DDR Ddr Corp.

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K/A

(Amendment No. 1)

 

 

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 1-11690

 

 

DDR Corp.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Ohio		34-1723097
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

3300 Enterprise Parkway, Beachwood, Ohio 44122

(Address of Principal Executive Offices — Zip Code)

(216) 755-5500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class		Name of Each Exchange on Which Registered
Common Shares, Par Value $0.10 Per Share		New York Stock Exchange
Depositary Shares, each representing 1/20 of a share of 6.5% Class J Cumulative Redeemable Preferred Shares without Par Value		New York Stock Exchange
Depositary Shares, each representing 1/20 of a share of 6.25% Class K Cumulative Redeemable Preferred Shares without Par Value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		x		Accelerated filer		¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of the voting stock held by non-affiliates of the registrant at June 30, 2014, was $5.3 billion.

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

360,847,935 common shares outstanding as of February 17, 2015

 

 

DOCUMENTS INCORPORATED BY REFERENCE

The registrant incorporates by reference in Part III hereof portions of its definitive Proxy Statement for its 2015 Annual Meeting of Shareholders.

 

 

 

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EXPLANATORY NOTE

DDR Corp., an Ohio corporation (the “Company”), is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to its Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which was originally filed on February 26, 2015 (the “Original Filing”), to amend Item 15 to include the separate financial statements of DDRM Properties LLC and Sonae Sierra Brazil BV SARL, as required under Rule 3-09 of Regulation S-X.

Other than as set forth herein, this Amendment does not affect any other parts of or exhibits to the Original Filing, and those unaffected parts or exhibits are not included in this Amendment. This Amendment continues to speak as of the date of the Original Filing and the Company has not updated the disclosure contained herein to reflect events that have occurred since the filing date of the Original Filing. Accordingly, this Amendment should be read in conjunction with the Company’s other filings made with the Securities and Exchange Commission since the filing date of the Original Filing, including amendments to those filings, if any.

 

1

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Item 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

a)	1. Financial Statements

The following documents were filed as a part of the Original Filing:

Report of Independent Registered Public Accounting Firm.

Consolidated Balance Sheets at December 31, 2014 and 2013.

Consolidated Statements of Operations for the three years ended December 31, 2014.

Consolidated Statements of Comprehensive Income (Loss) for the three years ended December 31, 2014.

Consolidated Statements of Equity for the three years ended December 31, 2014.

Consolidated Statements of Cash Flows for the three years ended December 31, 2014.

Notes to the Consolidated Financial Statements.

 

2.

Financial Statement Schedules

The following financial statement schedules were filed as part of the Original Filing and should be read in conjunction with the consolidated financial statements of the registrant:

Schedule

II — Valuation and Qualifying Accounts and Reserves for the three years ended December 31, 2014.

III — Real Estate and Accumulated Depreciation at December 31, 2014.

IV — Mortgage Loans on Real Estate at December 31, 2014.

Schedules not listed above have been omitted because they are not applicable or because the information required to be set forth therein is included in the consolidated financial statements or notes thereto.

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b)	Exhibits — The following exhibits are filed as part of, or incorporated by reference into, this report:

 

Exhibit No. Under Reg. S-K Item 601		Form 10-K Exhibit No.		Description		Filed Herewith or Incorporated Herein by Reference
2		2.1		Agreement of Purchase and Sale between the Parties listed on Schedule A attached thereto, as REIT Seller, BRE Pentagon Retail Holding B, LLC, as Homart Seller, JDN Real Estate – Lakeland, L.P., as REIT Buyer, and the Company, as Homart Buyer, dated as of May 15, 2013**		Quarterly Report on Form 10-Q (Filed with the SEC on August 8, 2013; File No. 001-11690)
2		2.2		Share Purchase Agreement, dated as of April 28, 2014, among Alexander Otto, AROSA Vermögensverwaltungsgesellschaft m.b.H. and CURA Beteiligungsgesellschaft Brasilien m.b.H., and DDR Luxembourg, S.à r.l. and DDR Luxembourg II, S.à r.l.**		Current Report on Form 8-K (Filed with the SEC on May 1, 2014; File No. 001-11690)
3		3.1		Third Amended and Restated Articles of Incorporation of the Company		Current Report on Form 8-K (Filed with the SEC on September 13, 2013; File No. 001-11690)
3		3.2		Amended and Restated Code of Regulations of the Company		Current Report on Form 8-K (Filed with the SEC on September 13, 2013; File No. 001-11690)
4		4.1		Specimen Certificate for Common Shares		Annual Report on Form 10-K (Filed with the SEC on February 28, 2012; File No. 001-11690)
4		4.2		Specimen Certificate for 7 3/8% Class H Cumulative Redeemable Preferred Shares		Annual Report on Form 10-K (Filed with the SEC on February 26, 2010; File No. 001-11690)
4		4.3		Deposit Agreement, dated as of October 26, 2009, by and between the Company and Mellon Investor Services LLC Relating to Depositary Shares Representing 7 3/8% Class H Cumulative Redeemable Preferred Shares (including Specimen Certificate for Depositary Shares)		Annual Report on Form 10-K (Filed with the SEC on February 26, 2010; File No. 001-11690)
4		4.4		Specimen Certificate for 6.50% Class J Cumulative Redeemable Preferred Shares		Registration Statement on Form 8-A (Filed with the SEC August 1, 2012; File No. 001-11690)
4		4.5		Deposit Agreement, dated as of August 1, 2012, among the Company and Computershare Shareowner Services LLC, as Depositary, and all holders from time to time of depositary shares relating to the Depositary Shares Representing 6.50% Class J Cumulative Redeemable Preferred Shares (including Specimen Certificate for Depositary Shares)		Current Report on Form 8-K (Filed with the SEC on August 1, 2012; File No. 001-11690)

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Exhibit No. Under Reg. S-K Item 601		Form 10-K Exhibit No.		Description		Filed Herewith or Incorporated Herein by Reference
4		4.6		Specimen Certificate for 6.250% Class K Cumulative Redeemable Preferred Shares		Registration Statement on Form 8-A (Filed with the SEC April 8, 2013; File No. 001-11690)
4		4.7		Deposit Agreement, dated as of April 9, 2013, among the Company and Computershare Shareowner Services LLC, as Depositary, and all holders from time to time of depositary shares relating to the Depositary Shares Representing 6.250% Class K Cumulative Redeemable Preferred Shares (including Specimen Certificate for Depositary Shares)		Current Report on Form 8-K (Filed with the SEC on April 9, 2013; File No. 001-11690)
4		4.8		Indenture, dated as of May 1, 1994, by and between the Company and The Bank of New York (as successor to JP Morgan Chase Bank, N.A., successor to Chemical Bank), as Trustee		Form S-3 Registration No. 333-108361 (Filed with the SEC on August 29, 2003)
4		4.9		Indenture, dated as of May 1, 1994, by and between the Company and U.S. Bank National Association (as successor to U.S. Bank Trust National Association (as successor to National City Bank)), as Trustee		Form S-3 Registration No. 333-108361 (Filed with the SEC on August 29, 2003)
4		4.10		First Supplemental Indenture, dated as of May 10, 1995, by and between the Company and U.S. Bank National Association (as successor to U.S. Bank Trust National Association (successor to National City Bank)), as Trustee		Form S-3 Registration No. 333-108361 (Filed with the SEC on August 29, 2003)
4		4.11		Second Supplemental Indenture, dated as of July 18, 2003, by and between the Company and U.S. Bank National Association (as successor to U.S. Bank Trust National Association (successor to National City Bank)), as Trustee		Form S-3 Registration No. 333-108361 (Filed with the SEC on August 29, 2003)
4		4.12		Third Supplemental Indenture, dated as of January 23, 2004, by and between the Company and U.S. Bank National Association (as successor to U.S. Bank Trust National Association (successor to National City Bank)), as Trustee		Form S-4 Registration No. 333-117034 (Filed with the SEC on June 30, 2004)
4		4.13		Fourth Supplemental Indenture, dated as of April 22, 2004, by and between the Company and U.S. Bank National Association (as successor to U.S. Bank Trust National Association (successor to National City Bank)), as Trustee		Form S-4 Registration No. 333-117034 (Filed with the SEC on June 30, 2004)
4		4.14		Fifth Supplemental Indenture, dated as of April 28, 2005, by and between the Company and U.S. Bank National Association (as successor to U.S. Bank Trust National Association (successor to National City Bank)), as Trustee		Annual Report on Form 10-K (Filed with the SEC on February 21, 2007; File No. 001-11690)

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Exhibit No. Under Reg. S-K Item 601		Form 10-K Exhibit No.		Description		Filed Herewith or Incorporated Herein by Reference
4		4.15		Sixth Supplemental Indenture, dated as of October 7, 2005, by and between the Company and U.S. Bank National Association (as successor to U.S. Bank Trust National Association (successor to National City Bank)), as Trustee		Annual Report on Form 10-K (Filed with the SEC on February 21, 2007; File No. 001-11690)
4		4.16		Seventh Supplemental Indenture, dated as of August 28, 2006, by and between the Company and U.S. Bank National Association (as successor to U.S. Bank Trust National Association (successor to National City Bank)), as Trustee		Current Report on Form 8-K (Filed with the SEC on September 1, 2006; File No. 001-11690)
4		4.17		Eighth Supplemental Indenture, dated as of March 13, 2007, by and between the Company and U.S. Bank National Association (as successor to U.S. Bank Trust National Association (successor to National City Bank)), as Trustee		Current Report on Form 8-K (Filed with the SEC on March 16, 2007; File No. 001-11690)
4		4.18		Ninth Supplemental Indenture, dated as of September 30, 2009, by and between the Company and U.S. Bank National, Association (as successor to U.S. Bank Trust National Association (successor to National City Bank)), as Trustee		Form S-3 Registration No. 333-162451 (Filed on October 13, 2009)
4		4.19		Tenth Supplemental Indenture, dated as of March 19, 2010, by and between the Company and U.S. Bank National, Association (as successor to U.S. Bank Trust National Association (successor to National City Bank)), as Trustee		Quarterly Report on Form 10-Q (Filed with the SEC on May 7, 2010; File No. 001-11690)
4		4.20		Eleventh Supplemental Indenture, dated as of August 12, 2010, by and between the Company and U.S. Bank National, Association (as successor to U.S. Bank Trust National Association (successor to National City Bank)), as Trustee		Quarterly Report on Form 10-Q (Filed with the SEC on November 11, 2010; File No. 001-11690)
4		4.21		Twelfth Supplemental Indenture, dated as of November 5, 2010, by and between the Company and U.S. Bank National, Association (as successor to U.S. Bank Trust National Association (successor to National City Bank)), as Trustee		Annual Report on Form 10-K (Filed with the SEC on February 28, 2011; File No. 001-11690)
4		4.22		Thirteenth Supplemental Indenture, dated as of March 7, 2011, by and between the Company and U.S. Bank National Association (as successor to U.S. Bank Trust National Association (successor to National City Bank)), as Trustee		Quarterly Report on Form 10-Q (Filed with the SEC on May 9, 2011; File No. 001-11690)
4		4.23		Fourteenth Supplemental Indenture, dated as of June 22, 2012, by and between the Company and U.S. Bank National Association (as successor to U.S. Bank Trust National Association (successor to National City Bank)), as Trustee		Form S-3 Registration No. 333-184221 (Filed with the SEC on October 1, 2012)

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Exhibit No. Under Reg. S-K Item 601		Form 10-K Exhibit No.		Description		Filed Herewith or Incorporated Herein by Reference
4		4.24		Fifteenth Supplemental Indenture, dated as of November 27, 2012, by and between the Company and U.S. Bank National Association (as successor to U.S. Bank Trust National Association (successor to National City Bank)), as Trustee		Annual Report on Form 10-K (Filed with the SEC on March 1, 2013; File No. 001-11690)
4		4.25		Sixteenth Supplemental Indenture, dated as of May 23, 2013, by and between the Company and U.S. Bank National Association (as successor to U.S. Bank Trust National Association (successor to National City Bank)), as Trustee		Quarterly Report on Form 10-Q (Filed with the SEC on August 8, 2013; File No. 001-11690)
4		4.26		Seventeenth Supplemental Indenture, dated as of November 26, 2013, by and between the Company and U.S. Bank National Association (as successor to U.S. Bank Trust National Association (successor to National City Bank)), as Trustee		Annual Report on Form 10-K (Filed with the SEC on February 27, 2014; File No. 001-11690)
4		4.27		Eighteenth Supplemental Indenture, dated as of January 22, 2015, by and between the Company and U.S. Bank National Association (as successor to U.S. Bank Trust National Association (as successor to National City Bank))		Current Report on Form 8-K (Filed with the SEC on January 22, 2015; File No. 001-11690)
4		4.28		Form of Fixed Rate Senior Medium-Term Note		Annual Report on Form 10-K (Filed with the SEC on March 30, 2000; File No. 001-11690)
4		4.29		Form of Fixed Rate Subordinated Medium-Term Note		Annual Report on Form 10-K (Filed with the SEC on March 30, 2000; File No. 001-11690)
4		4.30		Form of Floating Rate Subordinated Medium-Term Note		Annual Report on Form 10-K (Filed with the SEC on March 30, 2000; File No. 001-11690)
4		4.31		Eighth Amended and Restated Credit Agreement, dated as of October 20, 2010, by and among the Company, DDR PR Ventures LLC, S.E., the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent		Current Report on Form 8-K (Filed with the SEC on October 21, 2010; File No. 001-11690)
4		4.32		Amendment No. 1 to the Eighth Amended and Restated Credit Agreement, dated June 28, 2011, by and among the Company, DDR PR Ventures LLC, S.E., the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent		Current Report on Form 8-K (Filed with the SEC on July 1, 2011; File No. 001-11690)
4		4.33		Amendment No. 2 to the Eighth Amended and Restated Credit Agreement, dated January 17, 2013, by and among the Company, DDR PR Ventures LLC, S.E., the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent		Current Report on Form 8-K (Filed with the SEC on January 18, 2013; File No. 001-11690)

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Exhibit No. Under Reg. S-K Item 601		Form 10-K Exhibit No.		Description		Filed Herewith or Incorporated Herein by Reference
4		4.34		Second Amended and Restated Secured Term Loan Agreement, dated June 28, 2011, by and among the Company, DDR PR Ventures LLC, S.E., KeyBank National Association, as Administrative Agent, and the other several banks, financial institutions and other entities from time to time parties to such loan agreement		Current Report on 8-K (Filed with the SEC on July 1, 2011; File No. 001-11690)
4		4.35		First Amendment to the Second Amended and Restated Secured Term Loan Agreement, dated January 17, 2013, by and among the Company, DDR PR Ventures LLC, S.E., KeyBank National Association, as Administrative Agent, and the other several banks, financial institutions and other entities from time to time parties to such loan agreement		Current Report on Form 8-K (Filed with the SEC on January 18, 2013; File No. 001-11690)
10		10.1		Directors’ Deferred Compensation Plan (Amended and Restated as of November 8, 2000)*		Form S-8 Registration No. 333-147270 (Filed with the SEC on November 9, 2007)
10		10.2		DDR Corp. 2005 Directors’ Deferred Compensation Plan (January 1, 2012 Restatement)*		Annual Report on Form 10-K (Filed with the SEC on February 28, 2012; File No. 001-11690)
10		10.3		First Amendment to the DDR Corp. 2005 Directors’ Deferred Compensation Plan (effective November 30, 2012)*		Annual Report on Form 10-K (Filed with the SEC on March 1, 2013; File No. 001-11690)
10		10.4		Elective Deferred Compensation Plan (Amended and Restated as of January 1, 2004)*		Annual Report on Form 10-K (Filed with the SEC on March 15, 2004; File No. 001-11690)
10		10.5		Developers Diversified Realty Corporation Equity Deferred Compensation Plan, restated as of January 1, 2009*		Annual Report on Form 10-K (Filed with the SEC on February 27, 2009; File No. 001-11690)
10		10.6		Amended and Restated 2002 Developers Diversified Realty Corporation Equity-Based Award Plan (Amended and Restated as of December 31, 2009)*		Annual Report on Form 10-K (Filed with the SEC on February 26, 2010; File No. 001-11690)
10		10.7		Amended and Restated 2004 Developers Diversified Realty Corporation Equity-Based Award Plan (Amended and Restated as of December 31, 2009)*		Annual Report on Form 10-K (Filed with the SEC on February 26, 2010; File No. 001-11690)
10		10.8		Amended and Restated 2008 Developers Diversified Realty Corporation Equity-Based Award Plan (Amended and Restated as of June 25, 2009)*		Quarterly Report on Form 10-Q (Filed with the SEC August 7, 2009; File No. 001-11690)
10		10.9		2012 Equity and Incentive Compensation Plan*		Form S-8 Registration No. 333-181422 (Filed with the SEC on May 15, 2012)

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Exhibit No. Under Reg. S-K Item 601		Form 10-K Exhibit No.		Description		Filed Herewith or Incorporated Herein by Reference
10		10.10		Form Restricted Shares Agreement*		Quarterly Report on Form 10-Q (Filed with the SEC August 7, 2009; File No. 001-11690)
10		10.11		Form Restricted Shares Agreement*		Quarterly Report on Form 10-Q (Filed with the SEC May 9, 2012; File No. 001-11690)
10		10.12		Form of Restricted Shares Agreement*		Quarterly Report on Form 10-Q (Filed with the SEC May 10, 2013; File No. 001-11690)
10		10.13		Form of Incentive Stock Option Grant Agreement for Executive Officers under the 2004 Developers Diversified Realty Corporation Equity-Based Award Plan*		Quarterly Report on Form 10-Q (Filed with the SEC on November 9, 2006; File No. 001-11690)
10		10.14		Form of Incentive Stock Option Grant Agreement for Executive Officers (with accelerated vesting upon retirement) under the 2004 Developers Diversified Realty Corporation Equity-Based Award Plan*		Quarterly Report on Form 10-Q (Filed with the SEC on November 9, 2006; File No. 001-11690)
10		10.15		Form of Non-Qualified Stock Option Grant Agreement for Executive Officers under the 2004 Developers Diversified Realty Corporation Equity-Based Award Plan*		Quarterly Report on Form 10-Q (Filed with the SEC on November 9, 2006; File No. 001-11690)
10		10.16		Form of Non-Qualified Stock Option Grant Agreement for Executive Officers (with accelerated vesting upon retirement) under the 2004 Developers Diversified Realty Corporation Equity-Based Award Plan*		Quarterly Report on Form 10-Q (Filed with the SEC on November 9, 2006; File No. 001-11690)
10		10.17		Form Stock Option Agreement for Incentive Stock Options Grants to Executive Officers*		Quarterly Report on Form 10-Q (Filed with the SEC August 7, 2009; File No. 001-11690)
10		10.18		Form Stock Option Agreement for Non-Qualified Stock Option Grants to Executive Officers*		Quarterly Report on Form 10-Q (Filed with the SEC August 7, 2009; File No. 001-11690)
10		10.19		Form Non-Qualified Stock Option Agreement*		Quarterly Report on Form 10-Q (Filed with the SEC May 9, 2012; File No. 001-11690)
10		10.20		Form Non-Qualified Stock Option Agreement*		Quarterly Report on Form 10-Q (Filed with the SEC May 10, 2013; File No. 001-11690)
10		10.21		Form of Incentive Stock Option Agreement*		Quarterly Report on Form 10-Q (Filed with the SEC May 9, 2012; File No. 001-11690)
10		10.22		Form of Incentive Stock Option Agreement*		Quarterly Report on Form 10-Q (Filed with the SEC May 10, 2013; File No. 001-11690)
10		10.23		Promotion Grant Agreement, dated January 1, 2010, by and between the Company and Daniel B. Hurwitz*		Quarterly Report on Form 10-Q (Filed with the SEC on May 7, 2010; File No. 001-11690)
10		10.24		Developers Diversified Realty Corporation Value Sharing Equity Program*		Quarterly Report on Form 10-Q (Filed with the SEC on November 9, 2006; File No. 001-11690)

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Exhibit No. Under Reg. S-K Item 601		Form 10-K Exhibit No.		Description		Filed Herewith or Incorporated Herein by Reference
10		10.25		Form of Value Sharing Equity Program Award Shares Agreement*		Annual Report on Form 10-K (Filed with the SEC on March 1, 2013; File No. 001-11690)
10		10.26		2013 Value Sharing Equity Program*		Annual Report on Form 10-K (Filed with the SEC on March 1, 2013; File No. 001-11690)
10		10.27		Form of 2013 Value Sharing Equity Program Award Agreement*		Quarterly Report on Form 10-Q (Filed with the SEC May 10, 2013; File No. 001-11690)
10		10.28		Amended and Restated Employment Agreement, dated July 29, 2009, by and between the Company and Daniel B. Hurwitz*		Quarterly Report on Form 10-Q (Filed with the SEC on November 6, 2009; File No. 001-11690)
10		10.29		First Amendment to the Amended and Restated Employment Agreement, dated December 31, 2012, by and between the Company and Daniel B. Hurwitz*		Current Report on Form 8-K (Filed with the SEC on January 2, 2013; File No. 001-11690)
10		10.30		Mutual Separation Agreement and Release, dated December 29, 2014 as amended December 31, 2014, between Daniel B. Hurwitz and DDR Corp.*		Annual Report on Form 10-K (Filed with the SEC on February 26, 2015; File No. 001-11690)
10		10.31		Employment Agreement, dated April 12, 2011, by and between the Company and David J. Oakes*		Quarterly Report on Form 10-Q (Filed with the SEC on November 8, 2011; File No. 001-11690)
10		10.32		First Amendment to the Employment Agreement, dated December 31, 2012, by and between the Company and David J. Oakes*		Current Report on Form 8-K (Filed with the SEC on January 2, 2013; File No. 001-11690)
10		10.33		Employment Agreement, dated April 12, 2011, by and between the Company and Paul W. Freddo*		Quarterly Report on Form 10-Q (Filed with the SEC on November 8, 2011; File No. 001-11690)
10		10.34		First Amendment to the Employment Agreement, dated December 31, 2012, by and between the Company and Paul W. Freddo*		Current Report on Form 8-K (Filed with the SEC on January 2, 2013; File No. 001-11690)
10		10.35		Employment Agreement, dated February 29, 2012, by and between the Company and Christa A. Vesy*		Quarterly Report on Form 10-Q (Filed with the SEC May 9, 2012; File No. 001-11690)
10		10.36		First Amendment to the Employment Agreement, dated February 27, 2013, by and between the Company and Christa A. Vesy*		Current Report on Form 8-K (Filed with the SEC on March 4, 2013; File No. 001-11690)
10		10.37		Second Amendment to the Employment Agreement, dated February 28, 2014, by and between DDR Corp. and Christa A. Vesy*		Quarterly Report on Form 10-Q (Filed with the SEC on May 9, 2014; File No. 001-11690)
10		10.38		Form of Change in Control Agreement, entered into with certain officers of the Company*		Annual Report on Form 10-K (Filed with the SEC on February 27, 2009; File No. 001-11690)
10		10.39		Form of Director and Officer Indemnification Agreement*		Quarterly Report on Form 10-Q (Filed with the SEC on November 8, 2011; File No. 001-11690)

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Exhibit No. Under Reg. S-K Item 601		Form 10-K Exhibit No.		Description		Filed Herewith or Incorporated Herein by Reference
10		10.40		Form of Medium-Term Note Distribution Agreement		Annual Report on Form 10-K (Filed with the SEC on March 30, 2000; File No. 001-11690)
10		10.41		Program Agreement for Retail Value Investment Program, dated February 11, 1998, by and among Retail Value Management, Ltd., the Company and The Prudential Insurance Company of America		Annual Report on Form 10-K (Filed with the SEC on March 15, 2004; File No. 001-11690)
10		10.42		Investors’ Rights Agreement, dated as of May 11, 2009, by and between the Company and Alexander Otto		Current Report on Form 8-K (Filed with the SEC on May 11, 2009; File No. 001-11690)
10		10.43		Waiver Agreement, dated as of May 11, 2009, by and between the Company and Alexander Otto		Current Report on Form 8-K (Filed with the SEC on May 11, 2009; File No. 001-11690)
21		21.1		List of Subsidiaries		Annual Report on Form 10-K (Filed with the SEC on February 26, 2015; File No. 001-11690)
23		23.1		Consent of PricewaterhouseCoopers LLP		Annual Report on Form 10-K (Filed with the SEC on February 26, 2015; File No. 001-11690)
23		23.2		Consent of PricewaterhouseCoopers LLP		Filed herewith
23		23.3		Consent of Deloitte Touche Tohmatsu		Filed herewith
31		31.1		Certification of principal executive officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934		Filed herewith
31		31.2		Certification of principal financial officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934		Filed herewith
32		32.1		Certification of chief executive officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350		Filed herewith
32		32.2		Certification of chief financial officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350		Filed herewith
99		99.1		DDRM Properties LLC Consolidated Financial Statements		Filed herewith
99		99.2		Sonae Sierra Brazil BV SARL Consolidated Financial Statements		Filed herewith
101		101.INS		XBRL Instance Document		Annual Report on Form 10-K (Filed with the SEC on February 26, 2015; File No. 001-11690)
101		101.SCH		XBRL Taxonomy Extension Schema Document		Annual Report on Form 10-K (Filed with the SEC on February 26, 2015; File No. 001-11690)
101		101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document		Annual Report on Form 10-K (Filed with the SEC on February 26, 2015; File No. 001-11690)
101		101.DEF		XBRL Taxonomy Extension Definition Linkbase Document		Annual Report on Form 10-K (Filed with the SEC on February 26, 2015; File No. 001-11690)

---

Exhibit No. Under Reg. S-K Item 601		Form 10-K Exhibit No.		Description		Filed Herewith or Incorporated Herein by Reference
101		101.LAB		XBRL Taxonomy Extension Label Linkbase Document		Annual Report on Form 10-K (Filed with the SEC on February 26, 2015; File No. 001-11690)
101		101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document		Annual Report on Form 10-K (Filed with the SEC on February 26, 2015; File No. 001-11690)

 

*	Management contracts and compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 15(b) of Form 10-K.

**	Certain immaterial schedules and exhibits to this exhibit have been omitted pursuant to the provisions of Regulation S-K, Item 601(b)(2). A copy of any of the omitted schedules and exhibits will be furnished to the Securities and Exchange Commission upon request.

 

c)	Financial Statements of Unconsolidated Joint Ventures:

Financial statements for two of the Company’s unconsolidated joint venture companies, DDRM Properties LLC and Sonae Sierra Brazil BV SARL, are included as they meet the significant subsidiary definition of S-X 210.1-02(w) for the year ended December 31, 2013. The financial statements for these companies are filed with this Amendment.

---

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.

 

Date: March 12, 2015

EXHIBIT 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-184221, 333-184224) and in the Registration Statements on Form S-8 (Nos. 333-76537, 333-108681, 333-117069, 333-147270, 333-162453, 333-181442) of DDR Corp. of our report dated March 19, 2014, except for the effects of discontinued operations discussed in Note 10, as to which the date is March 12, 2015 relating to the consolidated financial statements of DDRM Properties LLC, appearing in Amendment No. 1 to the Annual Report on Form 10-K of DDR Corp. for the year ended December 31, 2014.

/s/ PricewaterhouseCoopers LLP

Cleveland, Ohio

March 12, 2015

EXHIBIT 23.3

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in this Registration Statement on Form S-3 (Nos. 333-184221, 333-184224) and in the Registration Statement on Form S-8 (333-76537; 333-108681; 333-117069; 333-147270, 333-162453, 333-181442) of DDR Corp. of our report dated March 19, 2014, relating to the consolidated financial statements of Sonae Sierra Brazil BV Sarl (which report expresses an unmodified opinion and includes an emphasis-of-matter paragraph relating to information on the nature and effect of differences in accounting practices in conformity with IFRS as issued by IASB and accounting principles generally accepted in United States of America, presented in Note 32 to the consolidated financial statements), appearing in Amendment No. 1 to the Annual Report on Form 10-K of DDR Corp. for the year ended December 31, 2014.

São Paulo, Brazil

March 12, 2015

 

/s/ DELOITTE TOUCHE TOHMATSU

Auditores Independentes

EXHIBIT 31.1

CERTIFICATIONS

I, David J. Oakes, certify that:

 

1.	I have reviewed this Annual Report on Form 10-K as amended by Amendment No. 1 to Form 10-K of DDR Corp.;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

---

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

March 12, 2015

Date

 

EXHIBIT 31.2

CERTIFICATIONS

I, Luke J. Petherbridge, certify that:

 

6.	I have reviewed this Annual Report on Form 10-K as amended by Amendment No. 1 to Form 10-K of DDR Corp.;

 

1.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

2.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

3.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

4.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

---

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

March 12, 2015

Date

 

EXHIBIT 32.1

CERTIFICATION PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

I, David J. Oakes, President and Chief Executive Officer of DDR Corp. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Annual Report on Form 10-K of the Company for the period ended December 31, 2014, as amended by Amendment No. 1 to Form 10-K, as filed with the Securities and Exchange Commission (the “Report”), which this certification accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

 

EXHIBIT 32.2

CERTIFICATION PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

I, Luke J. Petherbridge, Chief Financial Officer and Treasurer of DDR Corp. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Annual Report on Form 10-K of the Company for the period ended December 31, 2014, as amended by Amendment No. 1 to Form 10-K, as filed with the Securities and Exchange Commission (the “Report”), which this certification accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

 

EXHIBIT 99.1

DDRM PROPERTIES LLC

CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2014, 2013 and 2012

(Information for the Years Ended December 31, 2014

and 2012 not Covered by Auditor’s Report)

---

DDRM Properties LLC

Consolidated Financial Statements

Table of Contents

For the Years Ended December 31, 2014, 2013 and 2012

(Information for the Years Ended December 31, 2014

and 2012 not Covered by Auditor’s Report)

Contents

 

Independent Auditor’s Report			1
Consolidated Balance Sheets			2
Consolidated Statements of Operations and Comprehensive Loss			3
Consolidated Statements of Members’ Capital			4
Consolidated Statements of Cash Flows			5-6
Notes to Consolidated Financial Statements			7-22

---

Independent Auditor’s Report

To DDR Corp. and DDR Manatee Master REIT, Inc.:

We have audited the accompanying consolidated financial statements of DDRM Properties LLC and its subsidiaries, which comprise the consolidated balance sheet as of December 31, 2013, and the related consolidated statements of operations and comprehensive loss, of members’ capital and of cash flows for the year then ended.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements 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 consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on the consolidated financial statements 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 consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements 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 Company’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 consolidated financial statements. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of DDRM Properties LLC and its subsidiaries at December 31, 2013, and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Other Matter

The accompanying consolidated balance sheet of DDRM Properties LLC and its subsidiaries as of December 31, 2014, and the related consolidated statements of operations and comprehensive loss, of members’ capital and of cash flows for the year then ended and for the year ended December 31, 2012 are presented for purposes of complying with Rule 3-09 of SEC Regulation S-X, however, Rule 3-09 does not require the 2014 and 2012 financial statements to be audited and are therefore not covered by this report.

/s/ PricewaterhouseCoopers LLP

Cleveland, Ohio

March 19, 2014, except for the effects of discontinued operations discussed in Note 10 to the consolidated financial statements, as to which the date is March 12, 2015

---

DDRM Properties LLC

Consolidated Balance Sheets

As of December 31, 2014 and 2013 (December 31, 2014 not Covered by Auditor’s Report)

 

		December 31,
		2014				2013
Assets
Real estate rental property:
Land		$	366,281,299			$	383,411,136
Building and building improvements			966,569,488				1,003,235,812
Tenant improvements			47,737,894				37,151,120
			1,380,588,681				1,423,798,068
Less accumulated depreciation			(256,527,921	)			(230,197,884	)
			1,124,060,760				1,193,600,184
Construction in progress			1,033,956				1,211,731
Real estate, net			1,125,094,716				1,194,811,915
Cash and cash equivalents			25,579,650				17,975,463
Restricted cash			1,411,193				1,736,460
Accounts receivable, net			12,105,110				13,333,507
Deferred financing costs, net of accumulated amortization of $9,482,783 as of 2014 and $8,271,929 as of 2013			2,995,896				4,409,801
Deferred lease costs, net of accumulated amortization of $9,817,124 as of 2014 and $8,074,823 as of 2013			11,172,694				11,072,432
Intangible assets, net of accumulated amortization of $39,138,943 as of 2014 and $38,087,247 as of 2013			2,002,683				4,847,529
Prepaid expenses and other assets			247,606				68,335
Total assets		$	1,180,609,548			$	1,248,255,442
Liabilities and Members’ Capital
Mortgage notes payable		$	920,023,783			$	928,620,646
Accrued interest			3,810,263				3,831,593
Accrued real estate taxes			2,445,325				1,786,332
Accounts payable and other accrued liabilities			8,845,855				12,602,897
Prepaid tenant rents			2,582,777				3,114,084
Tenant security deposits			3,241,269				3,113,882
Total liabilities			940,949,272				953,069,434
Members’ capital			238,478,176				293,465,108
Accumulated other comprehensive income			1,182,100				1,720,900
Total members’ capital			239,660,276				295,186,008
Total liabilities and members’ capital		$	1,180,609,548			$	1,248,255,442

The accompanying notes are an integral part of these consolidated financial statements.

 

- 2 -

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DDRM Properties LLC

Consolidated Statements of Operations and Comprehensive Loss

For the Years Ended December 31, 2014, 2013 and 2012

(Years Ended December 31, 2014 and 2012 not Covered by Auditor’s Report)

 

		For the Year Ended December 31,
		2014				2013				2012
Revenues from operations:
Minimum rents		$	93,095,869			$	87,080,352			$	86,753,019
Percentage and overage rents			321,597				304,176				146,432
Recoveries from tenants			28,001,499				26,607,785				25,909,965
Ancillary and other income			6,077,301				1,222,319				1,755,458
Total revenues			127,496,266				115,214,632				114,564,874
Rental operation expenses:
Operating and maintenance			20,089,689				19,533,007				21,193,221
Real estate taxes			16,018,632				15,496,675				15,431,739
Asset management fees (Note 5)			3,338,507				3,338,507				3,338,507
Management fees (Note 5)			4,605,449				4,443,221				4,604,385
General and administrative			1,765,613				1,580,149				1,726,550
Depreciation and amortization			41,131,794				42,689,786				43,682,033
Impairment charges			17,652,802				12,764,520				—
Total expenses			104,602,486				99,845,865				89,976,435
Operating income			22,893,780				15,368,767				24,588,439
Other income (expense):
Interest income			1,844				4,413				1,959
Interest expense			(52,487,575	)			(52,553,157	)			(53,011,999	)
			(52,485,731	)			(52,548,744	)			(53,010,040	)
Loss from continuing operations			(29,591,951	)			(37,179,977	)			(28,421,601	)
Discontinued operations:
Income (loss) from discontinued operations			139,990				(13,191,553	)			(664,160	)
Gain (loss) on disposition of real estate (Note 10)			9,565,029				—				(226,476	)
			9,705,019				(13,191,553	)			(890,636	)
Gain on disposition of real estate			—				131,475				579,139
Net loss			(19,886,932	)			(50,240,055	)			(28,733,098	)
Other comprehensive loss:
Amortization of interest rate contracts			(538,800	)			(538,800	)			(538,800	)
Comprehensive loss		$	(20,425,732	)		$	(50,778,855	)		$	(29,271,898	)

The accompanying notes are an integral part of these consolidated financial statements.

 

- 3 -

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DDRM Properties LLC

Consolidated Statements of Members’ Capital

For the Years Ended December 31, 2014, 2013 and 2012

(Years Ended December 31, 2014 and 2012 not Covered by Auditor’s Report)

 

		Total
Balance at December 31, 2011		$	383,736,761
Distributions			(3,500,000	)
Net loss			(28,733,098	)
Other comprehensive loss:
Amortization of interest rate contracts			(538,800	)
Balance at December 31, 2012		$	350,964,863
Distributions			(5,000,000	)
Net loss			(50,240,055	)
Other comprehensive loss:
Amortization of interest rate contracts			(538,800	)
Balance at December 31, 2013		$	295,186,008
Distributions			(35,100,000	)
Net loss			(19,886,932	)
Other comprehensive loss:
Amortization of interest rate contracts			(538,800	)
Balance at December 31, 2014		$	239,660,276

The accompanying notes are an integral part of these consolidated financial statements.

 

- 4 -

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DDRM Properties LLC

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2014, 2013 and 2012

(Years Ended December 31, 2014 and 2012 not Covered by Auditor’s Report)

 

		For the Year Ended December 31,
		2014				2013				2012
Cash flow from operating activities:
Net loss		$	(19,886,932	)		$	(50,240,055	)		$	(28,733,098	)
Adjustments to reconcile net loss to net cash flow provided by operating activities:
Depreciation and amortization			41,892,488				45,202,321				45,501,279
Amortization of deferred financing costs and interest rate contracts			834,685				857,341				809,060
Amortization of above- and below- market leases, net			(4,845,105	)			(743,477	)			(743,477	)
Amortization of debt discount and premium			—				(235	)			2,279
Impairment charges			17,652,802				25,234,220				507,269
Gain on disposition of real estate			(9,565,029	)			(131,475	)			(352,663	)
Changes in operating assets and liabilities:
Accounts receivable, net			860,278				(1,688,760	)			4,469,051
Prepaid expenses and other assets			(179,271	)			81,623				(15,611	)
Accrued interest			(21,330	)			(5,276	)			(36,965	)
Accrued real estate taxes			658,993				(1,213	)			267,761
Accounts payable and other accrued liabilities			(1,980,109	)			(1,280,529	)			436,223
Prepaid tenant rents			(531,307	)			308,868				812,600
Tenant security deposits			253,249				175,763				142,617
Total adjustments			45,030,344				68,009,171				51,799,423
Net cash provided by operating activities			25,143,412				17,769,116				23,066,325
Cash flow from investing activities:
Net proceeds from disposition of real estate			43,284,553				252,655				7,733,815
Construction of and improvements to real estate and related assets			(14,110,373	)			(10,116,547	)			(6,225,116	)
Change in restricted cash			325,267				(671,024	)			295,206
Payment of lease procurement costs			(3,341,809	)			(4,047,675	)			(3,620,681	)
Net cash provided by (used in) investing activities			26,157,638				(14,582,591	)			(1,816,776	)
Cash flow from financing activities:
Proceeds of mortgage notes payable			—				17,000,000				—
Payments of mortgage notes payable			(8,596,863	)			(11,711,812	)			(8,790,510	)
Payments of debt issuance cost			—				(399,676	)			—
Distributions to Members			(35,100,000	)			(5,000,000	)			(3,500,000	)
Net cash used in financing activities			(43,696,863	)			(111,488	)			(12,290,510	)
Net change in cash and cash equivalents			7,604,187				3,075,037				8,959,039
Cash and cash equivalents at beginning of period			17,975,463				14,900,426				5,941,387
Cash and cash equivalents at end of period		$	25,579,650			$	17,975,463			$	14,900,426

The accompanying notes are an integral part of these consolidated financial statements.

 

- 5 -

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DDRM Properties LLC

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2014, 2013 and 2012

(Years Ended December 31, 2014 and 2012 not Covered by Auditor’s Report)

 

		For the Year Ended December 31
		2014				2013				2012
Supplemental disclosure of non-cash investing and financing activities:
Write-off of fully amortized tenant improvements		$	680,723			$	380,123			$	506,103
Write-off of fully amortized loan costs			194,193				188,922				76,200
Write-off of fully amortized deferred lease costs			912,362				513,793				473,280
Write-off of fully amortized intangible assets			200,057				283,550				395,561
Acquired fair value of real estate assets (Note 1)			1,364,888				—				—
Write-off of fully amortized building costs			—				—				1,195,123
Capital expenditures included in accounts payable and other accrued liabilities			2,600,690				753,264				1,248,859

The foregoing transactions did not provide or use cash, and accordingly, are not reflected in the consolidated statements of cash flows.

The accompanying notes are an integral part of these consolidated financial statements.

 

- 6 -

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DDRM Properties LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2014, 2013 and 2012

(Information for the Years Ended December 31, 2014

and 2012 not Covered by Auditor’s Report)

1. Organization of Company

Background

DDRM Properties LLC (the “Company”) was formed in the state of Delaware on February 27, 2007 to acquire, own, and operate shopping centers (the “Properties”) located throughout the United States. The Company first acquired the Properties on June 8, 2007.

The Company’s Members are DDR Corp. (“DDR”) and DDR Manatee Master REIT, Inc. (the “Master REIT”). The Master REIT is the Managing Member of the Company. DDR and the Master REIT have a 20% and 80% membership interest, respectively, and are collectively referred to as the “Members” and each, individually, a “Member.”

The Master REIT is responsible for the day-to-day management of the Company as the Managing Member. The Company has engaged DDR Property Management LLC (“DDRPM”), a wholly- owned subsidiary of DDR, to act as the Property Manager.

Nature of Business

The Company is engaged in the business of owning and operating shopping centers. The tenant base includes primarily national retail chains and local retailers. Consequently, the Company’s credit risk is concentrated in the retail industry. Adverse changes in general or local economic conditions could result in the inability of some tenants of the Company to meet their lease obligations and could adversely affect the Company’s ability to attract and retain tenants.

Revenues derived from the Company’s largest tenant Publix aggregated 11.8%, 14.2% and 14.1% of total revenues for the years ended December 31, 2014, 2013 and 2012, respectively.

The Properties

The Company owned 56, 59 and 59 properties located in eleven states as of December 31, 2014, 2013 and 2012, respectively, which are each owned by a wholly-owned single member limited liability company. The total gross leasable area of the Properties is 7,893,312 square feet (unaudited), 8,185,405 square feet (unaudited), and 8,184,315 square feet (unaudited) as of December 31, 2014, 2013 and 2012, respectively.

During the year ended December 31, 2014, the Company sold three properties and received net proceeds of $43,284,553. A portion of the net proceeds was utilized to pay down $7,530,178 of outstanding debt. The Company took title of a building valued at $1,364,888, through an assignment and assumption of a ground lease during the year ended December 31, 2014.

 

- 7 -

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DDRM Properties LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2014, 2013 and 2012

(Information for the Years Ended December 31, 2014

and 2012 not Covered by Auditor’s Report)

 

During the year ended December 31, 2013, the Company received net proceeds of $252,655 for a land condemnation of approximately 0.17 (unaudited) acres of land adjacent to a shopping center. The net proceeds were utilized to pay down outstanding debt.

During the year ended December 31, 2012, the Company sold one property and a land parcel and received net proceeds of $7,733,815. A portion of the proceeds was used to pay down outstanding debt.

Significant Membership Terms

The Company’s profits and losses are allocated to the Members in proportion to their respective percentage interests.

The Company’s cash flows are distributed to the Members on a quarterly basis in proportion to their respective percentage interests.

The term of the Company shall continue in perpetuity until one of the following events occurs: i) an election to dissolve the Company made by the Members; ii) the sale or disposition of all or substantially all of the Properties and other assets of the Company; iii) entry of a decree of judicial dissolution of the Company pursuant to the provisions of the Act; iv) the liquidation and dissolution of the parent entity of the Master REIT; or v) any other circumstance requiring the liquidation of the Company pursuant to any provision of the Agreement or any other Fund Governing Document.

2. Summary of Significant Accounting Principles

Basis of Presentation

These financial statements have been prepared pursuant to Rule 3-09 of SEC Regulation S-X for inclusion in the Form 10-K of DDR Corp., as the Company is an equity investee of DDR Corp. Pursuant to Rule 3-09, the financial statements as of and for the year ended December 31, 2014 are not required to be audited and they, therefore, are not covered by the audit report included herein.

Principles of Consolidation

The consolidated financial statements include the accounts of DDRM Properties LLC and its wholly-owned subsidiaries, all of which are limited liability companies. All significant intercompany balances and transactions have been eliminated.

 

- 8 -

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DDRM Properties LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2014, 2013 and 2012

(Information for the Years Ended December 31, 2014

and 2012 not Covered by Auditor’s Report)

 

Real Estate

Real estate assets are stated at cost less accumulated depreciation.

Depreciation is provided on a straight-line basis over the estimated useful lives of the assets as follows:

 

Building and building improvements		5 to 31.5 years
Tenant improvements		Useful lives, which approximate lease terms, where applicable

Depreciation expense on buildings and tenant improvements for the year ended December 31, 2014 was $36,350,827, which includes $680,723 related to the write-off of unamortized basis associated with the early termination of tenant leases. Depreciation expense on buildings and tenant improvements was $36,815,763, which includes $380,123 related to the write-off of unamortized basis associated with the early termination of tenant leases for the year ended December 31, 2013. Depreciation expense on buildings and tenant improvements was $37,167,943, which includes $1,115,785 related to the write-off of unamortized basis associated with the demolition of a building for redevelopment and the early termination of tenant leases for the year ended December 31, 2012. Expenditures for maintenance and repairs are charged to operations as incurred. Significant expenditures, which improve or extend the life of the asset, are capitalized.

The Company reviews its real estate assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An asset is considered impaired when the undiscounted future cash flows are not sufficient to recover the asset’s carrying value. The determination of undiscounted cash flows requires significant estimates made by management and is based on the most likely expected course of action at the balance sheet date based on current plans, intended hold periods and available market information. The determination of anticipated cash flows is inherently subjective and is based, in part, on assumptions regarding holding periods, future occupancy, rental rates and capital requirements that could differ materially from actual results. If such impairment is present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. See Note 9 for a discussion related to impairment charges recorded during 2014, 2013 and 2012.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less at acquisition to be cash equivalents. The Company maintains cash deposits with a major financial institution which from time to time may exceed federally insured limits. The Company periodically assesses the financial condition of the institution and believes that the risk of loss is minimal.

 

- 9 -

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DDRM Properties LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2014, 2013 and 2012

(Information for the Years Ended December 31, 2014

and 2012 not Covered by Auditor’s Report)

 

Restricted Cash

Pursuant to the provisions with the Company’s mortgage notes payable, funds are required to be held in escrow for the payment of real estate taxes and various capital expenditures. All such amounts are classified as restricted cash in the consolidated balance sheets.

Deferred Financing Costs

Costs incurred in obtaining long-term financing are capitalized and amortized. Amortization expense was $1,373,485, $1,396,141 and $1,347,860 for the years ended December 31, 2014, 2013 and 2012, respectively.

Deferred Lease Costs

Deferred lease costs represent direct costs paid to enter into tenant leases and are amortized over the related lease term. Amortization expense was $2,866,610, $2,637,260 and $2,437,915, which includes $912,362, $513,793 and $180,861 related to the write-off of unamortized costs associated with the early termination of tenant leases for the years ended December 31, 2014, 2013 and 2012, respectively.

Intangible Assets and Liabilities

Intangible assets and liabilities (in the case of below-market leases) generally consist of in-place leases, tenant relationships, above-market leases, and below-market leases, which were recorded at the time of acquisition of certain properties. Above- and below-market lease values are recorded based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the estimated term of any below-market, fixed-rate renewal options for below-market leases. The purchase price is further allocated to in-place lease values and tenant relationship values based on management’s evaluation of the specific characteristics of the acquired lease portfolio and the Company’s overall relationship with the anchor tenants. The value of in-place leases and tenant relationships are amortized to depreciation and amortization expense over the weighted-average remaining initial term of the lease (and expected renewal periods for tenant relationships); however, no amortization period for the intangible assets will exceed the remaining depreciable life of the building. Above- and or below-market leases are amortized over the remaining life of the respective leases (plus fixed-rate renewal periods for below-market leases) as a decrease or increase to minimum rent, respectively.

 

- 10 -

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DDRM Properties LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2014, 2013 and 2012

(Information for the Years Ended December 31, 2014

and 2012 not Covered by Auditor’s Report)

 

The Company’s intangible assets and liabilities are comprised of the following (in thousands):

 

		Net Carrying Value at December 31,								Useful Life		Amortization – For the years ended December 31,
		2014				2013						2014				2013				2012
In-place leases (1)		$	1,085.4			$	3,810.3			7-10yrs		$	2,675.1			$	5,749.3			$	5,895.4
Above-market leases			917.3				1,037.2			13-16yrs			119.9				119.9				119.9
			2,002.7				4,847.5
Below-market leases (liability) (2)			2,532.6				7,497.6			8-21yrs			4,965.2				863.4				863.4

 

(1)	Includes value allocated to in-place leases, lease origination and tenant relationships.

(2)	Classified in accounts payable and other accrued liabilities in the consolidated balance sheets.

The net estimated amortization pertaining to the Company’s finite-lived intangible assets and liabilities for the five years ending December 31, is as follows:

 

2015		$	98,470
2016			174,365
2017			(72,989	)
2018 2019			(158,555 (53,469	)  )

In the event that a tenant terminates its lease, the unamortized portion of the intangible values is written off as an adjustment to revenue or expense, as appropriate. During the year ended December 31, 2014, the unamortized portion of a below-market lease in the amount of $4,234,829 was written off as an adjustment to revenue as the tenant did not exercise its option upon expiration of the original lease term.

Revenue Recognition

Minimum rents from tenants are recognized using the straight-line method over the lease term. Percentage and overage rents are recognized after the reported tenant’s sales have exceeded the applicable sales breakpoint. Revenues associated with tenant reimbursements are recognized in the period in which the expenses are incurred based upon provisions of the individual tenant leases. Lease termination fees are generally recognized upon termination of a tenant’s lease and vacating the space with no further rights.

 

- 11 -

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DDRM Properties LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2014, 2013 and 2012

(Information for the Years Ended December 31, 2014

and 2012 not Covered by Auditor’s Report)

 

Income Taxes

The Company has elected to be treated as a partnership for federal income tax purposes. Accordingly, no provision has been made in the accompanying consolidated financial statements for any federal income taxes since each item of income, gain, loss, deduction or credit is reportable by the Members in their respective income tax returns. The statues of limitations for income tax returns remain open for the years 2011 through 2014.

Interest

Interest paid aggregated $51,800,635, $51,998,803 and $52,585,256 for the years ended December 31, 2014, 2013 and 2012, respectively.

Disposition of Real Estate

Gains from dispositions are recognized using the full accrual or partial sale methods, provided that various criteria relating to the terms of sale and any subsequent involvement by the Company with the properties sold are met. If the criteria for sale recognition or gain recognition are not met because of a form of continuing involvement, the accounting for such transactions is dependent on the nature of the continuing involvement. In certain cases, a sale might not be recognized, and in others all or a portion of the gain might be deferred. Pursuant to the definition of a component of an entity and, assuming no significant continuing involvement or cash flows, the sale of a retail operating property is considered discontinued operations. Interest expense, which is specifically identifiable to the property, and the operations and gain or loss on sale are reported as discontinued operations.

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

New Accounting Standards

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers. The objective of ASU 2014-09 is to establish a single comprehensive five-step model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the

 

- 12 -

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DDRM Properties LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2014, 2013 and 2012

(Information for the Years Ended December 31, 2014

and 2012 not Covered by Auditor’s Report)

 

transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. Most significantly for the real estate industry, leasing transactions are not within the scope of the new standard. A majority of the Company’s tenant-related revenue is recognized pursuant to lease agreements. The new guidance is effective for annual reporting periods beginning after December 15, 2016. The Company may elect to defer adoption for one year. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. The Company is currently assessing the impact, if any, the adoption of this standard will have on its financial statements and has not decided upon the method of adoption.

Discontinued Operations

In April 2014, the FASB issued a final standard that changed the criteria for determining which disposals are presented as discontinued operations. The revised definition of a discontinued operation is “a component or group of components that has been disposed of or is classified as held for sale, together as a group in a single transaction,” and “represents a strategic shift that has (or will have) a major effect on an entity’s financial results.” The FASB agreed that a strategic shift includes “a disposal of (i) a separate major line of business, (ii) a separate major geographical area of operations, or (iii) a combination of parts of (i) or (ii) that make up a major part of an entity’s operations and financial results.” A business that, upon acquisition, qualifies as held for sale will also be a discontinued operation. The FASB also reaffirmed its decision to no longer preclude presentation of a disposal as a discontinued operation if (a) there is significant continuing involvement with a component after its disposal, or (b) there are operations and cash flows of the component that have not been eliminated from the reporting entity’s ongoing operations. The Company is required to adopt the standard in annual periods beginning on or after December 15, 2014, and interim periods beginning on or after December 15, 2015. Beginning in 2015, the Company will apply the new guidance, as applicable, to future disposals of its shopping centers or classifications as held for sale. The Company believes that a significant portion of its ordinary course shopping center disposals will not qualify for discontinued operations presentation under this new standard.

3. Accounts Receivable

Accounts receivable, other than straight-line rents receivable, are expected to be collected within one year and are net of estimated unrecoverable amounts of $1,616,359 and $1,751,483 at December 31, 2014 and 2013, respectively. At December 31, 2014 and 2013, straight-line rents receivable, net of estimated uncollectible amounts of $472,458 and $467,935, respectively, aggregated $6,354,753 and $6,267,332, respectively. The Company analyzes accounts receivable, tenant credit worthiness and current economic trends when evaluation the adequacy of unrecoverable amounts.

 

- 13 -

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DDRM Properties LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2014, 2013 and 2012

(Information for the Years Ended December 31, 2014

and 2012 not Covered by Auditor’s Report)

 

4. Mortgage Notes Payable

The Company has the following mortgage notes payable outstanding:

 

		Carrying Value at December 31,								Interest Rate				Maturity Date
		2014				2013
2007 Pooled Secured Financing		$	883,504,936			$	883,504,936				5.60	%			07/05/17
2010 Pooled Secured Financing			20,106,298				28,379,019				4.21	%			04/11/15
2013 Pooled Secured Financing			16,412,549				16,736,691				3.56	%			02/01/18
		$	920,023,783			$	928,620,646

The cross-collateralized 2007 pooled secured financing requires monthly payments of interest only with the principal due at maturity.

The cross-collateralized 2010 pooled secured financing requires monthly payments of principal and interest, based upon a 30-year amortization schedule. In June 2014, net proceeds of $7,530,178 received from the sale of a shopping center were utilized to pay down a portion of the outstanding debt.

In January 2013, the separate mortgage note payable for Hilliard Rome Commons was paid off at maturity. The Company obtained new mortgage financing for Hilliard Rome Commons and Heather Island Plaza (“2013 Pooled Secured Financing”) aggregating $17.0 million at a fixed interest rate of 3.56% with required monthly payments of principal and interest, based on a 30-year amortization schedule for a term of five years.

The Company repaid a separate mortgage note payable of $241,937 at maturity without penalty during the year ended December 31, 2013.

The number of properties collateralized and the net carrying value of the collateralized properties as of December 31, is as follows:

 

		Collateralized Properties								Net Carrying Value of Collateralized Properties
		2014				2013				2014				2013
2007 Pooled Secured Financing			52				52			$	1,061,125,235			$	1,081,573,045
2010 Pooled Secured Financing			2				3				42,918,043				65,953,125
2013 Pooled Secured Financing			2				2				27,269,055				28,047,901
			56				57			$	1,131,312,333			$	1,175,574,071

 

- 14 -

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DDRM Properties LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2014, 2013 and 2012

(Information for the Years Ended December 31, 2014

and 2012 not Covered by Auditor’s Report)

 

As of December 31, 2014, the scheduled principal payments of the mortgage notes payable for the next four years are as follows:

 

2015		$	20,442,336
2016			346,742
2017			883,866,030
2018			15,368,675
		$	920,023,783

5. Transactions with Related Parties (including Discontinued Operations)

DDRPM is entitled to an asset management fee equal to 0.75% of the gross asset value for each property as defined in the limited partnership agreement. Asset management fees incurred by the Company aggregated $3,561,853, $3,661,690 and $3,685,834 for the years ended December 31, 2014, 2013 and 2012, respectively.

Management fees earned by DDR and DDRPM are determined pursuant to provisions set forth in the management and leasing agreement. The management fees earned by DDR and DDRPM are determined at an amount equal to 4% of gross rental receipts and are charged to operations as incurred. Management fees incurred by the Company aggregated $4,711,033, $4,611,028 and $4,782,886 for the years ended December 31, 2014, 2013 and 2012, respectively.

DDR employees perform certain maintenance services at the Properties. Maintenance services incurred by the Company aggregated $665,995, $616,956 and $586,701 for the years ended December 31, 2014, 2013 and 2012, respectively, which are recorded within operating and maintenance expenses on the consolidated statements of operations and comprehensive loss.

DDR and DDRPM have the ability to earn leasing commissions for the rental of space to tenants in accordance with the management and leasing agreement. Lease commissions are calculated based on whether the lease is a new lease or renewal of an existing lease, the rental income earned over the life of the lease or the square footage the tenant will occupy under the lease. Lease commissions incurred by the Company aggregated $3,191,107, $3,878,669 and $2,694,953 for the years ended December 31, 2014, 2013 and 2012, respectively, which are recorded within deferred lease costs, net of accumulated amortization on the consolidated balance sheets.

DDR and DDRPM have the ability to earn construction management fees which are determined in accordance with the management and leasing agreement. Except for the redevelopment or expansion of a property, construction management fees are calculated based on 5% of the cost of tenant improvements and other capital improvements, plus reimbursement of out of pocket costs and third party expenses. The construction management fee for a redevelopment or an expansion is determined by the Company and DDR and DDRPM in connection with the approval of development expenditures. The construction management fee is payable as costs for the work

 

- 15 -

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DDRM Properties LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2014, 2013 and 2012

(Information for the Years Ended December 31, 2014

and 2012 not Covered by Auditor’s Report)

 

conducted are due and is subject to adjustment once the final costs for the work are determined. The Company records the construction management fees to buildings and tenant improvements, as appropriate. The capitalized cost is depreciated over the estimated useful life of the related asset. Construction management fees incurred by the Company aggregated $542,387, $445,289 and $292,973 for the years ended December 31, 2014, 2013 and 2012, respectively.

DDR performs legal services on behalf of the Company. Legal fees incurred by the Company and paid to DDR aggregated $364,200, $335,124 and $395,370 for the years ended December 31, 2014, 2013 and 2012, respectively, which are recorded within general and administrative expenses on the consolidated statements of operations and comprehensive loss.

DDR employees perform certain tax preparation services on behalf of the Company. Tax preparation fees incurred by the Company aggregated $13,440, $13,037 and $12,867 for the years ended December 31, 2014, 2013 and 2012, respectively, which are recorded within general and administrative expenses on the consolidated statements of operations and comprehensive loss.

The Company pays ancillary fees to DDR and DDRPM equal to 25% of all funds received from ancillary income sources, as defined in the management and leasing agreement. Ancillary income fees incurred by the Company aggregated $230,528, $281,492 and $338,829 for the years ended December 31, 2014, 2013 and 2012, respectively. These fees were recorded within general and administrative expenses on the consolidated statements of operations and comprehensive loss.

In accordance with the management agreement, DDR arranges for insurance coverage from insurers authorized to do business in the United States, which provide liability, property and flood coverage. In 2014, 2013 and 2012, the Company remitted to DDR insurance premiums associated with these insurance policies. Insurance premiums billed to the Company aggregated $4,877,940, $5,201,344 and $4,424,900 for the years ended December 31, 2014, 2013 and 2012, respectively.

Related Party Payables

As of December 31, 2014 and 2013, the Company had related party payables of $1,889,137 and $2,064,700, respectively. The amounts are included within accounts payable and other accrued liabilities on the consolidated balance sheets and represents amounts owed to DDR and DDRPM for the services and fees discussed above incurred pursuant to the property management and other service agreements.

 

- 16 -

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DDRM Properties LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2014, 2013 and 2012

(Information for the Years Ended December 31, 2014

and 2012 not Covered by Auditor’s Report)

 

6. Commitments and Contingencies

Shopping center space is leased to tenants pursuant to agreements which provide for terms ranging from one to thirty years; and, in some cases, for annual rentals, which are subject to upward adjustments based on operating expense levels, sales volume, or contractual increases, as defined in the lease agreements.

The scheduled future minimum rents from rental property under the terms of all non-cancelable tenant leases, assuming no new or renegotiated leases or option extensions for such premises, for the subsequent five fiscal years ending December 31, are as follows:

 

2015		$	84,728,124
2016			72,801,113
2017			58,548,002
2018			46,656,981
2019			35,232,013

The Company and its subsidiaries are subject to various legal proceedings, which, taken together, are not expected to have a material adverse effect on the Company. The Company is also subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by insurance. While the resolution of all matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.

7. Derivative Instruments

Cash Flow Hedges

During 2007, the Company entered into treasury locks with a notional amount of $600 million. The treasury locks were executed to hedge the benchmark interest rate associated with forecasted interest payments related to the then anticipated issuance of the mortgage notes payable. The treasury locks were terminated in connection with the issuance of $885 million in mortgage notes payable at the time the properties were acquired (Note 4). The effective portion of these hedging relationships has been deferred in accumulated other comprehensive income and will be reclassified into earnings over the term of the debt as an adjustment to interest expense. The Company expects that within the next 12 months it will reflect as an increase to earnings approximately $538,800 of the amount recorded in accumulated other comprehensive income.

The Company did not have any derivative financial instruments outstanding as of or during the years ended December 31, 2014, 2013 and 2012.

 

- 17 -

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DDRM Properties LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2014, 2013 and 2012

(Information for the Years Ended December 31, 2014

and 2012 not Covered by Auditor’s Report)

 

8. Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating fair value disclosures of financial instruments:

Cash and cash equivalents, restricted cash, accounts receivable, accounts payable:

The carrying amounts reported in the consolidated balance sheets for these financial instruments approximated fair value because of their short-term maturities.

Debt:

Using a discounted cash flow technique that incorporates a market interest yield curve with adjustments for duration, optionality and risk profile, the Company has determined the fair value of its debt to be $987,113,726 and $961,111,384 at December 31, 2014 and 2013, respectively.

Considerable judgment is necessary to develop estimated fair values of financial instruments. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments.

9. Impairment Charges

Pursuant to the provisions of the standard, Accounting for the Impairment or Disposal of Long-Lived Assets, related to assets being held and used, the Company recorded impairment charges related to one, four and one properties aggregating $17,652,802, $25,234,220 and $507,269 during the years ended December 31, 2014, 2013 and 2012, respectively. The impairments were triggered primarily due to the Company’s marketing of these assets for sale and management’s assessment of the likelihood and timing of one or more potential transactions. Three properties were sold in 2014 and one property was sold in 2012 and as a result the impairment charges recorded in 2013 associated with these properties were reclassified to discontinued operations (Note 10) for the years ended December 31, 2014, 2013 and 2012, respectively.

Measurement of Fair Value

The Company is required to assess the fair value of impaired real estate assets. The valuation of impaired real estate assets is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows, the income capitalization approach considering prevailing market capitalization rates, analysis of recent comparable sales transactions, actual sales negotiations and bona fide purchase offers received from third parties and/or consideration of the amount that currently would be required to replace the asset, as adjusted for obsolescence. Although, the Company may consider multiple valuation techniques when measuring the fair value, in certain circumstances, a single valuation technique may be appropriate.

 

- 18 -

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DDRM Properties LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2014, 2013 and 2012

(Information for the Years Ended December 31, 2014

and 2012 not Covered by Auditor’s Report)

 

Fair Value Hierarchy

The standard Fair Value Measurements specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs). The following summarizes the fair value hierarchy:

 

•

Level 1 — Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

 

•

Level 2 — Quoted prices for identical assets and liabilities in markets that are inactive, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly, such as interest rates and yield curves that are observable at commonly quoted intervals, and

 

•

Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

- 19 -

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DDRM Properties LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2014, 2013 and 2012

(Information for the Years Ended December 31, 2014

and 2012 not Covered by Auditor’s Report)

 

Items Measured at Fair Value on a Non-Recurring Basis

The valuation techniques utilized by the Company were determined to fall under level 3 of the fair value hierarchy for the years ended December 31, 2014, 2013 and 2012, respectively.

 

		Fair Value Measurements (in millions)
		Level 1				Level 2				Level 3				Total				Total Impairment
December 31, 2014
Long-lived assets held and used		$	—			$	—			$	25.7			$	25.7			$	17.7
December 31, 2013
Long-lived assets held and used			—				—				22.5				22.5				12.8
Assets sold			—				—				19.2				19.2				12.5
December 31, 2012
Assets sold			—				—				6.8				6.8				0.5

The following table presents quantitative information about the significant unobservable inputs used by the Company to determine the fair value of non-recurring items (in millions):

 

		Quantitative Information about Level 3 Fair Value Measurements
		Fair Value at December,								Valuation Technique		Unobservable Input		Range
		2014				2013
Impairment of long-lived assets		$	25.7			$	41.7			Income Capitalization Approach		Market Capitalization Rate		6.75%-9.25%

 

- 20 -

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DDRM Properties LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2014, 2013 and 2012

(Information for the Years Ended December 31, 2014

and 2012 not Covered by Auditor’s Report)

 

10. Discontinued Operations

The company sold three properties in the year ended December 31, 2014 and one property in the year ended December 31, 2012 that were classified as discontinued operations for the years ended December 31, 2014, 2013 and 2012. Discontinued operations for the years ended December 31, 2014, 2013, and 2012 are as follows:

 

		2014				2013				2012
Revenues:
Minimum rents		$	1,888,009			$	3,004,585			$	3,260,118
Percentage and overage rents			—				22,449				46,095
Recoveries from tenants			590,198				1,051,450				1,067,452
Ancillary and other income			78,756				100,219				116,879
Total revenues			2,556,963				4,178,703				4,490,544
Expenses:
Operating and maintenance			485,802				834,094				1,186,781
Real estate taxes			365,023				636,927				651,795
Management fees (Note 5)			105,584				167,807				178,500
Asset management fees (Note 5)			223,346				323,182				347,327
General and administrative			197,730				127,237				116,178
Depreciaton and amortization			760,694				2,512,536				1,819,244
Impairment charges			—				12,469,700				507,269
Total expense			2,138,179				17,071,483				4,807,094
Other income (expense)
Interest income			—				(1,228	)			20
Interest expense			(126,415	)			(297,475	)			(347,630	)
Loss on debt extinguishments			(152,379	)			(70	)			—
			(278,794	)			(298,773	)			(347,610	)
Income (loss) from discontinued operations			139,990				(13,191,553	)			(664,160	)
Gain (loss) on disposition of real estate			9,565,029				—				(226,476	)
Income (loss) from discontinued operations		$	9,705,019			$	(13,191,553	)		$	(890,636	)

 

- 21 -

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DDRM Properties LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2014, 2013 and 2012

(Information for the Years Ended December 31, 2014

and 2012 not Covered by Auditor’s Report)

 

11. Subsequent Events

In accordance with ASC No. 855, Subsequent Events, the Company has evaluated subsequent events through the date of the Independent Auditor’s Report, the date the Company’s financial statements were available to be issued.

In January 2015, the Company made a distribution of $10,000,000 to its Members utilizing net proceeds from the sale of a shopping center in December 2014.

In February 2015, the Company refinanced the 2010 Pooled Secured Financing for $20.6 million with an interest rate of LIBOR plus 140 basis points and a maturity date of February 11, 2016. Payments are interest only and the Company has the option to extend for an additional year.

 

- 22 -

EXHIBIT 99.2

 

		Sonae Sierra Brazil BV SARL and Subsidiaries   Consolidated Financial Statements for the Period from January 1, 2014 to April 27, 2014 (unaudited) and for the Years Ended December 31, 2013 and 2012.

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						Deloitte Touche Tohmatsu Rua Alexandre Dumas, 1.981 04717-906 - São Paulo - SP Brasil
						Telefone:     (11) 5186-1000 Fac-símile:  (11) 5181-2911 www.deloitte.com.br

INDEPENDENT AUDITORS’ REPORT

To the Shareholders, Directors and Management of

Sonae Sierra Brazil BV SARL

São Paulo - SP - Brazil

We have audited the accompanying consolidated financial statements of Sonae Sierra Brazil BV SARL (the “Company”), which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for the three years ended December 31, 2013, and the related notes to the consolidated financial statements.

Management’s responsibility for the consolidated financial statements

The Company’s management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards - IFRS, as issued by the International Accounting Standards Board - IASB; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States of America - U.S. GAAS. 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 consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements 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 Company’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 consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

© Deloitte Touche Tohmatsu. All rights reserved.

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Deloitte Touche Tohmatsu

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sonae Sierra Brazil BV SARL as of December 31, 2013 and 2012 and the results of their operations and their cash flows for the three years ended December 31, 2013 in conformity with IFRS, as issued by IASB.

Emphasis of Matter

Accounting practices in conformity with IFRS, as issued by IASB, vary in certain significant respects from generally accepted accounting principles in the United States of America - U.S. GAAP. Information relating to the nature and effect of such differences is presented in note 32 to the consolidated financial statements. Our opinion is not modified with respect to this matter.

 

São Paulo, March 19, 2014
DELOITTE TOUCHE TOHMATSU				Marcelo Magalhães Fernandes
Auditores Independentes				Engagement Partner

 

2

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SONAE SIERRA BRAZIL BV SARL AND SUBSIDIARIES

BALANCE SHEETS AS OF DECEMBER 31, 2013

(In thousands of Brazilian reais - R$)

 

 

				Consolidated								Consolidated
		Note		12/31/13						Note		12/31/13
ASSETS								LIABILITIES AND EQUITY
CURRENT ASSETS								CURRENT LIABILITIES
Cash and cash equivalents		4			429,347			Loans and financing		12			61,168
Trade accounts receivable, net		5			40,196			Debentures		13			14,903
Recoverable taxes		6			9,979			Trade accounts payable					49,812
Prepaid expenses					29			Taxes payable		17			7,900
Other receivables		5			6,959			Personnel, payroll taxes, benefits and rewards					10,520
Total current assets					486,510			Key money		15			8,340
								Dividends payable		18			14,433
NONCURRENT ASSETS								Payables for purchase of asset		14			21,186
Restricted investments		30			6,124			Other payables					12,318
Trade accounts receivable, net		5			14,059			Total current liabilities					200,580
Recoverable taxes		6			18,472
Loans to condominiums		7 and 24			9,436			NONCURRENT LIABILITIES
Deferred income tax and social contribution		23			5,036			Loans and financing		12			510,495
Escrow deposits		16			11,677			Debentures		13			318,085
Other receivables		5			3,950			Key money		15			17,044
Investment under equity-method		8			33,375			Payables for purchase of asset		14			10,654
Investment property		10			3,946,171			Deferred income tax and social contribution		23			525,791
Property and equipment		9			3,163			Reserve for civil, tax, labor and social security risks		16			7,913
Intangible assets		11			5,662			Accrual for variable compensation		28			1,469
Total noncurrent assets					4,057,125			Total noncurrent liabilities					1,391,451
								EQUITY		18
								Capital					48
								Share premium					462,540
								Earnings reserves					1,398,449
								Equity attributable to owners of the Company					1,861,037
								Noncontrolling interests					1,090,567
								Total equity					2,951,604
TOTAL ASSETS					4,543,635			TOTAL LIABILITIES AND EQUITY					4,543,635

The accompanying notes are an integral part of these financial statements.

 

 

3

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SONAE SIERRA BRAZIL BV SARL AND SUBSIDIARIES

STATEMENTS OF INCOME

FOR THE PERIOD FROM JANUARY 1, 2014 THROUGH APRIL 27, 2014 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

(In thousands of Brazilian reais - R$)

 

 

				Consolidated
		Note		PERIOD FROM 1/1/14 TO 4/27/14 (Unaudited)				12/31/13				12/31/12
NET OPERATING REVENUE FROM RENTALS, SERVICES AND OTHER		19			97,712				275,754				256,851
COST OF RENTALS AND SERVICES		20			(24,330	)			(58,715	)			(43,177	)
GROSS PROFIT					73,382				217,039				213,674
OPERATING INCOME (EXPENSES)
General and administrative expenses		20			(9,209	)			(22,638	)			(20,394	)
Other tax expenses					(1,903	)			(4,834	)			(1,389	)
Equity pick-up		8			1,003				7,945				4,821
Changes in fair value of investment property		10			—				344,318				193,586
Other operating income, net		21			956				5,621				27,801
Total income from operations, net					(9,153	)			330,412				204,425
OPERATING INCOME BEFORE FINANCIAL INCOME (EXPENSES)					64,229				547,451				418,099
FINANCIAL INCOME (EXPENSES), NET		22			(16,309	)			(27,620	)			(13,090	)
INCOME BEFORE INCOME TAX AND SOCIAL CONTRIBUTION					47,920				519,831				405,009
INCOME TAX AND SOCIAL CONTRIBUTION
Current		23			(9,342	)			(32,748	)			(91,803	)
Deferred		23			(1,902	)			(129,674	)			(8,754	)
Total					(11,244	)			(162,422	)			(100,557	)
NET INCOME FOR THE YEAR					36,676				357,409				304,452
NET INCOME ATTRIBUTABLE TO
Owners of the Company					23,809				232,667				182,409
Noncontrolling interests					12,867				124,742				122,043
BASIC EARNINGS PER SHARE		18.4			129				1,264				991

The accompanying notes are an integral part of these financial statements.

 

 

4

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SONAE SIERRA BRAZIL BV SARL AND SUBSIDIARIES

STATEMENTS OF COMPREHENSIVE INCOME

FOR THE PERIOD FROM JANUARY 1, 2014 THROUGH APRIL 27, 2014 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

(In thousands of Brazilian reais - R$)

 

 

		Consolidated
		PERIOD FROM 1/1/14 TO 4/27/14 (Unaudited)				12/31/13				12/31/12
NET INCOME FOR THE YEAR			36,676				357,409				304,452
Other comprehensive income			—				—				—
TOTAL COMPREHENSIVE INCOME			36,676				357,409				304,452
NET INCOME ATTRIBUTABLE TO
Owners of the Company			23,809				232,667				182,409
Noncontrolling interests			12,867				124,742				122,043

The accompanying notes are an integral part of these financial statements.

 

 

5

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SONAE SIERRA BRAZIL BV SARL AND SUBSIDIARIES

STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

(In thousands of Brazilian reais - R$, except dividends per share)

 

 

																Total equity attributable to
								Share				Retained				owners of the				Noncontrolling				Total
		Note		Capital				premium				earnings				parent				interests				equity
BALANCES AS OF DECEMBER 31, 2011 (UNAUDITED)					48				467,524				1,056,438				1,524,010				904,156				2,428,166
Share premium decrease		18.2			—				(4,984	)			—				(4,984	)			—				(4,984	)
Net income for the year					—				—				182,409				182,409				122,043				304,452
Dividends (R$170,896.74 per share)					—				—				(31,445	)			(31,445	)			(12,415	)			(43,860	)
Dividends arising from operation of Fundo de Investimento Imobiliário Shopping Parque D. Pedro and Fundo de Investimento Parque D. Pedro Shopping Center					—				—				—				—				(14,511	)			(14,511	)
BALANCES AS OF DECEMBER 31, 2012					48				462,540				1,207,402				1,669,990				999,273				2,669,263
Net income for the year					—				—				232,667				232,667				124,742				357,409
Dividends (R$226,192.93 per share)					—				—				(41,620	)			(41,620	)			(11,596	)			(53,216	)
Dividends arising from operation of Fundo de Investimento Imobiliário Shopping Parque D. Pedro and Fundo de Investimento Parque D. Pedro Shopping Center					—				—				—				—				(21,852	)			(21,852	)
BALANCES AS OF DECEMBER 31, 2013					48				462,540				1,398,449				1,861,037				1,090,567				2,951,604

The accompanying notes are an integral part of these financial statements.

 

 

6

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SONAE SIERRA BRAZIL BV SARL AND SUBSIDIARIES

STATEMENTS OF CASH FLOWS

FOR THE PERIOD FROM JANUARY 1, 2014 THROUGH APRIL 27, 2014 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

(In thousands of Brazilian reais - R$)

 

 

		Consolidated
		PERIOD FROM 1/1/14 TO 4/27/14 (Unaudited)				12/31/2013				12/31/2012
CASH FLOW FROM OPERATING ACTIVITIES
Net income for the year			36,676				357,409				304,452
Adjustments to reconcile net income for the year to net cash provided by operating activities:
Depreciation and amortization			845				2,330				1,790
Residual value of property and equipment written-off			84				573				362
Gain by debentures adjustment in fair value hedge accounting			(581	)			(1,982	)			—
Loss with derivatives transaction in fair value hedge accounting			1,395				1,828				—
Unbilled revenue from rentals			(2,264	)			(1,950	)			(2,550	)
Allowance for doubtful accounts receivable			2,560				2,792				2,401
Provision for (reversal of) civil, tax, labor and social security risks			396				(1,526	)			(846	)
Accrual for variable compensation			495				2,012				1,928
Deferred income tax and social contribution			1,902				129,674				8,754
Income tax and social contribution			9,342				32,748				91,803
Interest on loans and financing			26,025				74,928				61,223
Transaction (gains) losses on foreign exchange			895				(2,875	)			1,461
Changes in fair value of investment property			—				(344,318	)			(193,586	)
Gain on sale of investment property			—				—				(30,578	)
Equity pick-up			(1,003	)			(7,945	)			(4,821	)
(Increase) decrease in operating assets:
Trade accounts receivable, net			6,599				(9,277	)			(10,166	)
Loans to condominiums			(5,586	)			(7,995	)			(1,113	)
Recoverable taxes			(4,412	)			(3,742	)			309
Prepaid expenses			(106	)			24				452
Escrow deposits			(164	)			(1,727	)			(6,221	)
Other receivables			(4,490	)			(5,382	)			282
Increase (decrease) in operating liabilities:
Trade accounts payable			(9,563	)			(10,008	)			6,777
Taxes payable			(8,132	)			(14,392	)			(19,202	)
Personnel, payroll taxes, benefits and rewards			(2,202	)			(978	)			442
Key money			(1,124	)			(5,580	)			4,938
Other payables			(4,867	)			(3,799	)			6,452
Cash provided by operating activities			42,720				180,842				224,743
Interest paid			(29,408	)			(61,136	)			(34,414	)
Income tax and social contribution paid			(4,403	)			(76,344	)			(16,837	)
Net cash provided by operating activities			8,909				43,362				173,492
CASH FLOW FROM INVESTING ACTIVITIES
Restricted investments			(531	)			(2,059	)			(1,894	)
Acquisition or construction of investment property			(18,426	)			(341,735	)			(394,498	)
Purchase of property and equipment			(820	)			(4,014	)			(1,167	)
Increase in intangible assets			(1	)			(634	)			(511	)
Proceeds from sale of investment property			—				—				238,696
Dividends received			920				3,100				2,448
Net cash used in investing activities			(18,858	)			(345,342	)			(156,926	)
CASH FLOW FROM FINANCING ACTIVITIES
Share premium decrease			—				—				(4,964	)
Debentures			—				—				300,000
Debentures issuance costs			—				—				(6,834	)
Payments of asset financed			(6,088	)			(18,264	)			(18,040	)
Proceeds from loans and financing			5,000				169,825				78,984
Loans repaid - principal			(9,917	)			(38,161	)			(11,579	)
Distributed earnings of real estate funds - noncontrolling interests			(7,096	)			(21,852	)			(22,672	)
Dividends paid			(8,797	)			(50,540	)			(39,601	)
Net cash provided by financing activities			(26,898	)			41,008				275,294
Effect of exchange rate changes on cash and cash equivalents			(895	)			2,875				(1,830	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS, NET			(37,742	)			(258,097	)			290,030
CASH AND CASH EQUIVALENTS
Cash and cash equivalents at April 27, 2014			391,605				429,347				687,444
Cash and cash equivalents at beginning of year			429,347				687,444				397,414
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS, NET			(37,742	)			(258,097	)			290,030

The accompanying notes are an integral part of these financial statements.

 

 

7

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

SONAE SIERRA BRAZIL BV SARL AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD FROM JANUARY 1, 2014 THROUGH APRIL 27, 2014 (UNAUDITED)

AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

(Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

 

 

1.	GENERAL INFORMATION

Sonae Sierra Brazil BV SARL (the “Company”) was incorporated under the laws of the Netherlands on January 22, 2001 as a limited liability company. On November 30, 2004, the principal establishment and effective place of the Company’s management was transferred from the Netherlands to the Grand Duchy of Luxembourg. The registered office of the Company is at 46A, Avenue John F. Kennedy, L.1855, Luxembourg. The principal business activities of the Company are holding, finance and real estate activities, particularly with respect to the development, exploitation and management of shopping malls.

As of December 31, 2013 and 2012, the Company was 50% owned by Sierra Investments Holding BV, 10.33% owned by DDR Luxembourg SARL and 39.67% owned by DDR Luxembourg II SARL. The Company’s ultimate parent companies were Sonae Sierra SGPS S.A., headquartered in Portugal, and DDR Corp., headquartered in the United States of America.

On April 27, 2014 (unaudited), DDR Corp., the ultimate controlling shareholder of DDR Luxembourg SARL and DDR Luxembourg II SARL, sold all of its shares owned, representing 50% of the corporate capital of the Company to Mr. Alexander Otto and certain of his affiliates. Sierra Investments Holdings B.V. did not exercise its right of first refusal to acquire DDR Luxembourg SARL and DDR Luxembourg II SARL’s interest in Sonae Sierra Brazil BV SARL. As a result of this sale, as of April 27, 2014 (unaudited), the Company is 50% owned by Sierra Investments Holding BV, 10.33% owned by Cura Beteiligungs gesellschaft Brasilien M.B.H., 13.64% owned by Arosa Vermögensverwaltungs gesellschaft M.B.H. and 26.63% owned by Alexander Otto.

Group companies

The Company’s direct and indirect subsidiaries included in the consolidated financial statements are the following:

 

a)

Sierra Brazil 1 BV - headquartered in the Netherlands, is primarily engaged in holding equity interest in other companies and/or real estate investment funds, directly or indirectly through subsidiaries and associates. As of April 27, 2014, Sierra Brazil 1 BV holds 66.65% of the undivided interest in Sonae Sierra Brasil S.A.

 

b)

Sonae Sierra Brasil S.A. - established on June 18, 2003, is primarily engaged in: (i) planning, developing, implementing and investing in real estate, namely shopping malls and related activities, as developer, builder, lessor and advisor; (ii) operating and managing owned and/or third-party properties and stores and providing related services; and (iii) holding equity interest in other companies and/or real estate investment funds, directly or indirectly through subsidiaries and associates. Sonae Sierra Brasil S.A. trades its shares on BM&FBOVESPA (São Paulo Stock Exchange), under the ticker symbol “SSBR3.” As of April 27, 2014, Sonae Sierra Brasil S.A. holds 100.00% of the undivided interest in Sierra Investimentos Brasil Ltda. and Unishopping Consultoria Ltda.

 

8

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

c)

Parque D. Pedro 1 BV SARL is primarily engaged in holding equity interest in real estate investment funds, directly or indirectly through subsidiaries. As of April 27, 2014, Parque D. Pedro 1 BV SARL holds 27.61% and 7.97% of the undivided interest in Fundo de Investimento Imobiliário Shopping Parque D. Pedro and Fundo de Investimento Imobiliário - FII Parque Dom Pedro Shopping Center, respectively.

 

d)

Fundo de Investimento Imobiliário Shopping Parque D. Pedro (“Fundo de Investimento Imobiliário I”) is engaged in holding long-term investment properties, to earn income by renting and leasing properties of its real estate assets. As of April 27, 2014, Fundo de Investimento Imobiliário I holds a trust equivalent to 85% of the undivided interest in Shopping Parque D. Pedro.

 

e)

Fundo de Investimento Imobiliário - FII Parque Dom Pedro Shopping Center (“Fundo de Investimento Imobiliário II”) is engaged in holding long-term investment properties to earn income by renting and leasing properties of its real estate assets. Established on June 30, 2009, through the partial spin-off of Fundo de Investimento Imobiliário I’s operations, Fundo de Investimento Imobiliário II holds a trust equivalent to 15% of the undivided interest in Shopping Parque D. Pedro. As of April 27, 2014, Fundo de Investimento Imobiliário II holds 17.72% of Fundo de Investimento Imobiliário I.

 

f)

Sierra Investimentos Brasil Ltda. (“Sierra Investimentos”) is primarily engaged in: (i) planning, developing, implementing and investing in real estate, namely shopping malls and related activities, as developer, builder, lessor and advisor; (ii) operating and managing properties and stores and providing related services; and (iii) holding equity interest in other companies. As of April 27, 2014, Sierra Investimentos holds 42.28% and 50.1% of the undivided interest in Fundo de Investimento Imobiliário I and Fundo de Investimento Imobiliário II, respectively. As of April 27, 2014, this company is the parent company of Pátio Boavista Shopping Ltda. (“Pátio Boavista”), Patio São Paulo Shopping Ltda. (“Pátio São Paulo”), Pátio São Bernardo Shopping Ltda. (“Pátio São Bernardo”), Pátio Sertório Shopping Ltda. (“Pátio Sertório”), Pátio Uberlândia Shopping Ltda. (“Pátio Uberlândia”), Pátio Londrina Empreendimentos e Participações Ltda. (“Pátio Londrina”), Pátio Goiânia Shopping Ltda. (“Pátio Goiânia”) and Pátio Campinas Shopping Ltda. (“Pátio Campinas”).

Pátio Boavista, Pátio São Paulo, Pátio São Bernardo, Pátio Sertório, Pátio Uberlândia, Pátio Londrina, Pátio Goiânia and Pátio Campinas, which are all primarily engaged in investing in real estate, namely shopping malls and related activities.

 

g)

Unishopping Consultoria Imobiliária Ltda. (“Unishopping Consultoria”) is engaged in planning, installing, developing and managing shopping malls, leasing, operating and managing car park areas, managing properties and related services and is responsible for selling development stores in which the group holds interests.

 

9

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

As of April 27, 2014 (unaudited) and as of December 31, 2013 and 2012, the Company’s subsidiaries and associates held the following interests in shopping malls:

 

 

(i)	These subsidiaries were merged and/or spun-off on November 2, 2013, without impact to the consolidated structure.

(ii)	Opened on May 3, 2013.

(iii)

Opened on October 30, 2013.

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

2.	SIGNIFICANT ACCOUNTING POLICIES

 

2.1.

Declaration of conformity

The Company’s financial statements comprise:

 

•

The consolidated financial statements, in accordance with International Financial Reporting Standards - IFRS, as issued by the International Accounting Standards Board - IASB, as applicable to the items included in these consolidated financial statements, have been prepared to fulfill the requirement of Rule 3-09 of Regulation S-X of its shareholder DDR Corp., to be included in its Form 10-K. The Company applied the accounting policies set out in note 2 for all periods presented. As a result of the sale by DDR Corp., the accompanying consolidated financial statements and notes thereto present separately the results of operations of DDR Corp.’s ownership period (January 1, 2014 to April 27, 2014 (unaudited) (the “2014 Stub Period”), and for the years ended December 31, 2013 and December 31, 2012).

 

2.2.

Basis of preparation

The financial statements have been prepared based on the historical cost and adjusted to reflect the fair values of the investment properties and certain financial instruments against net income for the year. The historical cost is generally based on the fair value of the consideration paid in exchange for assets.

The main accounting policies adopted in preparing these financial statements are summarized below. These practices are consistent with those adopted in the prior year reporting period.

The following is a summary of the significant accounting policies adopted by the group:

 

2.3.

Investments in associate

The investments are registered under the equity method.

Associates are entities that the Company is in a position to exercise significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but not have control or joint control over those policies (see note 8).

 

2.4.

Basis of consolidation

The consolidated financial statements have been prepared and are presented in conformity with IFRS, as issued by IASB. The main accounting policies applied include the financial statements of the Company and of its subsidiaries. Intercompany balances and the Company’s investments in subsidiaries have been eliminated in consolidation. Non-controlling interests are stated separately.

Control is achieved when the Company:

 

•

Has power over the investee;

 

•

Is exposed, or has rights, to variable returns from its involvement with the investee.

 

•

Has the ability to use its power to affect its returns.

 

11

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

As of April 27, 2014 and as of December 31, 2013 and 2012, the consolidated companies are as follows:

 

 

(a)	Subsidiaries merged in the corporate restructuring process.

(b)

Considering that Fundos the Investimento Imobiliário I and II held 85% and 15%, respectively, of Shopping Parque D. Pedro and that the Company held an indirect investment in Sonae Sierra Brasil of 66.65, the Company held 59.87% of this property on a combined basis as of April 27, 2014, December 31, 2013 and 2012.

(c)	Part of the net assets of indirect subsidiary Pátio Boavista was merged into Pátio Campinas on November 2, 2013.

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

2.5.

Segment reporting

Segment reporting is consistent with the internal report provided to the chief operating decision maker.

 

2.6.

Functional currency of the financial statements

The items included in the financial statements of each entity are measured using the currency of the primary economic environment in which the entity operates (“functional currency”). The Company and its subsidiaries’ functional and presentation currency is the Brazilian reais (R$).

 

2.7.

Foreign currency

In preparing the financial statements of the individual entities, transactions in foreign currency are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Exchange differences on monetary items are recognized in profit or loss in the period in which they arise.

 

2.8.

Cash and cash equivalents

Cash and cash equivalents are represented by available bank accounts. Short-term investments may be redeemed within 90 days and are comprised of highly-liquid securities convertible into cash, which presents an immaterial risk of change in fair value. Short-term investment balances are carried at cost plus income earned through the end of each reporting period.

 

2.9.

Restricted investments

As of April 27, 2014 and as of December 31, 2013 and 2012, the indirect subsidiary, Sierra Investimentos had investments in Financial Treasury Bills (LFTs) linked to commitments assumed with Banco Ourinvest S.A., as described in note 30. Investment balances were carried at cost plus income earned through the end of each reporting period.

 

2.10.

Financial instruments

 

2.10.1.

Recognition and measurement

Transactions with financial instruments are initially recognized at transaction value.

Transaction costs directly attributable to the acquisition or issuance of financial assets and financial liabilities are added to or deducted from the financial assets and financial liabilities.

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

2.10.2.

Classification

The Company and its subsidiaries’ financial instruments have been classified into the following categories:

 

•

Measured at fair value through profit or loss: financial assets and financial liabilities held for trading, i.e., acquired or originated primarily for the purpose of sale or repurchase in the short term. Changes in fair value are accounted for in profit or loss, and balances are stated at fair value.

 

•

Loans and receivables: non-derivative financial instruments with fixed or determinable payments that are not quoted in an active market. The loans and receivables are classified as current assets, except for maturities greater than 12 months after the end of the reporting period, which are classified as noncurrent assets. The Company’s loans and receivables include loans to associates and subsidiaries and trade and other receivables.

 

2.11.

Derivatives

Derivatives are initially recognized at fair value at the trade date and subsequently re-measured at fair value at the end of the reporting period. The resulting gain or loss is recognized in profit or loss immediately, unless the derivative is designated and effective as a hedging instrument; in which the timing of the recognition in profit or loss depends on the nature of the hedge relationship.

 

2.12.

Hedge accounting

The Company designates certain hedging instruments as fair value hedges.

At the beginning of the hedging relationship, the Company documents the relationship between the hedging instrument and the hedged item with its risk management objectives and strategy to enter into different hedging transactions. Additionally, the Company documents at the inception of a hedge, and continuously, if the hedging instrument used in a hedging relationship is highly effective in offsetting the exposure to changes in the hedged item’s fair values or cash flows attributable to the hedged risk.

Fair value hedges

Changes in the fair value of derivatives designated and qualified as fair value hedges are recorded in profit or loss together with any changes in the fair values of the hedged item, attributable to the hedged risk. Changes in the fair value of these instruments, as well as of the hedged item, are recognized in “Finance income (costs).”

Hedge accounting is discontinued prospectively when the Company cancels the hedging relationship, when the hedging instrument expires, is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. The adjustment to the fair value of the hedged item is accounted for in profit or loss, as of the adjustment date.

 

2.13.

Impairment of financial assets

Financial assets, except those designated at fair value through profit or loss, are valued using impairment indicators at the end of each annual reporting period. Impairment losses are recognized if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, with an impact on the estimated future cash flows.

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

The criteria used by the Company and its subsidiaries to determine if there is objective evidence that a financial asset is impaired includes:

 

•

Significant financial difficulty of the issuer or debtor

 

•

A breach of contract, such as default or delinquency in interest or principal payments

 

•

It is probable that the borrower will enter bankruptcy or other financial reorganization

 

•

The disappearance of an active market for the financial asset because of financial difficulties

The carrying amount of the financial asset is directly reduced by any impairment loss for all financial assets, except for receivables, in which the carrying amount is reduced through use of an allowance account. Subsequent recoveries of previously written-off amounts are added to the allowance. Changes in the carrying amount of the allowance account are recognized in profit or loss.

 

2.14.

Trade accounts receivable

Rental revenue is recognized on a straight-line basis, according to contractual terms.

An allowance for doubtful accounts is recorded in an amount considered sufficient by management to cover probable losses on the realization of trade accounts receivable, (100% of amounts over 120 days past due).

Past-due and renegotiated amounts are recorded at the renegotiation amounts, including principal plus financial charges, to be collected according to the new receiving period. Concurrently, an additional allowance is recorded on financial charges incurred and included in renegotiations. The allowance is registered until the payment of the renegotiated balance.

 

2.15.

Property and equipment

Property and equipment is carried at cost of purchase, less accumulated depreciation. Depreciation is calculated on a straight-line basis at the rates mentioned in note 9, based on the estimated useful lives of the assets.

The residual values and the useful lives of the assets are annually reviewed and adjusted, when appropriate.

The carrying amount of property and equipment is derecognized on disposal or when no future economic benefits are expected from its use. The gain or loss arising on the recognition of property and equipment corresponds to the difference between the amounts received and the carrying amount of the asset and is recognized in profit or loss.

 

2.16.

Investment property

Investment properties are represented by land and buildings in shopping malls held to earn rentals and/or for capital appreciation, as disclosed in note 10.

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

Investment properties are measured initially at their cost, including transaction costs. After initial recognition, investment properties are measured at fair value. The gain or loss from the change in fair value of investment properties in operation is recognized in profit or loss for the period in which it arises. Valuations were made by independent external appraisers using the cash flow model discounted at market rates. Semi-annually reviews are conducted to value any changes in the recognized balances.

Investment property under construction is recognized at cost of construction until it is placed into service or when the Company is able to measure, reliably, the fair value of the asset.

The fair value of an investment property does not reflect future capital expenditure that will improve or enhance the property and does not reflect the related future benefits from this future expenditure.

 

2.17.

Intangible assets

Intangible assets acquired separately with finite useful lives are carried at cost less accumulated amortization and impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful life and amortization method are reviewed at the end of each annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

 

2.18.

Impairment of tangible and intangible assets excluding goodwill

Items in property and equipment, intangible assets and other noncurrent assets are evaluated annually to identify evidence of unrecoverable losses or whenever significant events or material changes in circumstances indicate that the carrying value is not recoverable. In the event of a loss resulting from situations where the carrying amount of an asset exceeds its recoverable value, which is defined as the value in use of the asset, using the discounted cash flow method, an impairment loss is recognized in profit or loss.

 

2.19.

Loans, financing and debentures

Loans, financing and debentures are initially recognized at fair value, less transaction costs incurred, and subsequently stated at amortized cost. Any difference between the amounts raised (less transaction costs) and the settlement amount is recognized in the statement of income during the period the borrowings remain outstanding, using the effective interest rate method.

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, that take substantial period to get ready for their intended use or sale, are capitalized as part of the cost of such assets through the date they are ready for their intended use or sale. Other borrowing costs are recognized in profit or loss for the period in which they are incurred.

Part of the transactions carried out using debentures issued by the Company, subject to fair value hedge, are stated at fair value. Gains and losses are recognized through profit or loss.

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

2.20.

Provisions

Provisions are recognized when there is a present obligation (legal or constructive) as a result of a past event, when a reliable estimate can be made of the amount of the obligation and its settlement is probable.

The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation.

As of December 31, 2013, the main provisions recognized by the Company and subsidiaries are as follows:

 

2.20.1

Reserve for civil, tax, labor and social security risks

Reserves recorded for lawsuits assessed by the legal counsel and management of the Company and its subsidiaries as probable losses, considering the nature of the lawsuits, the legal counsel and management’s experience in similar cases. Reserves have been recognized for matters classified as legal obligations, regardless of the expected outcome of lawsuits.

 

2.20.2

Accrual for variable compensation

Accrual for variable compensation is recognized to cover the amounts of performance bonuses granted to some Company officers, which will only be paid three years after such bonuses are granted, provided the officers are still employees of the Company or its subsidiaries. These bonuses are adjusted through the payment date, based on the annual fluctuation of the Company’s market value, and are recognized on a straight-line basis in the income of period during the three-year period (from grant date to payment year), at the gross amount granted to these officers. A possible subsequent adjustment arising from changes in market value is recorded in the income of the period, when incurred.

 

2.21.

Revenue recognition

Revenue, costs and expenses are recognized on the accrual basis. Revenue from rentals is recognized on a straight-line basis over the term of rental agreements, pursuant to IAS 17 (Leases revenues, taking into account the contractual adjustment and the collection of the 13^th monthly rental and revenue from services, is recognized when services are provided). Revenues from assignment of rights to tenants are allocated to income over the term of the first rental agreement.

Our revenue derives mainly from the following activities:

 

a)

Rental

Rental revenue refers to the rental of store space to tenants and other commercial space, such as sales stands, including rentals of commercial space for advertising and promotion. Rentals to shopping mall tenants account for the highest percentage of Company and its subsidiaries’ revenue.

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

b)

Parking

Parking revenue refers to revenue from the operation of parking lots.

 

c)

Services

Service revenue refers to the provision of asset and property management services to shopping mall tenants and owners and brokerage services.

The Company receives management fees from tenants for the management of the shopping mall common areas.

Brokerage services include the sale of vacant spaces and the identification and development of relationships with prospect tenants, such as store chains to minimize a shopping mall vacancy rate. Management fees are calculated as a percentage of the rent charged from a potential lessee.

 

d)

Property space (key money) lease fee

Key money refer to the lease fees payable by new tenants as consideration for the advantages and benefits received by the tenants from their right to use the infrastructure offered by the shopping malls when new projects are launched, existing projects are expanded or the store rental is discontinued.

The amount payable by new tenants is negotiated based on the market value of the rented space. Usually the new tenants pay a higher fee for stores with greater visibility and exposure in the busiest areas of the shopping mall.

 

e)

Lessee transfer fees

Revenue generated by the fees paid when the rental is transferred from a lessee to another, generally calculated as a percentage of the amount involved in the transfer.

 

2.22.

Income tax and social contribution

The operations related to the development, management and investment of shopping malls are located only in Brazil.

 

a)

Subsidiary Sonae Sierra Brasil S.A. and its subsidiaries located in Brazil

Income tax is calculated at the rate of 15% plus a 10% surtax on annual taxable income exceeding R$240. Social contribution is calculated at the rate of 9% on annual taxable income. Deferred income tax and social contribution result from temporary differences in the recognition of income and expenses (for tax and financial reporting purposes), as well as tax loss carryforwards, when the utilization against future taxable income is probable.

As permitted by tax legislation, certain consolidated subsidiaries opted for taxation based on deemed income. Tax basis of income tax and social contribution are calculated at the rate of 32% on gross revenues from services and 100% of financial income, of which regular tax rates of 15%, plus a 10% surtax for income tax and 9% for social contribution are applied. As a result, these consolidated companies did not

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

record deferred income tax and social contribution on tax loss carryforwards and temporary differences and are not subject to the noncumulative regime for taxes on revenue (Social Integration Program Tax on Revenue (PIS) and Social Security Funding Tax on Revenue (COFINS)).

Shareholders of Fundos de Investimento Imobiliário I and II are subject to tax on income from the fund.

In the specific case of the adjustment to fair value of investment property, regardless of the taxation regime elected by the subsidiaries and associates, deferred tax liabilities were recognized at the rate of 34% on such adjustments (except for the property under Fundos de Investimento Imobiliário I and II, which is tax exempt), based on the assumption that these properties can be sold and a capital gain can be determined.

 

b)

Company

Current taxes

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statement of income because of items of income or expense items that are taxable or deductible in other years and items that are never taxable or deductible. The Company’s liability for current tax is calculated using a tax rate of 15%, which has been enacted or substantively enacted by the end of the reporting period.

Deferred taxes

For the adjustment to fair value of investment property related to Fundos de Investimento Imobiliário I and II, regardless of the taxation regime elected by the subsidiaries and associates, deferred tax liabilities were recognized at the rate of 15% on such adjustments, based on the assumption that these properties can be sold and a capital gain can be determined.

 

2.23.

Earnings per share

Basic and diluted earnings per share are calculated using net income for the year attributable to the owners of the Company and the weighted average number of shares outstanding in the year.

The Company has no debt convertible into shares, stock options granted or any other potentially dilutive instrument; therefore, diluted earnings per share is equal to basic earnings per share for the periods shown.

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

2.24.

New and revised standards and interpretations in 2014

 

The Company’s management assessed these new standards and interpretations and concluded that there was no impact from adopting these new standards.

 

3.	CRITICAL ACCOUNTING JUDGMENTS AND MAIN ESTIMATES

In the application of the Company’s accounting policies, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised.

The following are the main judgments and accounting estimates that the Company and its subsidiaries’ management understands as relevant for the preparation of the individual and consolidated financial statements:

 

a)

Investment property value: the fair value of investment property is determined by valuing the future cash flows of each property at present value, as determined by independent valuers. The Company and its subsidiaries’ management uses its judgment to choose the method and define assumptions, which are mainly based on market conditions existing at the end of the reporting period.

 

b)

Reserve for civil, tax, labor and social security risks: the reserve for risks is recognized for lawsuits assessed by the legal counsel and management of the Company and its subsidiaries as probable losses, considering the nature of the lawsuits, and the legal counsel and management’s experience in similar cases. Reserves have been recognized for matters classified as legal obligations, regardless of the expected final outcome of lawsuits.

 

c)

Projections prepared for the realization of deferred income tax and social contribution balances: based on analyses of the multi-year operating projections, the Company recognized tax credits related to prior year tax loss carryforwards and temporary differences.

Maintenance of tax credits from tax loss carryforwards, deferred income tax and social contribution tax loss carryforwards is supported by future earnings projections prepared by the Company’s management and periodically reviewed, for the next ten years, to determine the recoverability of tax loss carryforwards and temporary differences.

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

4.	CASH AND CASH EQUIVALENTS

 

		Consolidated
		12/31/13
Cash			75
Banks			3,507
Short-term investments (a)			422,795
Interest bearing account (b)			2,970
Total			429,347

 

(a)	As of December 31, 2013, short-term investments are highly liquid and earn yield at a weighted average interest rate of 102.9% of the interbank deposit rate (CDI).

(b)	Interest bearing account indexed to euros - € and earns yield at a weighted average interest rate of 0.85% per year.

 

5.	TRADE ACCOUNTS RECEIVABLE, NET AND OTHER RECEIVABLES

Trade accounts receivable, net

 

		Consolidated
		12/31/13
Rentals			49,613
Assignment of rights receivable (a)			1,298
Total trade receivables billed			50,911
Unbilled revenue from rentals (b)			14,059
Total trade receivables billed and unbilled			64,970
Allowance for doubtful accounts			(10,715	)
Total			54,255
Current			(40,196	)
Noncurrent			14,059

 

(a)	Represents receivables from the leasing of commercial spaces in shopping malls, also known as “Key Money.”

(b)	Represents the effect of unbilled revenue from rentals recognized on a straight-line basis according to agreement terms.

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

The aging list of trade accounts receivable billed as of December 31, 2013 is as follows:

 

		Consolidated
		12/31/13
Current			39,013
Past due:
Up to 30 days			2,067
31 to 60 days			978
61 to 90 days			903
91 to 180 days			2,423
Over 180 days			5,527
Subtotal			11,898
Total			50,911

Allowance for doubtful accounts

Change in allowance for doubtful accounts is as follows:

 

		Consolidated
Balance as of December 31, 2011 (unaudited)			(9,727	)
Write-offs arising from uncollectible receivables			417
Write-offs upon the sale of interests in the malls Tivoli, Penha and Pátio Brasil			2,367
Allowances recognized in the year			(2,401	)
Balance as of December 31, 2012			(9,344	)
Write-offs arising from uncollectible receivables			1,421
Allowances recognized in the year			(2,792	)
Balance as of December 31, 2013			(10,715	)

Other receivables

Additionally, the balance of “Other receivables” is broken down as follows:

 

		Consolidated
		12/31/13
Receivables of Banco Ourinvest S.A. (a)			833
Loan agreements with storeowners (b)			3,117
Other receivables from condominiums			3,846
Receivables from parking operations			1,315
Vacations, 13th salaries, and other advances to employees			98
Other			1,700
Total			10,909
Current			(6,959	)
Noncurrent			3,950

 

(a)	As of December 31, 2013, the subsidiary Sierra Investimentos has R$833 in receivables from Banco Ourinvest S.A., as a result from the commitment entered into on October 29, 2009 (see note 30).

(b)	Refers to loans agreements entered into among Company’s subsidiaries and shopping storeowners. These agreements are subject to financial charges corresponding to the annual fluctuation of the Amplified Consumer Price Index - IPCA, and mature within up to 60 months.

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

6.	RECOVERABLE TAXES

 

		Consolidated
		12/31/13
Withholding income tax (IRRF)			27,774
Social contribution - Law 10833/03			369
Other			308
Total			28,451
Current			(9,979	)
Noncurrent			18,472

 

7.	LOANS TO CONDOMINIUMS

Represent advances to condominiums of the shopping malls to cover cash shortages, notably arising from default. The amounts will be recovered as the common area maintenance fees are received and according to the condominiums’ cash availability.

 

				Consolidated
Subsidiary		Condominium		12/31/13
Pátio São Bernardo		Condomínio Shopping Center Plaza Sul			933
Pátio Sertório		Condomínio Manauara Shopping			341
Pátio Uberlândia		Condomínio Uberlândia Shopping			2,712
Pátio Londrina		Condomínio Boulevard Londrina Shopping			3,561
Pátio Goiânia		Condomínio Passeio das Águas Shopping			1,889
Total					9,436

These loans are considered related-party transactions (see note 24).

The contracted interest rates are based on the market practices and management does not expect problems on the realization of these amounts.

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

8.	INVESTMENT UNDER EQUITY-METHOD

 

a)

Investment in associate

 

(i)

Indirect ownership interest held in Campo Limpo Empreendimentos e Participações Ltda.

 

		Consolidated
		12/31/13
Number of shares held by Sierra Investimentos			9,435,400
Interest held in investee’s capital (%)			20.00
Investment balance			33,375
Equity in subsidiaries			7,945
		Consolidated
		4/27/14
Number of shares held by Sierra Investimentos			9,435,400
Interest held in investee’s capital (%)			20.00
Equity in subsidiaries			1,003

 

(ii)

Financial information on Campo Limpo Empreendimentos e Participações Ltda.

 

		12/31/13
Balance sheet:
Current assets			6,230
Noncurrent assets			220,475
Current liabilities			2,557
Noncurrent liabilities			57,272
Equity			166,876

 

		2014 Stub
		Period				12/31/13				12/31/12
Profit or loss:
Revenue			6,904				22,430				20,117
Profit for the year and comprehensive income			5,015				39,725				24,104

 

(iii)

Changes in investments for the years ended December 31, 2013 and 2012

 

		Consolidated
Balance as of December 31, 2011 (unaudited)			26,157
Equity in investees			4,821
Dividends received			(2,448	)
Balance as of December 31, 2012			28,530
Equity in investees			7,945
Dividends received			(3,100	)
Balance as of December 31, 2013			33,375

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

b)

Non-controlling interest

 

(i)

Sonae Sierra Brasil S.A. and subsidiaries

Ownership interest held by non-controlling interest

 

		2014 Stub
		Period				12/31/13				12/31/12
Interest in capital held by non-controlling (%)			33.35				33.35				33.35
Net income from non-controlling interests			6,179				57,854				61,874
Non-controlling interests in equity			750,398				743,908				697,583
Dividends paid to non-controlling			11,596				8,920				8,156

 

		12/31/13
Balance sheet:
Current assets			481,589
Noncurrent assets			4,048,448
Current liabilities			224,475
Noncurrent liabilities			1,341,003
Equity			2,964,559

 

		2014 Stub
		Period				12/31/13				12/31/12
Profit or loss:
Net operating revenue from rentals, services and other			97,712				275,754				256,851
Changes in fair value of investment properties			—				344,318				193,586
Net and comprehensive income for the year			35,148				368,497				309,795

 

(ii)

Fundos de Investimento Imobiliário I and II

Ownership interest held by non-controlling interest of Fundos de Investimento Imobiliário I and II

 

		Consolidated
		Fundo de Investimento Imobiliário I												Fundo de Investimento Imobiliário II
		2014 Stub												2014 Stub
		Period				12/31/13				12/31/12				Period				12/31/13				12/31/12
Interest in capital held by non-controlling (%)			12.39				12.39				12.39				41.93				41.93				41.93
Net income from non-controlling interests			5,091				30,572				26,657				1,597				36,316				33,512
Non-controlling interests in equity			158,232				157,771				137,279				187,708				188,888				164,411
Dividends paid to non-controlling			3,052				10,133				9,333				4,044				11,719				13,339

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

Financial information of Fundos de Investimento Imobiliário I and II

 

 

		Fundo de Investimento Imobiliário I												Fundo de Investimento Imobiliário II
		2014 Stub												2014 Stub
		Period				12/31/13				12/31/12				Period				12/31/13				12/31/12
Profit or loss:
Net operating revenue from rentals, services and other			28,603				87,875				78,833				5,048				15,507				13,913
Changes in fair value of investment properties			—				159,615				136,667				—				28,167				24,118
Net and comprehensive income for the year			28,542				246,745				215,153				9,862				86,611				65,676

 

9.	PROPERTY AND EQUIPMENT

 

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

Changes in property and equipment in operation for the years ended December 31, 2013 and 2012

 

Changes in construction in progress and advances to suppliers for the year ended December 31, 2013

 

		Consolidated
		Construction in progress				Advances to suppliers				Total
Balances as of December 31, 2011 (unaudited)			1,979				459				2,438
Additions			—				1,167				1,167
Transfer to fixed asset in operation and intangible			(1,979	)			(1,323	)			(3,302	)
Balances as of December 31, 2012			—				303				303
Additions			2,520				714				3,234
Transfer to fixed asset in operation and intangible			(2,520	)			(1,013	)			(3,533	)
Balances as of December 31, 2013			—				4				4

 

10.	INVESTMENT PROPERTY

Under IAS 40, properties can be held to earn rentals, for capital appreciation or both to be recognized as an investment property. The Company’s management adopted the fair value method, from January 1, 2009.

The measurement and change in fair value of property are made at the date of the financial statements.

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

		Consolidated
		12/31/13
Constructed investment property			3,879,411
Investment property under construction			25,068
Land			41,692
Total			3,946,171

Changes in investment property

 

 

(a)

Additions to property in operation

 

(i)

Additional acquisition of Shopping Plaza Sul

On January 27, 2012, indirect subsidiary Pátio Penha and CSHG Brasil Shopping FII entered into an exchange agreement with cash consideration, whereby Pátio Penha acquired an additional 30% interest in Shopping Plaza Sul, in exchange for a non-controlling interest in Shopping Penha and another portion in cash in the amount of R$63,701 (original value), to be paid in 42 equal, consecutive installments of R$1,522 (original value), adjusted based on the CDI, beginning on February 27, 2012. After this transaction, the group interest in Shopping Plaza Sul is 60%.

 

(ii)

Additional acquisition of Franca Shopping

On October 4, 2012, the Company, through its indirect subsidiary Sierra Enplanta, acquired additional ownership interest of 9.5% in Franca Shopping in the amount of R$9,000. After this acquisition, the Company holds 76.9% of ownership interest in Franca Shopping.

 

(b)

Disposal of constructed investment properties

 

(i)

In connection with the barter transaction described in item (a) (i) above, subsidiary Pátio Penha delivered 17.1% of Shopping Penha to acquire 30% of Shopping Plaza Sul.

 

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(ii)

Sale of Shopping Metrópole land

On August 27, 2012, indirect subsidiary Pátio Boavista sold the land to Setin Group (6,597 sqm) (information not audited by the independent auditors), next to Shopping Metrópole in São Bernardo do Campo, State of São Paulo, for R$11,000 in cash.

As a result of this transaction, subsidiary Pátio Boavista recognized a gain of R$7,467, which is recorded in “Other operating income (loss), net,” in the statement of income.

 

(iii)

Sale of interest in Shopping Penha

On February 6, 2012, subsidiary Pátio Penha sold its non-controlling interest of 5.06% in Shopping Penha to CSHG Brasil Shopping FII R$11,514, which was received in cash.

As a result of this transaction, subsidiary Pátio Penha recognized a gain of R$482, recorded in “Other operating income (loss), net,” in the statement of income.

 

(iv)

Sale of the remaining interest in Shopping Penha and the interests in the malls Tivoli and Pátio Brasil

On November 5, 2012, the Company sold its 10.4% stake in Pátio Brasil Shopping for R$36,133. The interest in Pátio Brasil Shopping was acquired by the mall’s controlling shareholders.

On December 11, 2012, the Company sold the remaining 51.0% stake in Shopping Penha and its 30.0% stake in Tivoli Shopping for a total of R$180,049. The Company will continue to provide management and sales services to Shopping Penha for at least five years and to Shopping Tivoli for at least three years. The interests in Shopping Penha and Tivoli Shopping were acquired by CSHG Brasil Shopping FII, a fund managed by Credit Suisse Hedging-Griffo.

As a result of these transactions, the indirect subsidiaries Pátio Penha and Sierra Enplanta recorded a gain, net of selling expenses, of R$13,247 and R$3,371, respectively, recorded in line item “Other operating (expenses) income, net,” in the statement of income for the year ended December 31, 2012.

 

(c)

Capitalized expenditures for the year ended December 31, 2013, in connection with properties under construction, refer to construction costs of projects Boulevard Londrina Shopping and Passeio das Águas Shopping, which were transferred to properties in operation on the opening date of the projects. Additionally, on September 6, 2013, indirect subsidiary Pátio Uberlândia acquired a land with 45.5 thousand sqm (unaudited information) at the price of R$24,563, for the expansion of Franca Shopping.

 

(d)

On May 3, 2013, indirect subsidiary Pátio Londrina transferred 11.36% of the stake held in Boulevard Londrina Shopping to pay for the land acquired for the construction of the aforementioned shopping mall. The Company, through the transaction, maintained its 88.64% interest.

 

(e)

On May 3, 2013, Boulevard Londrina Shopping was opened, with 47.8 thousand sqm of Gross Leasable Area (GLA) and 216 stores (unaudited information).

On October 30, 2013, Passeio das Águas Shopping, located in the city of Goiânia, was launched with 78.1 thousand sqm of GLA and 267 stores (unaudited information).

 

(f)

Refers to part of the land of projects Uberlândia Shopping and Passeio das Águas Shopping acquired for purposes of appreciation and future sale.

 

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The title to part of the property comprising Shopping Boavista project is not registered with the Registry of Deed Office. As of December 31, 2013, the total amount of such property, which was accounted for as investment property, is R$64,655 (R$65,215 as of December 31, 2012).

Fair value measurement methodology

The fair value of each investment property in operation and in construction was determined based on a valuation reported at the time, prepared by an independent external appraiser (Cushman & Wakefield) and reviewed by management.

The valuation of these investment properties was prepared in accordance with the practice statements of the RICS Appraisal and Valuation Manual, published by The Royal Institution of Chartered Surveyors (“Red Book”), based in the United Kingdom.

The methodology adopted to calculate the market value (fair value) of an investment property in operation involves developing ten-year projections of gains and losses for each shopping mall, added to the residual value, which corresponds to a perpetuity calculated based on the net earnings of the 11^th year and a market yield rate (exit yield or cap rate). For the calculation of the perpetuity, the Company considered a real growth rate of 0.0%. These projections are discounted at the measurement date using a market discount rate.

The projections are not forecasted, but simply reflect the best estimate of the appraiser regarding the current view of the market with respect to the future revenue and cost of each property. The yield rate and the discount rate are set according to the local investment and institutional market and the reasonableness of the market value obtained according to the methodology above, equally tested in terms of the initial yield rate obtained based on net yield estimated for the first year of the projections.

In the valuation of the investment properties, some assumptions classified by the Red Book as “special” were considered. These assumptions relate mainly to recently opened shopping malls, where investment expenses not yet paid were not included, as such amounts are recognized in the financial statements.

The period for measurement at fair value is on semi-annual basis.

The assumptions used as of December 31, 2013, for the measurement at fair value described above, are as follows:

 

12/31/13
Ten-year discount rate				Ten-year exit yield
Minimum		Maximum		Minimum		Maximum
12.25%		14.00%		7.75%		9.50%

 

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11.	INTANGIBLE ASSETS

 

		Annual
		amortization				Consolidated
		rate - %				12/31/13
Software			20				7,797
Accumulated amortization (*)							(2,135	)
Total							5,662

 

(*)	For the 2014 Stub Period and year ended December 31, 2013, the amortization expense of the cost to purchase software, amounting to R$474 and R$1,077, respectively, is recognized under the caption “General and administrative expenses” in the statement of income.

Changes in intangible assets

 

		Consolidated
		Cost				Amortization				Net
Balance as of December 31, 2011 (unaudited)			2,153				(571	)			1,582
Additions			511				(487	)			24
Transfer from construction in progress			1,979				—				1,979
Balance as of December 31, 2012			4,643				(1,058	)			3,585
Additions			634				(1,077	)			(443	)
Transfer from construction in progress			2,520				—				2,520
Balance as of December 31, 2013			7,797				(2,135	)			5,662

 

12.	LOANS AND FINANCING

 

						Consolidated
Domestic		Maturity				12/31/13
Banco do Amazonas S.A. - BASA (a)			12/10/20				119,546
Banco Itaú BBA S.A. (b)			10/21/15				8,152
Banco Itaú BBA S.A. (c)			10/17/16				14,019
Banco Bradesco S.A. (d)			10/27/25				117,778
Banco Bradesco S.A. (e)			10/26/25				72,784
Banco Itaú BBA S.A. (f)			05/10/23				42,654
Banco Santander S.A. (g)			06/22/23				196,730
Total							571,663
Current							(61,168	)
Noncurrent							510,495

 

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(a)

On December 17, 2008, subsidiary Pátio Sertório raised a loan of R$90,315 with Banco do Amazonas S.A. - BASA to finance the construction of the mall Shopping Manauara. In the year ended December 31, 2009, the subsidiary obtained new loans totaling R$21,985. These loans bear fixed interest of 10% per year, with possible discount of 15% if payments are made on the maturity date, and have a grace period of 48 months, during which only 50% of interests incurred are paid. The remaining balance of accrued interest will be paid after the grace period together with the principal repayment. The loan is collateralized by the Shopping Manauara property. The Company and subsidiary Sierra Investimentos are guarantors of this transaction.

 

(b)

On November 16, 2010, subsidiary Sierra Investimentos Brasil Ltda. raised R$20,000 with Banco Itaú BBA S.A. to finance working capital. This loan is subject to average interest linked to CDI plus 2.85% per year. The Company is the guarantor of this transaction. The loan is collateralized by: (i) the Shopping Metrópole property; and (ii) net receivables of Shopping Metrópole. This loan has a six-month grace period for the payment of the first installment of principal. On June 19, 2013, Sierra Investimentos changed the interest rate applied to CDI plus 1.66% per year.

 

(c)

On November 16, 2010, subsidiary Pátio Boavista raised R$27,000 with Banco Itaú BBA S.A. to finance working capital. This loan is subject to average interest linked to CDI plus 3.3% per year. The Company is the guarantor of this transaction. The loan is collateralized by: (i) the Shopping Metrópole property; and (ii) net receivables of Shopping Metrópole. This loan has a six-month grace period for the payment of the first installment of principal. On June 19, 2013, Pátio Boavista changed the interest rate applied to CDI plus 1.78% per year.

 

(d)

In the period from June to December 2013, subsidiary Pátio Londrina raised R$117,027 with Banco Bradesco S.A. to finance the construction of Shopping Londrina. This loan, in the total amount of R$120,000, bears a fixed rate equivalent to TR (a managed prime rate) plus 10.9% per year. The agreement is effective for 15 years, with a 2-year grace period for repaying the principal, beginning on April 27, 2014 (unaudited). After this period, the outstanding balance will be paid in 155 monthly consecutive installments. The loan is collateralized by the Shopping Londrina property. The Company is the guarantor of this transaction. On December 14, 2012, Pátio Londrina renegotiated the agreed interest rate to TR plus 9.7% per year.

 

(e)

From August 2010 to February 2012, subsidiary Pátio Uberlândia raised R$77,152 with Banco Bradesco S.A. to finance the construction of Shopping Uberlândia with a fixed rate equivalent to TR plus 11.3% per year. The agreement is effective for 15 years, with a 2-year grace period for the interest installment. After this period, the outstanding balance will be paid in 156 monthly consecutive installments. The loan is collateralized by the Shopping Uberlândia property. The Company is the guarantor of this transaction. On November 21, 2012, Pátio Uberlândia renegotiated the agreed interest rate to TR plus 9.7% per year.

 

(f)

On June 29, 2011, subsidiary Pátio Boavista raised R$52,651 with Banco Itaú BBA S.A. to finance the expansion of Shopping Metrópole. This loan bears a fixed rate equivalent to TR plus 10.30% per year. The agreement is effective for 7 years, with a 12-month grace period for repaying the principal. After this period, the outstanding balance will be paid in 72 monthly consecutive installments. The Company is the guarantor of this transaction.

 

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The loan is collateralized by: (i) the Shopping Metrópole property; and (ii) Shopping Metrópole’s net receivables. On June 19, 2013, Pátio Boavista renegotiated the interest rate applied to TR plus 9.3% per year. On September 23, 2013, Pátio Boavista renegotiated the repayment schedule to 128 monthly consecutive installments; because of this change, the maturity date of the agreement changed from May 10, 2018 to May 10, 2023.

 

(g)

Between March and December 2012, subsidiary Pátio Goiânia raised R$179,005 with Banco Santander (Brasil) to finance the construction of Passeio das Águas Shopping. The approved funding line, in the total amount of R$200,000, bears a fixed rate equivalent to the TR plus 11.00% per year. The agreement is effective for 12 years, with a 24-month grace period for repaying the principal. After this period, the outstanding balance will be paid in 111 monthly, consecutive installments. The finance is collateralized by Passeio das Águas Shopping property. The Company is the guarantor of this transaction. On December 21, 2012, Pátio Goiânia renegotiated the agreed interest rate to TR plus 9.7% per year.

As of December 31, 2013, the total amount of the properties pledged to the banks, in connection with the borrowings and financing, is R$1,983,836 and the amount of net receivables pledged by Pátio Boavista is R$3,614.

Covenants

The loan agreements entered by the Company and its subsidiaries, described above, do not provide for compliance with any financial ratios, such as debt ratios, expense coverage with interests, etc.

Changes in loans and financing for the years ended December 31, 2013 and 2012

 

Balance as of December 31, 2011			350,891
New borrowings			78,984
Payments - principal			(11,579	)
Interest payments			(29,142	)
Interest capitalized on investment property under construction			12,556
Interest allocated to net income			27,618
Balance as of December 31, 2012			429,328
New borrowings			169,825
Payments - principal			(38,161	)
Interest payments			(37,844	)
Interest capitalized on investment property under construction			12,966
Interest allocated to net income			35,549
Balance as of December 31, 2013			571,663

 

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The noncurrent portion of line item “Loans and financing” as of December 31, 2013, matures as follows:

 

2015			66,845
2016			62,323
2017			58,232
2018			58,232
2019			58,232
2020 - 2024			188,667
2025 - 2026			17,964
Total			510,495

 

13.	DEBENTURES

 

						Consolidated
Debentures		Maturity				12/31/13
Securities - 1st series			02/15/17				97,542
Securities - 2nd series			02/15/19				233,618
Loss with derivative transaction in fair value hedge accounting			02/15/19				1,828
Total							332,988
Current							(14,903	)
Noncurrent							318,085

On February 15, 2012, the Company issued 30,000 nonconvertible debentures, in two series, with a par value of R$10 each, totaling R$300,000. After the book-building procedure carried out on March 2, 2012, which defined the debenture interest, the series can be summarized as follows:

 

•

1st series: 9,550 debentures, in the total amount of R$95,500, yielding a floating annual rate equivalent to CDI plus 0.96%, with final maturity within five years. Compensation will be paid semiannually.

 

•

2nd series: 20,450 debentures, in the total amount of R$204,500, yielding a floating annual rate equivalent to consumer price index (IPCA) plus 6.25%, with final maturity within seven years. Compensation will be paid annually.

As described in note 26.3, on August 22, 2013, the Company contracted a derivative instrument (swap) in the notional amount of R$54,500, to partially hedge the inflation rate risk (IPCA) subject to the interest of the 2^nd series of debentures. In this transaction, the Company replaced the IPCA + 6.25% per year by the CDI +1.24% per year.

The swap agreement expires within six years and matures on February 15, 2019. This maturity date is the same as the hedged instrument.

This transaction is intended to adjust the Company’s indebtedness, including the change from variable IPCA rate to the CDI. Although both rates are variable, the CDI currently reflects the primary compensation index of the Company’s financial assets and, therefore, is more appropriate to manage financial instruments.

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

Changes in debentures, recorded in current and noncurrent liabilities, are broken down as follows:

 

Balance as of December 31, 2012			318,052
New borrowings			—
Amortizable borrowing costs			1,111
Interest allocated to net income			35,120
Interest payments			(21,141	)
Gain on debentures adjustment in fair value hedging accounting			(1,982	)
Loss with derivatives transaction in fair value hedging accounting			1,828
Balance as of December 31, 2013			332,988

The debenture, classified in noncurrent liabilities, will be repaid as follows:

 

		Principal and interests				Unamortized cost				R$
2015			—				(1,111	)			(1,111	)
2016 (repayment of 50% of 1st series)			47,750				(1,111	)			46,639
2017 (repayment of 50% of 1st series)			47,750				(744	)			47,006
2018 (repayment of 50% of 2nd series)			113,167				(671	)			112,496
2019 (repayment of 50% of 2nd series)			113,167				(112	)			113,055
Total			321,834				(3,749	)			318,085

Covenants

The debenture indenture subjects the Company to covenants, which are related mainly to financial ratios, as Earnings Before Interest, Taxes, Depreciation and Amortization - EBITDA (*), net debt and net financing expenses. Below we demonstrate the contractually required ratios:

 

		Contractually required ratio
Net debt/EBITDA			Equal or less than 3.5
EBITDA/Net financing expenses			Equal or greater than 1.75

As of December 31, 2013, the Company’s management believes that it is compliant with all covenants.

 

(*)	The indenture defines EBITDA as net income before net financial expenses (including net currency exchange variations), income and social contribution taxes, depreciation and amortization.

 

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14.	PAYABLES FOR PURCHASE OF ASSET

 

		Consolidated
		12/31/13
Acquisition of equity interest in shopping mall (a)			31,840
Current			(21,186	)
Noncurrent			10,654

Changes in trade accounts payable - acquisition of assets are as follows:

 

Balance as of December 31, 2011 (unaudited)			25,000
Acquisition of equity interest in shopping mall (a)			63,701
Payment of principal			(18,040	)
Financial charges allocated to profit or loss			4,162
Financial charges capitalized under investment property under construction			4,302
Financial charges paid			(715	)
Balance as of December 31, 2012			78,410
Payment of principal			(18,264	)
Financial charges allocated to profit or loss			3,148
Financial charges paid			(2,151	)
Financial charges capitalized under investment property under construction			607
Write-off - barter transaction of Boulevard Londrina Shopping			(29,910	)
Balance as of December 31, 2013			31,840

 

(a)

The balance payable refers to an asset barter transaction with cash consideration involving Shopping Center Penha for acquisition of stake in Shopping Plaza Sul. Such account payables will be settled in 42 equal consecutive installments of R$1,522 (original value), adjusted based on the CDI. As of December 31, 2013, 18 installments are outstanding.

 

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15.

KEY MONEY

 

				Consolidated
Subsidiary		Shopping mall		12/31/13
Pátio Boavista		Boavista Shopping			2,962
Pátio Sertório		Shopping Manauara			2,007
Pátio Uberlândia		Uberlândia Shopping			5,021
Pátio Londrina		Boulevard Londrina			6,839
Pátio Goiânia		Passeio das Águas			7,270
Fundo de Investimento Imobiliário I		Shopping Parque D. Pedro			1,092
Fundo de Investimento Imobiliário II		Shopping Parque D. Pedro			193
Total					25,384
Current					(8,340	)
Noncurrent					17,044

Key money refers to the lease agreements for the use of property space, payable by tenants from the time the point of sales lease agreement is executed. New tenants pay for the right to use commercial locations in the shopping malls upon the launching of new projects, expansions or when a store is returned. These amounts are negotiated based on the market value of the locations.

The key money amounts are billed according to the lease term, up to 60 months, and are recognized on a straight-line basis in the statement of income over the lease agreement period.

 

16.	RESERVE FOR CIVIL, TAX, LABOR AND SOCIAL SECURITY RISKS

The Company and its subsidiaries are parties to civil, tax, labor and social security lawsuits at different courts and levels. Based on the opinion of its legal counsel, the Company’s management recorded a reserve for lawsuits whose likelihood of an unfavorable outcome is considered probable. The reserve for risks is broken down as follows:

 

		Consolidated
		12/31/13
Labor and social security (a)			3,477
Tax (b)			3,754
Civil (c)			682
Total			7,913

 

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Changes in the reserve for civil, tax, labor and social security risks

 

(*) Adjusted for inflation in accordance with the specific indexes defined by the respective courts or legislation in force

 

(a)

Labor and social security

As of December 31, 2013, the Company and its subsidiaries whose contingency in the amount of R$1,210 was assessed as a probable loss by the legal counsel.

For the social security risks, as of December 31, 2013, the Company maintained a reserve of R$2,267 according to the legal counsel’s opinion, which estimated that the likelihood of loss on these lawsuits is probable.

 

(b)

Tax

IRRF, CIDE, CPMF and CADE

The Company is claiming the suspension of the payment of IRRF, economic intervention contribution (CIDE) and tax on banking transaction (CPMF) on payments made abroad. The historical amounts of such lawsuits correspond to the total amount of R$3,344, which are deposited in escrow and accrued, since the likelihood of loss on these lawsuits is probable.

The CIDE and IRRF lawsuits had an unfavorable decision to the Company on appellate court and await ruling at special appeal.

There was a final and unappealable decision on the lawsuit challenging the CPMF levied an unfavorable decision of foreign payments to subsidiary Sierra Investimentos. This decision will not require disbursements since the court costs have already been paid and the subsidiary was not sentenced to pay attorney’s fees to the prevailing party arising from the injunction. Presently, subsidiary Sierra Investimentos awaits the settlement of the escrow deposit, which amounts to R$1,278, in order to write off the tax credit. Additionally, Sierra Investimentos recognizes a reserve for contingencies and made an escrow deposit of R$410, corresponding to the administrative fine imposed by the CADE (Brazilian antitrust agency). As of December 31, 2012, this lawsuit had already obtained a final and un-appealable decision. Presently, Sierra Investimentos is awaiting the withdrawal of the escrow deposits made by the CADE to settle the fine, with no impact on net income.

 

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(c)

Civil

The Company’s subsidiaries are defendants in several lawsuits arising from their regular business activities, especially involving compensation, contract termination and shopping mall rental renewal and revision lawsuits.

The Company’s subsidiaries are plaintiffs in lawsuits mostly related to evictions (due to default and contractual breaches), executions and collections.

The Company and its subsidiaries are parties to other tax, civil, labor and social security lawsuits arising from the normal course of their business and whose likelihood of loss is possible. These lawsuits amounted to R$70,695 as of December 31, 2013. The Company does not expect a material impact on its financial statements. The main lawsuits are described as follows:

 

(i)

The subsidiary Pátio Sertório Shopping Ltda. filed suit against the building company responsible for the construction of Manauara Shopping. It refers to an action involving rescission of contract combined with indemnity for pain and suffering, claiming payment of compensation due to nonperformance and irregularities in the construction of Manauara Shopping. Additionally, subsidiary Pátio Sertório Shopping Ltda. is a defendant in a lawsuit started by the building company, claiming payment of the updated amount of R$25,253 related to the execution of the construction of Manauara Shopping. Currently the proceeding awaits ruling at lower court.

 

(ii)

The subsidiary Pátio Londrina is a party to an arbitration proceeding filed against the building company responsible for the construction of Boulevard Londrina Shopping. The counterparty claims compensation for the agreement termination, damages, pain and suffering for the non-compliance of the construction schedule and the resulting delay of the project’s opening. The building company claims compensation for pain and suffering, damages and loss of profits in the updated amount of R$35,958. Currently the proceeding awaits the arbitration award.

Escrow deposits

Breakdown of escrow deposits:

 

		Consolidated
		12/31/13
Labor and social security			454
Tax			4,206
Civil			7,017
Total			11,677

 

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17.	TAXES PAYABLE

 

		Consolidated
		12/31/13
Income tax and social contribution			4,163
Withholding income taxes (IRRF)			1,355
Social Security Funding Tax on Revenue (COFINS)			1,355
Social Integration Program Tax on Revenue (PIS)			304
Services tax (ISS)			523
Other			200
Total			7,900

 

18.	EQUITY - COMPANY

 

18.1.

Capital

As of December 31, 2013, the authorized share capital of the Company amounts to €91,000, divided into 910 ordinary shares with a nominal value of €100 each.

As of December 31, 2013, the issued and paid-up capital amounts to R$48, equivalent to €18,400, divided into 92 A Shares and 92 B Shares, with a nominal value of €100 each.

 

18.2.

Capital and share premium

On April 4, 2012 it was approved by the shareholders that the Company repays share premium to the shareholders in the amount of R$2,492, equivalent to €1,000,000 of the Company to Sierra Investimentos and the amount of R$2,492, equivalent to €1,000,000 of the Company to DDR Luxembourg SARL.

 

18.3.

Dividends

Company

For the 2014 Stub Period and the years ended December 31, 2013 and 2012, the Company paid dividends totaling R$8,797, R$41,620 and R$31,445, respectively.

Sonae Sierra Brasil S.A.

Under the Sonae Sierra Brasil S.A. bylaws, shareholders are entitled to minimum dividends of 25% of net income adjusted pursuant to the Brazilian Corporate Law. These realized minimum mandatory dividends were recorded by the subsidiary as of December 31, 2013 and 2012 in the amounts of R$34,772 and R$26,748, respectively.

On May 15, 2012, Sonae Sierra Brasil S.A. paid R$24,456 (R$16,300 to controlling shareholders and R$8,156 to non-controlling shareholders).

On May 15, 2013, Sonae Sierra Brasil S.A. paid R$26,748 (R$17,828 to controlling shareholders and R$8,920 to non-controlling shareholders).

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

The realized minimum mandatory dividends related to non-controlling interests as of December 31, 2013 and 2012 amount to R$11,596 and R$8,920, respectively.

Fundos de Investimento Imobiliário I and II

Fundos de Investimento Imobiliário I and II distribute to unit holders a minimum of 95% of their income, even though in excess of the revenue (expenses) (cash basis), calculated based on the existing cash and cash equivalents payable to unit holders registered as such on the closing of the last business day of the month preceding the respective payment.

For the 2014 Stub Period and the years ended December 31, 2013 and 2012, dividends paid totaled R$7,096, R$21,852 and R$22,672, respectively.

As of December 31, 2013 and 2012, the balances of dividends payable related to non-controlling interests amount to R$2,837 and R$3,015, respectively.

 

18.4.

Earnings per share

As required by IAS 33 - Earnings per Share, below is the reconciliation of net income to the amounts used to calculate the basic earnings per share.

The Company has no debt convertible into shares or stock options granted; therefore, the diluted earnings per share were equal to the basic earnings per share calculated as follows:

 

		Consolidated
		2014 Stub Period				12/31/13				12/31/12
Net income for the year attributable to the Company’s owners			23,809				232,667				182,409
Weighted average of outstanding common shares			184				184				184
Basic earnings per share			129				1,264				991

 

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19.	NET OPERATING REVENUE FROM RENTALS, SERVICES AND OTHER

 

		Consolidated
		2014 Stub Period				12/31/13				12/31/12
Gross revenue:
Rentals			88,664				243,457				224,350
Revenue from services			7,539				20,202				17,763
Parking revenue			9,785				27,919				26,471
Key money			5,612				18,993				12,064
Other income			1,014				5,198				2,784
Total			112,614				315,769				283,432
Deductions:
Taxes on rentals and services			(5,679	)			(20,968	)			(18,255	)
Discounts and abatements			(9,223	)			(19,047	)			(8,326	)
Total			(14,902	)			(40,015	)			(26,581	)
Net revenue			97,712				275,754				256,851

 

20.	EXPENSES BY NATURE

 

		Consolidated
		2014 Stub Period				12/31/13				12/31/12
Depreciation and amortization			845				2,330				1,790
Personnel			12,160				31,694				28,676
Services rendered by third parties			3,227				11,438				10,507
Cost of occupancy (vacant stores)			7,522				14,501				6,111
Costs of contractual agreements with tenants			3,288				6,299				2,219
Allowance for (reversal of) doubtful accounts receivable			2,560				2,792				2,401
Rent			995				2,756				2,571
Others			2,942				9,543				9,296
Total			33,539				81,353				63,571
Classified as:
Cost of rentals, services and other			24,330				58,715				43,177
General and administrative expenses			9,209				22,638				20,394

 

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21.	OTHER OPERATING INCOME, NET

 

		Consolidated
		2014 Stub Period				12/31/13				12/31/12
Gain on the sale of investment properties			—				—				30,758
Sales transaction costs			—				—				(6,048	)
Other			956				5,621				3,091
Total			956				5,621				27,801

 

22.	FINANCIAL INCOME (EXPENSES), NET

 

		Consolidated
		2014 Stub Period				12/31/13				12/31/12
Financial income:
Loans and receivables:
Interest from short-term investments			17,820				41,374				49,607
Interest receivable			876				1,333				1,364
Monetary and exchange variations			61				2,875				369
Other			1,916				2,726				1,328
			20,673				48,308				52,668
Fair value through profit and loss-
Gain arising from debenture adjustment hedged in a fair value hedge accounting			581				1,982				—
			581				1,982				—
			21,254				50,290				52,668

 

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23.	INCOME TAX AND SOCIAL CONTRIBUTION

 

a)

Income tax and social contribution expense

The Company and its subsidiaries’ operations are located in Brazil; therefore, the reconciliation of income tax expense was prepared according to the statutory rates in Brazil.

 

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(*)	Fundos de Investimento Imobiliário I and II are tax exempt (see details in note 2.22).

(**)	Deferred income taxes on tax losses not recognized.

 

b)

Deferred income tax and social contribution

Based on analyses of the multi-year operating projections, the Company and its subsidiaries recognized tax credits related to tax loss carryforwards and temporary differences in prior years.

Maintenance of tax credits from tax loss carryforwards (deferred income tax and social contribution tax loss carryforwards) is supported by future earnings projections prepared by the Company’s management and periodically reviewed, for the next ten years, to determine the recoverability of tax loss carryforwards and temporary differences.

 

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Deferred income tax and social contribution are broken down as follows:

 

		12/31/13
Tax loss carryforward			8,249
Reserve for civil, tax, labor and social security risks			1,767
Allowance for doubtful accounts			2,174
Other temporary reserves			(9	)
Change in fair value of investment property			(532,936	)
Total deferred income tax and social contribution			(520,755	)
In noncurrent assets			5,036
In noncurrent liabilities			(525,791	)

 

Recognized noncurrent tax credits totaling R$17,226 as of December 31, 2013 should be realized within up to ten years, as shown below:
Year		Consolidated
2014			361
2015			—
2016			268
2017			1,707
2018			2,963
2019 - 2023			11,927
Total			17,226

 

24.	RELATED-PARTY TRANSACTIONS

In the course of the Company’s business, controlling shareholders, subsidiaries, the associates and condominiums (related parties) carry out commercial and financial intercompany transactions. These commercial transactions primarily include management of shopping malls (common charges and promotion fund).

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

Balances with related parties for the 2014 Stub Period and as of December 31, 2013 and 2012 are as follows:

 

Balance sheet		Purpose		12/31/13
Current assets-
Affiliates:
Condomínio Shopping Center Penha		(a)			110
Condomínio Civil Center Shopping São Bernardo		(b)			420
Condomínio Tivoli Shopping Center		(b)			64
Condomínio Franca Shopping Center		(b)			58
Condomínio Parque Dom Pedro Shopping		(b)			633
Condomínio Shopping Center Plaza Sul		(b)			143
Total (a)					1,428
Noncurrent assets-
Affiliates:
Condomínio Manauara		(c)			341
Condomínio Shopping Boavista		(c)			—
Condomínio Shopping Center Plaza Sul		(c)			933
Condomínio Boulevard Londrina Shopping		(c)			3,561
Condomínio Passeio das Águas Shopping		(c)			1,889
Condomínio Uberlândia Shopping		(c)			2,712
Total					9,436

 

 

(a)	Included in the balance of receivables, net and other receivables.

(b)	Refers to revenue from services provided by the subsidiary Unishopping Consultoria Ltda., which relates to the management of common charges and the promotion fund of the condominiums. This revenue is recognized in line item “Revenue from services,” as disclosed in note 19.

(c)	Refers to loans to condominiums described in note 7.

 

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25.	OPERATING SEGMENTS REPORTING

Segment reporting is used by the Company’s top management to make decisions about resources to be allocated to a segment and assess its performance.

Therefore, the Company’s segments reportable pursuant to IFRS 8 are as follows:

 

a)

Development and management

Refers to the provision of asset and property management services to shopping malls’ tenants and owners, brokerage services, and development of a project for a new shopping mall

 

b)

Investment

Refers to the rental of store space to tenants and other commercial space, such as sales stands, rental of commercial space for advertising and promotion, operation of parking lots, and the property space (key money) lease fee

 

(i)

Segment reporting of asset

 

 

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(ii)

Segment reporting of statement of income

 

The operations related to the development, management and investment of shopping malls are located only in Brazil. Therefore, the Company does not present analyses of revenues by geographical area.

 

26.	FINANCIAL INSTRUMENTS

The Company and its subsidiaries conduct transactions involving financial instruments, all of which are recorded in balance sheet accounts, which are intended to meet their operating and financial needs.

These financial instruments are managed based on policies, definition of strategies and establishment of control systems, which are duly monitored by the management of the Company and its subsidiaries, with a view to maximize shareholder value and achieve a balance between debt and equity capital.

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

The Company and its subsidiaries’ main financial instruments are represented by:

 

a)

Cash and cash equivalents, restricted investments and escrow deposits: are classified as loans and receivable and their carrying amount is equivalent to the assets’ fair value

 

b)

Trade accounts receivable and loans to condominiums: are classified as loans and receivables and recorded at the contracted amounts, which approximate market

 

c)

Loans and financing: are classified as other financial liabilities and the fair value is determined using generally accepted pricing models based on analyses of discounted cash flows

 

d)

Debentures: are classified as other financial liabilities (part of the debentures issued by the Company, subject to fair value hedge, is stated at fair value)

 

e)

Domestic trade accounts payables: are classified as other financial liabilities and recorded at the contracted amounts, which approximate market

As of December 31, 2013, the carrying amounts and fair values of the Company’s and its subsidiaries’ financial instruments are as follows:

 

The measurement of financial instruments is grouped into levels 1 to 3, based on the fair value hierarchy:

 

•

Level 1 - quoted prices in active markets for identical assets and liabilities.

 

•

Level 2 - other techniques according to which all inputs with significant effects on the fair value are observable, either directly or indirectly. The fair values of the financial assets and financial liabilities included in the level 2 category above have been determined in accordance with generally accepted pricing models based on a discounted cash flow analysis, with the most significant inputs being the discount rate that reflects the credit risk of counterparties.

 

•

Level 3 - techniques that use inputs with significant effects on fair value not based on observable market inputs.

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

According to their nature, financial instruments may involve known or unknown risks, and the Company’s judgment is important to the risk assessment. Thus, risks may exist with or without guarantees depending on circumstantial or legal aspects. The main market risk factors that may affect the Company’s business are as follows:

 

26.1.

Credit risk

The Company has a large customer base and constantly monitors trade receivables using internal controls, which limit the risk of default. The allowance for doubtful accounts is recognized in an amount considered by management as sufficient to cover probable losses on the collection of receivables, based on the following criterion: allowance of 100% for receivables past due over 120 days.

The credit risk related to cash and cash equivalents is limited as the counterparties are represented by banks, with a high rating assigned by international credit rating agencies.

 

26.2.

Price fluctuation risk

The Company’s revenue consists of rentals received from shopping mall tenants. In general, rentals are adjusted based on the annual fluctuation of IPCA, as provided in the lease agreements. The rental levels may vary according to adverse economic conditions and, consequently, the revenue level may be affected. Management monitors these risks in order to minimize impacts on its business.

 

26.3.

Interest rate risk

Results from the portion of debt contracted with interest linked to the CDI, TR and IPCA and involves the risk of increase in financial expenses as a result of unfavorable rates.

The Company contracted non-speculative derivatives (swap) to partially hedge the inflation rate risk (IPCA) subject to interest of the 2^nd series of debentures, as follows:

 

The aforementioned swap transaction was designated by the Company as a fair value hedge accounting transaction. The fair value of debentures, which is the subject matter of the swap transaction, corresponds to a gain of R$1,982 (see notes 13 and 22).

 

26.4.

Currency risk

Trade receivables and trade payables are denominated in Brazilian reais and are not exposed to exchange fluctuations.

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

26.5.

Capital risk

The Company and its subsidiaries manage their capital to ensure regular business continuity and, at the same time, maximize return for all stakeholders or parties involved in their operations, by optimizing debt and equity balance.

The Company and its subsidiaries’ equity structure consists of loans and financing and debentures detailed in notes 12 and 13, less cash and cash equivalents and consolidated shareholders’ equity (including capital, reserves and non-controlling interests, as mentioned in note 18).

 

26.6.

Liquidity risk management

The Company and its subsidiaries manage the liquidity risk by maintaining proper reserves, bank and other credit facilities to raise new borrowings that they consider appropriate, based on the continuous monitoring of budgeted and actual cash flows, and the combination of the maturity profiles of financial assets and financial liabilities.

Liquidity risk and interest tables

The tables below detail the remaining contractual maturity of the Company’s financial liabilities and the contractual payment periods. These tables were prepared in accordance with undiscounted cash flows of financial liabilities, based on the closest date when the Company and its subsidiaries should settle the corresponding obligations. The tables include interest and principal cash flows. As interest flows are based on floating rates, the undiscounted amount was based on the interest curves at year-end. Contractual maturity is based on the most recent date when the Company and its subsidiaries should settle the related obligations.

 

Sensitivity analysis on financial instruments

Considering the financial instrument previously described, the Company and its subsidiaries have developed a sensitivity analysis based on 25% and 50% fluctuations in the risk variable taken into consideration. These scenarios may impact the Company and its subsidiaries’ net income and/or future cash flows, as described below:

 

•

Base scenario: maintenance of interest in the same levels as those as of December 31, 2013.

 

•

Adverse scenario: a 25% fluctuation of the main risk factor of the financial instrument compared to the level as of December 31, 2013.

 

•

Remote scenario: a 50% fluctuation of the main risk factor of the financial instrument compared to the level as of December 31, 2013.

 

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Assumptions

As described above, the Company believes that it is mainly exposed to the risks of fluctuation of the CDI, TR and IPCA, which is the basis to adjust a substantial portion of short-term investments and loans and financing. Accordingly, the table below shows the indices and rates used to prepare the sensitivity analysis:

 

Management analysis

 

						Consolidated
Risk factor		Financial instrument		Risk		Base scenario (*)				Adverse scenario				Remote scenario
Short-term investments		Interest rate		Decrease in CDI rate			43,717				32,809				21,859
Loans		Interest rate		Increase in CDI rate			2,282				2,852				3,423
Loans		Interest rate		Increase in TR rate			860				1,075				1,290
Debentures		Interest rate		Increase in CDI rate			9,986				12,343				14,812
Debentures		Interest rate		Increase IPCA rate			11,779				14,545				17,454
Swap derivatives		Inflation index and interest rate		Increase in CDI rate and Decrease in IPCA			2,898				5,282				7,667

 

(*)	The Company’s base scenario is comprised of interest estimated for the next 12-month period.

The Company’s management understands that the market risks originated from other financial instruments are immaterial.

 

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27.

INSURANCE

As of December 31, 2013, insurance is as follows:

 

		Insured amount
Civil liability (shopping mall operations)			213,684
Fire			1,765,725
Loss of profits			250,611
Windstorm/smoke			117,276

 

28.	MANAGEMENT COMPENSATION

For the 2014 Stub Period and during the years ended December 31, 2013 and 2012, expenses on management compensation are broken down as follows:

 

		Consolidated
		2014 Stub Period				12/31/13				12/31/12
Payroll and related taxes			943				3,639				3,825
Variable compensation			660				2,012				1,928
Benefits			103				364				335
Total			1,706				6,015				6,088

These amounts are recorded in line item “Cost of rents and services,” in the statement of income.

The amounts referring to the compensation of key management personnel are represented by short and long-term benefits, substantially corresponding to management fees and sharing profit (including performance bonuses). The Company and its subsidiaries do not pay post-employment benefits or share-based compensation.

As of December 31, 2013, the balance of line item “Accrual for variable compensation,” totaling R$1,469, stated in noncurrent liabilities, includes only variable compensation (performance bonuses) awarded to the subsidiary Sonae Sierra Brasil S.A.’s officers.

Additionally, as approved at the annual General and Extraordinary Shareholders’ Meeting (AGO/E) held on April 25, 2013, the overall compensation to Directors and Officers of the subsidiary Sonae Sierra Brasil S.A. in 2013 is R$10,000.

 

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29.	ADDITIONAL DISCLOSURES ON CASH FLOWS

The Company and its subsidiaries conducted the following noncash transactions:

 

 

30.	COMMITMENTS

With the enactment of Law 12024, dated August 27, 2009, which describes the tax treatment applicable to income earned by real estate investment funds, the administrator of Fundo de Investimento Imobiliário I, Banco Ourinvest S.A., stopped retaining IRRF on income paid to a certain shareholder headquartered in Brazil. In view of the inquiry made by Banco Ourinvest S.A., to the Federal Revenue Service on the content and scope of this law, Sierra Investimentos committed to an agreement entered into with this bank, dated October 29, 2009, to make a short - term investment under custody to cover a possible collection of the tax that is not being withheld. At the same date, Parque D. Pedro 1 BV/SARL (a Luxembourg company belonging to the same corporate group of the Company) and Sierra Investimentos, entered into an agreement under which Parque D. Pedro 1 BV/SARL agrees to reimburse Sierra Investimentos for any type of risk arising from the nonpayment of tax by Banco Ourinvest S.A.

As of May 13, 2010, the federal government filed an appeal against the federal lower court decision. On June 11, 2010, Banco Ourinvest S.A. filed its counter-arguments and currently awaits the appellate court decision.

As of December 31, 2013, subsidiary Sierra Investimentos has R$833 receivable from Banco Ourinvest S.A., as a result of the agreement entered into on October 29, 2009. These receivables are classified in line item “Other receivables”, in noncurrent assets (see note 5). In addition, the subsidiary Sierra Investimentos has a balance of R$6,124 in restricted investments, stated in noncurrent assets.

 

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Sonae Sierra Brazil BV SARL and Subsidiaries

 

31.	SUPPLEMENTAL INFORMATION - RECONCILIATION OF EQUITY AND NET INCOME BETWEEN U.S. GAAP AND IFRS, AS ISSUED BY IASB

The Company presents in this note the reconciliation of equity and net income between the amounts calculated in accordance with the U.S. GAAP and IFRS for the 2014 Stub Period and for the years ended December 31, 2013 and 2012 as follows:

Reconciliation

Reconciliation of shareholders’ equity as of December 31, 2013 and 2012:

 

				Consolidated
		Note		12/31/13
Shareholders’ equity as reported under IFRS					2,951,605
Adjustment of the fair value of investment property		(a)			(3,946,171	)
Effect of cost of investment property		(a)			2,300,796
Effect of depreciation of investment property		(a)			(186,360	)
Write-off of prepaid commission expenses		(c)			10,943
Campo Limpo Empreendimentos e Participações Ltda.		(d)			(22,538	)
Other differences					(1,874	)
Effect of deferred income tax and social contribution		(e)			505,141
Shareholders’ equity under U.S. GAAP					1,611,542

Reconciliation of income for the 2014 Stub Period and for the years ended December 31, 2013 and 2012:

 

				Consolidated
		Note		2014 Stub Period				12/31/13				12/31/12
Net income as reported under IFRS					36,676				357,409				304,452
Adjustment of the fair value of investment property		(a)			—				(344,318	)			(193,586	)
Effect of depreciation		(a)			(16,899	)			(36,596	)			(26,486	)
Interest capitalized on investment property under construction		(b)			625				29,213				24,601
Write-off of prepaid commission expenses		(c)			(1,396	)			416				(2,198	)
Campo Limpo Empreendimentos e Participações Ltda.		(d)			(108	)			(5,064	)			(2,312	)
Effect of deferred income tax and social contribution		(e)			(651	)			128,013				51,096
Gain on sales of investment properties		(f)			—				—				174,527
Income tax and social contribution related to gain on sales of investment properties		(f)			—				—				(60,073	)
Other differences					(251	)			(1,271	)			3,496
Net income under U.S. GAAP					17,996				127,802				273,517

 

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Summary of main differences between U.S. GAAP and IFRS:

 

(a)

Investment properties

Under IFRS, investment properties are measured initially at their cost, including transaction costs. After initial recognition, investment properties are measured at fair value. The gain or loss from the change in fair value of investment properties in operation are recognized in profit or loss for the period in which it arises.

Under U.S. GAAP, investment properties are carried at acquisition cost, including borrowing costs. Depreciation is calculated under the straight-line method based on estimated useful lives of the assets.

 

(b)

Interest capitalized on investment property under construction

Under IFRS, income earned on the temporary investment of actual borrowings is offset against the actual borrowing costs to be capitalized.

Under U.S. GAAP, income earned on the temporary investment of actual borrowings is not generally deducted from the amount of borrowing costs to be capitalized.

 

(c)

Write-off of prepaid commission expenses

Under U.S. GAAP, the Company recorded costs on commissions paid on store rentals as prepaid expenses, which are amortized over a five-year period taking into account the start and the termination of the lease agreements.

Under IFRS, these expenses and costs do not meet the definition of an asset; therefore, are recognized as operating costs when incurred.

 

(d)

Campo Limpo Empreendimentos e Participações Ltda.

The associate Campo Limpo Empreendimentos e Participações Ltda. also prepares financial statements in accordance with IFRS, and, as such, applies the policies described in items (a) and (b) above related to adjustment of the fair value of investment property. This amount represents the impact of these two adjustments in consolidated net income arising from the equity method valuation.

 

(e)

Deferred income taxes

The deferred income taxes reconciling item represents the tax effect of all the GAAP adjustments discussed in the reconciliation table above.

 

(f)

Gain on sales of investment properties

Under IFRS, investment properties are measured initially at their cost, including transaction costs. After initial recognition, investment properties are measured at fair value.

Under U.S. GAAP, investment properties are carried at acquisition cost, including borrowing costs less accumulated depreciation.

Therefore, the GAAP adjustment corresponds to the different results obtained by assets measured at fair value in IFRS and assets measured at cost of acquisition, deducted from accumulated depreciation in U.S. GAAP.

 

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Breakdown of investment property under U.S. GAAP as of December 31, 2013

 

 

32.	APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved by the Executive Committee and authorized for issue on March 12, 2015.

 

58