Howard Hughes Corp - Quarter Report: 2011 June (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

THE HOWARD HUGHES CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		36-4673192
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

13355 Noel Road, Suite 950, Dallas, Texas 75240

(214) 741-7744

N / A

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. þ Yes o 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). o Yes o No

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.

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

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

The number of shares of Common Stock, $0.01 par value, outstanding on August 5, 2011 was 37,942,107.

 

 

THE HOWARD HUGHES CORPORATION

INDEX

		PAGE
		NUMBER
Part I FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010			3
Condensed Consolidated and Combined Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2011 and 2010			4
Condensed Consolidated and Combined Statements of Equity for the six months ended June 30, 2011 and 2010			5
Condensed Consolidated and Combined Statements of Cash Flows for the six months ended June 30, 2011 and 2010			6
Notes to Condensed Consolidated and Combined Financial Statements			7
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3: Quantitative and Qualitative Disclosures about Market Risk			49
Item 4: Controls and Procedures			50
			50
Part II OTHER INFORMATION
Item 1: Legal Proceedings			50
Item 1A: Risk Factors			50
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds			50
Item 3: Defaults Upon Senior Securities			50
Item 5: Other Information			50
Item 6: Exhibits			50
SIGNATURE			51
EXHIBIT INDEX			52
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

		June 30,				December 31,
		2011				2010
		(In thousands, except share amounts)
Assets:
Investment in real estate:
Master Planned Community assets		$	1,348,138			$	1,350,648
Land			180,976				180,976
Buildings and equipment			344,636				343,006
Less accumulated depreciation			(88,894	)			(83,390	)
Developments in progress			292,550				293,403
Net property and equipment			2,077,406				2,084,643
Investment in Real Estate Affiliates			153,133				149,543
Net investment in real estate			2,230,539				2,234,186
Cash and cash equivalents			275,956				284,682
Accounts receivable, net			7,039				8,154
Notes receivable			37,405				38,954
Tax indemnity receivable, including interest			327,444				323,525
Deferred expenses, net			5,903				6,619
Prepaid expenses and other assets			141,145				126,587
Total assets		$	3,025,431			$	3,022,707
Liabilities:
Mortgages, notes and loans payable		$	306,668			$	318,660
Deferred tax liabilities			79,267				78,680
Warrant liabilities			298,483				227,348
Uncertain tax position liability			144,255				140,076
Accounts payable and accrued expenses			65,839				78,836
Total liabilities			894,512				843,600
Commitments and Contingencies
Equity:
Stockholders’ Equity:
Common stock: $.01 par value; 100,000,000 shares authorized, 37,942,107 shares issued and outstanding as of June 30, 2011 and 37,904,506 shares issued and outstanding as of December 31, 2010			379				379
Additional paid-in capital			2,709,281				2,708,036
Accumulated deficit			(577,047	)			(528,505	)
Accumulated other comprehensive loss			(2,503	)			(1,627	)
Total stockholders’ equity			2,130,110				2,178,283
Noncontrolling interests			809				824
Total equity			2,130,919				2,179,107
Total liabilities and equity		$	3,025,431			$	3,022,707

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

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
		(Consolidated)				(Combined)				(Consolidated)				(Combined)
		(In thousands, except per share amounts)
Revenues:
Master Planned Community land sales		$	18,148			$	4,174			$	41,540			$	7,388
Builder price participation			597				1,451				1,118				2,195
Minimum rents			16,976				16,969				33,695				34,000
Tenant recoveries			4,615				4,433				9,139				9,252
Condominium unit sales			6,660				—				10,424				—
Other land sale revenues			2,248				1,412				3,496				2,524
Other rental and property revenues			1,579				2,190				4,512				4,060
Total revenues			50,823				30,629				103,924				59,419
Operating Expenses:
Master Planned Community cost of sales			9,438				1,924				24,874				3,250
Master Planned Community land sales operations			4,585				8,856				10,213				17,347
Rental property real estate taxes			2,952				4,051				6,426				7,029
Rental property maintenance costs			1,566				1,439				3,125				3,283
Condominium unit cost of sales			5,272				—				8,252				—
Property operating costs			9,473				9,729				19,065				18,201
Provision for doubtful accounts			304				256				315				357
General and administrative			8,359				4,861				13,591				8,996
Provisions for impairment			—				208				—				486
Depreciation and amortization			3,185				3,975				6,384				8,425
Total operating expenses			45,134				35,299				92,245				67,374
Operating income (loss)			5,689				(4,670	)			11,679				(7,955	)
Interest income			2,244				—				4,756				59
Interest expense			—				(541	)			—				(1,207	)
Warrant liability gain (loss)			56,910				—				(69,135	)			—
Income (loss) before income taxes, income from Real Estate Affiliates, reorganization items and noncontrolling interests			64,843				(5,211	)			(52,700	)			(9,103	)
Provision for income taxes			(958	)			(16,467	)			(3,415	)			(17,953	)
Income from Real Estate Affiliates			2,108				3,680				7,621				5,172
Reorganization items			—				(10,019	)			—				(26,614	)
Income (loss) from continuing operations			65,993				(28,017	)			(48,494	)			(48,498	)
Net income attributable to noncontrolling interests			(20	)			(25	)			(48	)			(73	)
Net income (loss) attributable to common stockholders		$	65,973			$	(28,042	)		$	(48,542	)		$	(48,571	)
Basic Income (Loss) Per Share:		$	1.74			$	(0.74	)		$	(1.28	)		$	(1.29	)
Diluted Income (Loss) Per Share:		$	0.22			$	(0.74	)		$	(1.28	)		$	(1.29	)
Comprehensive Income (Loss), Net:
Net income (loss)		$	65,993			$	(28,017	)		$	(48,494	)		$	(48,498	)
Other comprehensive income (loss):
Interest rate swap			(748	)			—				(748	)			—
Pension adjustment			(63	)			(311	)			(128	)			99
Other comprehensive income (loss)			(811	)			(311	)			(876	)			99
Comprehensive income (loss)			65,182				(28,328	)			(49,370	)			(48,399	)
Comprehensive loss attributable to noncontrolling interests			(20	)			(25	)			(48	)			(73	)
Comprehensive income (loss) attributable to common stockholders		$	65,162			$	(28,353	)		$	(49,418	)		$	(48,472	)

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

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY
(UNAUDITED)

																		Accumulated				Noncontrolling
						Additional												Other				Interests in
		Common				Paid-In				Accumulated				GGP				Comprehensive				Consolidated				Total
(In thousands, except share amounts)		Stock				Capital				Deficit				Equity				Income (Loss)				Ventures				Equity
Balance, January 1, 2010		$	—			$	—			$	—			$	1,504,364			$	(1,744	)		$	900			$	1,503,520
Net income (loss)			—				—				—				(48,571	)			—				73				(48,498	)
Distributions to noncontrolling interests			—				—				—				—				—				(138	)			(138	)
Other comprehensive income			—				—				—				—				99				—				99
Contributions from GGP, net			—				—				—				65,655				—				—				65,655
Balance, June 30, 2010		$	—			$	—			$	—			$	1,521,448			$	(1,645	)		$	835			$	1,520,638
Balance, January 1, 2011		$	379			$	2,708,036			$	(528,505	)		$	—			$	(1,627	)		$	824			$	2,179,107
Net income (loss)			—				—				(48,542	)			—				—				48				(48,494	)
Distributions to noncontrolling interests			—				—				—				—				—				(63	)			(63	)
Other comprehensive loss			—				—				—				—				(876	)			—				(876	)
Restricted stock and stock option grants, (39,000 common shares)			—				1,245				—				—				—				—				1,245
Balance, June 30, 2011		$	379			$	2,709,281			$	(577,047	)		$	—			$	(2,503	)		$	809			$	2,130,919

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

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)

		Six Months Ended June 30,
		2011				2010
		(Consolidated)				(Combined)
		(In thousands)
Cash Flows from Operating Activities:
Net loss		$	(48,494	)		$	(48,498	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Income from Real Estate Affiliates			(7,621	)			(5,172	)
Dividends received from Real Estate Affiliates			4,074				—
Provision for doubtful accounts			315				357
Depreciation			5,435				7,356
Amortization			949				1,069
Deferred financing costs			277				225
Amortization of intangibles other than in-place leases			45				101
Straight-line rent amortization			(758	)			(615	)
Warrant liability loss			69,135				—
Provisions for impairment			—				486
Land/residential development and acquisitions expenditures			(33,206	)			(30,561	)
Cost of sales			33,126				3,250
Special Improvement District bond transfers			(3,188	)			—
Non-cash reorganization items			—				(570	)
Net changes:
Accounts and notes receivable			2,512				6,465
Prepaid expenses and other assets			(3,803	)			(7,191	)
Deferred expenses			(492	)			(926	)
Accounts payable and accrued expenses and deferred tax liabilities			(234	)			22,450
Other, net			(1,079	)			612
Cash provided by (used in) operating activities			16,993				(51,162	)
Cash Flows from Investing Activities:
Development of real estate and property additions/improvements			(18,565	)			(37,110	)
Increase in investments in Real Estate Affiliates			(42	)			(8	)
Cash used in investing activities			(18,607	)			(37,118	)
Cash Flows from Financing Activities:
Change in GGP investment, net			—				90,715
Proceeds from issuance of mortgages, notes and loans payable			29,000
Principal payments on mortgages, notes and loans payable			(38,049	)			(2,519	)
Proceeds from issuance of Management Warrant			2,000				—
Distributions to noncontrolling interests			(63	)			(138	)
Cash (used in) provided by financing activities			(7,112	)			88,058
Net change in cash and cash equivalents			(8,726	)			(222	)
Cash and cash equivalents at beginning of period			284,682				3,204
Cash and cash equivalents at end of period		$	275,956			$	2,982
Supplemental Disclosure of Cash Flow Information:
Interest paid		$	7,410			$	21,022
Interest capitalized			8,707				20,412
Reorganization items paid			—				1,231
Non-Cash Transactions:
Prepetition liabilities funded by GGP			2,714				—
Mortgage debt market rate adjustment related to emerged entities			—				876
Other non-cash GGP equity transactions			—				(25,024	)

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

THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED & COMBINED FINANCIAL STATEMENTS

NOTE 1 ORGANIZATION

The accompanying condensed consolidated and combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as issued by the SEC. Such condensed consolidated and combined financial statements do not include all of the information and disclosures required by GAAP for complete financial statements. In addition, readers of this Quarterly Report on Form 10-Q (“Quarterly Report”) should refer to the Company’s (as defined below) audited Consolidated and Combined Financial Statements for the year ended December 31, 2010 which are included in the Company’s Annual Report on Form 10-K (the “Annual Report”) for the fiscal year ended December 31, 2010 (Commission File No. 001-34856). Capitalized terms used, but not defined in this Quarterly Report have the same meanings as in the Annual Report.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. The results for the interim periods ended June 30, 2011 and 2010 are not necessarily indicative of the results to be expected for the full fiscal year. In addition, certain amounts in the 2010 Combined Financial Statements have been reclassified to conform to the current period presentation. Finally, HHC management has evaluated all material events occurring subsequent to the date of the consolidated financial statements up to the date and time this Quarterly Report is filed.

General

The Howard Hughes Corporation (“HHC” or the “Company”) is a Delaware corporation that was formed on July 1, 2010 to hold, after receipt via a tax-free distribution, certain assets of General Growth Properties, Inc. (“GGP”) and certain of its subsidiaries (collectively, the “Predecessors”) pursuant to their plans of reorganization (the “Plan”) under Chapter 11 of the United States Code (“Chapter 11”). We are a real estate company that specializes in the development and operation of master planned communities, operating rental properties and other strategic real estate opportunities across the United States. Pursuant to the Plan, certain of the assets and liabilities of the Predecessors (the “HHC Businesses”) were transferred to us and our common stock was distributed to the holders of GGP’s common stock and common units (the “Separation”) on a pro-rata basis (approximately 32.5 million shares of our common stock) on GGP’s date of emergence from bankruptcy, November 9, 2010 (the “Effective Date”). Also as part of the Plan, approximately 5.25 million shares of our common stock and 8.0 million warrants were purchased by certain of the investors sponsoring the Plan for $250 million. Unless the context otherwise requires, references to “we,” “us” and “our” refer to HHC and its subsidiaries.

The accompanying consolidated balance sheets at June 30, 2011 and December 31, 2010 reflect the consolidation of HHC and its subsidiaries, as of such date, with all intercompany balances and transactions eliminated. The accompanying combined financial statements for the periods prior to the Separation have been prepared in accordance with GAAP on a carve-out basis from the consolidated financial statements of GGP using the historical results of operations and the bases of the assets and liabilities of the transferred businesses and including allocations from GGP. This presentation incorporates the same principles used when preparing consolidated financial statements, including elimination of intercompany transactions. The presentation also includes the accounts of the HHC Businesses in which we have a controlling interest. The noncontrolling equity holders’ share of the assets, liabilities and operations are reflected in noncontrolling interests within permanent equity of the Company. The statement of equity and statement of cash flows for the six months ended June 30, 2010 and the statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2010 are presented on a carve out basis. The statement of equity and statements of cash flows for the six months ended June 30, 2011 and the statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2011 are presented on a consolidated basis.

As discussed above, we were formed for the purpose of receiving, via a tax-free distribution, certain assets and assuming certain liabilities of the Predecessors pursuant to the Plan. We conducted no business and had no separate material assets or liabilities until the Separation was consummated. No previous historical financial statements for the HHC Businesses have been prepared and, accordingly, our combined financial statements for

the three and six months ended June 30, 2010 are derived from the books and records of GGP and were carved-out from GGP at carrying values reflective of such historical cost in such GGP records. Our historical financial results reflect allocations for certain corporate expenses which include, but are not limited to, costs related to property management, human resources, security, payroll and benefits, legal, corporate communications, information services and restructuring and reorganizations. Costs of the services (approximately $2.9 million and $5.7 million, for the three and six months ended June 30, 2010, respectively) that were allocated or charged to us were based on either actual costs incurred or a proportion of costs estimated to be applicable to us based on a number of factors, most significantly the Company’s percentage of GGP’s adjusted revenue and assets and the number of properties. We believe these allocations are reasonable; however, these results do not reflect what our expenses would have been had the Company been operating as a separate, stand-alone public company for such period. In addition, the HHC Businesses were operated as subsidiaries of GGP, which operated as a real estate investment trust during such period. We operate as a taxable corporation. The historical combined statement of equity and statement of cash flows presented for the six months ended June 30, 2010, and the statement of operations and comprehensive income (loss) presented for the three and six months ended June 30, 2010 therefore are not indicative of the results of operations, or cash flows that would have been obtained if we had been an independent, stand-alone entity during such period nor are they indicative of our future performance as an independent, stand-alone entity.

As of June 30, 2011, our assets consisted of the following:

•

four master planned communities (“MPC“s);

•

thirteen operating assets; and

•

seventeen strategic developments.

Our ownership interests in properties in which we own a majority or controlling interest are combined for the period from January 1, 2010 through June 30, 2010 and consolidated for the period from January 1, 2011 through June 30, 2011 under GAAP, with the non-controlling interests in such consolidated or combined ventures reflected as components of equity. Our interests in TWCPC Holdings, L.P., (“The Woodlands Commercial”), the Woodlands Operating Company, L.P. (“The Woodlands Operating”) and the Woodlands Land Development Company, L.P. (“The Woodlands MPC”, and together with The Woodlands Commercial and the Woodlands Operating, “The Woodlands Partnerships”), all located in Houston, Texas, and our interests in Westlake Retail Associates, Ltd (“Circle T Ranch”) and 170 Retail Associates Ltd (“Circle T Power Center”, and together with Circle T Ranch, “Circle T”), located in Dallas/Fort Worth, Texas, are held through joint venture entities in which we own non-controlling interests and are unconsolidated and accounted for on the equity method. (See Note 3 for a description of our acquisition of our venture partner’s share of The Woodlands Partnerships on July 1, 2011.) The Woodlands Partnerships, Circle T and certain cost method investments (for example, our interest in the Summerlin Hospital Medical Center) are collectively referred to in this report as our “Real Estate Affiliates.”

Investment in Real Estate

Real estate assets are stated at cost, including acquisition cost, less any provisions for impairments. Construction and improvement costs incurred in connection with the development of new properties or the redevelopment of existing properties are capitalized. Real estate taxes and interest costs incurred during construction periods are also capitalized. Capitalized interest costs are based on qualified expenditures and interest rates in place during the construction period. As of June 30, 2011, we have approximately 14,000 remaining saleable acres within our master planned communities including The Woodlands.

Pre-development costs associated with specifically identified development properties, which generally include legal and professional fees and other directly-related third-party costs, are capitalized as part of the property being developed. In the event that management no longer has the ability or intent to complete a development, the costs previously capitalized are expensed (see also our impairment policies below).

With respect to the operating retail properties, tenant improvements, either paid directly or in the form of construction allowances paid to tenants, are capitalized and depreciated over the shorter of their economic lives or the lease term. Maintenance and repairs are charged to expense when incurred. Expenditures for significant improvements are capitalized.

Depreciation or amortization expense is computed using the straight-line method based upon the following estimated useful lives:

Asset Type		Years
Buildings and improvements			40-45
Equipment, tenant improvements and fixtures			5-10

Impairment

Generally accepted accounting principles related to accounting for the impairment or disposal of long-lived assets require that if impairment indicators exist and the undiscounted cash flows expected to be generated by an asset over its anticipated holding period are less than its carrying amount, the fair value of such assets should be estimated and an impairment provision should be recorded to write down the carrying amount of such asset to its estimated fair value. The impairment analysis does not consider the timing of future cash flows and whether the asset is expected to earn an above or below market rate of return. We review our real estate assets as well as our investments in Real Estate Affiliates for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

If an indicator of potential impairment exists, the asset is tested for recoverability by comparing its carrying amount to the estimated future undiscounted cash flow during our expected holding period. The cash flow estimates used both for determining recoverability and estimating fair value are inherently judgmental and reflect current and projected trends in rental, occupancy, pricing, development costs, sales pace and capitalization rates, and estimated holding periods for the applicable assets. Although the estimated fair value of certain assets may be exceeded by the carrying amount, a real estate asset is only considered to be impaired when its carrying amount is not expected to be recovered through estimated future undiscounted cash flows. To the extent an impairment provision is necessary, the excess of the carrying amount of the asset over its estimated fair value is expensed to operations. In addition, the impairment provision is allocated proportionately to adjust the carrying amount of the asset. The adjusted carrying amount, which represents the new cost basis of the asset, is depreciated over the remaining useful life of the asset or, for Master Planned Communities, is expensed as a cost of sales when the asset is sold. Assets that have been impaired will in the future have lower depreciation and cost of sale expenses, but the impairment will have no impact on cash flow.

No impairment provisions were recorded in the three and six months ended June 30, 2011 and approximately $0.2 million and $0.5 million, respectively, of impairment provisions, on predevelopment costs at certain of our Strategic Developments properties, were recorded in the three and six months ended June 30, 2010. As of June 30, 2011, no additional impairments were taken because we believe that the carrying amounts are recoverable. Despite this conclusion, additional impairment charges in the future could result if our plans regarding our assets change and/or economic conditions deteriorate. We can provide no assurance that material impairment charges with respect to Master Planned Community assets, Operating Assets, Strategic Developments, Real Estate Affiliates or Developments in progress will not occur in future periods. Accordingly, we will continue to monitor circumstances and events in future periods to determine whether additional impairments are warranted.

Investments in Real Estate Affiliates

We account for investments in joint ventures where we own a non-controlling participating interest using the equity method and, investments in joint ventures where we have virtually no influence on the joint venture’s operating and financial policies, on the cost method. Under the equity method, the cost of our investment is adjusted for our share of the equity in earnings (losses) of such Real Estate Affiliates from the date of acquisition and reduced by distributions received. Generally, the operating agreements with respect to our Real Estate Affiliates provide that assets, liabilities and funding obligations are shared in accordance with our ownership percentages. We generally also share in the profit and losses, cash flows and other matters relating to our Real Estate Affiliates in accordance with our respective ownership percentages. Differences between the carrying amount of our investment in the Real Estate Affiliates and our share of the underlying equity of such Real Estate Affiliates, arising for example, from acquisition accounting or impairment provisions, are amortized over the related lives ranging from 5 to 45 years. For cost method investments, we recognize earnings when dividends are received from such investments, and along with equity method earnings, is included in Income from Real Estate Affiliates in our consolidated and combined statements of operations and comprehensive income (loss).

Warrants

As described above, on the Effective Date, we issued warrants to purchase 8.0 million shares of our common stock to certain of the sponsors of the Plan (the “Sponsors Warrants”) with an estimated initial value of approximately $69.5 million. The warrants have an initial exercise price of $50.00 per share and will be subject to adjustment for future stock dividends, splits or reverse splits of our common stock or certain other events. Approximately 6.1 million warrants are immediately exercisable and approximately 1.9 million warrants are exercisable upon 90 days prior notice for the first 6.5 years after issuance and exercisable without notice any time thereafter. Sponsors Warrants expire on November 9, 2017.

In addition, in 2010 and 2011, the Company entered into certain warrant agreements with David R. Weinreb, our Chief Executive Officer, Grant Herlitz, our President, and Andrew C. Richardson, our Chief Financial Officer (the “Management Warrants”), in each case prior to his appointment to such position. Warrants for an aggregate of 2,862,687 shares were issued pursuant to such agreements in exchange for approximately $19.0 million from such executives at the commencement of their respective employment, which was deemed to be the fair value of such warrants. Mr. Weinreb and Mr. Herlitz’s warrants have exercise prices of $42.23 per share and Mr. Richardson’s warrant has an exercise price of $54.50 per share. Generally, the Management Warrants become exercisable in November 2016 and expire by February 2018.

The aggregate estimated $298.5 million and $227.3 million fair values of the Sponsors Warrants and Management Warrants as of June 30, 2011 and December 31, 2010, respectively, have been recorded as a liability because the holders of the warrants could require HHC to settle such warrants in cash upon a change of control. Such fair values were estimated using an option pricing model and level 3 inputs due to the unavailability of comparable market data. Changes in fair value of the Sponsors Warrants and the Management Warrants have been and will continue to be recognized in earnings and, accordingly, the warrant liability gains reflecting a decrease in value of approximately $56.9 million and the warrant liability losses reflecting an increase in value of $69.1 million, were recognized for the three and six months ended June 30, 2011, respectively.

Contingent Stock Agreement

In conjunction with GGP’s acquisition of The Rouse Company (“TRC”) in November 2004, GGP assumed TRC’s obligations under the Contingent Stock Agreement, (the “CSA”). TRC entered into the CSA in 1996 when it acquired The Hughes Corporation (“Hughes”). This acquisition included various assets, including Summerlin (the “CSA Assets”), a development in our Master Planned Communities segment. The CSA provided that the beneficiaries receive a share of the cash flow and income from the development or sale of the CSA assets and a final payment representing their share of the valuation of the CSA Assets as of December 31, 2009. The Plan provided that the final payment and settlement of all other claims under the CSA was an obligation of GGP and was $230 million (down from the $245 million estimate at December 31, 2009), and such amount was distributed by GGP after the Effective Date. Accordingly, during September 2010, we reduced our carrying value of the CSA assets, and the related GGP equity, by $15 million for this revised estimate.

Fair Value Measurements

The accounting principles for fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

•

Level 1 — defined as observable inputs such as quoted prices for identical assets or liabilities in active markets;

•

Level 2 — defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

•

Level 3 — defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The asset or liability fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. Any fair values utilized or disclosed in our financial statements were developed for the purpose of complying with the accounting principles established for fair value measurements.

The Company is required to estimate the fair value of its long-lived assets, such as its real estate investments, that it determines are impaired. For the three and six months ended June 30, 2011, no real estate assets were considered impaired and therefore no real estate assets were measured at fair value in such period. Those assets which were impaired in 2010 were recorded at their estimated fair value in the period in which the impairment occurred.

The only liabilities presented at fair value and measured on a recurring basis at June 30, 2011 are the Sponsors Warrants and Management Warrants for which we recognized approximately $56.9 million of income and $69.1 million, of expense, respectively, in the three and six months ended June 30, 2011 for the changes in the recorded valuation of such warrants and a swap entered into in May 2011 with a recorded fair value of $0.7 million (Note 4). As of December 31, 2010, we did not have any derivative financial instruments and our investments in marketable securities were immaterial.

For the three and six months ended June 30, 2010, non-recurring fair value measurements included approximately $0.2 million and $0.5 million, respectively, of impairment provisions, representing the full write-off of various pre-development costs that were determined to be non-recoverable due to the related projects being terminated. In addition, no debt was measured at fair value during the three and six months ended June 30, 2010 as no HHC Debtors emerged from bankruptcy during this time period.

Fair Value of Financial Instruments

The fair values of our financial instruments approximate their carrying amount in our financial statements except for debt. Management’s required estimates of fair value are presented below for our debt at June 30, 2011 and December 31, 2010. This fair value was estimated solely for financial statement reporting purposes and should not be used for any other purposes, including estimating the value of any of the Company’s securities. We estimated the fair value of this debt based on quoted market prices for publicly-traded debt, recent financing transactions (which may not be comparable), estimates of the fair value of the property that serves as collateral for such debt, historical risk premiums for loans of comparable quality, the current London Interbank Offered Rate (“LIBOR”), a widely quoted market interest rate which is frequently the index used to determine the rate at which we borrow funds, U.S. treasury obligation interest rates and on the discounted estimated future cash payments to be made on such debt. The discount rates estimated reflect our judgment as to what the approximate current lending rates for loans or groups of loans with similar maturities and credit quality would be if credit markets were operating efficiently and assume that the debt is outstanding through maturity. We have utilized available market information or present value techniques to estimate the amounts required to be disclosed. Since such amounts are estimates that are based on limited available market information for similar transactions and do not acknowledge transfer or other repayment restrictions that may exist in specific loans, it is unlikely that the estimated fair value of any of such debt could be realized by immediate settlement of the obligation.

		June 30, 2011								December 31, 2010
		Carrying				Estimated				Carrying				Estimated
(In thousands)		Amount				Fair Value				Amount				Fair Value
Fixed-rate debt		$	154,949			$	168,447			$	191,037			$	202,897
Variable-rate debt			93,902				94,378				65,518				65,629
SID bonds (*)			57,817				57,817				62,105				62,105
Total		$	306,668			$	320,642			$	318,660			$	330,631

Revenue Recognition and Related Matters

Revenues from land sales are recognized using the full accrual method if various criteria provided by GAAP relating to the terms of the transactions and our subsequent involvement with the land sold are met. Revenues relating to transactions that do not meet the established criteria are deferred and recognized when the criteria are

met or using the installment or cost recovery methods, as appropriate in the circumstances. In addition, we recognize revenue related to our right to participate in the ultimate home sale proceeds of the builders we sell our lots to as such amounts are collected.

Cost of land sales is determined as a specified percentage of land sales revenues recognized for each community development project. These cost ratios used are based on actual costs incurred and estimates of future development costs and sales revenues to completion of each project. The ratios are reviewed regularly and revised for changes in sales and cost estimates or development plans. Significant changes in these estimates or development plans, whether due to changes in market conditions or other factors, could result in changes to the cost ratio used for a specific project. For certain parcels of land, however, the specific identification method is used to determine cost of sales including acquired parcels we do not intend to develop or for which development was complete at the date of acquisition.

Nouvelle at Natick is a 215 unit residential condominium project, located in Natick, Massachusetts. Pursuant to the Plan, only the unsold units at Nouvelle at Natick on the Effective Date were distributed to us and no deferred revenue or sales proceeds from unit closings prior to the Effective Date were allocated to us. As of June 30, 2011, 33 units were unsold at Nouvelle at Natick, of which eight were under contract for sale. Income related to unit sales subsequent to the Effective Date is accounted for on a unit-by-unit full accrual method.

Minimum rent revenues are recognized on a straight-line basis over the terms of the related leases. Minimum rent revenues also include amounts collected from tenants to allow the termination of their leases prior to their scheduled termination dates and accretion related to above and below-market tenant leases on acquired properties. Certain of our leases include both a base rent component and a component which requires tenants to pay amounts related to all, or substantially all, of their share of real estate taxes and certain property operating expenses, including common area maintenance and insurance. The portion of the tenant rent from these leases attributable to real estate tax and operating expense recoveries are recorded as tenant recoveries.

Straight-line rent receivables, which represent the current net cumulative rents recognized prior to when billed and collectible as provided by the terms of the leases, of $2.7 million and $2.0 million as of June 30, 2011 and December 31, 2010, respectively, are included in Accounts receivable, net in our consolidated balance sheets.

Income Taxes

Deferred income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred income taxes also reflect the impact of operating loss and tax credit carryforwards. A valuation allowance is provided if we believe it is more likely than not that all or some portion of the deferred tax asset will not be realized. There are events or circumstances that could occur in the future that could limit the benefit of deferred tax assets, such as an inability to generate taxable income in the future or a change in ownership. An increase or decrease in the valuation allowance that results from a change in circumstances, and which causes a change in our judgment about the realizability of the related deferred tax asset, is included in the current year deferred tax provision. In addition, we recognize and report interest and penalties, if necessary, related to uncertain tax positions within our provision for income tax expense.

In many of our Master Planned Communities, gains with respect to sales of land for commercial use are reported for tax purposes on the percentage of completion method. Under the percentage of completion method, gain is recognized for tax purposes as costs are incurred in satisfaction of contractual obligations. The method used for determining the percentage complete for income tax purposes is different than that used for financial statement purposes. In addition, gains with respect to sales of land for single family residences are reported for tax purposes under the completed contract method. Under the completed contract method, gain is recognized for tax purposes when 95% of the costs of our contractual obligations are incurred or the contractual obligation is transferred.

Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of all potentially dilutive common

shares. The dilutive effect of options and nonvested stock issued under stock-based compensation plans is computed using the “treasury stock” method. The dilutive effect of Sponsor Warrants and Management Warrants is computed using the if-converted method.

As defined and described in Note 6, certain HHC Replacement Options outstanding are required to be settled by GGP and therefore do not represent dilutive securities at any date presented. Of the HHC Replacement Options outstanding that are required to be settled by HHC, diluted EPS excludes options where the exercise price was higher than the average market price of our common stock and options for which vesting requirements were not satisfied. Such options totaled 2,522 shares as of June 30, 2011.

As discussed above, in connection with the Separation on November 9, 2010, GGP distributed to its stockholders 32.5 million shares of our common stock and approximately 5.25 million shares were purchased by certain investors sponsoring the Plan. This share amount is being used in the calculation of basic and diluted EPS for the three and six months ended June 30, 2010 as our common stock was not traded prior to November 9, 2010 and there were no dilutive securities in the prior periods.

Information related to our EPS calculations is summarized as follows:

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
(In thousands, except per share amounts)
Basic EPS:
Numerator:
Net income (loss) attributable to common stockholders		$	65,973			$	(28,042	)		$	(48,542	)		$	(48,571	)
Denominator:
Weighted average number of common shares outstanding — basic			37,897				37,716				37,897				37,716
Diluted EPS:
Numerator:
Net income (loss) attributable to common stockholders		$	65,973			$	(28,042	)		$	(48,542	)		$	(48,571	)
Warrant liability gain			(56,910	)			—				—				—
Adjusted net income available to common stockholders		$	9,063			$	(28,042	)		$	(48,542	)		$	(48,571	)
Denominator:
Weighted average number of common shares outstanding — basic			37,897				37,716				37,897				37,716
Diluted effect:
Restricted stock			3				—				—				—
Warrants			2,970				—				—				—
Weighted average number of common shares outstanding — diluted			40,870				37,716				37,897				37,716
Anti-dilutive securities not included above			669								9,335
Basic Earnings (Loss) Per Share		$	1.74			$	(0.74	)		$	(1.28	)		$	(1.29	)
Diluted Earnings (Loss) Per Share		$	0.22			$	(0.74	)		$	(1.28	)		$	(1.29	)

Municipal Utility Districts

In Houston, Texas, certain development costs are reimbursable through the creation of Municipal Utility Districts (“MUD“s) and Water Control and Improvement Districts, which are separate political subdivisions authorized by Article 16, Section 59 of the Texas Constitution and governed by the Texas Commission on Environmental Quality (“TCEQ”). MUDs are formed to provide municipal water, waste water, drainage services, recreational facilities and roads to those areas where they are currently unavailable through the regular city services. Typically, the developer advances funds for the creation of the facilities, which must be designed, bid and constructed in accordance with the City of Houston’s and TCEQ requirements. The developer initiates

the MUD process by filing the applications for the formation of the MUD, and once the applications have been approved, a board of directors is elected for the MUD and given the authority to issue ad valorem tax bonds and the authority to tax residents. The MUD board authorizes and approves all MUD development contracts and pay estimates. The Company estimates the costs it believes will be eligible for reimbursement and classifies them as MUD receivables. MUD bond sale proceeds are used to reimburse the developer for its construction costs, including interest. MUD taxes are used to pay the debt service on the bonds and the operating expenses of the MUD. The Company has not incurred any debt relating to the MUDs.

Reorganization and Other 2010 Bankruptcy-Related Items

As certain of the HHC Businesses had filed for bankruptcy protection in April 2009 (the “HHC Debtors”), these entities are required by GAAP to separately present as Reorganization items elements of expense or income that were incurred or realized as a result of the bankruptcy filings. These items include professional fees and similar types of expenses and gains and interest earned on cash accumulated by certain of our subsidiaries, all as a result of the bankruptcy. Reorganization items specific to the HHC Debtors have been allocated to us and have been reflected in our combined statement of operations and comprehensive income (loss) for the three and six months ended June 30, 2010 and in the table presented below.

Reorganization items are as follows:

		Three Months Ended				Six Months Ended
Reorganization Items		June 30, 2010				June 30, 2010
(In thousands)
Gains on liabilities subject to compromise — vendors (a)		$	(36	)		$	(282	)
Losses on liabilities subject to compromise, net — mortgage debt (b)			365				365
Interest income (c)			(1	)			(1	)
U.S. Trustee fees			131				270
Restructuring costs (d)			9,560				26,262
Total reorganization items		$	10,019			$	26,614

Gains on liabilities subject to compromise — vendors represent the income effects of the settlement of certain liabilities of the HHC Debtors that were incurred prior to their bankruptcy filings in 2009. All liabilities incurred by the HHC Debtors prior to such bankruptcy filings were subject to compromise in 2010 as the amounts to be paid were subject to settlement, adjustment, or reinstatement as provided by Chapter 11. The amounts of the various categories of liabilities that were subject to compromise are set forth below and represented the then estimates of known or potential liabilities likely to be resolved in connection with the then planned 2010 emergence from bankruptcy of the HHC Debtors. As the plans of reorganization for the HHC Debtors ultimately approved subsequent to June 30, 2010 provided for, in general, full payment of allowed claims, substantially all recorded liabilities of the HHC Debtors that were subject to compromise at June 30, 2010 were settled, reinstated or retained by the Effective Date. In addition, GGP agreed that it would reimburse HHC up to $5.0 million for liability claims related to periods prior to the HHC Debtors’ bankruptcy filings, the majority of which has been paid as of June 30, 2011.

The amounts subject to compromise at June 30, 2010 consisted of the following items:

(In thousands)
Mortgages and secured notes		$	132,849
Accounts payable and accrued liabilities			100,774
Total liabilities subject to compromise		$	233,623

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. For example, estimates and assumptions have been made with respect to useful lives of assets, capitalization of development and leasing costs, provision for income taxes, recoverable amounts of receivables and deferred taxes, initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to acquisitions, impairment of long-lived assets and goodwill, fair value of warrants and debt and cost ratios and completion percentages used for land sales. Actual results could differ from these and other estimates.

Recently Issued Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued a new standard which changes the requirements for presenting comprehensive income in the financial statements. The new standard eliminates the option to present other comprehensive income (OCI) in the statement of stockholders’ equity and instead requires net income, components of OCI, and total comprehensive income to be presented in one continuous statement or two separate but consecutive statements. The standard will be effective for us beginning with our first quarter 2012 reporting and will be applied retrospectively. HHC had elected to present OCI in one continuous statement in all its previous filings and accordingly, the effective date of this standard will not have an effect on our results of operating, financial position, or cash flows in our consolidated financial statements.

In May 2011, the FASB issued “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The standard revises guidance for fair value measurement and expands the disclosure requirements. It is effective for fiscal years beginning after December 15, 2011. We are currently evaluating the impact that the adoption of this standard will have on our Consolidated Financial Statements.

NOTE 2 INTANGIBLE ASSETS AND LIABILITIES

The following table summarizes our intangible assets and liabilities:

						Accumulated				Net
		Gross Asset				(Amortization)				Carrying
(In thousands)		(Liability)				/ Accretion				Amount
As of June 30, 2011
Tenant leases:
In-place value		$	11,738			$	(10,385	)		$	1,353
Above-market			1,820				(1,814	)			6
Below-market			—				—				—
Ground leases:
Above-market			(3,545	)			874				(2,671	)
Below-market			23,096				(2,247	)			20,849
As of December 31, 2010
Tenant leases:
In-place value		$	11,824			$	(10,221	)		$	1,603
Above-market			1,820				(1,701	)			119
Below-market			(77	)			77				—
Ground leases:
Above-market			(3,545	)			638				(2,907	)
Below-market			23,096				(2,078	)			21,018

The gross asset balances of the in-place value of tenant leases are included in Buildings and equipment in our consolidated balance sheets. The above-market and below-market tenant and ground leases are included in Prepaid expenses and other assets and Accounts payable and accrued expenses in our consolidated balance sheets.

Amortization/accretion of these intangible assets and liabilities decreased our income (excluding the impact of noncontrolling interests and the provision for income taxes) by $0.1 million and $0.3 million, respectively, for the three and six months ended June 30, 2011 and by $0.2 million and $0.4 million, respectively, for the three and six months ended June 30, 2010

Future amortization of these intangible assets and liabilities is estimated to decrease net income (excluding the impact of noncontrolling interests and the provision for income taxes) by approximately $0.2 million for the remainder of 2011 and $0.3 million in 2012, $0.2 million in 2013, $0.1 million in 2014 and $18.7 million thereafter.

NOTE 3 REAL ESTATE AFFILIATES

As of June 30, 2011, we own noncontrolling investments in The Woodlands Partnerships and Circle T whereby, generally, we share in the profits and losses, cash flows and other matters relating to our investments in Real Estate Affiliates in accordance with our respective ownership percentages. As we have joint interest and joint control of these ventures with our venture partners, we account for these joint ventures using the equity method. For cost method investments (Note 1), we recognize earnings to the extent of dividends received from such investments, which are included, along with equity method earnings, in Income from Real Estate Affiliates in our consolidated and combined statements of operations and comprehensive income (loss). In March 2011, we received approximately $3.9 million in dividends from our Summerlin Hospital investment which is reported on the cost method.

As of June 30, 2011, approximately $296.5 million of indebtedness was secured by the properties owned by our Real Estate Affiliates, our share of which was approximately $126.0 million.

On July 1, 2011, HHC completed the acquisition of its venture partner’s 57.5% legal interest, which equates to a 47.5% economic interest based on the joint venture agreement, in The Woodlands Partnerships for $117.5 million. The purchase consideration consisted of $20.0 million in cash paid at closing and a $97.5 million non-interest bearing promissory note due December 1, 2011. Upon completion of the acquisition, The Woodlands Partnerships became a wholly-owned subsidiary of HHC. This business combination did not represent a significant acquisition of assets under the SEC rules. However, the acquisition will require that we apply in our future reports the acquisition method of accounting and record, on a consolidated basis, the assets and liabilities of The Woodlands Partnerships at fair value on the date of acquisition.

Condensed Combined Financial Information of Certain Real Estate Affiliates

The Woodlands Partnerships and Circle T are accounted for on the equity method. The three and six months ended June 30, 2010 revenues and expenses and net income attributable to joint ventures in the table below have been restated to correct the prior presentation to reflect certain eliminations not previously reported. The restatement has no effect on our previously reported Income from Real Estate Affiliates. The following summarized financial information as of June 30, 2011 and December 31, 2010 and for the three and six months ended June 30, 2011 and 2010, is presented below:

		June 30,				December 31,
Condensed Combined Balance Sheets - Certain Real Estate Affiliates		2011				2010
		(In thousands)
Assets:
Land		$	31,077			$	31,077
Building and equipment			242,430				241,436
Less accumulated depreciation			(85,081	)			(81,218	)
Developments in progress			28,725				25,431
Net property and equipment			217,151				216,726
Land held for development and sale			226,777				237,117
Net investment in real estate			443,928				453,843
Cash and cash equivalents			25,493				99,769
Accounts and notes receivable, net			44,782				45,863
Deferred expenses, net			5,094				895
Prepaid expenses and other assets			39,377				41,663
Total assets		$	558,674			$	642,033
Liabilities and Owners’ Equity:
Mortgages, notes and loans payable		$	296,515			$	372,222
Accounts payable, accrued expenses and other liabilities			109,403				122,877
Owners’ equity			152,756				146,934
Total liabilities and owners’ equity		$	558,674			$	642,033
Investment in Real Estate Affiliates, Net
Owners’ equity		$	152,756			$	146,934
Less joint venture partners’ equity			(73,009	)			(70,243	)
Basis differences, loans and cost basis investments			73,386				72,852
Investment in Real Estate Affiliates		$	153,133			$	149,543

The Woodlands Partnerships had total assets, total debt and owner’s equity of $540.7 million, $296.5 million and $107.3 million, respectively, as of June 30, 2011. On December 31, 2010, such amounts were $616.9 million, $372.2 million and $101.1 million, respectively.

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
		(In thousands)								(In thousands)
Revenue:
Land sales		$	25,907			$	26,085			$	47,880			$	49,471
Tenant rents			4,207				3,620				6,048				4,541
Other			13,799				10,651				26,569				21,987
Total revenues			43,913				40,356				80,497				75,999
Expenses:
Cost of sales — land			12,442				14,057				23,932				26,206
Land sales operations			8,887				5,282				14,206				11,438
Real estate taxes			485				496				984				986
Property maintenance costs			568				383				1,037				468
Property operating costs			9,810				9,896				20,969				20,354
Depreciation and amortization			1,899				1,711				3,829				3,676
Total operating expenses			34,091				31,825				64,957				63,128
Operating income			9,822				8,531				15,540				12,871
Other income			639				570				1,084				1,339
Interest expense			(4,918	)			(5,219	)			(8,927	)			(8,121	)
Provision for income taxes			(970	)			(827	)			(1,467	)			(1,137	)
Net income attributable to joint ventures		$	4,573			$	3,055			$	6,230			$	4,952
Income from Real Estate Affiliates:
Net income attributable to joint ventures		$	4,573			$	3,055			$	6,230			$	4,952
Joint venture partners’ share of income			(2,172	)			(1,451	)			(2,959	)			(2,352	)
Amortization of capital or basis differences, and distributions from cost method investments			(293	)			2,076				4,350				2,572
Income from Real Estate Affiliates		$	2,108			$	3,680			$	7,621			$	5,172
Income from Real Estate Affiliates — By Affiliate:
The Woodlands		$	2,108			$	3,680			$	3,727			$	5,172
Circle T			—				—				—				—
Summerlin Hospital Medical Center			—				—				3,894				—
		$	2,108			$	3,680			$	7,621			$	5,172

NOTE 4 MORTGAGES, NOTES AND LOANS PAYABLE

Mortgages, notes and loans payable are summarized as follows:

		June 30,				December 31,
(In thousands)		2011				2010
Fixed-rate debt:
Collateralized mortgages, notes and loans payable		$	154,949			$	191,037
Special Improvement District bonds			57,817				62,105
Variable-rate debt:
Collateralized mortgages, notes and loans payable			93,902				65,518
Total mortgages, notes and loans payable		$	306,668			$	318,660

The following table presents our mortgages, notes, and loans payable by property:

		As of June 30, 2011
										Carrying				Interest
Property (In thousands)		Principal				Discount				Value				Rate				Maturity
Mortgages, notes and loans payable Ward Centers
Ward Gateway — Industrial — Village		$	86,823			$	(6,612	)		$	80,211				5.61	%		October 2016
Ward Entertainment Center — Ward Centre			55,584				(2,411	)			53,173				4.33	%		January 2014
Ward Village Shops			377				—				377				5.35	%		June 2025
Ward Warehouse — Ward Plaza			67,302				(2,400	)			64,902				2.69	% (a)		October 2016
111 N. Wacker			29,000				—				29,000				5.21	% (b)		November 2019
Bridgeland
Note #1			2,249				(180	)			2,069				6.50	%		June 2033
Note #2			3,394				—				3,394				6.50	%		December 2017
Note #3			15,452				—				15,452				6.50	%		May 2026
Note #4			273				—				273				6.50	%		December 2021
Total Mortgages, notes and loans payable			260,454				(11,603	)			248,851
Special Improvement District bonds
Summerlin West — S808			1,053				—				1,053				7.75	%		April 2021
Summerlin West — S809			1,518				—				1,518				6.65	%		April 2023
Summerlin West — S810			23,048				—				23,048				7.13	%		April 2031
Summerlin South — S108			1,426				—				1,426				5.95	%		December 2016
Summerlin South — S124			438				—				438				5.95	%		December 2019
Summerlin South — S128			898				—				898				7.30	%		December 2020
Summerlin South — S128C			6,060				—				6,060				6.05	%		December 2030
Summerlin South — S132			4,124				—				4,124				7.88	%		December 2020
Summerlin South — S151			14,243				—				14,243				6.00	%		June 2025
The Shops @ Summerlin Centre — S108			943				—				943				5.95	%		December 2016
The Shops @ Summerlin Centre — S128			4,066				—				4,066				6.05	%		December 2030
Total Special Improvement District bonds			57,817				—				57,817
		$	318,271			$	(11,603	)		$	306,668

The weighted average interest rate on our mortgages, notes and loans payable, inclusive of interest rate hedges, was 4.99% and 5.14% as of June 30, 2011 and December 31, 2010, respectively.

Collateralized Mortgages, Notes and Loans Payable

As of June 30, 2011, we had $248.9 million of collateralized mortgages, notes and loans payable. All of the debt is non-recourse and is secured by the individual properties as listed in the table above, except for a $7.0 million recourse guarantee associated with the 110 N. Wacker mortgage, which is more fully discussed below. The Bridgeland MPC loan is secured by approximately 7,615 acres of land within the Bridgelands MPC. In addition, certain of our loans contain provisions which grant the lender a security interest in the operating cash flow of the property that represents the collateral for the loan. Such provisions are not expected to materially impact our operations in 2011. Certain mortgage notes may be prepaid, but may be subject to a prepayment penalty equal to a yield-maintenance premium, defeasance or a percentage of the loan balance.

On May 10, 2011, the Company closed a $29.0 million first mortgage financing secured by its office building located at 110 N. Wacker Drive in Chicago, Illinois and bearing interest at LIBOR plus 2.25%. The loan matures on October 31, 2019 and its term is coterminous with the expiration of the first term of the existing tenant’s lease (Note 9). The loan has an interest-only period through April 2015 and, thereafter, amortizes ratably to $12.0 million through maturity. The proceeds from the financing were used to repay the existing $28.2 million mortgage and to pay closing costs and other expenses. The Company provided a $7.0 million repayment guarantee for the loan, which is reduced on a dollar for dollar basis during the amortization period.

In order to limit the Company’s exposure to interest rate fluctuations related to the variable rate debt disclosed above, the Company entered into an interest rate swap. This interest rate swap was designated as a cash flow hedge and fixed the interest rate at 5.21% per annum. The effective portion of the swap’s gains or losses due to changes in fair value are initially recorded in accumulated other comprehensive loss and are subsequently reclassified into earnings when the interest payments are remitted. The gross notional amount of the swap is $29.0 million and matures on October 31, 2019. The fixed pay rate is 2.96% and the variable receive rate is

based on the monthly LIBOR rate. The fair value of the swap was estimated using Level 2 measurements based on the hedged variable cash flows and forward yield curves relating to the variable interest rates on which the cash flows are based. At June 30, 2011, the swap liability was $0.7 million and is recorded in accounts payable and accrued expenses. The swap was determined to be highly effective and as a result the impact to earnings for the three and six months ended June 30, 2011 due to ineffectiveness was immaterial.

Special Improvement District Bonds

The Summerlin master planned community uses Special Improvement District bonds to finance certain common infrastructure. These bonds are issued by the municipalities and, although unrated, are secured by the assessments on the land and approximately 1,971 acres of land within the Summerlin MPC. The majority of proceeds from each bond issued is held in a construction escrow and dispersed to us as infrastructure projects are completed, inspected by the municipalities and approved for reimbursement. Accordingly, the cash raised but not yet spent related to the Special Improvement District bonds has been classified as a receivable within Prepaid and other assets. We pay the debt service on the bonds semi-annually, but typically receive reimbursement of all principal amortization paid by us from certain purchasers of our land; therefore, the Special Improvement District receivable (included in Prepaid expenses and other assets) and Special Improvement District bonds (included in Mortgages, notes and loans payable) largely offset (Note 7). In addition, as the Summerlin master planned community sells land, the purchasers assume a proportionate share of the bond obligation.

Letters of Credit and Surety Bonds

We had outstanding letters of credit and surety bonds of $33.5 million as of June 30, 2011 and $38.7 million as of December 31, 2010. These letters of credit and bonds were issued primarily in connection with insurance requirements, special real estate assessments and construction obligations.

NOTE 5 INCOME TAXES

We are taxed as a C Corporation. One of our consolidated entities, Victoria Ward, Limited. (“Ward”, substantially all of which is owned by us) elected to be taxed as a REIT under sections 856-860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with the taxable year beginning January 1, 2002. To qualify as a REIT, Ward must meet a number of organizational and operational requirements, including requirements to distribute at least 90% of its ordinary taxable income and to distribute to stockholders or pay tax on 100% of capital gains and to meet certain asset and income tests. Ward was in compliance with the REIT requirements for 2010 and we intend to operate Ward as a REIT in all periods subsequent to the Effective Date.

Warrant liability gain or loss as calculated for GAAP purposes reflects the change in the estimated Warrant Liability based on an option pricing model and is not deductible for tax purposes. Changes in the Company’s stock price can materially change the estimated liability from quarter to quarter. For financial reporting purposes, the tax effect of the warrant liability gain or loss will be treated as a discrete item within the provision for income taxes due to the volatility of the change in estimated liability from quarter to quarter.

Unrecognized tax benefits recorded pursuant to uncertain tax positions were $120.1 million as of June 30, 2011 and December 31, 2010, excluding interest, of which none would impact our effective tax rate. Accrued interest related to these unrecognized tax benefits amounted to $24.2 million as of June 30, 2011 and $20.0 million as of December 31, 2010. We recognized an increase of interest expense related to the unrecognized tax benefits of $2.0 million and $4.2 million, respectively, for the three and six months ended June 30, 2011. Based on the expected outcome of existing examinations or examinations that may commence, or as a result of the expiration of the statute of limitations for specific jurisdictions, management does not believe that the unrecognized tax benefits, excluding accrued interest, for tax positions taken regarding previously filed tax returns will materially increase or decrease during the next twelve months. As described in the Annual Report, pursuant to the Tax Matters Agreement, GGP has indemnified us from and against 93.75% of any and all losses, claims, damages, liabilities and reasonable expenses to which we become subject (the “Tax Indemnity Cap”), in each case solely to the extent directly attributable to certain taxes related to sales of certain assets in our Master Planned Communities segment prior to March 31, 2010, in an amount up to $303.8 million, plus interest and penalties related to these amounts so long as GGP controls the action in the Tax Court related to the dispute with the IRS. The unrecognized tax benefits and related accrued interest recorded through June 30, 2011 are primarily related to the taxes that are the subject of the Tax Indemnity Cap.

NOTE 6 STOCK-BASED PLANS

Incentive Stock Plans

On November 9, 2010, HHC adopted The Howard Hughes Corporation 2010 Equity Incentive Plan (the ''Equity Plan’’). Pursuant to the Equity Plan, 3,698,050 shares of HHC common stock are reserved for issuance. The Equity Plan provides for grants of options, stock appreciation rights, restricted stock, other stock-based awards and performance-based compensation (collectively, ''the Awards’’). Directors, employees and consultants of HHC and its subsidiaries and affiliates are eligible for Awards.

Prior to the Separation, the Predecessors granted qualified and non-qualified stock options and restricted stock to certain GGP officers and key employees whose compensation costs related specifically to our assets. Accordingly, an allocation of stock-based compensation costs of approximately $0.2 million and $0.3 million, respectively, pertaining to such employees has been reflected in our combined statement of operations and comprehensive income (loss) for the three and six months ended June 30, 2010.

Stock Options

There were no grants of stock options under the Equity Plan in 2010. In the six months ended June 30, 2011, 679,340 options to purchase shares of our common stock were granted to certain of our employees. Such options had a weighted average exercise price of approximately $58.53, vest at the rate of 20% per year on each of the first five anniversaries of the grant date, may not be exercised prior to December 31, 2016 and, unless earlier terminated under certain circumstances, expire ten years from the grant date. Compensation expense related to stock options was approximately $0.9 million for the six months ended June 30, 2011.

Pursuant to the Plan, each outstanding option to acquire shares of GGP stock (“Old GGP Options”) was converted on the Effective Date into (i) an option to acquire the same number of shares of common stock of reorganized GGP (“New GGP Options”) and (ii) a separate option to acquire 0.0983 shares of our common stock for each existing option for one share of GGP common stock (“HHC Replacement Options”). The HHC Replacement Options were fully vested as of the Effective Date and have the same terms and conditions as the Old GGP Options except that we have agreed with GGP that all exercises of New GGP Options and HHC Replacement Options in 2011 and beyond would be settled by the respective employer at the time of exercise. As of June 30, 2011 and January 1, 2011, there were 53,393 and 164,138, respectively, HHC Replacement Options outstanding. Of such amounts, only 2,522 of such options represent potentially dilutive shares at such dates as all remaining amounts were held by GGP employees. In addition, 25,994 New GGP Options (with a weighted average exercise price of $45.99 as compared to a June 30, 2010 GGP closing stock price of $16.69 and a weighted average remaining contracted term of 0.7 years) were held by our employees at June 30, 2011 and therefore our potential net share settlement obligation for such New GGP Options is expected to be nominal.

The following tables summarize HHC Replacement Option activity as of and for the six months ended June 30, 2011:

		2011
						Weighted
						Average
						Exercise
		Shares				Price
HHC Replacement Options outstanding at January 1			164,138			$	133.28
Exercised (a)			(19,265	)			40.71
Expired			(91,480	)			139.01
HHC Replacement Options outstanding at June 30			53,393			$	156.88	(b)

Restricted Stock

Pursuant to the Equity Plan, the Company granted 8,247 and 8,953 shares of restricted common stock in November 2010 and June 2011, respectively, to certain non-employee directors as part of their annual retainer for their services on the board of directors. Our chairman has waived all compensation, including any restricted stock grants, for services rendered as a director. Subsequently, receipt of 1,352 of the shares of restricted stock issued in November 2010 was waived by one of the directors as he also elected to not receive compensation for his service as a director. The restrictions on all shares of restricted common stock issued in 2010 lapsed on June 1, 2011, and restrictions on all shares of restricted common stock issued in 2011 lapse on the earlier of the Company’s annual stockholders meeting or June 1, 2012. The Company granted 20,000 shares of restricted common stock to our CFO in March 2011 and 10,000 shares to our general counsel in May 2011 in connection with their employment agreements and pursuant to the Equity Plan. The restricted shares granted to our CFO generally do not vest until March 28, 2016, and the restricted shares granted to our general counsel generally do not vest unit May 2, 2016.

NOTE 7 OTHER ASSETS AND LIABILITIES

The following table summarizes the significant components of prepaid expenses and other assets.

		June 30,				December 31,
(in thousands)		2011				2010
Special Improvement District receivable		$	45,089			$	46,250
MUD and other receivables			46,194				33,455
Prepaid expenses			5,135				2,859
Below-market ground leases (Note 2)			20,849				21,018
Security and escrow deposits			8,049				6,814
Above-market tenant leases (Note 2)			6				119
Uncertain tax position asset			10,407				8,945
Other			5,416				7,127
		$	141,145			$	126,587

The following table summarizes the significant components of accounts payable and accrued expenses.

		June 30,				December 31,
(in thousands)		2011				2010
Construction payable		$	6,559			$	15,531
Accounts payable and accrued expenses			20,962				29,745
Above-market ground leases (Note 2)			2,671				2,907
Deferred gains/income			8,377				5,631
Accrued interest			1,496				1,633
Accrued real estate taxes			3,535				3,953
Tenant and other deposits			3,467				3,555
Insurance reserve			4,212				4,229
Accrued payroll and other employee liabilities			5,078				3,930
Other			9,482				7,722
Total accounts payable and accrued expenses		$	65,839			$	78,836

NOTE 8 COMMITMENTS AND CONTINGENCIES

In the normal course of business, from time to time, we are involved in legal proceedings relating to the ownership and operations of our properties. In management’s opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a material effect on our consolidated financial position, results of operations or liquidity.

We lease land or buildings at certain properties from third parties. The leases generally provide us with a right of first refusal in the event of a proposed sale of the property by the landlord. Rental payments are expensed as incurred and have, to the extent applicable, been straight-lined over the term of the lease. Contractual rental expense, including participation rent, was $1.0 million and $1.6 million for the three and six months ended June 30, 2011, respectively. Contractual rental expense, including participation rent, was $0.7 million and $1.3 million for the three and six months ended June 30, 2010, respectively. The amortization of above and below-market ground leases and straight-line rents included in the contractual rent amount is not significant.

See Note 5 for our obligations related to uncertain tax positions for disclosure of additional contingencies.

NOTE 9 TRANSACTIONS WITH GGP AND WITH RELATED PARTIES

Prior to the Effective Date, we entered into a transition services agreement (the “TSA”) whereby GGP will provide to us, on a transitional basis, certain specified services on an interim basis for various terms not exceeding 24 months following the Separation, subject to our right of earlier termination. Concurrently, we entered into a reverse transition services agreement (“RTSA”) whereby we will provide GGP with certain income tax and accounting support services, also subject to earlier termination prior to its scheduled expiration of November 9, 2013. For the six months ended June 30, 2011, we incurred approximately $0.4 million of expenses related to the TSA and earned a negligible amount of reimbursements under RTSA. In addition, for the three and six months ended June 30, 2011 and 2010, approximately $1.5 million and $3.0 million, respectively, of rental income was recognized from GGP and its subsidiaries.

During January 2011, the Audit Committee of our Board of Directors approved a Transition Agreement with TPMC Realty Services Group, Inc. (“TPMC”). David Weinreb, a director and our CEO, is the sole equity owner of TPMC and the chief executive officer of TPMC and Grant Herlitz, our president, is the president of TPMC. The Transition Agreement provided for, among other things, certain mutual transactions and services that facilitated the continuity of Company management, the net value of which was approximately $65,000 for the six months ended June 30, 2011. In addition, the reimbursement to TPMC of approximately $0.9 million of expenses as contemplated by Mr. Weinreb’s employment agreement with us was approved. Such reimbursements are reflected as an administrative expense for the six months ended June 30, 2011.

With the approval of our Board of Directors, we entered into a lease agreement for 3,253 square feet of office space in Los Angeles, California with an affiliate of TPMC, which commenced on May 1, 2011. Rental expense to be recognized for such lease will be approximately $111,965 per year and the lease is scheduled to terminate in July 2016.

NOTE 10 SEGMENTS

We have three business segments which offer different products and services. In 2010, we reported in two segments predominantly as the assets within our current Operating Assets segment and our current Strategic Developments segment were managed jointly as a group. Our current three segments are managed separately because each requires different operating strategies or management expertise. These segments are different than those of the Predecessors with respect to the HHC Businesses and are reflective of our current management’s operating philosophies and methods. All resulting changes from the Predecessors’ previous presentation of our segments have been applied to all periods presented. In addition, our current segments or assets within such segments could change in the future as development of certain properties commence or other operational or management changes occur. We do not distinguish or group our combined operations on a geographic basis. Further, all operations are within the United States and no customer or tenant comprises more than 10% of revenues. Our reportable segments are as follows:

•

Master Planned Communities — includes the development and sale of land, in large-scale, long-term community development projects in and around Las Vegas, Nevada; Houston, Texas and Columbia, Maryland. This segment also includes certain office properties and other ownership interests owned by The Woodlands Partnerships as such assets are managed jointly with The Woodlands Master Planned Community.

•

Operating Assets — includes commercial, mixed use and retail properties currently generating revenues, many of which we believe there is an opportunity to redevelop or reposition the asset to increase operating performance.

•

Strategic Developments — includes all properties held for development and redevelopment, including the current rental property operations (primarily retail and other interests in real estate at such locations) as well as our one residential condominium project located in Natick (Boston), Massachusetts.

The assets included in each segment are contained in the following chart:

As our segments are managed separately, different operating measures are utilized to assess operating results and allocate resources. The one common operating measure used to assess operating results for the business segments is Real Estate Property Earnings Before Taxes (“EBT”) which represents the operating revenues of the properties less property operating expenses, as further described below. Management believes that EBT provides useful information about the operating performance of all of our assets, projects and property.

EBT is defined as net income (loss) from continuing operations as adjusted for: (1) reorganization items; (2) income tax provision (benefit); (3) warrant liability gain (loss); and (4) general and administrative costs. The net income (loss) from our Real Estate Affiliates, at our proportionate share, is similarly adjusted for items (1) through (4) immediately above. We present EBT because we use this measure, among others, internally to assess the core operating performance of our assets. We also present this measure because we believe certain investors use it as a measure of a company’s historical operating performance and its ability to service and incur debt. We believe that the inclusion of certain adjustments to net income (loss) from continuing operations to calculate EBT is appropriate to provide additional information to investors because EBT excludes certain non-recurring and non-cash items, including reorganization items related to the bankruptcy, which we believe are not indicative of our core operating performance. EBT should not be considered as an alternative to GAAP net income (loss) attributable to common stockholders or GAAP net income (loss) from continuing operations, it has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP.

We report the operations of our equity method Real Estate Affiliates using the proportionate share method, whereby our share of the revenues and expenses of these Real Estate Affiliates are aggregated with the revenues and expenses of consolidated or combined properties. Our investment in the Summerlin Hospital Medical Center is accounted for on the cost method. Approximately $3.9 million was received in the first quarter of 2011 as dividends related to this investment and has been reflected as other rental and property revenues for the six months ended June 30, 2011 within the Operating Assets segment.

The total cash expenditures for additions to long-lived assets for the Master Planned Communities segment

was $27.0 million for the six months ended June 30, 2011 and $30.6 million for the six months ended June 30, 2010. Similarly, cash expenditures for long-lived assets for the Operating Assets and Strategic Developments segments was $16.5 million and $2.1 million, respectively, for the six months ended June 30, 2011 and $36.5 million and $0.6 million, respectively, for the six months ended June 30, 2010. Such amounts for the Master Planned Communities segment and certain amounts in the Strategic Developments segment are included in the amounts listed in our consolidated and combined statements of cash flow as Land/residential development and acquisitions expenditures. With respect to the long-lived assets within the Operating Assets segment and certain other investing amounts in the Strategic Developments segment, such amounts are included in the amounts listed as Development of real estate and property additions/improvements primarily previously accrued, respectively, in our consolidated and combined statements of cash flows.

As more fully discussed in this report, on July 1, 2011 we acquired our partner’s interest in The Woodlands master planned community for $117.5 million. We now own 100% of The Woodlands and will consolidate its operations beginning the third quarter 2011.

Segment operating results are as follows:

		Three Months Ended June 30, 2011
		Consolidated				Real Estate				Segment
		Properties				Affiliates				Basis
						(In thousands)
Master Planned Communities
Land sales		$	18,148			$	12,982			$	31,130
Builder price participation			597				619				1,216
Minimum rents			383				2,302				2,685
Other land sale revenues			2,248				592				2,840
Other rental and property revenues			1				11,257				11,258
Total revenues			21,377				27,752				49,129
Cost of sales — land			9,438				6,532				15,970
CSA participation expense			—				—				—
Land sales operations			3,044				3,949				6,993
Land sales real estate and business taxes			1,541				471				2,012
Rental property real estate taxes			54				268				322
Rental property maintenance costs			59				299				358
Property operating costs			207				11,162				11,369
Provisions for impairment			—				—				—
Depreciation and amortization			66				1,006				1,072
Interest income (a)			1,165				(335	)			830
Interest expense (b)			(2,602	)			1,584				(1,018	)
Total expenses			12,972				24,936				37,908
MPC EBT			8,405				2,816				11,221
Operating Assets
Minimum rents			16,357				—				16,357
Tenant recoveries			4,522				—				4,522
Other rental and property revenues			1,551				—				1,551
Total revenues			22,430				—				22,430
Rental property real estate taxes			2,439				—				2,439
Rental property maintenance costs			1,378				—				1,378
Property operating costs			7,977				—				7,977
Provision for doubtful accounts			291				—				291
Provisions for impairment			—				—				—
Depreciation and amortization			3,060				—				3,060
Interest income			(3,409	)			—				(3,409	)
Interest expense			2,602				—				2,602
Total expenses			14,338				—				14,338
Operating Assets EBT			8,092				—				8,092
Strategic Developments
Minimum rents			236				—				236
Tenant recoveries			93				—				93
Condominium unit sales			6,660				—				6,660
Other rental and property revenues			27				—				27
Total revenues			7,016				—				7,016
Condominium unit cost of sales			5,272				—				5,272
Real estate taxes			459				—				459
Rental property maintenance costs			129				—				129
Property operating costs			1,289				—				1,289
Provision for doubtful accounts			13				—				13
Provisions for impairment			—				—				—
Depreciation and amortization			59				—				59
Total expenses			7,221				—				7,221
Strategic Developments EBT			(205	)			—				(205	)
EBT		$	16,292			$	2,816			$	19,108