 293,651 | | | 1,807,896 | |
| | | | | | | | | | |
| Cash and cash equivalents | | 5,841 | | | — | | | 5,841 | |
| | | | | | | | | | |
| Restricted cash | | 50,898 | | | 1,110 | | | 52,008 | |
| | | | | | | | | | |
| Demand deposit from affiliate (D) | | 42,565 | | | (12,837 | ) | | 29,728 | |
| | | | | | | | | | |
| Accounts receivable, net | | 24,643 | | | — | | | 24,643 | |
| | | | | | | | | | |
| Deferred expenses, net | | 41,488 | | | 3,805 | | | 45,293 | |
| | | | | | | | | | |
| Prepaid expenses and other assets, net (C) | | 75,966 | | | 9,010 | | | 84,976 | |
| | | | | | | | | | |
| Total assets | | $ | 1,755,646 | | | $ | 294,739 | | | $ | 2,050,385 | |
| | | | | | | |
| Liabilities: | | | | | | |
| | | | | | | |
| Mortgages, notes and loans payable | | $ | 1,177,305 | | | $ | 279,745 | | | $ | 1,457,050 | |
| | | | | | | | | | | | | |
| Accounts payable and accrued expenses, net (C) | | 92,702 | | | 14,994 | | | 107,696 | |
| | | | | | | | | | |
| Total liabilities | | 1,270,007 | | | 294,739 | | | 1,564,746 | |
| | | | | | | |
| Commitments and contingencies | | — | | | — | | | |
| | | | | | | |
| Equity: | | | | | | |
| | | | | | | |
| Preferred stock: $0.01 par value; 50,000,000 shares authorized, 0 issued and outstanding at September 30, 2013 and December 31, 2012 | | — | | | — | | | — | |
| | | | | | | | | | |
| Common stock: $0.01 par value; 500,000,000 shares authorized, 49,645,796 issued and 49,641,636 outstanding at September 30, 2013 and 49,246,087 issued and 49,235,528 outstanding at December 31, 2012 | | 497 | | | — | | | 497 | |
| | | | | | | | | | |
| Class B common stock: $0.01 par value; 1,000,000 shares authorized, 0 and 359,056 issued and 0 and 359,056 outstanding at September 30, 2013 and December 31, 2012 | | — | | | — | | | — | |
| | | | | | | | | | |
| | | | | | | | | | |
| Additional paid-in capital | | 571,465 | | | — | | | 571,465 | |
| | | | | | | | | | |
| Accumulated deficit | | (86,434 | ) | | — | | | (86,434 | ) |
| | | | | | | | | | |
| Total stockholders' equity | | 485,528 | | | — | | | 485,528 | |
| | | | | | | | | | |
| Non-controlling interest | | 111 | | | — | | | 111 | |
| | | | | | | | | | |
| Total equity | | 485,639 | | | — | | | 485,639 | |
| | | | | | | | | | |
| Total liabilities and equity | | $ | 1,755,646 | | | $ | 294,739 | | | $ | 2,050,385 | |
See accompanying notes to the unaudited Pro Forma Consolidated Balance Sheet.
ROUSE PROPERTIES, INC.
Notes to the Pro Forma Consolidated Balance Sheet
September 30, 2013
(Unaudited)
| (A) | The historical column represents the Company’s Consolidated Balance Sheet as of September 30, 2013 as filed with the Securities and Exchange Commission on its Quarterly Report on Form 10-Q for the quarter ended September 30, 2013. |
| (B) | The pro forma adjustments column includes adjustments related to our significant acquisitions or mortgage financings which occurred after September 30, 2013 and are detailed below as follows: |
| | | Chesterfield Towne Center | | The Centre at Salisbury | | Revolver Draw | | Total Pro Forma Adjustments |
| | | | | (In Thousands) | | |
| Land | | $ | 19,546 | | | $ | 22,580 | | | $ | — | | | $ | 42,126 | |
| | | | | | | | | | | | | | | | | |
| Buildings and equipment | | 146,149 | | | 105,376 | | | — | | | 251,525 | |
| | | | | | | | | | | | | |
| Restricted cash | | 360 | | | 750 | | | — | | | 1,110 | |
| | | | | | | | | | | | | |
| Deferred expenses | | 2,421 | | | 1,384 | | | — | | | 3,805 | |
| | | | | | | | | | | | | |
| Prepaid expenses and other assets | | 4,967 | | | 4,043 | | | — | | | 9,010 | |
| | | | | | | | | |
Mortgage, notes, and loans payable (1) | | 110,988 | | | 113,757 | | | 55,000 | | | 279,745 | |
| | | | | | | | | | | | | |
| Account payable and accrued liabilities | | 8,613 | | | 6,381 | | | — | | | 14,994 | |
The following unaudited Pro Forma Consolidated Statement of Operations is presented to give effect to the acquisitions and financings of the properties as indicated in Note (B) to the Notes to the Pro Forma Consolidated Statement of Operations as though they occurred on January 1, 2012. Pro forma adjustments have been made for significant properties that were purchased or financed subsequent to December 31, 2012. The pro forma adjustments were made for Chesterfield Towne Center, the The Centre at Salisbury, and the draw on our corporate revolver.
The unaudited Pro Forma Consolidated Statement of Operations is not necessarily indicative of what the actual results of operations would have been for the nine months ended September 30, 2013, nor does it purport to represent future results of operations.
See accompanying notes to the unaudited Pro Forma Consolidated Statement of Operations.
The unaudited Pro Forma Consolidated and Combined Statement of Operations is not necessarily indicative of what the actual results of operations would have been for the year ended December 31, 2012, nor does it purport to represent future results of operations.
See accompanying notes to the unaudited Pro Forma Consolidated and Combined Statement of Operations.
