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Howard Hughes Corp - Quarter Report: 2012 September (Form 10-Q)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2012

 

or

 

o         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 001-34856

 

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, 22nd Floor, Dallas, Texas 75240

(Address of principal executive offices, including zip code)

 

(214) 741-7744

(Registrant’s telephone number, including area code)

 

N / A

(Former name, former address and former fiscal year, if changed since last report)

 

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.  xYes  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).  x 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 x

 

Accelerated filer o

 

 

 

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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

 

The number of shares of common stock, $0.01 par value, outstanding as of November 5, 2012 was 37,973,640.

 

 

 



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

INDEX

 

 

 

PAGE

 

 

NUMBER

 

 

 

PART I

FINANCIAL INFORMATION

 

 

 

 

 

Item 1: Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011

3

 

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2012 and 2011

5

 

 

 

 

Condensed Consolidated Statements of Equity for the nine months ended September 30, 2012 and 2011

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

 

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

 

 

 

 

Item 3: Quantitative and Qualitative Disclosures about Market Risk Operations

52

 

 

 

 

Item 4: Controls and Procedures

53

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

Item 1: Legal Proceedings

53

 

 

 

 

Item 1A: Risk Factors

53

 

 

 

 

Item 6: Exhibits

53

 

 

 

 

SIGNATURE

54

 

 

 

 

EXHIBIT INDEX

55

 



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

UNAUDITED

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands, except share amounts)

 

Assets:

 

 

 

 

 

Investment in real estate:

 

 

 

 

 

Master Planned Community assets

 

$

1,585,514

 

$

1,602,437

 

Land

 

253,867

 

236,363

 

Buildings and equipment

 

646,459

 

556,786

 

Less: accumulated depreciation

 

(106,387

)

(92,494

)

Developments in progress

 

224,370

 

195,034

 

Net property and equipment

 

2,603,823

 

2,498,126

 

Investment in Real Estate Affiliates

 

36,162

 

62,595

 

Net investment in real estate

 

2,639,985

 

2,560,721

 

Cash and cash equivalents

 

272,854

 

227,566

 

Accounts receivable, net

 

13,425

 

15,644

 

Municipal Utility District receivables, net

 

105,487

 

86,599

 

Notes receivable, net

 

28,677

 

35,354

 

Tax indemnity receivable, including interest

 

326,150

 

331,771

 

Deferred expenses, net

 

12,740

 

10,338

 

Prepaid expenses and other assets, net

 

124,752

 

127,156

 

Total assets

 

$

3,524,070

 

$

3,395,149

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Mortgages, notes and loans payable

 

$

683,804

 

$

606,477

 

Deferred tax liabilities

 

75,538

 

75,966

 

Warrant liabilities

 

290,488

 

127,764

 

Uncertain tax position liability

 

135,468

 

129,939

 

Accounts payable and accrued expenses

 

136,760

 

125,404

 

Total liabilities

 

1,322,058

 

1,065,550

 

 

 

 

 

 

 

Commitments and Contingencies (see Note 13)

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Preferred stock: $.01 par value; 50,000,000 shares authorized, none issued

 

 

 

Common stock: $.01 par value; 150,000,000 shares authorized, 37,973,640 shares issued and outstanding as of September 30, 2012 and 37,945,707 shares issued and outstanding as of December 31, 2011

 

379

 

379

 

Additional paid-in capital

 

2,714,258

 

2,711,109

 

Accumulated deficit

 

(508,686

)

(381,325

)

Accumulated other comprehensive loss

 

(9,590

)

(5,578

)

Total stockholders’ equity

 

2,196,361

 

2,324,585

 

Noncontrolling interests

 

5,651

 

5,014

 

Total equity

 

2,202,012

 

2,329,599

 

Total liabilities and equity

 

$

3,524,070

 

$

3,395,149

 

 

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

 

3



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

UNAUDITED

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands, except per share amounts)

 

Revenues:

 

 

 

 

 

 

 

 

 

Master Planned Community land sales

 

$

40,218

 

$

34,152

 

$

120,235

 

$

75,692

 

Builder price participation

 

1,867

 

1,233

 

4,208

 

2,351

 

Minimum rents

 

23,135

 

19,403

 

62,609

 

53,098

 

Tenant recoveries

 

6,065

 

5,398

 

17,932

 

14,537

 

Condominium unit sales

 

 

9,071

 

267

 

19,495

 

Resort and conference center revenues

 

8,328

 

7,200

 

29,954

 

7,200

 

Other land revenues

 

6,385

 

5,537

 

13,433

 

9,093

 

Other rental and property revenues

 

8,817

 

4,679

 

19,879

 

9,130

 

Total revenues

 

94,815

 

86,673

 

268,517

 

190,596

 

Expenses:

 

 

 

 

 

 

 

 

 

Master Planned Community cost of sales

 

21,439

 

27,033

 

63,096

 

51,907

 

Master Planned Community operations

 

9,936

 

10,734

 

30,962

 

22,313

 

Rental property real estate taxes

 

3,574

 

2,010

 

10,583

 

7,793

 

Rental property maintenance costs

 

2,263

 

2,155

 

6,304

 

5,278

 

Other property operating costs

 

16,933

 

14,961

 

46,306

 

34,413

 

Condominium unit cost of sales

 

 

5,470

 

96

 

13,722

 

Resort and conference center operations

 

6,965

 

6,352

 

21,750

 

6,352

 

Provision for (recovery of) doubtful accounts

 

240

 

(141

)

285

 

174

 

General and administrative

 

9,339

 

8,673

 

25,896

 

21,156

 

Depreciation and amortization

 

6,764

 

7,208

 

17,715

 

13,592

 

Total expenses

 

77,453

 

84,455

 

222,993

 

176,700

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

17,362

 

2,218

 

45,524

 

13,896

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

2,375

 

2,341

 

7,048

 

7,097

 

Interest expense

 

(445

)

 

(646

)

 

Early extinguishment of debt

 

 

(11,305

)

 

(11,305

)

Warrant liability gain (loss)

 

(64,303

)

169,897

 

(162,724

)

100,762

 

Reduction in tax indemnity receivable

 

(2,873

)

 

(11,655

)

 

Investment in Real Estate Affiliate basis adjustment

 

 

(6,053

)

 

(6,053

)

Equity in earnings from Real Estate Affiliates

 

310

 

166

 

3,432

 

7,787

 

Income (loss) before taxes

 

(47,574

)

157,264

 

(119,021

)

112,184

 

Provision (benefit) for income taxes

 

2,618

 

(7,760

)

7,703

 

(4,344

)

Net income (loss)

 

(50,192

)

165,024

 

(126,724

)

116,528

 

Net income (loss) attributable to noncontrolling interests

 

781

 

(729

)

(637

)

(777

)

Net income (loss) attributable to common stockholders

 

$

(49,411

)

$

164,295

 

$

(127,361

)

$

115,751

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share:

 

$

(1.30

)

$

4.33

 

$

(3.36

)

$

3.05

 

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per share:

 

$

(1.30

)

$

(0.14

)

$

(3.36

)

$

0.38

 

 

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

 

4



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

UNAUDITED

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(50,192

)

$

165,024

 

$

(126,724

)

$

116,528

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Interest rate swaps (a)

 

(954

)

(2,024

)

(3,115

)

(2,772

)

Capitalized swap interest (b)

 

(328

)

 

(897

)

 

Other comprehensive loss

 

(1,282

)

(2,024

)

(4,012

)

(2,772

)

Comprehensive income (loss)

 

(51,474

)

163,000

 

(130,736

)

113,756

 

Comprehensive income (loss) attributable to noncontrolling interests

 

781

 

(729

)

(637

)

(777

)

Comprehensive income (loss) attributable to common stockholders

 

$

(50,693

)

$

162,271

 

$

(131,373

)

$

112,979

 

 


(a)         Net of deferred taxes of $1.1 million during both the three and nine months ended September 30, 2011. Net of deferred taxes of $ 0.1 million and $ 0.2 million during the three and nine months ended September 30, 2012, respectively.

(b)         Net of deferred taxes of $ 0.2 million and $0.5 million during the three and nine months ended September 30, 2012, respectively.

 

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

 

5



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Noncontrolling

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Interests in

 

 

 

 

 

 

 

Common

 

Paid-In

 

Accumulated

 

Comprehensive

 

Consolidated

 

Total

 

(In thousands, except shares) 

 

Shares

 

Stock

 

Capital

 

Deficit

 

Income (Loss)

 

Ventures

 

Equity

 

Balance January 1, 2011

 

37,904,506

 

$

379

 

$

2,708,036

 

$

(528,505

)

$

(1,627

)

$

824

 

$

2,179,107

 

Net income (loss)

 

 

 

 

 

115,751

 

 

777

 

116,528

 

Adjustment to noncontrolling interests

 

 

 

 

 

 

 

3,700

 

3,700

 

Acquisitions

 

 

 

 

 

 

 

(248

)

(248

)

Interest rate swaps, net of tax $1,100

 

 

 

 

 

 

(2,772

)

 

(2,772

)

Stock plan activity

 

37,601

 

 

2,500

 

 

 

 

2,500

 

Balance, September 30, 2011

 

37,942,107

 

$

379

 

$

2,710,536

 

$

(412,754

)

$

(4,399

)

$

5,053

 

$

2,298,815

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 1, 2012

 

37,945,707

 

$

379

 

$

2,711,109

 

$

(381,325

)

$

(5,578

)

$

5,014

 

$

2,329,599

 

Net income (loss)

 

 

 

 

 

(127,361

)

 

637

 

(126,724

)

Interest rate swaps, net of tax $212

 

 

 

 

 

 

(3,115

)

 

(3,115

)

Capitalized swap interest, net of tax $523

 

 

 

 

 

 

(897

)

 

(897

)

Stock plan activity

 

27,933

 

 

3,149

 

 

 

 

3,149

 

Balance, September 30, 2012

 

37,973,640

 

$

379

 

$

2,714,258

 

$

(508,686

)

$

(9,590

)

$

5,651

 

$

2,202,012

 

 

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

 

6



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

UNAUDITED

 

 

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net income (loss)

 

$

(126,724

)

$

116,528

 

Adjustments to reconcile net loss to cash provided by operating activities:

 

 

 

 

 

Reduction in tax indemnity receivable

 

11,655

 

 

Equity in earnings (loss) from Real Estate Affiliates, net of distributions

 

14

 

(3,693

)

Investment in Real Estate Affiliate basis adjustment

 

 

6,053

 

Provision for doubtful accounts

 

285

 

174

 

Depreciation

 

14,062

 

11,235

 

Amortization

 

3,653

 

2,357

 

Amortization of deferred financing costs and debt market rate adjustments, net

 

(49

)

393

 

Amortization of intangibles other than in-place leases

 

(263

)

(1,205

)

Straight-line rent amortization

 

(379

)

(1,223

)

Deferred income taxes

 

6,454

 

(4,730

)

Restricted stock and stock option amortization

 

3,149

 

2,500

 

Warrant liability loss (gain)

 

162,724

 

(100,762

)

Master Planned Community and condominium development expenditures

 

(72,741

)

(65,813

)

Master Planned Community and condominium cost of sales

 

60,407

 

65,359

 

Net changes:

 

 

 

 

 

Accounts and notes receivable

 

13,284

 

(1,822

)

Prepaid expenses and other assets

 

1,168

 

(3,463

)

Deferred expenses

 

(2,377

)

(872

)

Accounts payable and accrued expenses

 

(15,341

)

2,393

 

Other, net

 

279

 

(1,457

)

Cash provided by operating activities

 

59,260

 

21,952

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Real estate and property expenditures

 

(36,815

)

(25,015

)

Cash acquired from The Woodlands acquisition, net of cash consideration

 

 

5,493

 

Reimbursement for infrastructure improvements from municipality

 

 

5,560

 

Proceeds from dispositions

 

 

1,130

 

Consideration paid to acquire Millennium Waterway Apartments, net of cash acquired

 

(2,721

)

 

Distribution from Millennium Waterway Apartments

 

6,876

 

 

Proceeds from sales of investment in Real Estate Affiliates

 

8,579

 

 

Investments in Real Estate Affiliates, net

 

(496

)

 

Decrease in restricted cash

 

4,251

 

 

Cash used in investing activities

 

(20,326

)

(12,832

)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from issuance of mortgages, notes and loans payable

 

44,828

 

241,644

 

Principal payments on mortgages, notes and loans payable

 

(37,193

)

(241,148

)

Deferred financing costs

 

(1,281

)

(2,935

)

Proceeds from issuance of management warrants

 

 

2,000

 

Cash provided by (used in) financing activities

 

6,354

 

(439

)

Net change in cash and cash equivalents

 

45,288

 

8,681

 

Cash and cash equivalents at beginning of period

 

227,566

 

284,682

 

Cash and cash equivalents at end of period

 

$

272,854

 

$

293,363

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

16,398

 

$

15,272

 

Interest capitalized

 

19,737

 

16,687

 

Income taxes paid

 

966

 

 

 

 

 

 

 

 

Non-Cash Transactions:

 

 

 

 

 

Acquisition of Millennium Waterway Apartments

 

 

 

 

 

Land

 

(15,917

)

 

Building and equipment

 

(56,002

)

 

Other Assets

 

(2,669

)

 

Mortgages, notes and loans payable

 

55,584

 

 

Other liabilities

 

754

 

 

Acquisition of 70 CCC

 

 

 

 

 

Land

 

(1,281

)

 

Building and equipment

 

(13,089

)

 

Other Assets

 

(2,957

)

 

Mortgages, notes and loans payable

 

16,037

 

 

Other liabilities

 

1,290

 

 

Reduction in investments in Real Estate Affiliates due to the Millennium Waterway Apartments’ acquisition

 

22,405

 

 

Special Improvement District bond transfers associated with land sales

 

(2,689

)

(3,188

)

Real estate and property expenditures

 

11,984

 

 

Reduction in investments in Real Estate Affiliates due to The Woodlands’ acquisition

 

 

(128,764

)

Acquisition note related to The Woodlands (See Note 4)

 

 

96,500

 

Debt assumed from The Woodlands’ acquisition (See Note 4)

 

 

296,695

 

Prepetition liabilities funded by GGP

 

 

3,323

 

MPC land contributed to Real Estate Affiliate

 

(2,190

)

 

Purchase of land from GGP

 

(1,315

)

 

 

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

 

7



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

NOTE 1        BASIS OF PRESENTATION AND ORGANIZATION

 

The accompanying unaudited condensed consolidated 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 Securities Exchange Commission (the “SEC”). Such condensed consolidated 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 Howard Hughes Corporation’s (“HHC” or the “Company”) audited Consolidated Financial Statements for the year ended December 31, 2011 which are included in the Company’s Annual Report on Form 10-K (the “Annual Report”) for the fiscal year ended December 31, 2011. 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. We have made certain reclassifications in 2011 to conform to the 2012 presentation. In 2011, we reclassified $4.7 million of deferred income taxes from accounts payable and accrued expenses on the Condensed Consolidated Statements of Cash Flows to conform to the 2012 presentation. We reclassified certain salaries and overhead costs relating to land development activities for The Woodlands from general and administrative expenses to Master Planned Community operations of $1.5 million and $4.0 million related to the three and nine months ended September 30, 2011, respectively. In addition, we reclassified operating costs related to the Columbia office properties from general and administrative expenses to other property costs. The results for the interim period ended September 30, 2012 and 2011 are not necessarily indicative of the results to be expected for the full fiscal year.

 

As more fully described in Note 4, on July 1, 2011, we acquired our partner’s 47.5% economic interest in The Woodlands not previously owned by us. As a result of this acquisition, beginning on July 1, 2011, we consolidated the financial results of The Woodlands which were previously accounted for under the equity method. Our condensed consolidated statements of operations and cash flows for the nine months ended September 30, 2012 are not comparable to the same period in 2011 due to the consolidation of The Woodlands.

 

Management has evaluated all material events occurring subsequent to the date of the condensed consolidated financial statements up to the date and time this Quarterly Report is filed.

 

NOTE 2        SPONSORS AND MANAGEMENT WARRANTS

 

On November 9, 2010 (the “Effective Date”), we issued warrants to purchase 8.0 million shares of our common stock to certain of the sponsors (the “Sponsors Warrants”) with an estimated initial value of approximately $69.5 million. The initial exercise price for the warrants of $50.00 per share and the number of shares of common stock underlying each warrant are 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 are subsequently exercisable without notice any time thereafter. The Sponsors Warrants expire on November 9, 2017.

 

In November 2010 and February 2011, we entered into certain warrant agreements (the “Management Warrants”) with David R. Weinreb, our Chief Executive Officer, Grant Herlitz, our President, and Andrew C. Richardson, our Chief Financial Officer, in each case prior to his appointment to such position. The Management Warrants representing 2,862,687 underlying shares which may be adjusted pursuant to a net settlement option were issued pursuant to such agreements at fair value in exchange for a combined total of approximately $19.0 million in cash from such executives at the commencement of their respective employment. 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 estimated $230.2 million fair value for the Sponsors Warrants and estimated $60.3 million fair value for the Management Warrants as of September 30, 2012, have been recorded as liabilities because the holders of these warrants could require us to settle such warrants in cash upon a change of control. The fair values were estimated

 

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Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

using an option pricing model and Level 3 inputs due to the unavailability of comparable market data. The estimated fair values for the Sponsor Warrants and Management Warrants were $102.6 million and $25.2 million, respectively, as of December 31, 2011. Increases (loss) and decreases (gain) in the fair value of the Sponsors Warrants and the Management Warrants are recognized in earnings.

 

NOTE 3        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 any potentially dilutive common shares. The dilutive effect of options and non-vested stock issued under stock-based compensation plans is computed using the “treasury stock” method. The dilutive effect of the Sponsors Warrants and Management Warrants is computed using the if-converted method. Gains, if any, associated with the Sponsors Warrants and Management Warrants are excluded from the numerator in computing diluted earnings per share because inclusion of such gains in the computation would be anti-dilutive.

 

Information related to our EPS calculations is summarized as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands, except per share amounts)

 

Basic EPS:

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(50,192

)

$

165,024

 

$

(126,724

)

$

116,528

 

Net income (loss) attributable to noncontrolling interests

 

781

 

(729

)

(637

)

(777

)

Net income (loss) attributable to common stockholders

 

$

(49,411

)

$

164,295

 

$

(127,361

)

$

115,751

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

37,916

 

37,912

 

37,909

 

37,907

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

 

$

(49,411

)

$

164,295

 

$

(127,361

)

$

115,751

 

Less: Warrant liability gain

 

 

(169,897

)

 

(100,762

)

Adjusted net income (loss) available to common stockholders

 

$

(49,411

)

$

(5,602

)

$

(127,361

)

$

14,989

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

37,916

 

37,912

 

37,909

 

37,907

 

Restricted stock and stock options

 

 

 

 

5

 

Warrants

 

 

843

 

 

1,585

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted common shares oustanding

 

37,916

 

38,755

 

37,909

 

39,497

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share:

 

$

(1.30

)

$

4.33

 

$

(3.36

)

$

3.05

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share:

 

$

(1.30

)

$

(0.14

)

$

(3.36

)

$

0.38

 

 

9



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

The diluted EPS computations for the three and nine months ended September 30, 2012 exclude 843,962 stock options, 57,933 shares of restricted stock, 8,000,000 shares of common stock underlying the Sponsor Warrants and 2,862,687 shares of common stock underlying the Management Warrants because their inclusion would have been anti-dilutive.

 

Additionally, the diluted EPS computation for the three months ended September 30, 2011 excludes 692,362 stock options and 38,953 shares of restricted stock because their inclusion would have been anti-dilutive. The diluted EPS computation for the nine months ended September 30, 2011 excludes 692,362 stock options because their inclusion would have been anti-dilutive.

 

NOTE 4        ACQUISITIONS AND DISPOSITIONS

 

On August 15, 2012, we acquired 70 Columbia Corporate Center (“70 CCC”), a 169,590 square foot Class A office building located in the Columbia, Maryland town center by assuming a promissory note which encumbered the property and providing a participation right to the lender for 30% of the appreciation in the market value of the building less our preferred return. The promissory note bears interest at 4.25% and matures on August 31, 2017. The building was approximately 23.7% leased at closing. Simultaneous with the closing of the transaction, we executed a lease for 76,308 square feet that will increase occupancy to approximately 68.7% when the tenants take possession which is estimated to occur in March 2013. As part of the transaction, we deposited approximately $5.0 million into an escrow account for capital expenditures, tenant improvements and leasing commissions at the property. We are entitled to a 10% cumulative preferred return, after debt service, on our invested capital in the property. Cash flow is then split pro-rata based on our original contributed equity of $5.0 million plus any additional equity contributed and the loan amount. Excess proceeds from a capital event, after repayment of outstanding debt and the preferred return will be split 30% to the lender and 70% to us. The acquisition was recorded at fair value of $17.5 million and consists of land and a building that was valued as if it were vacant and the “as-if-vacant” value was allocated between the land and building. The “as-if-vacant” value was derived by estimating the value of the property assuming it was generating stabilized cash flows using market lease, capitalization and discount rates based on recent comparable market transactions, reduced by the estimated lease-up and carrying costs that we would incur to achieve stabilized cash flow if the property were vacant. The fair value of the liabilities assumed was determined using a discounted cash flow analysis. 70 CCC is included in our Operating segment.

 

On July 6, 2012, we sold 11.5 acres including 104,705 square feet of mostly vacant retail space in Pocatello, ID (Alameda Plaza) for $4.5 million. Our net earnings recognized on the sale was $2.0 million. As the sale of certain development assets is an integral part of our business strategy, we recognize the proceeds as revenue in the condensed consolidated statements of operations.

 

On May 31, 2012, we acquired our partner’s interest in the 393-unit Millennium Waterway Apartments for $6.9 million, following the funding of a $55.6 million ten-year non-recourse mortgage bearing a 3.75% interest rate. Total assets of $78.6 million and liabilities of $56.4 million, including the recently funded loan, were consolidated into our financial statements at fair value as of the acquisition date. Prior to the acquisition, we accounted for our investment in Millennium Waterway Apartments under the equity method. We now own 100% of this stabilized Class A multi-family property located in The Woodlands Town Center. Included in the condensed consolidated statements of operations are revenues of $1.9 million and $2.5 million and net earnings of $0.6 million and $0.9 million since the acquisition date, for the three and nine months ended September 30, 2012, respectively. In conjunction with this acquisition, we entered into a new joint venture with the partner to construct a 314-unit Class A multi-family property. Please refer to Note 7 — Real Estate Affiliates for information about the new joint venture.

 

On July 1, 2011, we acquired our partner’s 47.5% economic interest (represented by a 57.5% legal interest) in TWCPC Holdings, L.P., The Woodlands Operating Company, L.P. and TWLDC Holdings, L.P. (collectively referred to as “The Woodlands”) for $117.5 million. The Woodlands is located near Houston, Texas.  As a result of the acquisition, we now consolidate The Woodlands operations into our financial statements: therefore, our condensed consolidated financial statements are not comparable for the nine months ended September 30, 2011.

 

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Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

Please refer to Note 15 — Segments for a presentation of the results as if we consolidated The Woodlands for all periods presented. Prior to such acquisition, we accounted for The Woodlands using the equity method. Our acquisition of The Woodlands net assets resulted in a $3.9 million after-tax loss on the re-measurement relating to our existing 52.5% economic interest which had a $134.8 million net book value at June 30, 2011. The loss is recorded in the Investment in Real Estate Affiliate basis adjustment line on our Condensed Consolidated Statements of Operations. Included in the Condensed Consolidated Statement of Operations for the three months and nine months ended September 30, 2011, are revenues of $40.3 million and a net loss of $7.9 million for the quarter ended September 30, 2011. The net loss includes the impact of purchase accounting adjustments, including an $8.6 million increase in cost of sales to reflect the step-up in basis of finished lot inventory sold during the three months ended September 30, 2011.

 

Pro Forma Information

 

The following pro forma information for the nine months ended September 30, 2011 was prepared as if The Woodlands’ acquisition had occurred as of the beginning of such period:

 

 

 

Nine Months Ended
September 30, 2011

 

 

 

(In thousands)

 

Total revenues

 

$

276,240

 

Net income (loss) attributable to common shareholders

 

112,393

 

 

Pro forma adjustments were made for: (1) purchase accounting, including (a) depreciation for the step-up in basis for net property and equipment, (b) amortization of in-place and above/below market leases, (c) land cost of sales increase for step-up in land basis for finished lots acquired and sold and (d) amortization of deferred financing costs, prepaid commissions and deferred profits which were eliminated and (2) adjustments for interest expense which is capitalizable in accordance with our interest capitalization policy.

 

The pro forma information is not necessarily indicative of the results that would have occurred had the acquisition occurred as of the beginning of the period presented, nor is it necessarily indicative of future results.

 

NOTE 5        IMPAIRMENT

 

We review our real estate assets, including operating assets, land held for development and sale and developments in progress, for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Generally accepted accounting principles require that if impairment indicators exist and the undiscounted cash flows expected to be generated by an asset are less than its carrying amount, an impairment provision should be recorded to write down the carrying amount of such asset to its 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.

 

Our investment in each of the Real Estate Affiliates is evaluated periodically and as deemed necessary for recoverability and valuation declines that are other-than-temporary. If the decrease in value of our investment in a Real Estate Affiliate is deemed to be other-than-temporary, our investment in such Real Estate Affiliate is reduced to its estimated fair value.

 

There were no impairment charges recorded during the three or nine months ended September 30, 2012 or 2011.

 

11



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

NOTE 6                                           FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The following table presents, for each of the fair value hierarchy levels required under Accounting Standards Codification (“ASC”) 820, “Fair Value Measurement,” our assets and liabilities that are measured at fair value on a recurring basis.

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Fair Value Measurements Using

 

Fair Value Measurements Using

 

 

 

Total

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs 
(Level 3)

 

Total

 

Quoted Prices in
Active Markets
for Identical
Assets (Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

(In thousands)

 

(In thousands)

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

$

290,488

 

$

 

$

 

$

290,488

 

$

127,764

 

$

 

$

 

$

127,764

 

Interest rate swaps

 

7,724

 

 

7,724

 

 

4,367

 

 

4,367

 

 

 

The valuation of warrants is based on an option pricing valuation model. The inputs to the model include the fair value of the stock related to the warrants, exercise price of the warrants, term, expected volatility, risk-free interest rate and dividend yield.

 

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts and includes consideration of counterparty credit risk. The variable cash receipts are based on an expectation of future interest rates derived from observable market interest rate curves.

 

The following table presents a reconciliation of the beginning and ending balances of the fair value measurements using significant unobservable inputs (Level 3):

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Balance as of December 31,

 

$

127,764

 

$

227,348

 

Warrant liability (gain) loss

 

162,724

 

(100,762

)

Purchases

 

 

2,000

 

Balance as of September 30,

 

$

290,488

 

$

128,586

 

 

The significant unobservable input used in the fair value measurement of our warrants designated as Level 3 as of September 30, 2012 is as follows:

 

 

 

Fair Value

 

Valuation
Technique

 

Unobservable
Input

 

Range/
Average

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

$

290,488

 

Option Pricing
Valuation Model

 

Expected
Volatility (a)

 

27%-28%
(28%)

 

 


(a) Based on the asset volatility of comparable companies.

 

12



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

The expected volatility in the table above is a significant unobservable input used to estimate the fair value of our warrant liabilities. An increase in expected volatility would increase the fair value of the liability, while a decrease in expected volatility would decrease the fair value of the liability.

 

The following tables summarize our assets and liabilities that were measured at fair value on a non-recurring basis:

 

 

 

Total Fair
Value
Measurement

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs (Level 2)

 

Significant
Unobservable Inputs
(Level 3)

 

Total Loss (Gain)
Three and Nine
Months Ended
September 30,
2012

 

 

 

(In thousands)

 

Investment in Real Estate Affiliates

 

$

22,405

 

$

22,405

(a)

$

 

$

 

$

 

 


(a)         We measured our equity interest in Millennium Waterway Apartments based on our purchase of our partner’s 23.5% economic interest in Millennium Waterway Apartments. We used Level 1 inputs for the cash payment.

 

The estimated fair values of the Company’s financial instruments that are not measured at fair value on a recurring basis are as follows:

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Carrying
Amount

 

Estimated
Fair Value

 

Carrying
Amount

 

Estimated
Fair Value

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Notes receivable, net

 

$

28,677

 

$

28,677

 

$

35,354

 

$

35,354

 

Tax indemnity receivable, including interest

 

326,150

 

(c)

 

331,771

 

(c)

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Fixed-rate debt

 

$

159,098

 

$

160,689

 

$

83,164

 

$

85,047

 

Variable-rate debt (a)

 

473,778

 

473,778

 

468,100

 

468,100

 

SID bonds (b)

 

50,928

 

50,928

 

55,213

 

55,213

 

Total mortgages, notes and loans payable

 

683,804

 

685,395

 

606,477

 

608,360

 

 


(a) As more fully described below, $172.0 million of variable-rate debt has been swapped to a fixed rate for the term of the related debt.

(b) Due to the uncertain repayment terms of the Special Improvement District (“SID”) bonds, the carrying value approximates fair value.

(c) It is not practicable to estimate the fair value of the tax indemnity receivable, including interest, as the timing and ultimate amount received under contract is highly dependent on numerous future events that cannot be reliably predicted.

 

Notes receivables are carried at net realizable value which approximates fair value. The estimated fair values of these notes receivable are categorized as Level 3 due to certain factors, such as current interest rates, terms of the note and credit worthiness of the borrower.

 

The fair value of debt in the table above was estimated based on a discounted future cash payment model using Level 2 inputs which includes risk premiums for loans of comparable quality and a risk free rate derived from the current London Interbank Offered Rate (“LIBOR) or U.S. Treasury obligation interest rates. The discount rates reflect our judgment as to what the approximate current lending rates for loans or groups of loans with similar

 

13



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

maturities and credit quality would be if credit markets were operating efficiently and assuming that the debt is outstanding through maturity.

 

The carrying amounts of cash and cash equivalents and accounts receivable approximate fair value because of the short-term maturity of these instruments.

 

NOTE 7                                                 REAL ESTATE AFFILIATES

 

In the ordinary course of business, we enter into partnerships or joint ventures primarily for the development and operations of real estate assets which are referred to as real estate affiliates. These partnerships or joint ventures are typically characterized by a non-controlling ownership interest with decision making and distribution of expected gains and losses being proportionate to the ownership interest.  We account for these partnerships and joint ventures in accordance with ASC 810, as amended (“ASC 810”).

 

In accordance with ASC 810, we assess our partnerships or joint ventures at inception to determine if any meet the qualifications of a variable interest entity (“VIE”). We consider a partnership or joint venture to be a VIE if: (a) the total equity investment is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) characteristics of a controlling financial interest are missing (either the ability to make decisions through voting or other rights, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity); or (c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity and/or their rights to receive the expected residual returns of the entity, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights. Upon the occurrence of certain events outlined in ASC 810, we reassess our initial determination of whether the partnership or joint venture is a VIE. We also perform a qualitative assessment of each VIE to determine if we are the primary beneficiary, as required by ASC 810.

 

We account for investments in joint ventures deemed to be variable interest entities for which we are not considered to be the primary beneficiary 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. 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.

 

On October 11, 2011, we entered into a joint venture with two local developers and formed HHMK Development, LLC to explore the development of a luxury condominium tower at the Ala Moana Center, Honolulu, HI. On June 14, 2012, we formed another 50:50 joint venture, KR Holdings, LLC (“KR Holdings”), with the same partner. The initial capital contribution which is due at closing for the construction loan will include our interest in the condominium declaration and air rights for the condominium tower and cash from our partner. We anticipate the construction loan to close in June 2013. We determined that KR Holdings is a VIE, and that we are not the primary beneficiary. Accordingly, we account for our investment in KR Holdings using the equity method. On September 17, 2012, KR Holdings closed on two $20.0 million non-recourse mezzanine loan commitments with List Island Properties, LLC and A & B Properties, Inc. These loans have a blended interest rate of 12%, must be drawn in full at the construction loan closing date and mature on April 30, 2018 with the option to extend for one year. In addition to the mezzanine loans, A & B Properties and List Island Properties, LLC, both have a back-end profit interest in KR Holdings, LLC, which entitles them to receive a share of the profits after we get a return of our capital plus a 13% preferred return on our capital. LIST Co., Ltd, the parent of List Island Properties, LLC, will serve as an exclusive representative for buyers in Japan for the residences. Three million dollars of the $40.0 million provided by the mezzanine lenders may be drawn and used to fund the pre-development costs of the venture. Per the terms of the mezzanine loans, the venture is not required to repay this $3.0 million if the construction loan fails to close or the project fails to go forward. Of the committed pre-development costs, $2.0 million has been funded as of September 30, 2012 and is non-interest bearing.

 

14



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

On May 14, 2012, we entered into a joint venture, Millennium Woodlands Phase II, LLC (“Millennium Phase II”), with the same partner from Millennium Waterway Apartments as discussed in Note 4 for the construction of a 314-unit Class A multi-family complex in The Woodlands Town Center. Our partner is the managing member of Millennium Phase II.  As the managing member, our partner controls, directs, manages and administers the affairs of Millennium Phase II. Millennium Phase II is a variable interest entity, and although we have the majority ownership interest in the joint venture, we determined that we are not the primary beneficiary because our partner has the power to direct activities that most significantly impact the economic performance of the joint venture (81.43%). On July 5, 2012, Millennium Phase II was capitalized by our contribution of 4.8 acres of land valued at $15.5 million to the joint venture, our partner’s contribution of $3.0 million in cash, and by a construction loan in the amount of $37.7 million which is guaranteed by our partner. The development of Millennium Phase II further expands our multi-family portfolio in The Woodlands Town Center.

 

On October 30, 2012, we funded $4.5 million in cash to the Bridges at Mint Hill joint venture in accordance with the venture’s operating agreement. The cash was used to repay a mortgage secured by land to be contributed by our partner. As a result, our ownership percentage increased to 90.5% from 79.0%, and we now have the ability to direct the significant economic activities of the entity; therefore, we will begin consolidating this joint venture in the fourth quarter of 2012.

 

The Bridges at Mint Hill, LLC, HHMK Development, LLC, KR Holdings, LLC, Millennium Woodlands Phase II, LLC and the Parcel D Development, LLC joint venture entities included in the table below are VIEs. The aggregate carrying value of the unconsolidated VIEs was $7.9 million and $3.2 million as of September 30, 2012 and December 31, 2011, respectively, and was classified as Investments in Real Estate Affiliates in the Condensed Consolidated Balance Sheet. Because these joint ventures are in the pre-development stage, there were no earnings for the three and nine months ended September 30, 2012. Our maximum exposure to loss as a result of these investments is limited to the aggregate carrying value of the investment as we have not provided any guarantees on behalf of these VIEs.

 

15



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

Below is a summary of our Investments in Real Estate Affiliates:

 

 

 

Economic/ Legal Ownership

 

Carrying Value

 

Share of Earnings/Dividends

 

 

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

 

 

(In percentages)

 

(In thousands)

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands (a)

 

 

 

 

 

$

 

$

 

$

 

$

 

$

 

$

3,727

 

Bridges at Mint Hill, LLC (b)

 

79.00

%

79.00

%

673

 

180

 

 

 

 

 

Circle T

 

50.00

%

50.00

%

9,004

 

9,004

 

 

 

 

 

Forest View Apartments (c) (d)

 

 

50.00

%

 

5,358

 

 

1

 

2

 

1

 

HHMK Development, LLC

 

50.00

%

50.00

%

947

 

 

 

 

 

 

KR Holdings, LLC

 

50.00

%

 

 

 

 

 

 

 

Millennium Waterway Apartments (e)

 

100.00

%

83.55

%

 

21,998

 

 

14

 

406

 

14

 

Millennium Woodlands Phase II, LLC

 

81.43

%

 

2,190

 

 

 

 

 

 

Parcel D Development, LLC

 

50.00

%

50.00

%

4,084

 

2,990

 

 

 

 

 

Stewart Title (c)

 

50.00

%

50.00

%

3,758

 

3,643

 

324

 

85

 

640

 

85

 

Timbermill Apartments (c) (d)

 

 

50.00

%

 

3,988

 

 

1

 

2

 

1

 

Woodlands Sarofim #1 (c)

 

20.00

%

20.00

%

2,462

 

2,456

 

(14

)

30

 

6

 

30

 

Other investments

 

 

 

 

 

300

 

 

 

 

 

 

 

 

 

 

 

 

23,418

 

49,617

 

310

 

131

 

1,056

 

3,858

 

Cost basis investments (f)

 

 

 

 

 

12,744

 

12,978

 

 

35

 

2,376

 

3,929

 

Total

 

 

 

 

 

$

36,162

 

$

62,595

 

$

310

 

$

166

 

$

3,432

 

$

7,787

 

 


(a)              As of July 1, 2011, The Woodlands is consolidated and no longer a Real Estate Affiliate (Refer to Note 4). Prior to July 1, 2011, we owned 52.5% economic interest in The Woodlands.

(b)             Ownership percentage as of October 30, 2012 is 90.50%

(c)              Equity investment consolidated into our financial statements as part of the acquisition of our partner’s economic interest in The Woodlands on July 1, 2011.

(d)             On April 19, 2012, the joint ventures owning the Forest View and Timbermill Apartments completed their sale to a third party. Our share of the distributable cash, after repayment of debt and transaction expenses, was $8.6 million.

(e)              On May 31, 2012, we acquired our partner’s interest for $6.9 million and consolidated this property.

(f)               Includes dividends received from Summerlin Hospital Medical Center.

 

As of September 30, 2012, approximately $9.1 million of indebtedness was secured by the properties owned by our Real Estate Affiliates in which our share was approximately $2.5 million (KR Holdings, LLC - $1.0 million; Millennium Woodlands Phase II - $0.1 million; and Woodlands Sarofim #1 - $1.4 million) based upon our economic ownership. The debt is non-recourse to us.

 

NOTE 8                                                 MORTGAGES, NOTES AND LOANS PAYABLE

 

Mortgages, notes and loans payable are summarized as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Fixed-rate debt:

 

 

 

 

 

Collateralized mortgages, notes and loans payable

 

$

159,098

 

$

83,164

 

Special Improvement District bonds

 

50,928

 

55,213

 

Variable-rate debt:

 

 

 

 

 

Collateralized mortgages, notes and loans payable

 

473,778

 

468,100

 

Total mortgages, notes and loans payable

 

$

683,804

 

$

606,477

 

 

16



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

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

 

 

 

 

 

 

 

Maximum

 

Carrying Value

 

 

 

Final Maturity (a)

 

Interest
Rate

 

Facility
Amount

 

September 30,
2012

 

December 31,
2011

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

110 N. Wacker (b)

 

October 2019

 

5.21

%

 

 

$

29,000

 

$

29,000

 

 

 

 

 

 

 

 

 

 

 

 

 

70 Columbia Corporate Center

 

August 2017

 

4.25

%

 

 

16,037

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Financing Arrangements

 

July 2015

 

 

 

 

754

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridgeland

 

 

 

 

 

 

 

 

 

 

 

Land Loan (d)

 

June 2022

 

5.50

%

 

 

18,066

 

 

Development Loan (e)

 

June 2015

 

5.00

%

$

30,000

 

2,757

 

 

Various mortgage notes

 

 

 

 

 

 

20,604

 

Bridgeland Total

 

 

 

 

 

 

 

20,823

 

20,604

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Improvement District bonds

 

 

 

 

 

 

 

 

 

 

 

Summerlin South - S108

 

December 2016

 

5.95

%

 

 

1,183

 

1,302

 

Summerlin South - S124

 

December 2019

 

5.95

%

 

 

342

 

378

 

Summerlin South - S128

 

December 2020

 

7.30

%

 

 

825

 

862

 

Summerlin South - S128C

 

December 2030

 

6.05

%

 

 

5,847

 

5,956

 

Summerlin South - S132

 

December 2020

 

6.00

%

 

 

5,067

 

5,378

 

Summerlin South - S151

 

June 2025

 

6.00

%

 

 

11,064

 

12,293

 

Summerlin West - S808

 

April 2021

 

5.71

%

 

 

 

682

 

Summerlin West - S809

 

April 2023

 

6.65

%

 

 

 

1,000

 

Summerlin West - S810

 

April 2031

 

7.13

%

 

 

22,185

 

22,770

 

The Shops at Summerlin Centre - S128

 

December 2030

 

6.05

%

 

 

3,765

 

3,829

 

The Shops at Summerlin Centre - S108

 

December 2016

 

5.95

%

 

 

650

 

713

 

SID Payable to Nevada Cancer Institute

 

December 2019

 

5.95

%

 

 

 

50

 

Special Improvement District bonds Total

 

 

 

 

 

 

 

50,928

 

55,213

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

Master Credit Facility (f)

 

March 2015

 

5.00

%

$

270,000

 

176,704

 

183,000

 

Resort and Conference Center (g)

 

October 2013

 

6.00

%

 

 

36,100

 

36,100

 

2201 Lake Woodlands Drive

 

November 2016

 

5.25

%

 

 

 

4,803

 

Weiner Tract

 

January 2013

 

6.25

%

 

 

 

1,479

 

Land in Montgomery Co.

 

December 2012

 

6.00

%

 

 

 

649

 

Land in Harris Co.

 

January 2013

 

6.00

%

 

 

 

381

 

Capital lease obligation

 

 

2.84

%

 

 

67

 

147

 

CVS

 

upon sale

 

3.25

%

 

 

 

101

 

4 Waterway Square

 

December 2023

 

4.88

%

 

 

40,359

 

41,000

 

9303 New Trails

 

December 2023

 

4.88

%

 

 

13,781

 

14,000

 

3 Waterway Square (h)

 

January 2017

 

3.25

%

$

43,295

 

217

 

 

20/25 Waterway

 

May 2022

 

4.79

%

 

 

14,450

 

 

Millennium Waterway Apartments (i)

 

June 2022

 

3.75

%

 

 

55,584

 

 

The Woodlands Total

 

 

 

 

 

 

 

337,262

 

281,660

 

 

 

 

 

 

 

 

 

 

 

 

 

Ward Centers (j)

 

September 2016

 

3.40

%

$

250,000

 

229,000

 

220,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

683,804

 

$

606,477

 

 


(a)   Maturity date includes any extension option periods which are within our control.

(b)   Loan has a stated interest rate of one-month LIBOR + 2.25%. The $29.0 million outstanding principal balance is swapped to a 5.21% fixed rate through maturity.

(c)   The loan was refinanced during the second quarter of 2012.

(d)   Loan is for ten year term. First five years interest is fixed at 5.50% and for second five years interest rate is floating based on three-month LIBOR +2.75%.

(e)   Revolving development loan provides for a maximum of $30.0 million outstanding balance at any time with all draws not to exceed $140.0 million. The loan bears interest at three-month LIBOR + 3.25% and has a 5.00% minimum rate.

(f)    Loan bears interest at one-month LIBOR + 4.00% and has a 1.00% LIBOR floor.

(g)   Loan currently bears interest at one-month LIBOR + 5.00% and has a 1.00% LIBOR floor. The rate increases by 0.5% every six months after March 23, 2012 until maturity.

(h)   Loan bears interest at one-month LIBOR + 2.65%.

(i)    Loan payments are interest only until June 2017, then monthly principal and interest payment of $257,418 with unpaid balance due at maturity.

(j)    Loan has a stated interest rate of one-month LIBOR + 2.50%. $143.0 million of the outstanding principal balance is swapped to a 3.80% fixed rate through maturity.

 

17



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

The weighted average interest rate on our mortgages, notes and loans payable was 4.52% and 4.68% as of September 30, 2012 and December 31, 2011, respectively.

 

Mortgages, Notes and Loans Payable

 

As of September 30, 2012, we had $683.8 million of mortgages, notes and loans payable. Approximately $337.3 million of the debt included in the table above is related to The Woodlands, which was consolidated on July 1, 2011. All of the debt is non-recourse and is secured by the individual properties as listed in the table above, except for The Woodlands Master Credit Facility and Resort and Conference Center loans which are recourse to the partnerships that directly own The Woodlands operations, and a $7.0 million parent guarantee associated with the 110 N. Wacker mortgage, which is more fully discussed below.

 

The Woodlands Master Credit Facility is a $270.0 million facility consisting of a $170.0 million term loan and a $100.0 million revolving credit line (together, the “TWL Facility”). As of September 30, 2012, the TWL Facility had an outstanding balance of $176.7 million. The TWL Facility bears interest at one-month LIBOR plus 4.00% with a 1.00% LIBOR floor, has a March 29, 2014 initial maturity date and a one-year extension at borrower’s option. The TWL Facility also contains certain restrictions or covenants that, among other things, require the maintenance of specified financial ratios, restrict the incurrence of additional indebtedness at The Woodlands, and limit distributions from The Woodlands to us.  Until The Woodlands leverage, as defined by the credit agreement, is less than a 40.0% loan to value ratio, we must amortize the debt on a dollar for dollar basis for any distributions that we make from The Woodlands.  We have not distributed and do not currently intend to distribute cash from The Woodlands; therefore, this distribution provision has had no impact on us. As of September 30, 2012, leverage was approximately 37.90%. There was $11.0 million of undrawn and available borrowing capacity under the TWL Facility based on the collateral underlying the facility and covenants as of September 30, 2012. The TWL Facility also requires mandatory principal amortization payments during its initial term and during the extension period, if exercised.  Repayments of $25.0 million and $30.0 million are required on March 29, 2013 and, if extended, 2014, respectively. Furthermore, $10.0 million is due on each of June 29, September 29 and December 29, 2014 during the extension period.

 

On August 15, 2012, we assumed a $16.0 million loan as part of the acquisition of 70 CCC. The non-recourse, interest only promissory note matures on August 31, 2017, has a fixed rate of 4.25% and is secured by the property. Please refer to Note 4 — Acquisitions and Dispositions for description of the acquisition.

 

The Woodlands Resort and Conference Center loan has a $36.1 million outstanding balance as of September 30, 2012. The maturity date has been extended to December 2012 and may be further extended to October 2013 at our option. The loan bears interest at one-month LIBOR plus 5.00% as of September 30, 2012 and has a 1.00% LIBOR floor. The rate began to increase by 0.50% every six months after March 23, 2012 until maturity. The loan is secured by a 440-room and 40-acre conference center and resort located within The Woodlands, and requires the maintenance of specified financial ratios.

 

During the second quarter of 2012, we refinanced $18.1 million of existing debt related to our Bridgeland master planned community with a ten-year term loan facility at a fixed interest rate of 5.50% for the first five years and three-month LIBOR plus 2.75% for the remaining term and maturing on June 29, 2022. Beginning on June 29, 2014, annual principal payments are required in the amount of 5.00% of the then outstanding principal balance. In addition, we simultaneously entered into a three-year revolving credit facility with aggregate borrowing capacity of $140.0 million and which has a $30.0 million maximum outstanding loan amount at any time. The revolving loan bears interest at the greater of 5.00% or LIBOR plus 3.25% and matures on June 29, 2015. This loan is intended to provide working capital at Bridgeland in order to accelerate development efforts to meet the demand of homebuilders for finished lots in the community. The Bridgeland loans are cross collateralized and cross-defaulted and the Bridgeland Master Planned Community serves as collateral for the loans. The loans also require that Bridgeland maintain a minimum $3.0 million cash balance and a minimum net worth of $250.0 million. Additionally, we are restricted from making cash distributions from Bridgeland unless the revolver has no outstanding balance and one year of real estate taxes and debt service on the term loan have been escrowed with the lender.

 

18



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 UNAUDITED

 

On May 31, 2012, as part of our acquisition of the partner’s interest in Millennium Waterway Apartments, we consolidated a $55.6 million non-recourse first mortgage loan. The proceeds from the mortgage were used to refinance the joint venture’s existing debt and to fund our acquisition of the partner’s interest in the property. The loan matures on June 1, 2022 and has a fixed interest rate of 3.75%. Payments are interest only until June 2017, then monthly principal and interest payments of $257,418 with the unpaid principal balance due at maturity.

 

On April 26, 2012, we closed on a 10-year, fixed rate loan with interest at 4.79% secured by 20/25 Waterway Avenue. The proceeds from the loan were $13.6 million.

 

On February 2, 2012, we secured non-recourse financing totaling $43.3 million for the construction of 3 Waterway Square, an eleven-story, 232,021-square foot office building in The Woodlands. The loan matures on January 31, 2015 and has two, one-year extension options. The loan bears interest at LIBOR plus 2.65%.

 

On December 5, 2011, we secured a $41.0 million loan for 4 Waterway Square and a $14.0 million loan for 9303 New Trails. The non-recourse mortgages mature on December 11, 2023 and have fixed interest rates of 4.88%.

 

On September 30, 2011, we closed on a $250.0 million first mortgage financing secured by the Ward Centers in Honolulu, HI, that bears interest at LIBOR plus 2.50%.  The loan matures on September 29, 2016, and $143.0 million of the principal balance was swapped to a 3.80% fixed rate for the term of the loan. The loan had a weighted-average interest rate of 3.40% as of September 30, 2012. The loan may be drawn to a maximum $250.0 million to fund capital expenditures at the property; provided, that the outstanding principal balance cannot exceed 65% of the property’s appraised value and the borrowers are required to have a minimum 10% debt yield to draw additional loan proceeds under the facility. The loan also permits partial repayment during its term in connection with property releases for development. On September 17, 2012, we drew an additional $9.0 million on the loan. As a result, the unused portion of this mortgage is $21.0 million as of September 30, 2012.

 

On May 10, 2011, we closed a $29.0 million first mortgage financing secured by our office building located at 110 N. Wacker Drive in Chicago, IL which bears interest at LIBOR plus 2.25%. At closing, the interest rate on the loan was swapped to a 5.21% fixed rate for the term of the loan. 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. The loan has an interest-only period through April 2015 and, thereafter, amortizes ratably to $12.0 million through maturity. We provided a $7.0 million repayment guarantee for the loan, which is reduced on a dollar for dollar basis during the amortization period.

 

As of September 30, 2012, $1.1 billion of land, buildings and equipment and developments in progress (before accumulated depreciation) have been pledged as collateral for our mortgages, notes and loans payable.

 

Special Improvement District Bonds

 

The Summerlin master planned community uses Special Improvement District bonds to finance certain common infrastructure improvements.  These bonds are issued by the municipalities and, although unrated, are secured by the assessments on the land.  The majority of proceeds from each bond issued is held in a construction escrow and disbursed to us as infrastructure projects are completed, inspected by the municipalities and approved for reimbursement. Accordingly, the Special Improvement District bonds have been classified as debt. The Summerlin Master Planned Community pays the debt service on the bonds semi-annually. However, our residential land sales contracts provide for the reimbursement of the principal amounts included in these debt service payments. In addition, as Summerlin sells land, the purchasers assume a proportionate share of the bond obligation.

 

As of September 30, 2012, we were in compliance with all of the financial covenants related to our debt agreements.

 

19



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

NOTE 9                                              DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

We are primarily exposed to interest rate risks related to our variable interest debt, and we seek to manage this risk by utilizing interest rate derivatives. Our objectives in using interest rate derivatives are to add stability to interest costs by reducing our exposure to interest rate movements. To accomplish this objective and predictability, we use interest rate swaps and caps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.

 

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income (“AOCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The outstanding derivatives at September 30, 2012 were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended September 30, 2012, the amount of ineffectiveness recorded in earnings was insignificant.

 

Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. Over the next 12 months, we estimate that an additional $2.3 million will be reclassified as an increase to interest expense.

 

As of September 30, 2012, we had gross notional amounts of $172.0 million for interest rate swaps and a $100.0 million interest rate cap that were designated as cash flow hedges of interest rate risk. The fair value of the interest rate cap derivative was insignificant.

 

The table below presents the fair value of our derivative financial instruments which are included in accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheets:

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Interest Rate Swaps

 

$

7,724

 

$

4,367

 

Total derivatives designated as hedging instruments

 

$

7,724

 

$

4,367

 

 

The table below presents the effect of our derivative financial instruments on the Condensed Consolidated Statements of Operations:

 

 

 

Three months ended September 30,

 

 

 

Three months ended September 30,

 

 

 

2012

 

2011

 

 

 

2012

 

2011

 

Cash Flow Hedges

 

Amount of (Loss)
Recognized in
OCI

 

Amount of Gain
(Loss) Recognized in
OCI

 

Location of Gain
(Loss) Reclassified
from AOCI into
Earnings

 

Amount of (Loss)
Reclassified from
AOCI into Earnings

 

Amount of Gain or
(Loss) Reclassified
from AOCI into
Earnings

 

 

 

(In thousands)

 

 

 

(In thousands)

 

Interest Rate Swaps

 

$

(1,466

)

$

(1,834

)

Interest Expense

 

$

(512

)

$

(205

)

 

 

$

(1,466

)

$

(1,834

)

 

 

$

(512

)

$

(205

)

 

20



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

 

 

Nine months ended September 30,

 

 

 

Nine months ended September 30,

 

 

 

2012

 

2011

 

 

 

2012

 

2011

 

Cash Flow Hedges

 

Amount of (Loss)
Recognized in
OCI

 

Amount of Gain
(Loss) Recognized in
OCI

 

Location of Gain
(Loss) Reclassified
from AOCI into
Earnings

 

Amount of (Loss)
Reclassified from
AOCI into Earnings

 

Amount of Gain or
(Loss) Reclassified
from AOCI into
Earnings

 

 

 

(In thousands)

 

 

 

(In thousands)

 

Interest Rate Swaps

 

$

(4,627

)

$

(2,582

)

Interest Expense

 

$

(1,512

)

$

(316

)

 

 

$

(4,627

)

$

(2,582

)

 

 

$

(1,512

)

$

(316

)

 

NOTE 10                                             INCOME TAXES

 

Several of our subsidiaries are involved in a dispute with the IRS relating to years in which those subsidiaries were owned by GGP, and in connection therewith General Growth Properties (“GGP”) has provided us with an indemnity against certain potential tax liabilities. 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”), 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 (“MPC Taxes”), in an amount up to $303.8 million, plus interest and penalties related to these amounts (the “Indemnity Cap”) so long as GGP controls the action in the Tax Court related to the dispute with the IRS as described below.  We recorded the Tax Indemnity receivable at the Indemnity Cap amount as of the spinoff date. The unrecognized tax benefits and related accrued interest recorded through September 30, 2012 are primarily related to the taxes that are the subject of the Tax Indemnity. We have recorded interest income receivable on the Tax Indemnity receivable in the amounts of $34.0 million and $28.0 million as of September 30, 2012 and December 31, 2011, respectively.

 

The timing of the utilization of the tax assets attributable to indemnified and non-indemnified gains results in changes to the Tax Indemnity receivable and is dependent on numerous future events, such as the timing of recognition of indemnified and non-indemnified gains, the amount of each type of gain recognized in each year, the use of specific deductions and the ultimate amount of indemnified gains recognized. These non-cash changes could be material to our financial statements.  Resolution of the Tax Court case noted below could also result in changes to the master planned community deferred gains and the timing of utilization of the tax assets, both of which could result in changes to the Tax Indemnity receivable.  We record the Tax Indemnity receivable based on the amounts indemnified which are determined in accordance with the provisions set forth in ASC 740 (Income Taxes).

 

During the three and nine months ended September 30, 2012, the reduction in tax indemnity receivable of $2.9 million and $11.7 million, respectively, related to our utilization of tax assets that contractually limit the amount we can receive pursuant to the Tax Matters Agreement and changes to our deferred tax liability for the MPC Taxes.

 

On May 6, 2011, GGP filed Tax Court petitions on behalf of the two former taxable REIT subsidiaries of GGP seeking a redetermination of federal income tax for the years 2007 and 2008. The petitions seek to overturn determinations by the IRS that the taxpayers were liable for combined deficiencies totaling $144.1 million. On October 20, 2011, GGP filed a motion in the United States Tax Court to consolidate the cases of the two former taxable REIT subsidiaries of GGP subject to litigation with the Internal Revenue Service due to the common nature of the cases’ facts and circumstances and the issues being litigated. The United States Tax Court granted the motion to consolidate. The litigation is currently scheduled for trial in November 2012.

 

Unrecognized tax benefits recorded pursuant to uncertain tax positions were $101.0 million as of September 30, 2012 and $101.4 as of December 31, 2011, excluding interest, of which this entire amount would not

 

21



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

impact our effective tax rate. Accrued interest related to these unrecognized tax benefits amounted to $34.5 million as of September 30, 2012 and $28.5 million as of December 31, 2011. We recognized an increase in interest expense related to the unrecognized tax benefits of $2.1 million and $6.0 million for the three and nine months ended September 30, 2012, respectively. A significant amount of the unrecognized tax benefits recorded in the financial statements are related to the tax court litigation and are expected to be resolved within the next twelve months.

 

We file a consolidated corporate tax return which includes all of our subsidiaries with the exception of Victoria Ward, Limited (“Ward”, substantially all of which is owned by us). Ward elected to be taxed as a REIT, commencing with the taxable year beginning January 1, 2002.  Ward has satisfied the REIT distribution requirements for 2011, and presently we intend to continue to operate Ward as a REIT.

 

NOTE 11                                             STOCK-BASED PLANS

 

Stock Options

 

Our stock based plans are described, and informational disclosures provided, in the notes to the Consolidated Financial Statements included in our Form 10-K for the year ended December 31, 2011. The following table summarizes our stock option plan activity for the nine months ended September 30, 2012:

 

 

 

Stock Options

 

Weighted
Average
Exercise Price

 

Stock Options Outstanding at December 31, 2011

 

712,640

 

$

57.72

 

Granted

 

165,000

 

63.38

 

Forfeited

 

(36,200

)

58.56

 

Stock Options Outstanding at September 30, 2012

 

841,440

 

$

58.79

 

 

Options granted vest ratably over five years, expire ten years after the grant date and generally do not become exercisable until 2017 due to their restriction on exercise until after the five-year anniversary of grant date.

 

Restricted Stock

 

During the second quarter of 2012, we granted 14,900 shares of restricted stock shares at a share price of $67.11. The restrictions on the shares generally lapse in 2017. In addition, shares of restricted stock shares totaling 13,033 at a share price of $60.15 were awarded to certain non-employee directors as part of an annual retainer for their services during the second quarter of 2012. Likewise, 8,953 of restricted stock shares at a share price $65.04 were awarded during the second quarter of 2011. The restrictions on the shares granted in 2011 have lapsed and the restrictions on the shares granted in 2012 will generally lapse in the second quarter of 2013. As of September 30, 2012, there were 57,933 shares of restricted stock outstanding.

 

22



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

NOTE 12                                    OTHER ASSETS AND LIABILITIES

 

Prepaid Expenses and Other Assets

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Special Improvement District receivable

 

$

41,402

 

$

40,580

 

Other receivables

 

2,818

 

4,181

 

Federal income tax receivable

 

5,401

 

5,393

 

Prepaid expenses

 

7,209

 

6,507

 

Below-market ground leases

 

20,426

 

20,680

 

Security and escrow deposits

 

12,944

 

17,266

 

Above-market tenant leases

 

1,042

 

1,014

 

Uncertain tax position asset

 

12,070

 

11,935

 

In-place leases

 

13,713

 

11,865

 

Intangibles

 

3,714

 

3,074

 

Other

 

4,013

 

4,661

 

 

 

$

124,752

 

$

127,156

 

 

Accounts Payable and Accrued Expenses

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Construction payable

 

$

11,470

 

$

8,923

 

Accounts payable and accrued expenses

 

38,998

 

45,078

 

Membership deposits

 

19,091

 

16,033

 

Above-market ground leases

 

2,629

 

2,748

 

Deferred gains/income

 

8,112

 

5,739

 

Accrued interest

 

2,218

 

2,747

 

Accrued real estate taxes

 

8,916

 

3,439

 

Tenant and other deposits

 

7,882

 

5,966

 

Insurance reserve

 

6,015

 

4,728

 

Accrued payroll and other employee liabilities

 

10,205

 

9,658

 

Interest rate swaps

 

7,724

 

4,367

 

Other

 

13,500

 

15,978

 

 

 

$

136,760

 

$

125,404

 

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

NOTE 13                                    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 had outstanding letters of credit and surety bonds of $34.5 million as of September 30, 2012 and $41.6 million as of December 31, 2011. These letters of credit and bonds were issued primarily in connection with insurance requirements, special real estate assessments and construction obligations.

 

On June 29, 2012, we entered into an agreement to amend and restate the South Street Seaport ground lease with the City of New York according to the terms described in a non-binding letter of intent, dated December 12, 2011 between the New York City Economic Development Corporation and us. The agreement allows for the redevelopment of Pier 17 (“Renovation Project”). The restated ground lease will become effective when we meet certain milestones, the most important of which is the commencement of construction by June 30, 2013. Following commencement of construction of the Renovation Project, annual ground rent will be fixed at $1.2 million with an escalation of 3.00% annually and we will be entitled to a total $1.5 million rent credit, to be taken monthly over a 30-month period.  We also must provide a completion guarantee to New York City for the Renovation Project. We agreed to pay approximately $1.1 million of esplanade maintenance costs over a five-year period.  The initial esplanade payment of $210,000 per year escalates annually at CPI for the duration of the lease.

 

See Note 10 for additional contingencies related to our uncertain tax positions.

 

NOTE 14                                    TRANSACTIONS RELATED TO THE SPINOFF  FROM GGP AND RELATED PARTIES

 

Prior to the Effective Date, we entered into a Transition Services Agreement (the “TSA”) whereby GGP agreed to provide to us, on a transitional basis, certain specified services on an interim basis for various terms not exceeding 24 months following the Spinoff, subject to our right of earlier termination. Concurrently, we entered into a Reverse Transition Services Agreement (“RTSA”) whereby we agreed to provide GGP with certain income tax and accounting support services, also subject to earlier termination prior to its scheduled expiration of November 9, 2013. We incurred $0.4 million of expenses related to the TSA, and we received negligible reimbursements under the RTSA for the nine months ended September 30, 2011. No services have been provided under the TSA and RTSA for the nine months ended September 30, 2012, and we do not expect to provide or incur any services in the future. On November 9, 2010, we entered in to a Tax Matters Agreement with GGP. For a discussion of the Tax Matters Agreement, please refer to Note 10 — Income Taxes.

 

In January 2011, we entered into a Transition Agreement with TPMC Realty Services Group, Inc. (“TPMC”). David Weinreb, a director and our CEO, is the sole equity owner 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 were not material for the nine months ended September 30, 2011. Additionally, reflected in our general and administrative expense for the nine months ended September 30, 2011 are reimbursements to TPMC of $0.9 million related to Mr. Weinreb’s employment agreement with us. We also 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. Annual rental expense relating to the lease is approximately $111,965 per year and the lease expires in July 2016.

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

On January 31, 2011, we terminated a Management Services Agreement with Brookfield Advisors LP. Pursuant to the agreement which was executed on August 6, 2010, Brookfield Advisors LP provided us services that included strategic advice, project development oversight, financial planning, financing consultation, internal controls expertise and community and investor relations. This agreement provided for payments to Brookfield Advisors LP of $0.5 million per month.

 

NOTE 15                                    SEGMENTS

 

We have three business segments which offer different products and services. Our three segments are managed separately because each requires different operating strategies or management expertise and are reflective of management’s operating philosophies and methods. In addition, our segments or assets within such segment could change in the future as development of certain properties commences or other operational or management changes occur. We do not distinguish or group our combined operations on a geographic basis.  Furthermore, 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 (“MPCs”) — 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.

·                  Operating Assets — includes retail and office properties, a multi-family property, The Woodlands Resort and Conference Center and other real estate investments. These assets are currently generating revenues, and we believe there is an opportunity to redevelop or reposition many of these assets to improve operating performance.

·                  Strategic Developments — includes all properties held for development and redevelopment which are not currently operating (primarily retail and other interests in real estate at such locations), and our one residential condominium project located in Natick (Boston), Massachusetts, in which the remaining units were sold during the first six months of 2012.

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

The assets included in each segment as of September 30, 2012, are contained in the following chart:

 

 

As more fully discussed in Note 4, on July 1, 2011, we acquired our partner’s interest in The Woodlands. We now own 100% of The Woodlands and consolidate its operations. As such, The Woodlands operating results for historical periods when this investment was a Real Estate Affiliate are now analyzed internally on a non-GAAP consolidation basis by management in order to provide management comparability between periods for analyzing operating results.

 

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

 

REP EBT, as it relates to our business, is defined as net income (loss) excluding general and administrative expenses, corporate interest income and depreciation expense, provision for income taxes, warrant liability gain (loss). We present REP 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

 

26



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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

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) to calculate REP EBT is appropriate to provide additional information to investors because REP EBT excludes certain non-recurring and non-cash items, which we believe are not indicative of our core operating performance. REP EBT should not be considered as an alternative to GAAP net income (loss) attributable to common stockholders or GAAP net income (loss) as 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.

 

27



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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

Segment operating results are as follows:

 

 

 

Three Months Ended September 30, 2012

 

 

 

Consolidated
Properties

 

Real Estate
Affiliates

 

Segment
Basis

 

 

 

(In thousands)

 

Master Planned Communities

 

 

 

 

 

 

 

Land sales

 

$

40,218

 

$

 

$

40,218

 

Builder price participation

 

1,867

 

 

1,867

 

Minimum rents

 

130

 

 

130

 

Other land revenues

 

6,385

 

 

6,385

 

Other rental and property revenues

 

(7

)

 

(7

)

Total revenues

 

48,593

 

 

48,593

 

Cost of sales - land

 

21,439

 

 

21,439

 

Land sales operations

 

8,209

 

 

8,209

 

Land sales real estate and business taxes

 

1,751

 

 

1,751

 

Depreciation and amortization

 

64

 

 

64

 

Interest income

 

(49

)

 

(49

)

Interest expense (1)

 

(3,638

)

 

(3,638

)

Total expenses

 

27,776

 

 

27,776

 

MPC EBT

 

20,817

 

 

20,817

 

 

 

 

 

 

 

 

 

Operating Assets

 

 

 

 

 

 

 

Minimum rents

 

22,788

 

 

22,788

 

Tenant recoveries

 

6,030

 

 

6,030

 

Resort and conference center revenues

 

8,328

 

 

8,328

 

Other rental and property revenues

 

4,342

 

 

4,342

 

Total revenues

 

41,488

 

 

41,488

 

Rental property real estate taxes

 

2,934

 

 

2,934

 

Rental property maintenance costs

 

2,126

 

 

2,126

 

Resort and conference center operations

 

6,965

 

 

6,965

 

Other property operating costs

 

14,853

 

 

14,853

 

Provision for doubtful accounts

 

237

 

 

237

 

Depreciation and amortization

 

6,440

 

 

6,440

 

Interest income

 

(48

)

 

(48

)

Interest expense

 

4,313

 

 

4,313

 

Equity in Earnings from Real Estate Affiliates

 

 

(310

)

(310

)

Total expenses

 

37,820

 

(310

)

37,510

 

Operating Assets EBT

 

3,668

 

310

 

3,978

 

 

 

 

 

 

 

 

 

Strategic Developments

 

 

 

 

 

 

 

Minimum rents

 

217

 

 

217

 

Tenant recoveries

 

35

 

 

35

 

Other rental and property revenues

 

4,482

 

 

4,482

 

Total revenues

 

4,734

 

 

4,734

 

 

 

 

 

 

 

 

 

Condominium sales operations

 

(24

)

 

(24

)

Real estate taxes

 

640

 

 

640

 

Rental property maintenance costs

 

137

 

 

137

 

Other property operating costs

 

2,080

 

 

2,080

 

Provision for doubtful accounts

 

3

 

 

3

 

Depreciation and amortization

 

56

 

 

56

 

Interest expense

 

(193

)

 

(193

)

Total expenses

 

2,699

 

 

2,699

 

Strategic Developments EBT

 

2,035

 

 

2,035

 

REP EBT

 

$

26,520

 

$

310

 

$

26,830

 

 


(1) Negative interest expense relates to interest capitalized on debt assigned to our Operating Assets Segment.

 

28



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

 

 

Three Months Ended September 30, 2011

 

 

 

Consolidated
Properties

 

Real Estate
Affiliates

 

Segment
Basis

 

 

 

(In thousands)

 

Master Planned Communities

 

 

 

 

 

 

 

Land sales

 

$

34,152

 

 

$

34,152

 

Builder price participation

 

1,233

 

 

1,233

 

Minimum rents

 

122

 

 

122

 

Other land revenues

 

5,597

 

 

5,597

 

Total revenues

 

41,104

 

 

41,104

 

Cost of sales - land

 

27,033

 

 

27,033

 

Land sales operations

 

8,430

 

 

8,430

 

Land sales real estate and business taxes

 

2,059

 

 

2,059

 

Depreciation and amortization

 

23

 

 

23

 

Interest income

 

(70

)

 

(70

)

Interest expense (1)

 

(3,808

)

 

(3,808

)

Total expenses

 

33,667

 

 

33,667

 

MPC EBT

 

7,437

 

 

7,437

 

 

 

 

 

 

 

 

 

Operating Assets

 

 

 

 

 

 

 

Minimum rents

 

19,072

 

 

19,072

 

Tenant recoveries

 

5,387

 

 

5,387

 

Resort and conference center revenues

 

7,200

 

 

7,200

 

Other rental and property revenues

 

4,593

 

 

4,593

 

Total revenues

 

36,252

 

 

36,252

 

Rental property real estate taxes

 

2,829

 

 

2,829

 

Rental property maintenance costs

 

2,016

 

 

2,016

 

Resort and conference center operations

 

6,352

 

 

6,352

 

Other property operating costs

 

14,249

 

 

14,249

 

Recovery of doubtful accounts

 

(136

)

 

(136

)

Depreciation and amortization

 

6,961

 

 

6,961

 

Interest income

 

(46

)

 

(46

)

Interest expense

 

4,050

 

 

4,050

 

Early extinguishment of debt

 

11,305

 

 

11,305

 

Equity in Earnings from Real Estate Affiliates

 

 

(166

)

(166

)

Total expenses

 

47,580

 

(166

)

47,414

 

Operating Assets EBT

 

(11,328

)

166

 

(11,162

)

 

 

 

 

 

 

 

 

Strategic Developments

 

 

 

 

 

 

 

Minimum rents

 

209

 

 

209

 

Tenant recoveries

 

11

 

 

11

 

Condominium unit sales

 

9,071

 

 

9,071

 

Other land revenues

 

(60

)

 

(60

)

Other rental and property revenues

 

86

 

 

86

 

Total revenues

 

9,317

 

 

9,317

 

 

 

 

 

 

 

 

 

Condominium unit cost of sales

 

5,470

 

 

5,470

 

Condominium sales operations

 

245

 

 

245

 

Real estate taxes

 

(819

)

 

(819

)

Rental property maintenance costs

 

139

 

 

139

 

Other property operating costs

 

712

 

 

712

 

Recovery of doubtful accounts

 

(5

)

 

(5

)

Depreciation and amortization

 

59

 

 

59

 

Interest expense

 

149

 

 

149

 

Total expenses

 

5,950

 

 

5,950

 

Strategic Developments EBT

 

3,367

 

 

3,367

 

REP EBT

 

$

(524

)

$

166

 

$

(358

)

 


(1) Negative interest expense relates to interest capitalized on debt assigned to our Operating Assets Segment.

 

29



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

 

 

Nine Months Ended September 30, 2012

 

 

 

Consolidated
Properties

 

Real Estate
Affiliates

 

Segment
Basis

 

 

 

(In thousands)

 

Master Planned Communities

 

 

 

 

 

 

 

Land sales

 

$

120,235

 

 

$

120,235

 

Builder price participation

 

4,208

 

 

4,208

 

Minimum rents

 

384

 

 

384

 

Other land revenues

 

13,401

 

 

13,401

 

Other rental and property revenues

 

28

 

 

28

 

Total revenues

 

138,256

 

 

138,256

 

Cost of sales - land

 

63,096

 

 

63,096

 

Land sales operations

 

25,382

 

 

25,382

 

Land sales real estate and business taxes

 

5,533

 

 

5,533

 

Depreciation and amortization

 

67

 

 

67

 

Interest income

 

(179

)

 

(179

)

Interest expense (1)

 

(10,709

)

 

(10,709

)

Total expenses

 

83,190

 

 

83,190

 

MPC EBT

 

55,066

 

 

55,066

 

 

 

 

 

 

 

 

 

Operating Assets

 

 

 

 

 

 

 

Minimum rents

 

61,532

 

 

61,532

 

Tenant recoveries

 

17,817

 

 

17,817

 

Resort and conference center revenues

 

29,954

 

 

29,954

 

Other rental and property revenues

 

15,307

 

 

15,307

 

Total revenues

 

124,610

 

 

124,610

 

Rental property real estate taxes

 

8,160

 

 

8,160

 

Rental property maintenance costs

 

5,851

 

 

5,851

 

Resort and conference center operations

 

21,750

 

 

21,750

 

Other property operating costs

 

43,274

 

 

43,274

 

Provision for doubtful accounts

 

386

 

 

386

 

Depreciation and amortization

 

16,969

 

 

16,969

 

Interest income

 

(134

)

 

(134

)

Interest expense

 

11,373

 

 

11,373

 

Equity in Earnings from Real Estate Affiliates (2)

 

 

(3,432

)

(3,432

)

Total expenses

 

107,629

 

(3,432

)

104,197

 

Operating Assets EBT

 

16,981

 

3,432

 

20,413

 

 

 

 

 

 

 

 

 

Strategic Developments

 

 

 

 

 

 

 

Minimum rents

 

693

 

 

693

 

Tenant recoveries

 

115

 

 

115

 

Condominium unit sales

 

267

 

 

267

 

Other land revenues

 

32

 

 

32

 

Other rental and property revenues

 

4,544

 

 

4,544

 

Total revenues

 

5,651

 

 

5,651

 

 

 

 

 

 

 

 

 

Condominium unit cost of sales

 

96

 

 

96

 

Condominium sales operations

 

47

 

 

47

 

Real estate taxes

 

2,423

 

 

2,423

 

Rental property maintenance costs

 

453

 

 

453

 

Other property operating costs

 

3,032

 

 

3,032

 

Recovery of doubtful accounts

 

(101

)

 

(101

)

Depreciation and amortization

 

173

 

 

173

 

Interest expense

 

61

 

 

61

 

Total expenses

 

6,184

 

 

6,184

 

Strategic Developments EBT

 

(533

)

 

(533

)

REP EBT

 

$

71,514

 

$

3,432

 

$

74,946

 

 


(1) Negative interest expense relates to interest capitalized on debt assigned to our Operating Assets Segment.

(2) Includes the $2.4 million cash distribution from Summerlin Hospital Medical Center which is a Real Estate Affiliate accounted for using the cost method as described above.

 

30



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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

 

 

Nine Months Ended September 30, 2011

 

 

 

Consolidated
Properties

 

Real Estate
Affiliates

 

Segment
Basis

 

 

 

(In thousands)

 

Master Planned Communities

 

 

 

 

 

 

 

Land sales

 

$

75,692

 

46,773

 

$

122,465

 

Builder price participation

 

2,351

 

1,108

 

3,459

 

Minimum rents

 

739

 

14

 

753

 

Other land revenues

 

9,093

 

3,924

 

13,017

 

Total revenues

 

87,875

 

51,819

 

139,694

 

Cost of sales - land

 

51,907

 

23,932

 

75,839

 

Land sales operations

 

16,343

 

8,439

 

24,782

 

Land sales real estate and business taxes

 

5,110

 

899

 

6,009

 

Depreciation and amortization

 

23

 

46

 

69

 

Interest income

 

(70

)

(364

)

(434

)

Interest expense (1)

 

(8,936

)

(2,370

)

(11,306

)

Total expenses

 

64,377

 

30,582

 

94,959

 

Venture partner share of The Woodlands EBT

 

 

 

(10,088

)

(10,088

)

MPC EBT

 

23,498

 

11,149

 

34,647

 

 

 

 

 

 

 

 

 

Operating Assets

 

 

 

 

 

 

 

Minimum rents

 

51,701

 

2,803

 

54,504

 

Tenant recoveries

 

14,391

 

1,061

 

15,452

 

Resort and conference center revenues

 

7,200

 

19,106

 

26,306

 

Other rental and property revenues

 

8,034

 

6,992

 

15,026

 

Total revenues

 

81,326

 

29,962

 

111,288

 

Rental property real estate taxes

 

7,167

 

972

 

8,139

 

Rental property maintenance costs

 

4,807

 

477

 

5,284

 

Resort and conference center operations

 

6,352

 

13,904

 

20,256

 

Other property operating costs

 

31,716

 

9,060

 

40,776

 

Provision for (recovery of) doubtful accounts

 

317

 

(9

)

308

 

Depreciation and amortization

 

13,200

 

3,968

 

17,168

 

Interest income

 

(79

)

(2

)

(81

)

Interest expense

 

9,143

 

2,316

 

11,459

 

Early extinguishment of debt

 

11,305

 

 

11,305

 

Equity in Earnings from Real Estate Affiliates (2)

 

 

(3,139

)

(3,139

)

Total expenses

 

83,928

 

27,547

 

111,475

 

Venture partner share of The Woodlands EBT

 

 

 

(1,067

)

(1,067

)

Operating Assets EBT

 

(2,602

)

1,348

 

(1,254

)

 

 

 

 

 

 

 

 

Strategic Developments

 

 

 

 

 

 

 

Minimum rents

 

658

 

 

658

 

Tenant recoveries

 

146

 

 

146

 

Condominium unit sales

 

19,495

 

 

19,495

 

Other rental and property revenues

 

1,096

 

 

1,096

 

Other land revenue

 

 

 

 

Total revenues

 

21,395

 

 

21,395

 

 

 

 

 

 

 

 

 

Condominium unit cost of sales

 

13,722

 

 

13,722

 

Condominium sales operations

 

860

 

 

860

 

Real estate taxes

 

626

 

 

626

 

Rental property maintenance costs

 

471

 

 

471

 

Other property operating costs

 

2,697

 

 

2,697

 

Recovery of doubtful accounts

 

(143

)

 

(143

)

Provision for impairment

 

 

 

 

Depreciation and amortization

 

176

 

 

176

 

Interest expense

 

154

 

 

154

 

Total expenses

 

18,563

 

 

18,563

 

Strategic Developments EBT

 

2,832

 

 

2,832

 

REP EBT

 

$

23,728

 

$

12,497

 

$

36,225

 

 


(1) Negative interest expense relates to interest capitalized on debt assigned to our Operating Assets Segment.

(2) Includes the $3.9 million cash distribution from Summerlin Hospital Medical Center which is a Real Estate Affiliate accounted for using the cost method as described above.

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

The following reconciles REP EBT to GAAP-basis income (loss):

 

Reconciliation of REP EBT to GAAP-net 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

income (loss)

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

(In thousands)

 

Real estate property EBT:

 

 

 

 

 

 

 

 

 

Segment basis

 

$

26,830

 

$

(358

)

$

74,946

 

$

36,225

 

Real Estate Affiliates

 

(310

)

(166

)

(3,432

)

(12,497

)

 

 

26,520

 

(524

)

71,514

 

23,728

 

General and administrative

 

(9,339

)

(8,673

)

(25,896

)

(21,156

)

Corporate interest income

 

2,315

 

2,616

 

6,814

 

7,309

 

Warrant liability gain (loss)

 

(64,303

)

169,897

 

(162,724

)

100,762

 

Benefit (provision) for income taxes

 

(2,618

)

7,760

 

(7,703

)

4,344

 

Reduction in tax indemnity receivable

 

(2,873

)

 

(11,655

)

 

Equity in earnings from Real Estate Affiliates

 

310

 

166

 

3,432

 

7,787

 

Investment in Real Estate Affiliate basis adjustment

 

 

(6,053

)

 

(6,053

)

Corporate depreciation

 

(204

)

(165

)

(506

)

(193

)

Net income (loss)

 

$

(50,192

)

$

165,024

 

$

(126,724

)

$

116,528

 

 

The following reconciles segment revenue to GAAP-basis consolidated and combined revenues:

 

Reconciliation of Segment Basis Revenues to 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

GAAP Revenues 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

(In thousands)

 

Master Planned Communities - Total Segment

 

$

48,593

 

$

41,104

 

$

138,256

 

$

139,694

 

Operating Assets - Total Segment

 

41,488

 

36,252

 

124,610

 

111,288

 

Strategic Developments - Total Segment

 

4,734

 

9,317

 

5,651

 

21,395

 

Total Segment revenues

 

94,815

 

86,673

 

268,517

 

272,377

 

Less: The Woodlands Partnerships revenues

 

 

 

 

(81,781

)

Total revenues - GAAP basis

 

$

94,815

 

$

86,673

 

$

268,517

 

$

190,596

 

 

The assets by segment and the reconciliation of total segment assets to the total assets in the consolidated balance sheets at September 30, 2012 and December 31, 2011 are summarized as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Master Planned Communities

 

$

1,787,034

 

$

1,778,515

 

Operating Assets

 

950,665

 

869,186

 

Strategic Developments

 

217,217

 

189,807

 

Total segment assets

 

2,954,916

 

2,837,508

 

Corporate and other

 

569,154

 

557,641

 

Total assets

 

$

3,524,070

 

$

3,395,149

 

 

NOTE 16              SUBSEQUENT EVENTS

 

As disclosed in Note 2 - Sponsors and Management Warrants, we have issued warrants to purchase 8.0 million shares of our common stock to certain sponsors.  In early November, Brookfield Asset Management, Inc. (“Brookfield”), one of our sponsors, exercised warrants to purchase 1,525,272 shares of our common stock at an exercise price of $50.00 per warrant or $76.3 million.  In addition, we agreed to purchase Brookfield’s remaining warrants to purchase 2,308,061 shares of our common stock for $89.3 million.  The cash consideration paid to Brookfield net of the exercise price was $13.0 million.  The warrant liability included in our condensed consolidated balance sheet as of September 30, 2012 associated with these warrants that has subsequently been settled was $110.3 million.  As a result of these transactions, an additional warrant liability loss of $11.4 million related to Brookfield’s warrants will be recorded in our financial statements in the fourth quarter.

 

As a result of superstorm Sandy, South Street Seaport which is one of our operating assets located in lower Manhattan in New York City, suffered damage due to flooding. We believe that our insurance will cover most of the cost of repairing the property and the surrounding area and also will compensate us for any rental income or other revenue that is lost as a result of the storm or the recovery from the storm. Consequently, we do not believe that Hurricane Sandy, or the resulting damage, will have a significant impact on our earnings.

 

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ITEM 2   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

All references to numbered Notes are to specific footnotes to our Condensed Consolidated Financial Statements included in this Quarterly Report. The following discussion should be read in conjunction with such Condensed Consolidated Financial Statements and related Notes.

 

Forward-looking information

 

We may make forward-looking statements in this Quarterly Report and in other reports that we file with the SEC. In addition, our management may make forward-looking statements orally to analysts, investors, creditors, the media and others.

 

Forward-looking statements include:

 

·                  Projections of our revenues, operating income, net income, earnings per share, REP EBT, capital expenditures, income tax, other contingent liabilities, dividends, leverage, capital structure or other financial items;

·                  Forecasts of our future economic performance; and

·                  Descriptions of assumptions underlying or relating to any of the foregoing.

 

In this Quarterly Report, for example, we make forward-looking statements discussing our expectations about:

 

·                  Capital required for our operations and development opportunities for the properties in our Strategic Developments segment;

·                  Expected performance of our Master Planned Communities segment and other current income producing properties; and

·                  Future liquidity, development opportunities, development spending and management plans.

 

Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements often include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “would,” or similar expressions.  Forward-looking statements should not be unduly relied upon. They give our expectations about the future and are not guarantees.  Forward-looking statements speak only as of the date they are made, and we might not update them to reflect changes that occur after the date they are made.

 

There are several factors, many beyond our control, which could cause results to differ materially from our expectations. These factors are described in our Annual Report and are incorporated herein by reference.  Any factor could, by itself, or together with one or more other factors, adversely affect our business, results of operations or financial condition. There may also be other factors that we have not described in this Quarterly Report or in our Annual Report that could cause results to differ from our expectations. These forward-looking statements present our estimates and assumptions only as of the date of this Quarterly Report.  Except as may be required by law, we undertake no obligation to modify or revise any forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report.

 

Real Estate Property Earnings Before Taxes

 

We use a number of operating measures for assessing operating performance of our communities, assets, properties and projects within our segments, some of which may not be common among all three of our segments. We believe that investors may find some operating measures more useful than others when separately evaluating each segment.  One common operating measure used to assess operating results for our business segments is Real Estate Property Earnings Before Taxes (“REP EBT”).  Management believes that REP EBT provides useful information about our operating performance because it excludes certain non-recurring and non-cash items which we believe are not indicative of our core business.

 

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Table of Contents

 

REP EBT, as it relates to our business, is defined as net income (loss) excluding general and administrative expenses, corporate interest income, corporate interest and depreciation expense, provision (benefit) for income taxes, warrant liability gain (loss), the reduction in tax indemnity receivable, equity in earnings from Real Estate Affiliates and Investment in Real Estate Affiliate basis adjustment. We present REP 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) to calculate REP EBT is appropriate to provide additional information to investors.

 

REP EBT should not be considered as an alternative to GAAP net income (loss) attributable to common stockholders or GAAP net income (loss), as 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. Some of the limitations of this metric are that it:

 

·                  does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

·                  does not reflect corporate general and administrative expenses;

·                  does not reflect income taxes that we may be required to pay;

·                  does not reflect any cash requirements for replacement of depreciated or amortized assets or that these assets have different useful lives;

·                  does not reflect limitations on, or costs related to, transferring earnings from our Real Estate Affiliates to us; and

·                  may be calculated differently by other companies in our industry, limiting its usefulness as a comparative measure.

 

Operating Assets Net Operating Income

 

We believe that net operating income (“NOI”) is a useful supplemental measure of the performance of our Operating Assets because it provides a performance measure that, when compared year over year, reflects the revenues and expenses directly associated with owning and operating real estate properties and the impact on operations from trends in occupancy rates, rental rates, and operating costs. We define NOI as property specific revenues (rental income, tenant recoveries and other income) less expenses (real estate taxes, repairs and maintenance, marketing and other property expenses). NOI also excludes straight line rents, property specific net interest expense, depreciation, ground rent and other amortization expenses and equity in earnings from real estate affiliates. We use NOI to evaluate our operating performance on a property-by-property basis because NOI allows us to evaluate the impact that factors such as lease structure, lease rates and tenant base, which vary by property, have on our operating results, gross margins and investment returns.

 

Although we believe that NOI provides useful information to the investors about the performance of our Operating Assets due to the exclusions noted above, NOI should only be used as an alternative measure of the financial performance of such assets and not as an alternative to GAAP operating income (loss) or net income (loss) available to common stockholders. For reference, and as an aid in understanding our computation of NOI, a reconciliation of NOI to REP EBT has been presented in the Operating Assets segment discussion below and a reconciliation of REP EBT to consolidated net income (loss) as computed in accordance with GAAP has been presented in Note 15.

 

Results of Operations

 

On July 1, 2011, we acquired our partner’s economic interest in The Woodlands located near Houston, Texas. As a result of the acquisition, we now consolidate The Woodlands’ operations in our condensed consolidated financial statements, and our condensed consolidated statements of operations and cash flows for the nine months ended September 30, 2012 are not comparable to the same period in 2011. Prior to such acquisition, we accounted for The Woodlands using the equity method.

 

Consolidated revenues for the three months ended September 30, 2012 increased $8.1 million or 9.4%, to $94.8 million from $86.7 million for the three months ended September 30, 2011. The increase in revenues is primarily due to a $6.7 million increase in land sales and builder price participation in the MPC segment, $5.2 million higher revenues in the Operating Assets segment of which $2.4 million is from the acquisition of

 

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Table of Contents

 

Millennium Waterway Apartments and $0.9 million from The Woodlands Conference Center and Resort, partially offset by lower revenues from our Strategic Developments segment due to the absence of condominium unit sales at Nouvelle Natick of $9.1 million as a result of the sale of the last two units in the second quarter of 2012. The three months ended September 30, 2012 revenues also include $4.5 million of proceeds from the partial sale of Alameda Plaza.

 

Consolidated revenues for the nine months ended September 30, 2012 increased $77.9 million or 40.9%, to $268.5 million from $190.6 million for the nine months ended September 30, 2011. The increase in revenue is primarily due to the inclusion of $83.3 million from The Woodlands’ operations for the first half of 2012 compared to no revenues for the same period in the prior year because The Woodlands was not consolidated in 2011, higher MPC revenues of $3.7 million, higher revenues in the Operating Assets segment of $9.0 million and higher revenues at the Resort and Conference Center of $1.1 million offset by lower Natick condominium unit sales of $19.2 million.

 

Net loss attributable to common stockholders was $49.4 million for the three months ended September 30, 2012, compared to net income attributable to common stockholders of $164.3 million for the same period in 2011. The $213.7 million decrease in net income attributable to common stockholders is primarily due to the $234.2 million increase in value of outstanding warrants, higher tax provision of $10.4 million, lower Nouvelle at Natick profit contribution of $3.6 million and the reduction in tax indemnity receivable of $2.9 million. The decrease in net income attributable to common stockholders was partially offset by an improved profit margin from the MPC business of $13.9 million, principally relating to The Woodlands lower land inventory value resulting from our acquisition in 2011, the improved profit margin from our operating asset business of $4.9 million and non-recurring charges in 2011 for the early extinguishment of debt of $11.3 million and the investment in real estate basis adjustment of $6.1 million.

 

Net loss attributable to common stockholders was $127.4 million for the nine months ended September 30, 2012, compared to net income attributable to common stockholders of $115.8 million in the same period for 2011. The $243.2 million decrease in net income attributable to common stockholders is primarily due to the $263.5 million increase in value of the warrants, higher income tax provision of $12.0 million, the reduction in tax indemnity receivable of $11.7 million, lower Nouvelle at Natick profit contribution of $5.6 million, lower equity in earnings from Real Estate Affiliates of $1.4 million and higher general and administrative expenses of $2.0 million. The decrease in net income attributable to common stockholders was partially offset by the inclusion in earnings of $15.6 million from The Woodlands compared to no earnings in the prior year because The Woodlands was not consolidated in 2011, higher MPC earnings of $15.0 million, higher earnings from our operating assets of $5.5 million and nonrecurring charges in 2011 for the early extinguishment of debt of $11.3 million and the investment in real estate basis adjustment of $6.1 million.

 

Segment Operations

 

See Note 15 for additional information including reconciliations of our segment basis results to generally accepted accounting principles (“GAAP”) basis results.

 

Master Planned Communities Segment

 

MPC revenues vary between periods based on economic conditions and several factors such as location, development density and commercial or residential use, among others. Although our business does not involve the sale or resale of homes, we believe that net new home sales are an important indicator of future demand for lots; therefore, we use this statistic in the discussion of our MPCs below. Reported results may differ significantly from actual cash flows generated principally because cost of sales for GAAP purposes is derived from margins calculated using carrying values, projected future improvements and other capitalized costs in relation to projected future land sale revenues. Carrying values, generally, represent acquisition costs and improvements incurred in prior periods, and may also have been previously written down through impairment charges. Expenditures for improvements are capitalized and generally not reflected in the income statement of operations in the current year.

 

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Table of Contents

 

MPC sales data for the three months ended September 30, 2012 and 2011 is summarized as follows:

 

 

 

 

 

Land Sales

 

Acres Sold

 

Number of Lots/Units

 

Price per acre

 

Price per lot

 

 

 

 

 

Three Months Ended September 30,

 

($ in thousands)

 

 

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Land Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maryland - Columbia

 

Single family - detached

 

$

 

$

630

 

 

0.5

 

 

3

 

$

 

$

1,260

 

$

 

$

210

 

 

 

Townhomes

 

 

1,697

 

 

0.5

 

 

12

 

 

 

 

141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridgeland

 

Single family - detached

 

6,170

 

5,149

 

22.2

 

20.3

 

104

 

103

 

278

 

254

 

59

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summerlin

 

Single family - detached (1)

 

7,213

 

 

21.2

 

 

94

 

 

341

 

 

77

 

 

 

 

Custom lots

 

515

 

 

0.6

 

 

1

 

 

805

 

 

515

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

Single family - detached (2)

 

19,898

 

19,949

 

52.3

 

53.5

 

235

 

216

 

380

 

373

 

85

 

92

 

 

 

Single family - attached

 

 

887

 

 

2.3

 

 

34

 

 

386

 

 

26

 

 

 

Subtotal

 

33,796

 

28,312

 

96.3

 

77.1

 

434

 

368

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Land Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maryland - Columbia

 

Apartments

 

5,300

 

 

18.7

 

 

 

 

284

 

 

 

 

Summerlin

 

Not-for-profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

Office and other

 

1,330

 

 

10.4

 

 

 

 

 

 

128

 

 

 

 

 

 

 

 

Retail

 

 

2,001

 

1.2

 

5.0

 

 

 

 

 

 

400

 

 

 

 

 

 

 

Other

 

 

1,839

 

 

5.3

 

 

 

 

 

 

347

 

 

 

 

 

 

 

Subtotal

 

6,630

 

3,840

 

30.3

 

10.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Total acreage sales revenue

 

40,426

 

32,152

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

(1,051

)

2,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Improvement District revenue

 

843

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total land sales - GAAP basis

 

$

40,218

 

$

34,152

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1) The Summerlin 2012 revenue per acre of $341,000 includes 41 single family finished lots that average $691,543 per acre and 53 super pad lots that average $230,000 per acre.

(2) The Woodlands 2011 lot sales revenues have been restated to include fixed price builder payments collected at lot closing to conform with the 2012 lot sales presentation.

 

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Table of Contents

 

MPC sales data for the nine months ended September 30, 2012 and 2011 is summarized as follows:

 

MPC Sale Summary

 

 

 

 

 

Land Sales

 

Acres Sold

 

Number of Lots/Units

 

Price per acre

 

Price per lot

 

 

 

 

 

Nine Months Ended September 30,

 

($ in thousands)

 

 

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Land Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maryland - Columbia

 

Single family - detached

 

$

 

$

1,480

 

 

1.4

 

 

7

 

$

 

$

1,057

 

$

 

$

211

 

 

 

Townhomes

 

4,156

 

3,311

 

1.2

 

1.0

 

28

 

24

 

 

 

148

 

138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridgeland

 

Single family - detached

 

17,183

 

13,846

 

63.9

 

52.2

 

313

 

260

 

269

 

265

 

55

 

53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summerlin

 

Single family - detached (1)

 

23,773

 

25,504

 

71.6

 

62.4

 

353

 

312

 

332

 

409

 

67

 

82

 

 

 

Custom lots

 

3,761

 

 

4.8

 

 

9

 

 

784

 

 

418

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

Single family - detached (2)

 

55,459

 

55,523

 

151.0

 

149.8

 

598

 

610

 

367

 

371

 

93

 

91

 

 

 

Single family - attached

 

 

887

 

 

2.3

 

 

34

 

 

386

 

 

 

26

 

 

 

Subtotal

 

104,332

 

100,551

 

292.5

 

269.1

 

1,301

 

1,247

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Land Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maryland - Columbia

 

Apartments

 

5,300

 

 

18.7

 

 

 

 

284

 

 

 

 

Summerlin

 

Not-for-profit

 

 

3,615

 

 

16.0

 

 

 

 

226

 

 

 

 

 

 

 

Retail

 

784

 

 

1.0

 

 

 

 

784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

Office and other

 

6,437

 

1,800

 

10.4

 

3.2

 

 

 

 

 

619

 

563

 

 

 

 

 

 

 

Retail

 

1,250

 

5,115

 

1.2

 

10.5

 

 

 

 

 

1,042

 

487

 

 

 

 

 

 

 

Other

 

50

 

1,839

 

0.8

 

5.3

 

 

 

 

 

63

 

347

 

 

 

 

 

 

 

Subtotal

 

13,821

 

12,369

 

32.1

 

35.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Total acreage sales revenue

 

118,153

 

112,920

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

(1,870

)

5,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Improvement District revenue

 

3,952

 

4,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total segment land sales

 

120,235

 

122,464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands acreage sales (3)

 

 

(46,772

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total land sales - GAAP basis

 

$

120,235

 

$

75,692

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1) The Summerlin 2012 revenue per acre of $332,000 includes 121 single family finished lots that average $688,516 per acre and 232 super pad lots that average $226,452 per acre.

(2) The Woodlands 2011 lot sales revenues have been restated to include fixed price builder payments collected at lot closing to conform with the 2012 lot sales presentation.

(3) The Woodlands acreage sales for the six months ended June 30, 2011 are deducted from total segment land sales revenue to derive Total land sale revenue - GAAP basis because The Woodlands operating results were not consolidated during this period.

 

Total land sales increased $6.1 million for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. Residential land sales increased at Summerlin and Bridegeland by $8.7 million, offset by $2.3 million less land sales at Columbia. Commercial land sales increased by $2.8 million due to a $5.3 million land sale at Columbia for the development of an apartment complex offset by $2.5 million lower land sales

 

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at The Woodlands. In addition, Summerlin recognized $2.0 million of deferred revenue in 2011 which did not reoccur in 2012. Total segment land sales for the nine months ended September 30, 2012 decreased $2.2 million as compared to the nine months ended September 30, 2011 primarily due to $6.8 million of lower deferred revenue at The Woodlands related to our continuing involvement with a project requiring local government approval and a separate project requiring the construction of certain infrastructure partially offset by overall higher residential and commercial land sales of $3.8 million and $1.5 million, respectively, for the nine months ended September 30, 2012 compared to the same period in prior year. The increase in residential land sales is primarily due to increased land sales at Bridgeland of $3.3 million and Summerlin of $2.0 million due to improving market conditions, offset by lower residential land sales at The Woodlands and Columbia of $1.6 million due to less available inventory for sale.

 

In general, the lower the lot price, the lower the average price per acre. This relationship does not hold true for lower-priced, high-density lots that have a high price per acre. For large MPCs such as ours, sales prices on a per lot basis and per acre basis generally increase as the size of the developed lot grows. This is because smaller lots are more commodity-like and larger lots typically have more unique features. The average homebuyer will find more competition for new and resale homes on the lower end of the price range in the broader residential market. As lot sizes and prices increase, however, the potential customer and developer base decreases. Barring a softening in market conditions, when a MPC reaches the level whereby land is scarce, pricing begins to escalate markedly on a per lot and per acre basis due to a scarcity premium resulting from the market’s realization that new home site inventory will be depleted.

 

The Woodlands and Bridgeland MPCs

 

The Woodlands residential land sales were $19.9 million and $55.5 million representing 235 lots and 598 lots sold during the three and nine months ended September 30, 2012, respectively, which was relatively flat compared to $20.8 million and $56.4 million of revenues representing 250 lots and 644 lots sold for the same periods in 2011. The price per acre for the three month period ended September 30, 2012 was higher than the same period in 2011 and lower for the nine month period ended September 30, 2012 than the same period in 2011. The average price per acre for three months ended September 30, 2012 was flat compared to the same period in 2011 due to stable pricing and higher volume of smaller lots sold which approximated the same acreage sold in 2011. The decrease in average lot sales price for the three months ended September 30, 2012, was due to higher sales volume of small sized lower priced production lots, compared to the same period in 2011. The average price per acre and the average lot price for the nine months ended September 2012 were flat compared to the same period in 2011 due to approximately the same volume and mix of lots sold in both periods. The Woodlands housing market continues to be extremely strong with 859 net home sales in the first nine months of 2012 compared to 755 net home sales in the first nine months of 2011, representing an increase of 13.8%. This strong housing market creates a higher demand for finished lots. We estimate that The Woodlands has four to five years of remaining lot sales based on current sales velocity, and our goal is to maximize value by finding the optimal pricing/volume relationship. In the third quarter of 2012, we restructured our production lot sales program to a bidding process that has generated a substantial increase in average lot prices. In August of 2012, we conducted an auction with home builders in The Woodlands for 375 lots in seven new sections.  The auction generated an aggregate increase in price of approximately $16.7 million, or 49%, compared to selling prices prior to the auction.  As these sales have not yet closed, these results are not included in our condensed consolidated financial statements. Scheduled closings for these lots are expected to occur during the fourth quarter of 2012 and the first two quarters of 2013. We plan to continue the bid process for future sections to ensure we maximize values.

 

Bridgeland’s land sales revenues were $6.2 million and $17.2 million for the three and nine months ended September 30, 2012, respectively, a $1.0 million and $3.3 million increase for the same periods in 2011 due to the higher demand resulting from higher home sales. Bridgeland net new home sales increased 29.4% during the first nine months of 2012 with 352 net new home sales compared to 272 net new home sales for the same period in 2011. The increases in price for both the three and nine months ended September 30, 2012, in average price per acre and lot are due to price increases on all product types including premium amenity lots which was implemented during the second quarter of 2012.

 

ExxonMobil is constructing a large corporate campus on a 385-acre site just south of The Woodlands. The site is expected to include approximately three million square feet of space. According to several reports, ExxonMobil expects to begin relocating employees into this new location starting in 2014 and ending in 2015. We believe that the direct and indirect jobs related to this relocation will have a significant positive impact on The Woodlands and

 

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Bridgeland due to increased housing demand and commercial space needs for companies servicing ExxonMobil. Lastly, construction of the extension of the Grand Parkway to 1-45 is expected to commence in the near future and is anticipated to open by 2015. The new Parkway will have a very positive impact on travel patterns for residents living in The Woodlands and Bridgeland.

 

Summerlin MPC

 

Summerlin’s residential land sales revenues increased by $7.7 million and $2.0 million, respectively, for the three months and nine months ended September 30, 2012 compared to the same periods in 2011. Summerlin sold 95 and 362 residential lots during the three and nine months ended September 30, 2012 compared to none and 312 residential lots during the three and nine months ended September 30, 2011. The decrease in average lot prices for nine months ended September 30, 2012 was due to the higher mix of super pad lot sales which are priced lower than single family finished lots. Summerlin net new home sales ended the third quarter of 2012 at 372, a 119% increase over the same period in 2011. Inventory levels in both the new home segment and resale market continue to decline, resulting in improved home pricing. Increases in new home prices benefit us because we earn higher price participation fees from the home builders and the value of our land inventory increases as well. At September 30, 2012, Summerlin had 147 residential lots under contract representing approximately $11.8 million of sales, of which $3.7 million are scheduled to close in 2012 with the remaining $8.1 million scheduled for 2013, if all sales are completed.

 

Total revenue and expenses for the Master Planned Communities segment is summarized as follows:

 

 

 

Three months Ended September 30,

 

Nine months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

(In thousands)

 

Master Planned Communities (*)

 

 

 

 

 

 

 

 

 

Land sales

 

$

40,218

 

$

34,152

 

$

120,235

 

$

122,465

 

Builder price participation

 

1,867

 

1,233

 

4,208

 

3,459

 

Other land sale revenues

 

6,508

 

5,719

 

13,813

 

13,770

 

Total revenues

 

48,593

 

41,104

 

138,256

 

139,694

 

 

 

 

 

 

 

 

 

 

 

Cost of sales - land

 

21,439

 

27,033

 

63,096

 

75,839

 

Land sales operations

 

9,960

 

10,489

 

30,915

 

30,791

 

Depreciation and amortization

 

64

 

23

 

67

 

69

 

Interest, net

 

(3,687

)

(3,878

)

(10,888

)

(11,740

)

Total expenses

 

27,776

 

33,667

 

83,190

 

94,959

 

Venture partner share of The Woodlands EBT

 

 

 

 

(10,088

)

MPC REP EBT

 

$

20,817

 

$

7,437

 

$

55,066

 

$

34,647

 

 


(*)  Our Master Planned Communities segment includes revenues and expenses related to The Woodlands. On July 1, 2011, we acquired our partner’s equity interest. As a result of the acquisition, we now consolidate The Woodlands operations. Such amounts in prior periods include The Woodlands as if consolidated. For a detailed breakdown of EBT, refer to Note 15 in our Condensed Consolidated Financial Statements.

 

The cost of land sales decreased by $5.6 million for the three months ended September 30, 2012 compared to the same period in 2011 due primarily to higher land sales revenue at Summerlin and Columbia and fewer commercial land sales at The Woodlands. Our total land sales gross margins, which include builder price participation, increased to approximately 49.1% for the third quarter of 2012 compared to 23.6% for the third quarter of 2011. The increase primarily relates to the cost percentages attributable to The Woodlands sales. As part of The Woodlands acquisition, its land was valued at fair market value therefore the finished lots acquired were recorded at close to their actual selling prices, significantly reducing margins on their sales. The Woodlands third quarter 2011 cost of sales therefore reflected lower margins associated with its finished lot sales. Land sales revenues for The Woodlands in 2012 primarily consist of finished lots that were undeveloped as of the date of acquisition and had a much lower cost basis than those finished lots sold in 2011 which had reflected our recent purchase price adjustments.

 

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The cost of land sales decreased by $12.7 million for the nine months ended September 30, 2012 compared to the same period in 2011 due primarily to lower land sales in The Woodlands and the higher cost of sales percentage applied to The Woodlands third quarter 2011 land sales. Land sales gross margins, including builder price participation, increased for the nine months ended September 30, 2012 to 49.3% compared to 39.8%for the three and nine months ended September 30, 2011, respectively, due to sales of lots which were undeveloped as of July 1, 2011, the date of acquisition, and had a much lower costs basis due to purchase accounting adjustments.

 

Land sale operations were flat for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011.

 

MPC Net Contribution

 

 

 

Three months Ended September 30,

 

Nine months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

(In thousands)

 

MPC REP EBT (*)

 

$

20,817

 

$

7,437

 

$

55,066

 

$

34,647

 

Plus:

 

 

 

 

 

 

 

 

 

Cost of sales - land

 

21,439

 

27,033

 

63,096

 

64,471

 

Depreciation and amortization

 

64

 

23

 

67

 

47

 

Less:

 

 

 

 

 

 

 

 

 

MPC land/residential development and acquisitions expenditures

 

25,506

 

32,607

 

72,741

 

72,951

 

MPC Net Contribution

 

$

16,814

 

$

1,886

 

$

45,488

 

$

26,214

 

 


(*)  Our master planned communities segment includes revenues and expenses related to The Woodlands Partnerships. On July 1, 2011, we acquired our partner’s equity interest. As a result of the acquisition, we now consolidate The Woodlands’ operations into our consolidated financial statements. Prior to such acquisitions, we accounted for The Woodlands using the equity method.  For a detailed breakdown of EBT, refer to Note 15.

 

The above table sets forth MPC Net Contribution for the three and nine months ended September 30, 2012 and 2011. MPC Net Contribution is defined as MPC REP EBT, plus MPC cost of sales and depreciation and amortization, and reduced by MPC development and acquisition expenditures. Current period expenditures primarily relate to land expected to be sold in future periods. The increase in the MPC Net Contribution of $14.9 million during the three months ended September 30, 2012 is primarily due to increased land sales at Summerlin and decreased residential development and acquisitions expenditures mainly at Bridgeland and Summerlin.  The increase in the MPC Net Contribution of $19.3 million for the nine months ended September 30, 2012 compared to the same periods in 2011 is primarily due to the acquisition of our partner’s interest in The Woodlands during the nine months ended September 30, 2011 and the increase in Summerlin land sales during the third quarter of 2012.

 

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Operating Assets Segment

 

We view NOI as an important measure of the operating performance of our Operating Assets. These assets typically generate rental revenues sufficient to cover their operating costs, and variances between years in net operating income typically result from changes in rental rates, occupancy, tenant mix and operating expenses.

 

Operating Assets NOI and REP EBT

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

(In thousands)

 

Operating Assets NOI

 

 

 

 

 

 

 

 

 

Retail

 

 

 

 

 

 

 

 

 

Ward Centers

 

$

5,616

 

$

5,630

 

$

16,735

 

$

16,449

 

South Street Seaport (a) 

 

1,878

 

1,866

 

4,085

 

3,404

 

Rio West Mall

 

265

 

286

 

995

 

963

 

Landmark Mall (a)

 

153

 

108

 

662

 

627

 

Riverwalk Marketplace (a)

 

94

 

130

 

573

 

339

 

Cottonwood Square

 

97

 

83

 

320

 

299

 

Park West

 

251

 

159

 

739

 

490

 

20/25 Waterway Avenue

 

407

 

375

 

1,242

 

902

 

Waterway Garage Retail

 

(8

)

(8

)

2

 

6

 

Total Retail

 

8,753

 

8,629

 

25,353

 

23,479

 

Office

 

 

 

 

 

 

 

 

 

110 N. Wacker

 

1,517

 

1,526

 

4,554

 

4,518

 

Columbia Office Properties

 

593

 

326

 

1,698

 

1,662

 

70 Columbia Corporate Center

 

(8

)

 

(8

)

 

4 Waterway Square

 

1,478

 

426

 

4,140

 

1,102

 

9303 New Trails

 

475

 

299

 

1,435

 

852

 

1400 Woodloch Forest

 

440

 

239

 

1,202

 

649

 

2201 Lake Woodlands Drive

 

23

 

83

 

21

 

249

 

Total Office

 

4,518

 

2,899

 

13,042

 

9,032

 

 

 

 

 

 

 

 

 

 

 

Millennium Waterway Apartments (b)

 

1,147

 

 

1,407

 

 

The Woodlands Resort and Conference Center

 

1,363

 

848

 

8,205

 

6,050

 

Total Retail, Office, Multi-family, Resort and Conference Center

 

15,781

 

12,376

 

48,007

 

38,561

 

 

 

 

 

 

 

 

 

 

 

The Club at Carlton Woods

 

(1,081

)

(1,420

)

(3,383

)

(3,933

)

The Woodlands Parking Garages

 

(236

)

(469

)

(729

)

(906

)

The Woodlands Ground Leases

 

98

 

97

 

289

 

312

 

Other Properties

 

260

 

(148

)

1,037

 

1,173

 

Total Other

 

(959

)

(1,940

)

(2,786

)

(3,354

)

Total Operating Assets NOI- Consolidated

 

14,822

 

10,436

 

45,221

 

35,207

 

 

 

 

 

 

 

 

 

 

 

Straight-line lease amortization

 

(449

)

506

 

(32

)

1,318

 

Early Extinguishment of debt

 

 

(11,305

)

 

(11,305

)

Depreciation and amortization

 

(6,440

)

(6,961

)

(16,969

)

(17,168

)

Equity in earnings from Real Estate Affiliates

 

310

 

166

 

3,432

 

3,139

 

Interest expense, net

 

(4,265

)

(4,004

)

(11,239

)

(11,378

)

Less: Partners’ share of Operating Assets REP EBT

 

 

 

 

(1,067

)

Total Operating Assets REP EBT (c)

 

$

3,978

 

$

(11,162

)

$

20,413

 

$

(1,254

)

 

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Table of Contents

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

(In thousands)

 

Operating Assets NOI - Equity and Cost Method Investments

 

 

 

 

 

 

 

 

 

Millennium Waterway Apartments (b)

 

$

 

$

779

 

$

1,768

 

$

741

 

Woodlands Sarofim # 1

 

61

 

364

 

537

 

1,138

 

Stewart Title (title company)

 

665

 

323

 

1,333

 

667

 

Forest View/Timbermill Apartments (d)

 

(25

)

465

 

557

 

1,317

 

Total NOI - equity investees

 

701

 

1,931

 

4,195

 

3,863

 

 

 

 

 

 

 

 

 

 

 

Adjustments to NOI (e)

 

(22

)

(1,412

)

(1,473

)

(3,748

)

Equity Method Investments REP EBT

 

679

 

519

 

2,722

 

115

 

Less: Joint Venture Partner’s Share of REP EBT

 

(369

)

(388

)

(1,666

)

(905

)

Equity in earnings (loss) from Real Estate Affiliates

 

310

 

131

 

1,056

 

(790

)

 

 

 

 

 

 

 

 

 

 

Distributions from Summerlin Hospital Investment

 

 

35

 

2,376

 

3,929

 

Segment equity in earnings from Real Estate Affiliates

 

$

310

 

$

166

 

$

3,432

 

$

3,139

 

 

 

 

 

 

 

 

 

 

 

Company’s Share of Equity Method Investments NOI

 

 

 

 

 

 

 

 

 

Millennium Waterway Apartments (b)

 

$

 

$

651

 

$

1,477

 

$

619

 

Woodlands Sarofim # 1

 

12

 

73

 

107

 

228

 

Stewart Title (title company)

 

333

 

162

 

667

 

334

 

Forest View/Timbermill Apartments (d)

 

(13

)

233

 

279

 

659

 

Total NOI - equity investees

 

$

332

 

$

1,119

 

$

2,530

 

$

1,840

 

 

 

 

Economic

 

September 30, 2012

 

 

 

 

 

 

 

Ownership

 

Debt

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Millennium Waterway Apartments (b)

 

83.55

%

not applicable

 

 

 

 

 

Woodlands Sarofim #1

 

20.00

%

6,882

 

 

 

 

 

Stewart Title(title company)

 

50.00

%

 

 

 

 

 

Forest View/Timbermill Apartments (d)

 

50.00

%

not applicable

 

 

 

 

 

 


(a) Straight-line ground rent amortization was excluded from 2011 to conform with 2012.

(b) On May 31, 2012, we acquired our partner’s interest in the 393-unit Millennium Waterway Apartments. NOI for periods prior to June 1, 2012 is included in Operating Assets NOI - Equity and Cost Method Investments.

(c) For a detailed breakdown of our Operating Assets segment EBT, refer to Note 15. Such amounts in prior periods include The Woodlands as if consolidated.

(d) On April 19, 2012, the joint ventures owning the Forest View and Timbermill Apartments completed their sale to a third party. Our share of the distributable cash, after repayment of debt and transaction expenses, was $8.6 million.

(e) Adjustments to NOI primarily include straight-line and market lease amortization, depreciation and amortization and non-real estate taxes.

 

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Reconciliation of Operating Assets Segment Equity in Earnings

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

Segment Equity in Earnings from Real Estate Affiliates

 

$

310

 

$

166

 

$

3,432

 

$

3,139

 

Less: Equity Method Investments Share of REP EBT

 

(310

)

(131

)

(1,056

)

790

 

Cost Basis Investments and dividends

 

 

35

 

2,376

 

3,929

 

 

 

 

 

 

 

 

 

 

 

Add HHC Equity Method investments:

 

 

 

 

 

 

 

 

 

The Woodlands

 

 

 

 

3,727

 

Circle T

 

 

 

 

 

Forest View/ Timbermill Apartments

 

 

2

 

4

 

2

 

Millennium Waterway Apartments

 

 

14

 

406

 

14

 

Stewart Title (title company)

 

324

 

85

 

640

 

85

 

Woodlands Sarofim #1

 

(14

)

30

 

6

 

30

 

Equity in Earnings from Real Estate Affiliates

 

$

310

 

$

166

 

$

3,432

 

$

7,787

 

 

Retail Properties

 

Retail NOI of $8.8 million for the three months ended September 30, 2012 increased $0.1 million compared to $8.6 million for the same period in 2011. Retail NOI of $25.4 million increased $1.9 million for the nine months ended September 30, 2012 as compared to $23.5 million for the same period in 2011.

 

For the nine months ended September 30, 2012, we have executed 61 leases representing 236,364 square feet with average annual rents of $31.69 per square foot during the initial year of the lease term. Of the 61 leases, 43 represent comparable leases where there was a prior tenant with an increase in cash basis rent of less than one percent. Included in our executed leases is an existing tenant who is relocating within our property and will vacate 30,000 square feet of space.

 

Ward Centers

 

Prior to the third quarter, we executed a lease with Bed Bath & Beyond for approximately 30,000 square feet formerly occupied by Borders. We expect Bed Bath & Beyond to occupy the space during the first quarter of 2013. Additionally, during the second quarter of 2012, we completed at a cost of approximately $9.4 million and opened the upper level of Phase One of Ward Village Shops at Ward Centers. The space is approximately 35,744 square feet and is leased to TJ Maxx commencing in May 2012.  We are seeking a tenant for the approximately 34,000 square foot space in the lower level.  Approximately $2.9 million has been incurred to complete this space as of September 30, 2012, and we estimate approximately $4.7 million of additional costs (including tenant allowances) to complete.  TJ Maxx and Bed Bath & Beyond are expected to provide an additional $2.0 million in NOI.

 

On July 25, 2012, we announced the development of Phase Two of Ward Village Shops, a 57,000 square foot, two story retail center located in Honolulu, Hawaii.  Construction began in the third quarter of 2012. Our anticipated investment is expected to be approximately $26.2 million with an expected opening in the fall of 2013.  Phase Two is 100% leased as we will relocate Pier 1 Imports and Nordstrom Rack from their current locations at Ward Centers. These tenants are expected to contribute an incremental $1.0 million of combined annual NOI when they take possession in late 2013 or early 2014.

 

In October 2012, we announced plans to create an urban master planned community in the Kaka′ako district of Honolulu, HI. Over the next decade, Ward Centers will be transformed into Ward Village, a mixed-use retail, dining, entertainment, along with market rate and affordable housing. The development of Ward Village will be consistent with the master plan approved by the Hawaii Community Development Authority (“HCDA”).  In January 2011, we entered into a development agreement with the HCDA which allows for up to 9.3 million square feet, including up to 7.6 million square feet of residential (4,300 units), five million square feet of retail and four million square feet of office, commercial and other uses. Full build out is estimated to take over fifteen years, but will ultimately

 

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depend on market absorption and many other factors that are difficult to estimate.  The redevelopment will commence with four components on four separate blocks consisting of two mixed-use market-rate residential towers, one reserved housing tower and the renovation of the IBM building, a portion of which will serve as the information and sales center for Ward Village. We anticipate breaking ground on the first phase in 2014 with an expected completion in 2016.

 

South Street Seaport

 

As more fully described in Note 13 — Commitments and Contingencies, during June of 2012, we entered into an agreement to amend and restate the South Street Seaport ground lease (“Agreement to Amend”), which allows us to renovate and rehabilitate Pier 17 (“Renovation Project”). The Renovation Project includes the renovation and reconstruction of the existing Pier 17 Building, which consists of approximately 195,000 square feet of leasable area. Construction on this site is expected to begin during the second quarter of 2013 and conclude mid-year 2015. We continue to process the necessary governmental approvals, and we are actively pursuing potential tenants.  Design development drawings are complete and construction documents and development budget are underway for this project. As of September 30, 2012, we have incurred $6.6 million of costs related to this project.

 

Riverwalk Marketplace

 

On July 26, 2012, we announced plans to redevelop Riverwalk Marketplace into an upscale outlet center.  The Outlet Collection at Riverwalk will be the nation’s first outlet center located in the downtown of a major city. The redevelopment will feature a tenant mix of top national retailers with established outlet stores, local retailers and several dining and entertainment options. Plans currently include expanding the current leasable area by 44,000 square feet to 244,000 square feet. The redevelopment is contingent upon obtaining an acceptable amount of pre-leasing for the property and financing.

 

Office Properties

 

All of the office properties listed in the NOI schedule, except for 110 N. Wacker, 70 Columbia Corporate Center (“70 CCC”) and the Columbia Office Properties, are located in The Woodlands. Leases related to our office properties, except those located in Columbia, MD, are generally triple net leases. These leases typically require tenants to pay their pro-rata share of certain property operating costs, such as real estate taxes, utilities and insurance.

 

NOI of $4.5 million increased $1.6 million, or 55.8% for the three months ended September 30, 2012 as compared to $2.9 million for the same period in 2011. NOI of $13.0 million increased $4.0 million, or 44.4% for the nine months ended September 30, 2012 as compared to $9.0 million for the same period in 2011. As of September 30, 2012, all of the office properties have reached stabilized NOI with the exception of 70 CCC and certain properties included in the Columbia Office portfolio that are more fully described below.

 

The increase in NOI is associated with 4 Waterway Square and 9303 New Trails and relates to the stabilization of these assets. Both properties are fully occupied as of September 30, 2012, but the occupancy percentage was 46.7% for 4 Waterway Square and 73.9% for 9303 New Trails as of September 30, 2011. Stabilized NOI for 4 Waterway Square and 9303 New Trails is approximately $5.2 million and $1.8 million, respectively.

 

On August 15, 2012, we acquired 70 CCC, a 169,590 square foot Class A office building located in Columbia, Maryland town center. The building was approximately 23.7% leased at closing. Simultaneous to the closing of the transaction, we executed a lease for 76,308 square feet that will increase occupancy to approximately 68.7% when the tenant takes possession which is estimated to occur in March 2013. Refer to Note 4 — Acquisitions and Dispositions.

 

On July 26, 2012, we entered into a lease agreement with Whole Foods Market to lease 45,000 square feet of the approximate 88,000 leasable area of our Columbia headquarters building located in Columbia, MD.  We will begin a complete restoration and redevelopment of the building that will serve as a catalyst for future developments in the area. We expect to invest approximately $25.0 million and plan to begin construction in the second quarter of 2013 with an anticipated completion during the third quarter 2014.  Based on our pro forma analyses and market rental

 

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rates, we estimate stabilized NOI of $2.1 million in the second quarter of 2015, compared to current annual NOI loss of approximately $1.0 million. Costs incurred to date are approximately $0.8 million.

 

For the nine months ended September 30, 2012, we executed 15 leases representing 238,103 square feet with average annual rents of $23.69 per square foot during the initial year of the lease term. Of the 15 leases, 11 are initial leases for first generation space that has never been occupied or represents pre-leasing at 3 Waterway Square, which is currently under construction. Two of the 15 leases represent comparable leases where there was a prior tenant with an increase in cash basis rent of 32.6%.

 

Multi-family

 

On May 31, 2012, we acquired our partner’s interest in Millennium Waterway Apartments. We now consolidate Millennium Waterway Apartments.  This asset adds a stabilized Class A multi-family property located in The Woodlands Town Center to our portfolio. The property is currently 95.4% occupied and has a stabilized annual NOI of approximately $4.2 million. In conjunction with this acquisition, we entered into a joint venture agreement with our partner to construct a 314-unit Class A multi-family property as more fully discussed under our Strategic Developments segment.

 

The Woodlands Resort and Conference Center

 

The Woodlands Resort and Conference Center’s $0.5 million and $2.2 million increases in NOI, respectively, for the three and nine months ended September 30, 2012 as compared to the same period in 2011 is primarily due to higher overall revenue per available room (which is the average daily room rate multiplied by average occupancy), which increased 14.7% and 14.5%, respectively. The overall revenue per available room increased to $98.10 from $85.53 and $113.64 and $99.27 for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011. Increased business activity and strong local economic conditions at The Woodlands and surrounding areas are driving increased revenue and NOI as compared to 2011.

 

Other

 

The Club at Carlton Woods (the “Club”) is a 36-hole golf and country club at The Woodlands with 603 total members as of September 30, 2012. The Club sold 38 net new golf memberships generating approximately $3.1 million in cash during the nine months ended September 30, 2012. We estimate the Club requires approximately 800 members to achieve break-even NOI, and therefore we expect to continue to incur NOI losses for the foreseeable future.

 

The Woodlands Parking Garages comprise nearly 3,000 parking spaces in two separate parking structures. The Waterway Square Garage (1,942 spaces) is located in The Woodlands Town Center and has excess parking capacity for future commercial development. Woodloch Forest garage has approximately 1,000 total spaces with 300 spaces available for future adjacent office development.

 

Partially Owned

 

During the first quarter of 2012, we received a $2.4 million distribution from our Summerlin Hospital investment. We received a $3.9 million distribution in the first quarter of 2011, approximately $2.0 million of which was related to the calendar year 2010 and the remaining $1.9 million was related to periods prior to 2010 which had been deferred due to a capital project at the hospital. Distributions from the Summerlin Hospital are typically made one time per year and in the first quarter.

 

On April 19, 2012, the joint ventures owning the Forest View and Timbermill tax-credit apartments completed their sale to a third party.  There was no gain or loss recognized on these sales. Our share of the distributable cash, after repayment of debt and transaction costs, was $8.6 million. The NOI associated with the management fees for operating these joint ventures were included in Other Properties on the schedule of Operating Assets NOI and REP EBT. As a result of the sale, NOI decreased $0.2 million and $0.4 million for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011.

 

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Total revenue and expenses for the Operating Assets segment is summarized as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

(In thousands)

 

Operating Assets (*)

 

 

 

 

 

 

 

 

 

Minimum rents

 

$

22,788

 

$

19,072

 

$

61,532

 

$

54,504

 

Resort and conference center revenues

 

8,328

 

7,200

 

29,954

 

26,306

 

Other rental and property revenues

 

10,372

 

9,980

 

33,124

 

30,478

 

Total revenues

 

41,488

 

36,252

 

124,610

 

111,288

 

Rental property real estate taxes

 

2,934

 

2,829

 

8,160

 

8,139

 

Rental property maintenance costs

 

2,126

 

2,016

 

5,851

 

5,284

 

Resort and conference center operations

 

6,965

 

6,352

 

21,750

 

20,256

 

Other property operating costs

 

14,853

 

14,249

 

43,274

 

40,776

 

Provisions for doubtful accounts

 

237

 

(136

)

386

 

308

 

Depreciation and amortization

 

6,440

 

6,961

 

16,969

 

17,168

 

Interest, net

 

4,265

 

4,004

 

11,239

 

11,378

 

Early Extinguishment of debt

 

 

11,305

 

 

11,305

 

Equity in Earnings from Real Estate Affiliates

 

(310

)

(166

)

(3,432

)

(3,139

)

Total expenses

 

37,510

 

47,414

 

104,197

 

111,475

 

Venture partner share of The Woodlands EBT

 

 

 

 

(1,067

)

Operating Assets REP EBT

 

$

3,978

 

$

(11,162

)

$

20,413

 

$

(1,254

)

 


(*) For a detailed breakdown of our Operating Assets segment EBT, refer to Note 15. Such amounts in prior periods include The Woodlands as if consolidated.

 

Total revenues of $41.5 million and $124.6 million for the three and nine months ended September 30, 2012 increased $5.2 million and $13.3 million, respectively, as compared to $36.3 million and $111.3 million for the same periods in 2011. The increase in minimum rents for the three months ended September 30, 2012 is primarily due to the acquisition of Millennium Waterway Apartments which contributed $2.4 million in revenue during the period.  In addition to the Millennium Waterway Apartment acquisition, South Street Seaport’s minimum rents are up $1.2 million and 4 Waterway Square’s minimum rents are up $2.0 million due to higher average occupancy during the nine months ended September 30, 2012. The Resort and Conference Center revenues increased due to higher overall revenue per available room as discussed above.

 

Total expenses for the three and nine months ended September 30, 2012 are lower primarily due to the early extinguishment of debt charge of $11.3 million related to the mortgage refinancing at Ward Center during the third quarter of 2011.  Other property operating costs generally include recoverable and non-recoverable costs relating to our properties such as utilities, ground rent, salaries and contract cleaning and security services. Other property operating costs for the three and nine months ended September 30, 2012, include expenses of $0.5 million associated with Millennium Waterway Apartments.

 

Strategic Developments Segment

 

Our Strategic Development assets generally require substantial future development to achieve their highest and best use. Other than the residential condominium project located in Nouvelle at Natick (Boston, Massachusetts), which is now sold out, the remaining properties in this segment generate little to no revenues. Expenses relating to these assets are primarily related to carrying costs, such as property taxes and insurance, and other ongoing costs related to maintaining the assets in their current condition. If we decide to redevelop a Strategic Development asset, we would expect that, upon completion of redevelopment, the asset would be reclassified to the Operating Assets segment and NOI would become an important measure of its operating performance.

 

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Total revenue and expenses for the Strategic Developments segment is summarized as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

(In thousands)

 

Strategic Developments (*)

 

 

 

 

 

 

 

 

 

Minimum rents

 

$

217

 

$

209

 

$

693

 

$

658

 

Condominium unit sales

 

 

9,071

 

267

 

19,495

 

Other rental and property revenues

 

4,517

 

37

 

4,691

 

1,242

 

Total revenues

 

4,734

 

9,317

 

5,651

 

21,395

 

Condominium unit cost of sales

 

(24

)

5,715

 

143

 

14,582

 

Rental and other property operations

 

2,857

 

32

 

5,908

 

3,794

 

Recovery of doubtful accounts

 

3

 

(5

)

(101

)

(143

)

Depreciation and amortization

 

56

 

59

 

173

 

176

 

Interest, net

 

(193

)

149

 

61

 

154

 

Total expenses

 

2,699

 

5,950

 

6,184

 

18,563

 

Venture partner share of the Woodlands EBT

 

 

 

 

 

Strategic Developments REP EBT

 

$

2,035

 

$

3,367

 

$

(533

)

$

2,832

 

 


(*) For a detailed breakdown of our Strategic Developments segment of EBT, refer to Note 15.

 

Condominium unit sales and costs of sales decreased as we had no sales at Nouvelle at Natick in the three months ended September 30, 2012 and only sold two condominium units for the nine months ended September 30, 2012. There are no remaining units at September 30, 2012. The sales in 2012 were units designated for low-income housing.

 

Other rental and property revenues increased for the three and nine months ended September 30, 2012 as we sold 11.5 acres including 104,705 square feet of mostly vacant retail space for $4.5 million in Pocatello, ID (Alameda Plaza). We are continuing to explore the sale of the remaining 10.5 acres including 85,636 square feet of mostly vacant retail space. Other rental and property revenues for the nine months ended September 30, 2011 is primarily due to the sale of two ancillary parcels of land, aggregating approximately 4.6 acres, at the Kendall Town Center. Rental and other property operations for the three and nine months ended September 30, 2011 includes a real estate tax refund of $1.3 million received at one of our projects.

 

The following describes the status of our active Strategic Development Projects as of September 30, 2012:

 

The Woodlands

 

3 Waterway Square is a 232,021 square foot office building located in The Woodlands Town Center which began construction in the first quarter of 2012. The cost as of September 30, 2012 for this development is approximately $16.8 million (exclusive of allocated land value). Included in this amount is approximately $2.5 million in prepaid leasing costs. We estimate an additional $34.6 million to complete this project with an anticipated completion during the second quarter of 2013. The building is currently 90% pre-leased.  We currently expect the property to reach stabilized annual NOI of $5.9 million in the third quarter of 2013.

 

On May 14, 2012, we entered into a joint venture, Millennium Woodlands Phase II, LLC (“Millennium Phase II”), with The Dinerstein Companies, for the construction of a 314-unit Class A multi-family property in The Woodlands Town Center. Our partner is the managing member of Millennium Phase II.  On July 5, 2012, Millennium Phase II was capitalized by our contribution of 4.8 acres of land valued at $15.5 million to the joint venture (compared to our $4.5 million book value), our partner’s contribution of $3.0 million in cash, and by a construction loan in the amount of $37.7 million, which is guaranteed by our partner. Total construction costs are estimated to be approximately $38.4 million (exclusive of land value).

 

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On July 18, 2012, we announced the development of a 66-acre mixed use site called Hughes Landing at Lake Woodlands. Hughes Landing is currently envisioned to ultimately have up to eight office buildings, hotels, retail and multi-family residential housing. As a result of a high demand for office space in The Woodlands, in the third quarter of 2012, we began pre-development of the first office building, One Hughes Landing, an eight story, 195,227 square foot Class-A building. Construction of this building is expected to begin in the fourth quarter of 2012 with completion anticipated in the fall of 2013. Approximately, $0.2 million of costs have been incurred through September 30, 2012. Total budgeted construction cost is $45.0 million (exclusive of land value).

 

One Ala Moana

 

During the first nine months of 2012, HHMK Development, LLC, our venture with local development partners in Honolulu, continued pre-development work on a proposed 206-unit condominium tower above the Nordstrom parking garage at Ala Moana shopping center in Honolulu, HI.  On September 17, 2012, we closed on non-recourse mezzanine loan commitments with List Island Properties, LLC and A & B Properties, Inc. to provide a combined $40.0 million of mezzanine financing, including $3.0 million of pre-development costs which is not required to be repaid if the construction loan fails to close or the project fails to go forward. Of the committed pre-development costs, $2.0 million has been funded as of September 30, 2012 and is non-interest bearing. We anticipate the construction loan to close in June 2013. The mezzanine financing has a blended 12.00% interest rate and a final maturity date of April 30, 2018. In addition to the mezzanine loans, A & B Properties and List Island Properties, LLC, both have a back-end profit interest in KR Holdings, LLC, which entitles them to receive a share of the profits after we get a return of our capital plus a 13% preferred return on our capital. We believe that these commitments, along with the capital committed by the venture partners and anticipated presale deposits, will be sufficient to provide all of the non-first mortgage capital for the project. Restated Condo Documents were submitted to the Real Estate Commission and we anticipate approval in the fourth quarter of 2012. This approval will allow us to enter into binding sales contracts with 30 day rescission rights. Accordingly, the venture expects to begin pre-sales prior to the end of the first quarter of 2013. Construction is expected to begin in the second quarter of 2013 with anticipated completion at the end of 2014.

 

Summerlin

 

On September 19, 2012, we announced Macy’s as the first department store tenant for The Shops at Summerlin.  We are continuing negotiations with a second department store. The Shops at Summerlin will be an approximately 1.6 million square foot regional mall located in downtown Summerlin, NV.  It will consist of a Fashion Center of approximately 1.1 million square feet that will feature three anchor tenants, retail and restaurants. Additionally, it will have approximately 198,000 square feet of office and approximately 280,000 square feet of big box and junior anchor retail space which will be located adjacent to the Fashion Center. Pre-development, design and leasing efforts continue. We anticipate construction to begin by middle of 2013. Costs incurred to date are $2.3 million.

 

Columbia

 

On April 12, 2012, the Columbia Parcel D venture, in which we are a 50% partner with a multi-family developer and which was formed to construct a 375-unit apartment building, received approval of the final development plan component of the entitlement process for the first phase.  The approval also includes Parcel C, which would allow for up to an additional 442 apartment units and 76,000 square feet of retail in the two parcels.  We have not entered into any partnerships or ventures with respect to the development of Parcel C. We submitted the site development plan in the fourth quarter of 2012 and we expect its approval. We currently expect construction to start in the first quarter of 2013, subject to obtaining debt financing and necessary approvals, with completion and leasing during 2014. Our share of the venture’s development costs to date is approximately $1.7 million.  The total project budget is $90.6 million including $20.1 million attributable to our contributed land. Our anticipated cash investment in this project is expected to be $5.9 million excluding our land contribution.

 

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Bridges at Mint Hill

 

On September 8, 2011, we entered into a joint venture with the owner of land adjacent to our property Bridges at Mint Hill located near Charlotte, NC to develop a shopping center on our properties.  On October 30, 2012, we contributed $4.5 million in cash to pay off an existing mortgage on our partner’s property and both parties contributed their respective properties into the venture. Our ownership in the venture increased from 79.0% to 90.5% as a result of the contribution transactions.  Costs to date are $0.8 million. The venture will continue pre-development work in the fourth quarter of 2012.

 

General and Administrative, Warrant Liability, Tax Indemnity Receivable, Tax and Equity in Earnings

 

General and administrative, warrant liability gain (loss), reduction in tax indemnity receivable, provision (benefit) for income taxes and equity in earnings from real estate affiliates are summarized as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

General and administrative

 

$

9,339

 

$

8,673

 

$

25,896

 

$

21,156

 

Warrant liability gain (loss)

 

(64,303

)

169,897

 

(162,724

)

100,762

 

Reduction in tax indemnity receivable

 

(2,873

)

 

(11,655

)

 

Provision (benefit) for income taxes

 

2,618

 

(7,760

)

7,703

 

(4,344

)

Equity in earnings from Real Estate Affiliates

 

310

 

166

 

3,432

 

7,787

 

 

We reclassified certain salaries and overhead costs for 2011 relating to land development activities for The Woodlands from general and administrative expenses to MPC operations to be consistent with the 2012 presentation. The amounts reclassified were $1.5 million and $4.0 million for the three and nine months ended September 30, 2011, respectively.

 

We do not believe that the general and administrative expenses for the three and nine months ended September 30, 2011 are comparable to the three and nine months ended September 30, 2012 because during 2011 we were building our infrastructure and had not consolidated The Woodlands’ operations. If we had completed The Woodlands acquisition on January 1, 2011, our general and administrative expenses for the nine months ended September 30, 2011 would have increased by approximately $2.7 million to $23.9 million.

 

Our general and administrative expenses for the three months ended September 30, 2012 totaled $9.3 million compared to $8.4 million and $8.2 million for the first and second quarter of 2012, respectively. Included in general and administrative expenses for the third, second quarter and first quarter of 2012 were $2.2 million, $0.9 million and $1.8 million, respectively, related to The Woodlands. Corporate compensation and benefits expenses totaled approximately $5.9 million and $15.7 million for the three and nine months ended September 30, 2012, respectively.

 

During the three and nine months ended September 30, 2012, we capitalized $1.9 million and $5.8 million, respectively, of internal costs related to our MPC segment, compared to $2.1 million and $4.6 million for the same periods in 2011. Of those capitalized internal costs, salaries represented $1.2 million and $3.7 million for the three and nine months ended September 30, 2012, respectively, compared to $1.4 million and $2.7 million for the same periods in 2011. We capitalized $2.0 million and $4.5 million of internal costs related to our Strategic Development Segment for the three and nine months ended September 30, 2012. Approximately $1.7 million and $3.5 million of these costs are related to salaries for the three and six months ended September 30, 2012. We did not capitalize internal costs with respect to this segment in 2011 as we were in the initial stages of evaluating if any of the projects should be developed.

 

The increase in warrant liability for the nine months ended September 30, 2012 and 2011 is due to an increase in estimated value of the Sponsors and Management Warrants (Note 2) during the periods.

 

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The reduction in tax indemnity receivable of $2.9 million and $11.7 million for the three and nine months ended September 30, 2012, respectively, relate to the utilization of tax assets. See Note 10 — Income Taxes for more information related to the reduction in tax indemnity receivable.

 

The increase in the provision for income taxes for the three and nine months ended September 30, 2012 compared to the same periods in 2011 was primarily attributable to increases in operating income in the three and nine months ended September 30, 2012 compared to the same periods in 2011. The provision for income taxes was also impacted by changes in valuation allowances, unrecognized tax benefit interest expense and other permanent items.

 

The effective tax rates on our pretax earnings were (5.6)% and (6.4)% for the three and nine months ended September 30, 2012, respectively, compared to (5.0)% and (3.9)% for the three and nine months ended September 30, 2011, respectively. The changes in the tax rate were primarily attributable to the changes in the warrant liability for the three and nine months ended September 30, 2012 compared to the same periods in 2011. We have significant permanent differences, primarily from warrant liability gains and losses, interest income on the tax indemnity receivable, and changes in valuation allowances that cause our effective tax rate to deviate greatly from statutory rates.

 

Liquidity and Capital Resources

 

Our primary sources of cash include cash flow from land sales in our Master Planned Communities segment, cash generated from our operating assets, net proceeds from asset sales and first mortgage financings secured by our assets. Our primary uses of cash include working capital, overhead, debt service, property improvements, pre-development and development costs. We believe that our sources of cash, including existing cash on hand, will provide sufficient liquidity to meet our existing contracted obligations and anticipated ordinary course operating expenses for at least the next twelve months. The pursuit of development and re-development opportunities in our Operating Assets and Strategic Developments segments are capital intensive and will require significant additional funding. Most of these costs are currently discretionary, which means that we could discontinue spending on these activities if our liquidity profile, economic conditions or feasibility of projects changes. We intend to raise this additional funding with a mix of construction, bridge and long-term financings, by entering into joint venture arrangements and the sale of non-core assets at the appropriate time.

 

As of September 30, 2012, our consolidated debt was $683.8 million and our share of the debt of our Real Estate Affiliates aggregated $2.5 million. We have no final debt maturities for the remainder of 2012 and have approximately $36.1 million of debt related to the Woodlands Conference Center and Resort maturing in 2013. Please refer to Note 8 — Mortgages, Notes and Loans Payable for a table showing our debt maturity dates. We expect to refinance this loan no later than the first quarter of 2013 in connection with a planned renovation of the property which is currently estimated to cost approximately $75.0 million.

 

During the second quarter of 2012, we refinanced $18.1 million of existing debt related to our Bridgeland master planned community with a ten-year term loan facility at a fixed interest rate of 5.50% for the first five years and three-month LIBOR plus 2.75% for the remaining term and maturing on June 29, 2022. Beginning on June 29, 2014, annual principal payments are required in the amount of 5.00% of the then outstanding principal balance. In addition, we entered into a three year revolving credit facility with aggregate borrowing capacity of $140.0 million and a $30.0 million maximum loan amount. The revolving loan bears interest at the greater of 5.00% or LIBOR plus 3.25%. This loan will provide working capital for development at Bridgeland. Also, in the third quarter of 2012, we paid off several small notes totaling approximately $7.3 million.

 

The following table summarizes our Net Debt on a segment basis as of September 30, 2012. Net Debt is defined as our share of mortgages, notes and loans payable, at our ownership share, reduced by short-term liquidity sources to satisfy such obligations such as our ownership share of cash and cash equivalents and Special Improvement District receivables. Although Net Debt is not a recognized GAAP financial measure, it is readily computable from existing GAAP information and we believe, as with our other non-GAAP measures, that such information is useful to our investors and other users of our financial statements.

 

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Segment Basis Net Debt

 

 

 

Master

 

 

 

 

 

 

 

Non-

 

Total

 

 

 

Planned

 

Operating

 

Strategic

 

Segment

 

Segment

 

September 30,

 

(In thousands)

 

Communities

 

Assets

 

Developments

 

Totals

 

Amounts

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgages, notes and loans payable

 

$

244,107

(a)

$

436,832

(b)

$

4,631

 

$

685,570

 

$

754

 

$

686,324

 

Less: Cash and cash equivalents

 

(103,114

)

(26,720

)(c)

 

(129,834

)

(144,356

)

(274,190

)

Special Improvement District receivables

 

(41,402

)

 

 

(41,402

)

 

(41,402

)

Municipal Utility District receivables

 

(105,487

)

 

 

(105,487

)

 

(105,487

)

Net debt

 

$

(5,896

)

$

410,112

 

$

4,631

 

$

408,847

 

$

(143,602

)

$

265,245

 

 


(a)    Includes The Woodlands’ $176.7 million Master Credit Facility outstanding balance.

(b)    Includes our $2.5 million share of debt of our Real Estate Affiliates.

(c)     Includes our $1.3 million share of cash and cash equivalents of our Real Estate Affiliates.

 

Summary of Cash Flows

 

The Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 are not comparable on a line item basis because The Woodlands was not consolidated for the nine months ended September 30, 2011. As a result, the following line item comparisons between periods do not include The Woodlands.

 

Cash Flows from Operating Activities

 

Cash provided by operating activities was $59.3 million for the nine months ended September 30, 2012 as compared to cash provided by operations of $22.0 million for the nine months ended September 30, 2011. The increase of $37.3 million is primarily due to cash contribution from The Woodlands’ operations of $11.2 million and higher earnings from the non-Woodlands operating assets offset by lower condominium unit sales and higher master planned community and condominium development expenditures of $6.9 million.

 

Cash Flows from Investing Activities

 

Cash used in investing activities was $20.3 million for the nine months ended September 30, 2012 and $12.8 million for the nine months ended September 30, 2011.

 

Total cash expenditures for the nine months ended September 30, 2012 primarily include $5.1 million related to the Ward Village Shops, $2.7 million for property improvements at Ward Centers, $3.2 million related to improvements at South Street Seaport, $7.7 million of tenant-related improvements at The Woodlands and $8.4 million related to the 3 Waterway development. For the three months ended September 30, 2011, the majority of the expenditures were related to completing a parking garage at Ward Centers.

 

The expenditures were partially offset by proceeds from the sales of investment in real estate affiliate of $8.6 million generated by the sale of the Timbermill and Forest View Apartments in April of 2012. Further, the net cash from Millennium Phase II transaction of $4.1 million, and a decrease in restricted cash of $4.3 million also offset the expenditures.

 

Cash Flows from Financing Activities

 

Cash provided by financing activities was $6.4 million for the nine months ended September 30, 2012 compared to cash used of $0.4 million for the nine months ended September 30, 2011.

 

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Principal payments on mortgages, notes and loans payable were $37.2 million for the nine months ended September 30, 2012 and included repayment of $21.1 million of mortgages at Bridgeland, repayment of $6.3 million of The Woodlands Master Credit Facility and the remainder of repayments are associated with $9.9 million early repayment of several small notes and SID bonds. Proceeds from new borrowings totaling $44.8 million were generated from a $9.0 million draw on the Ward Centers mortgage loan and the $14.5 million financing at 20/25 Waterway, with the remaining proceeds primarily generated from the refinancing of the Bridgeland mortgage.

 

Cash provided by financing activities of $241.6 million for the nine months ended September 30, 2011 resulted primarily from the $250.0 million ($212.5 million initial funding as of September 30, 2011) Ward Centers mortgage financing and $29.0 million 110 N. Wacker Drive office building mortgage financing. The principal payments on mortgages, notes and loan payable including the refinancing of the Ward Centers and 110 N. Wacker mortgages were $241.1 million for the nine months ended September 30, 2011.

 

Off-Balance Sheet Financing Arrangements

 

We do not have any material off-balance sheet financing arrangements. We have interests in certain property owning non-consolidated ventures which have mortgage financing. The financings are non-recourse to us and totaled $9.1 million as of September 30, 2012.

 

REIT Requirements

 

In order for Ward Centers to remain qualified as a REIT for federal income tax purposes, Ward Centers must distribute or pay tax on 100% of its capital gains and distribute at least 90% of its ordinary taxable income to its stockholders, including us.  See Note 10 for more detail on Ward Center’s ability to remain qualified as a REIT.

 

Seasonality

 

Generally, revenues from our Operating Assets segment, Master Planned Communities segment and Strategic Developments segment are not subject to seasonal variations; however, rental incomes for certain retail tenants are subject to overage rent terms, which are based on tenant sales. These retail tenants are generally subject to seasonal variations, with a significant portion of their sales and earnings occurring during the last two months of the year.  As such, our rental income is higher in the fourth quarter of each year.

 

Critical Accounting Policies

 

Critical accounting policies are those that are both significant to the overall presentation of our financial condition and results of operations and require management to make difficult, complex or subjective judgments.

 

Recently Issued Accounting Pronouncements

 

In May 2011, the FASB issued “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in the U.S. GAAP and IFRSs”, and it is effective for fiscal years beginning after December 15, 2011. The adoption of this policy did not have an impact on our financial statements. No other new accounting pronouncements have been issued which impact or could impact the prior, current or subsequent years.

 

ITEM 3                           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are subject to interest rate risk with respect to our fixed-rate financing in that changes in interest rates will impact the fair value of our fixed-rate financing and with respect to our floating rate financings in that increases in interest rates could adversely affect cash flow. As of September 30, 2012, we had $473.8 million of variable-rate debt outstanding of which $172.0 million has been swapped to a fixed-rate. Approximately $176.7 million of the $301.8 million of total variable rate debt that has not been swapped to a fixed rate is represented by the Master Credit Facility at The Woodlands. Due to the revolving nature of this type of debt, it is generally inefficient to use interest rate swaps as a hedging instrument; rather, we have purchased an interest rate cap for this facility to mitigate our exposure to rising interest rates. We also did not swap to a fixed rate $86.0 million of the outstanding balance on the Victoria Ward financing because it is structured to permit partial repayments to release collateral for

 

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re-development. Due to the uncertain timing of such partial repayments, hedging this portion of the outstanding balance is inefficient. As of September 30, 2012, annual interest costs would increase approximately $3.0 million for every 1% increase in floating interest rates. Generally, our interest costs are capitalized due to the level of assets we currently have under development; therefore, the impact of a change in our interest rate on our Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income (Loss) is expected to be minimal. For additional information concerning our debt, and management’s estimation process to arrive at a fair value of our debt as required by GAAP, reference is made to Item 2, the Liquidity and Capital Resources discussion above and to Notes 8 and 9. We intend to manage a portion of our floating rate interest exposure by using interest rate swaps and caps.

 

ITEM 4                           CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rule 13(a)-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in our reports to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.

 

As required by SEC rules, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal financial and accounting officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2012, the end of the period covered by this report. Based on the foregoing, our principal executive officer and principal financial and accounting officer concluded that our disclosure controls and procedures were effective as of September 30, 2012.

 

Internal Controls over Financial Reporting

 

There have been no changes in our internal controls during our most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

PART II                  OTHER INFORMATION

 

ITEM 1             LEGAL PROCEEDINGS

 

In the ordinary course of our business, we are from time to time involved in legal proceedings related to the ownership and operations of our properties.  Neither we nor any of our real estate affiliates are currently involved in any legal or administrative proceedings that we believe are  likely to have a materially adverse effect on our business, results of operations or financial condition.

 

ITEM 1A             RISK FACTORS

 

There are no material changes to the risk factors previously disclosed in our Annual Report.

 

ITEM 6                      EXHIBITS

 

The Exhibit Index following the signature page to the Quarterly Report lists the exhibits furnished as required by Item 601 of Regulation S-K and is incorporated by reference.

 

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SIGNATURE

 

Pursuant to the requirements 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.

 

 

The Howard Hughes Corporation

 

 

 

 

By:

/s/ Andrew C. Richardson

 

 

Andrew C. Richardson

 

 

Chief Financial Officer

 

 

November 9, 2012

 

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EXHIBIT INDEX

 

3.1

 

Certificate of Designations of Series A Junior Participating Preferred Stock, filed with the Secretary of State of Delaware on February 29, 2012 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed February 29, 2012).

 

 

 

4.1

 

Section 382 Rights Agreement, dated as of February 27, 2012, by and between The Howard Hughes Corporation and Computershare Trust Company, N.A., as rights agent (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed February 29, 2012).

 

 

 

10.1

 

Amendment No.1 to Employment Agreement, dated as of August 17, 2012, between The Howard Hughes Corporation and David R. Weinreb. +*

 

 

 

31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

 

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

 

 

101.INS

 

XBRL Instance Document.*

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document.*

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.*

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.*

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.*

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.*

 


* Filed herewith

+ Management Contract, Compensatory plan or arrangement

 

Pursuant to Item 601(b)(4)(v) of Regulation S-K, the registrant has not filed debt instruments relating to long-term debt that is not registered and for which the total amount of securities authorized thereunder does not exceed 10% of total assets of the registrant and its subsidiaries on a consolidated basis as of September 30, 2012.  The registrant agrees to furnish a copy of such agreements to the SEC upon request.

 

Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2012 and 2011, (ii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2012 and 2011, (iii) the Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011, (iv) Condensed Consolidated Statements of Equity for the nine months ended September 30, 2012 and 2011, and (v) the Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011.

 

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