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 March 31, 2011

 

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, Suite 950, 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 (the “Exchange Act”) 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). oYes 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.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x
(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, $.01 par value, outstanding on May 6, 2011 was 37,933,154.

 

 

 



Table of Contents

 

THE HOWARD HUGHES CORPORATION, INC.

 

INDEX

 

 

 

 

 

PAGE
NUMBER

Part I

 

FINANCIAL INFORMATION

 

 

 

 

Item 1: Condensed Consolidated and Combined Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010

 

3

 

 

 

 

 

 

 

 

 

Consolidated and Combined Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2011 and 2010

 

4

 

 

 

 

 

 

 

 

 

Consolidated and Combined Statements of Equity for the three months ended March 31, 2011 and 2010

 

5

 

 

 

 

 

 

 

 

 

Consolidated and Combined Statements of Cash Flows for the three months ended March 31, 2011 and 2010

 

6

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

 

7

 

 

 

Note 1: Organization

 

7

 

 

 

Note 2: Intangible Assets and Liabilities

 

16

 

 

 

Note 3: Real Estate Affiliates

 

16

 

 

 

Note 4: Mortgages, Notes and Loans Payable

 

19

 

 

 

Note 5: Income Taxes

 

20

 

 

 

Note 6: Stock-Based Plans

 

20

 

 

 

Note 7: Other Assets and Liabilities

 

22

 

 

 

Note 8: Commitments and Contingencies

 

22

 

 

 

Note 9: Transactions with GGP and with Related Parties

 

23

 

 

 

Note 10: Segments

 

23

 

 

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

 

29

 

 

Liquidity and Capital Resources

 

39

 

 

Item 3: Quantitative and Qualitative Disclosures about Market Risk

 

41

 

 

Item 4: Controls and Procedures

 

41

 

 

 

 

 

Part II

 

OTHER INFORMATION

 

 

 

 

Item 1: Legal Proceedings

 

42

 

 

Item 1A: Risk Factors

 

42

 

 

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

 

42

 

 

Item 3: Defaults Upon Senior Securities

 

42

 

 

Item 5: Other Information

 

42

 

 

Item 6: Exhibits

 

42

 

 

SIGNATURE

 

43

 

 

EXHIBIT INDEX

 

44

 

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THE HOWARD HUGHES CORPORATION

 

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Assets:

 

 

 

Investment in real estate:

 

 

 

 

 

Master Planned Community assets

 

$

1,348,531

 

$

1,350,648

 

Land

 

180,976

 

180,976

 

Buildings and equipment

 

342,797

 

343,006

 

Less accumulated depreciation

 

(86,116

)

(83,390

)

Developments in progress

 

293,954

 

293,403

 

Net property and equipment

 

2,080,142

 

2,084,643

 

Investment in and loans to/from Real Estate Affiliates

 

151,093

 

149,543

 

Net investment in real estate

 

2,231,235

 

2,234,186

 

Cash and cash equivalents

 

280,481

 

284,682

 

Accounts receivable, net

 

7,094

 

8,154

 

Notes receivable

 

38,883

 

38,954

 

Tax indemnity receivable, including interest

 

325,555

 

323,525

 

Deferred expenses, net

 

6,076

 

6,619

 

Prepaid expenses and other assets

 

137,223

 

126,587

 

Total assets

 

$

3,026,547

 

$

3,022,707

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Mortgages, notes and loans payable

 

$

314,924

 

$

318,660

 

Deferred tax liabilities

 

79,639

 

78,680

 

Warrant liabilities

 

355,393

 

227,348

 

Uncertain tax position liability

 

142,329

 

140,076

 

Accounts payable and accrued expenses

 

69,640

 

78,836

 

Total liabilities

 

961,925

 

843,600

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Common stock: $.01 par value; 100,000,000 shares authorized, 37,924,506 shares issued as of March 31, 2011 and 37,904,506 shares issued as of December 31, 2010

 

379

 

379

 

Additional paid-in capital

 

2,708,165

 

2,708,036

 

Accumulated deficit

 

(643,020

)

(528,505

)

Accumulated other comprehensive loss

 

(1,692

)

(1,627

)

Total stockholders’ equity

 

2,063,832

 

2,178,283

 

Noncontrolling interests in consolidated ventures

 

790

 

824

 

Total equity

 

2,064,622

 

2,179,107

 

Total liabilities and equity

 

$

3,026,547

 

$

3,022,707

 

 

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

 

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THE HOWARD HUGHES CORPORATION

 

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE

INCOME (LOSS)

(UNAUDITED)

 

 

 

Three Months Ended March 31,

 

 

 

2011

 

2010

 

 

 

(Consolidated)

 

(Combined)

 

 

 

(In thousands)

 

Revenues:

 

 

 

 

 

Master Planned Community land sales

 

$

23,392

 

$

3,215

 

Builder price participation

 

521

 

744

 

Minimum rents

 

16,719

 

17,031

 

Tenant recoveries

 

4,524

 

4,819

 

Condominium unit sales

 

3,764

 

 

Other land sale revenues

 

1,248

 

1,111

 

Other rental and property revenues

 

2,933

 

1,870

 

Total revenues

 

53,101

 

28,790

 

Expenses:

 

 

 

 

 

Master Planned Community cost of sales

 

15,436

 

1,326

 

Master Planned Community land sales operations

 

5,628

 

8,491

 

Rental property real estate taxes

 

3,474

 

2,978

 

Rental property maintenance costs

 

1,559

 

1,844

 

Condominium unit cost of sales

 

2,980

 

 

Other property operating costs

 

9,592

 

8,472

 

Provision for doubtful accounts

 

11

 

101

 

General and administrative

 

5,232

 

4,135

 

Provisions for impairment

 

 

278

 

Depreciation and amortization

 

3,199

 

4,450

 

Total operating expenses

 

47,111

 

32,075

 

 

 

 

 

 

 

Operating income (loss)

 

5,990

 

(3,285

)

 

 

 

 

 

 

Interest income

 

2,512

 

105

 

Interest expense

 

 

(712

)

Warrant liability expense

 

(126,045

)

 

Loss before income taxes, income from Real Estate Affiliates, reorganization items and noncontrolling interests

 

(117,543

)

(3,892

)

Provision for income taxes

 

(2,457

)

(1,486

)

Income from Real Estate Affiliates

 

5,513

 

1,492

 

Reorganization items

 

 

(16,595

)

Loss from continuing operations

 

(114,487

)

(20,481

)

Allocation to noncontrolling interests

 

(28

)

(48

)

Net loss attributable to common stockholders

 

$

(114,515

)

$

(20,529

)

 

 

 

 

 

 

Basic and Diluted Loss Per Share:

 

 

 

 

 

Continuing operations

 

$

(3.02

)

$

(0.54

)

Total basic and diluted loss per share

 

$

(3.02

)

$

(0.54

)

 

 

 

 

 

 

Comprehensive Income (Loss), Net:

 

 

 

 

 

Net loss

 

$

(114,487

)

$

(20,481

)

Other comprehensive income (loss)

 

(65

)

410

 

Comprehensive loss

 

(114,552

)

(20,071

)

Comprehensive loss allocated to noncontrolling interests

 

(28

)

(48

)

Comprehensive loss attributable to common stockholders

 

$

(114,580

)

$

(20,119

)

 

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

 

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THE HOWARD HUGHES CORPORATION

 

CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Noncontrolling

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

Interests in

 

 

 

 

 

Common

 

Paid-In

 

Accumulated

 

GGP

 

Comprehensive

 

Consolidated

 

Total

 

 

 

Stock

 

Capital

 

Deficit

 

Equity

 

Income (Loss)

 

Ventures

 

Equity

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2010

 

$

 

$

 

$

 

$

1,504,364

 

$

(1,744

)

$

900

 

$

1,503,520

 

Net (loss) income

 

 

 

 

(20,529

)

 

48

 

(20,481

)

Distributions to noncontrolling interests

 

 

 

 

 

 

(41

)

(41

)

Other comprehensive income

 

 

 

 

 

410

 

 

410

 

Contributions from GGP, net

 

 

 

 

33,398

 

 

 

33,398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2010

 

$

 

$

 

$

 

$

1,517,233

 

$

(1,334

)

$

907

 

$

1,516,806

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2011

 

$

379

 

$

2,708,036

 

$

(528,505

)

$

 

$

(1,627

)

$

824

 

$

2,179,107

 

Net (loss) income

 

 

 

(114,515

)

 

 

28

 

(114,487

)

Distributions to noncontrolling interests

 

 

 

 

 

 

(62

)

(62

)

Other comprehensive loss

 

 

 

 

 

(65

)

 

(65

)

Restricted stock amortization

 

 

129

 

 

 

 

 

129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2011

 

$

379

 

$

2,708,165

 

$

(643,020

)

$

 

$

(1,692

)

$

790

 

$

2,064,622

 

 

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

 

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THE HOWARD HUGHES CORPORATION

 

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Three Months Ended March 31,

 

 

 

2011

 

2010

 

 

 

(Consolidated)

 

(Combined)

 

 

 

(In thousands)

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net loss

 

$

(114,487

)

$

(20,481

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

Income from Real Estate Affiliates

 

(5,513

)

(1,492

)

Distributions received from Real Estate Affiliates

 

3,894

 

 

Provision for doubtful accounts

 

11

 

101

 

Depreciation

 

2,748

 

3,884

 

Amortization

 

451

 

566

 

Amortization (accretion) of deferred financing costs and debt market rate adjustments

 

(1,709

)

713

 

Amortization of intangibles other than in-place leases

 

33

 

51

 

Straight-line rent amortization

 

(835

)

(494

)

Non-cash expense on warrant liabilities

 

126,045

 

 

Provisions for impairment

 

 

278

 

Land/residential development and acquisitions expenditures

 

(18,687

)

(11,870

)

Cost of sales

 

18,416

 

1,326

 

Non-cash reorganization items

 

 

(248

)

Net changes:

 

 

 

 

 

Accounts and notes receivable

 

(75

)

436

 

Prepaid expenses and other assets

 

(387

)

8,088

 

Deferred expenses

 

(62

)

(451

)

Accounts payable and accrued expenses and deferred tax liabilities

 

(5,115

)

(116

)

Other, net

 

(58

)

3

 

Net cash provided by (used in) operating activities

 

4,670

 

(19,706

)

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Development of real estate and property additions/improvements, primarily previously accrued

 

(9,140

)

(9,342

)

 

Increase in investments in Real Estate Affiliates

 

(10

)

(27

)

 

Distributions received from Real Estate Affiliates in excess of income

 

79

 

19

 

Net cash used in investing activities

 

(9,071

)

(9,350

)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

Change in GGP investment, net

 

 

30,109

 

 

Principal payments on mortgages, notes and loans payable

 

(1,738

)

(1,466

)

 

Proceeds from issuance of Management Warrant

 

2,000

 

 

 

Distributions to noncontrolling interests

 

(62

)

(41

)

Net cash provided by financing activities

 

200

 

28,602

 

Net change in cash and cash equivalents

 

(4,201

)

(454

)

Cash and cash equivalents at beginning of period

 

284,682

 

3,204

 

Cash and cash equivalents at end of period

 

$

280,481

 

$

2,750

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

Interest paid

 

$

3,597

 

$

3,793

 

 

Interest capitalized

 

4,224

 

5,104

 

 

Reorganization items paid

 

 

720

 

 

 

 

 

 

 

Non-Cash Transactions:

 

 

 

 

 

 

Change in accrued capital expenditures included in accounts payable and accrued expenses

 

$

(5,687

)

$

(7,622

)

 

Other non-cash GGP equity transactions

 

 

3,289

 

 

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

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

NOTE 1         ORGANIZATION

 

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

 

General

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

 

The accompanying consolidated balance sheets at March 31, 2011 and December 31, 2010 reflect the consolidation of HHC and its subsidiaries, as of such date, with all intercompany balances and transactions eliminated. The accompanying combined financial statements for the periods prior to the Separation have been prepared in accordance with GAAP on a carve-out basis from the consolidated financial statements of GGP using the historical results of operations and bases of the assets and liabilities of the transferred businesses and including allocations from GGP. This presentation incorporates the same principles used when preparing consolidated financial statements, including elimination of intercompany transactions. The presentation also includes the accounts of the HHC Businesses in which we have a controlling interest. The noncontrolling equity holders’ share of the assets, liabilities and operations are reflected in noncontrolling interests within permanent equity of the Company. All intercompany balances and transactions between the HHC Businesses have been eliminated.  Accordingly, the results presented for the three months ended March 31, 2010 reflect the aggregate of operations and changes in cash flows and equity on a carved-out basis for the period from January 1, 2010 through March 31, 2010 and on a consolidated basis for the period from January 1, 2011 through March 31, 2011.

 

As discussed above, we were formed for the purpose of receiving, via a tax-free distribution, certain assets and assuming certain liabilities of the Predecessors pursuant to the Plan. We conducted no business and had no separate material assets or liabilities until the Separation was consummated. No previous historical financial statements for the HHC Businesses have been prepared and, accordingly, our combined financial statements for the three months ended March 31, 2010 are derived from the books and records of GGP and were carved-out from GGP at a carrying value reflective of such historical cost in such GGP records.  Our historical financial results reflect allocations for certain corporate expenses which include, but are not limited to, costs related to property management, human resources, security, payroll and benefits, legal, corporate communications, information services and restructuring and reorganizations.  Costs of the services (approximately $2.8 million for the three months ended March 31, 2010) that were allocated or charged to us were based on either actual costs incurred or a proportion of costs estimated to be applicable to us based on a number of factors, most significantly the Company’s percentage of GGP’s adjusted revenue and assets and the number of properties.  We believe these allocations are reasonable; however, these results do not reflect what our expenses would have

 

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been had the Company been operating as a separate, stand-alone public company for such period. In addition, the HHC Businesses were operated as subsidiaries of GGP, which operated as a real estate investment trust during such period. We operate as a taxable corporation. The historical combined balance sheet, statement of operations and comprehensive income (loss), statement of equity and statement of cash flows presented for the three months ended March 31, 2010 therefore are not indicative of the results of operations, financial position or cash flows that would have been obtained if we had been an independent, stand-alone entity during such period or of our future performance as an independent, stand-alone entity.

 

As of March 31, 2011, our assets consisted of the following:

 

·                  four master planned communities;

·                  thirteen operating assets; and

·                  seventeen strategic developments.

 

Our ownership interests in properties in which we own a majority or controlling interest are combined for the period from January 1, 2010 through March 31, 2010 and consolidated for the period from January 1, 2011 through March 31, 2011 under GAAP, with the non-controlling interests in such consolidated or combined ventures reflected as components of equity.  Our interests in TWCPC Holdings, L.P., (“The Woodlands Commercial”), the Woodlands Operating Company, L.P. (“The Woodlands Operating”) and the Woodlands Land Development Company, L.P. (“The Woodlands MPC”), all located in Houston, Texas and, collectively, the “Woodlands Partnerships”, and our interests in Westlake Retail Associates, Ltd (“Circle T Ranch”) and 170 Retail Associates Ltd (“Circle T Power Center”) and, together with Circle T Ranch, “Circle T”, located in Dallas/Fort Worth, Texas, are held through joint venture entities in which we own non-controlling interests and are unconsolidated and accounted for on the equity method. The Woodlands Partnerships, Circle T and certain cost method investments (for example, our interest in the Summerlin Hospital Medical Center) are collectively referred to in this report as our “Real Estate Affiliates.”

 

In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. The results for the interim periods ended March 31, 2011 and 2010 are not necessarily indicative of the results to be obtained for the full fiscal year.

 

Warrants

As described above, on the Effective Date, we issued warrants to purchase up to approximately 8.0 million shares of our common stock to certain of the sponsors of the Plan (the “Sponsors Warrants”) with an estimated initial value of approximately $69.5 million. The warrants have an initial exercise price of $50.00 per share and will be subject to adjustment for future stock dividends, splits or reverse splits of our common stock or certain other events. Approximately 6.08 million warrants are immediately exercisable and approximately 1.92 million warrants are exercisable upon 90 days prior notice for the first 6.5 years after issuance and exercisable without notice any time thereafter. Sponsors Warrants expire on November 9, 2017.

 

In addition, in 2010 and 2011, the Company entered into certain warrant agreements with David R. Weinreb, our Chief Executive Officer, Grant Herlitz, our President, and Andrew C. Richardson, our Chief Financial Officer, (the “Management Warrants”), in each case prior to his appointment to such position. Warrants for an aggregate of 2,862,687 shares were issued pursuant to such agreements in exchange for approximately $19 million from such executives at the commencement of their respective employment, which was deemed to be the fair value of such warrants. The Management Warrants have exercise prices of $42.23 per share and $54.50 per share. Generally, the Management Warrants become exercisable in November 2016 and expire by February 2018.

 

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The aggregate estimated $355.4 million and $227.3 million fair value of the Sponsors and Management Warrants as of March 31, 2011 and December 31, 2010, respectively, has been recorded as a liability because the holders of the warrants could require HHC to settle such warrants in cash due to a subsequent change of control.  Such fair values were estimated using an option pricing model and level 3 inputs due to the unavailability of comparable market data. Changes in fair value of the Sponsors Warrants and the Management Warrants have been and will continue to be recognized in earnings and, accordingly, warrant liability expense of approximately $126.0 million was recognized for the three months ended March 31, 2011.

 

Reorganization and Other 2010 Bankruptcy-Related Items

As certain of the HHC Businesses had filed for bankruptcy protection in April 2009 (the “HHC Debtors”), these entities are required by GAAP to separately present as Reorganization items elements of expense or income that were incurred or realized as a result of the bankruptcy filings. These items include professional fees and similar types of expenses and gains and interest earned on cash accumulated by certain of our subsidiaries, all as a result of the bankruptcy.  Reorganization items specific to the HHC Debtors have been allocated to us and have been reflected in our combined statement of operations and comprehensive income (loss) for the three months ended March 31, 2010 and in the table presented below.

 

Reorganization items are as follows:

 

Reorganization Items

 

Three Months Ended
March 31, 2010

 

 

 

(In thousands)

 

Gains on liabilities subject to compromise - vendors (a)

 

$

(246

)

U.S. Trustee fees

 

139

 

Restructuring costs (b)

 

16,702

 

Total reorganization items

 

$

16,595

 

 


(a)

This amount includes gains from repudiation, rejection or termination of contracts or guarantee of obligations. Such gains reflect agreements reached with certain critical vendors, which were authorized by the Bankruptcy Court and for which payments on an installment basis began in July 2009.

(b)

Restructuring costs primarily include professional fees incurred related to the bankruptcy filings, our allocated share of the KEIP payment, finance costs incurred by debtors upon emergence from bankruptcy and any associated write-off of unamortized deferred finance costs related to emerged debtors.

 

Gains on liabilities subject to compromise represent the income effects of the settlement of certain liabilities of the HHC Debtors that were incurred prior to their bankruptcy filings in 2009.  All liabilities incurred by the HHC Debtors prior to such bankruptcy filings were subject to compromise in 2010 as the amounts to be paid were subject to settlement, adjustment, or reinstatement as provided by Chapter 11. The amounts of the various categories of liabilities that were subject to compromise are set forth below and represented the then estimates of known or potential liabilities likely to be resolved in connection with the then planned 2010 emergence from bankruptcy of the HHC Debtors. As the plans of reorganization for the HHC Debtors ultimately approved subsequent to March 31, 2010 provided for, in general, full payment of allowed claims, substantially all recorded liabilities of the HHC Debtors that were subject to compromise at March 31, 2010 were settled, reinstated or retained by the Effective Date.  In addition, GGP has agreed that it will reimburse HHC up to $5.0 million for liability claims related to periods prior to the HHC Debtors’ bankruptcy filings, the majority of which is unpaid as of March 31, 2011.

 

The amounts subject to compromise at March 31, 2010 consisted of the following items:

 

 

 

March 31, 2010

 

 

 

(In thousands)

 

Mortgages and secured notes

 

$

133,631

 

Accounts payable and accrued liabilities

 

136,619

 

Total liabilities subject to compromise

 

$

270,250

 

 

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Table of Contents

 

Properties

Real estate assets are stated at cost less any provisions for impairments.  Construction and improvement costs incurred in connection with the development of new properties or the redevelopment of existing properties are capitalized. Real estate taxes and interest costs incurred during construction periods are also capitalized. Capitalized interest costs are based on qualified expenditures and interest rates in place during the construction period.  For these costs, amounts related to the Master Planned Communities are reflected in Master Planned Community assets and in Buildings and equipment for the operating retail properties and Developments in progress for our Strategic Developments assets.

 

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

 

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

 

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

 

Asset Type

 

Years

Buildings and improvements

 

40-45

Equipment, tenant improvements and fixtures

 

5-10

 

Certain of the HHC Businesses, particularly certain properties in our Master Planned Communities segment, were purchased by the Predecessors rather than developed.  Accordingly, the acquisitions of such properties were accounted for utilizing the acquisition method.  Estimates of future cash flows and other valuation techniques were used to allocate the purchase price of acquired property between land, buildings and improvements, equipment, debt liabilities assumed and identifiable intangible assets and liabilities such as amounts related to in-place at-market tenant leases, acquired above and below-market tenant and ground leases and tenant relationships.

 

Impairment

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

 

If an indicator of potential impairment exists, the asset is tested for recoverability by comparing its carrying amount to the estimated future undiscounted cash flow during our expected holding period. The cash flow estimates used both for determining recoverability and estimating fair value are inherently judgmental and reflect current and projected trends in rental, occupancy, pricing, development costs, sales pace and capitalization rates, and estimated holding periods for the applicable assets.  Although the estimated fair value of certain assets may be exceeded by the carrying amount, a real estate asset is only considered to be impaired when its carrying amount is not expected to be recovered through estimated future undiscounted cash flows. To the extent an impairment provision is necessary, the excess of the carrying amount of the asset over its estimated fair value is expensed to operations. In addition, the impairment provision is allocated proportionately to adjust the carrying amount of the asset.  The adjusted carrying amount, which represents the new cost basis of the asset, is depreciated over the remaining useful life of the asset or, for Master Planned Communities, is

 

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Table of Contents

 

expensed as a cost of sales when land is sold.  Assets that have been impaired will in the future have lower depreciation and cost of sale expenses, but the impairment will have no impact on cash flow.

 

Based on our policies and procedures, no impairment provisions were recorded in the three months ended March 31, 2011 and approximately $0.3 million of impairment provisions, on predevelopment costs at certain of our Strategic Developments properties, were recorded in the three months ended March 31, 2010. As of March 31, 2011, certain of our properties had fair values less than their carrying amounts; however, based on the Company’s plans with respect to those properties, we believe that the carrying amounts are recoverable and therefore, under applicable GAAP guidance, no additional impairments were taken.  Despite this conclusion, additional impairment charges in the future could result if our plans regarding our assets change and/or economic conditions deteriorate. We can provide no assurance that material impairment charges with respect to Master Planned Community assets, Operating Assets, Strategic Developments, Real Estate Affiliates or Developments in progress will not occur in future periods. Accordingly, we will continue to monitor circumstances and events in future periods to determine whether additional impairments are warranted.

 

Investments in Real Estate Affiliates

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

 

Contingent Stock Agreement

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

 

Fair Value Measurements

The Company is required to estimate the fair value of its long-lived assets, such as its real estate investments, that it determines are impaired.  Accordingly, those assets which were impaired in 2009 and 2010 were recorded at their estimated fair value in the year in which impairment occurred.  As of March 31, 2011, we do not have any derivative financial instruments and our investments in marketable securities are immaterial.

 

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Table of Contents

 

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

 

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

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

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

 

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

 

For the three months ended March 31, 2011, as discussed above, no real estate assets were considered impaired and therefore no real estate assets were measured at fair value in such period. The only liabilities presented at fair value and measured on a recurring basis at March 31, 2011 are the Sponsor and Management Warrants for which, as discussed above, we recognized approximately $126.0 million of expense in the three months ended March 31, 2011 for the increase in the recorded valuation of such warrants.  For the three months ended March 31, 2010, also as discussed above, non-recurring fair value measurements included approximately $0.3 million of impairment provisions, representing the full write-off of various pre-development costs that were determined to be non-recoverable due to the related projects being terminated. In addition, no debt was measured at fair value during the three months ended March 31, 2010 as no HHC Debtors emerged from bankruptcy during this time period.

 

Fair Value of Financial Instruments

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

 

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Table of Contents

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Carrying
Amount

 

Estimated
Fair Value

 

Carrying
Amount

 

Estimated
Fair Value

 

 

 

(In thousands)

 

Fixed-rate debt

 

$

190,421

 

$

202,756

 

$

191,037

 

$

202,897

 

Variable-rate debt

 

65,210

 

65,549

 

65,518

 

65,629

 

SID bonds (*)

 

59,293

 

59,293

 

62,105

 

62,105

 

Total

 

$

314,924

 

$

327,598

 

$

318,660

 

$

330,631

 

 


(*) Due to the uncertain repayment terms of special improvement district (SID) bonds, the carrying value has been used as an approximation of fair value.

 

Revenue Recognition and Related Matters

Revenues from land sales are recognized using the full accrual method if various criteria provided by GAAP relating to the terms of the transactions and our subsequent involvement with the land sold are met.  Revenues relating to transactions that do not meet the established criteria are deferred and recognized when the criteria are met or using the installment or cost recovery methods, as appropriate in the circumstances.  In addition, we recognize revenue related to our right to participate in the ultimate home sale proceeds of the builders we sell our lots to as such amounts are collected.

 

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

 

Nouvelle at Natick is a 215 unit residential condominium project, located in Natick, Massachusetts.  Pursuant to the Plan, only the unsold units at Nouvelle at Natick on the Effective Date were distributed to us and no deferred revenue or sales proceeds from unit closings prior to the Effective Date was allocated to us.  As of March 31, 2011, 34 units were unsold at Nouvelle at Natick. Income related to unit sales subsequent to the Effective Date is accounted for on a unit-by-unit full accrual method.

 

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

 

Straight-line rent receivables, which represent the current net cumulative rents recognized prior to when billed and collectible as provided by the terms of the leases, of $2.8 million as of March 31, 2011 and $2.0 million as of December 31, 2010, are included in Accounts receivable, net in our consolidated balance sheets.

 

Percentage rent in lieu of fixed minimum rent received from tenants was $0.9 million for the three months ended March 31, 2011 and $0.7 million for the three months ended March 31, 2010, and is included in Minimum rents in our consolidated and combined statements of operations and comprehensive income (loss).

 

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Table of Contents

 

Income Taxes

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

 

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

 

Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding.  Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of all potentially dilutive common shares.  The dilutive effect of options and warrants (including fixed awards and nonvested stock issued under stock-based compensation plans) is computed using the “treasury stock” method.

 

As defined and described in Note 6, certain HHC Replacement Options outstanding are required to be settled by GGP and therefore do not represent dilutive securities at any date presented. Of the HHC Replacement Options outstanding that are required to be settled by HHC, diluted EPS excludes options where the exercise price was higher than the average market price of our common stock and options for which vesting requirements were not satisfied.  Such options totaled 2,497 shares as of March 31, 2011. Finally, the effect of an additional 25 HHC Replacement Options, 651,340 options for our common stock issued in 2011 (Note 6) and 10.9 million shares represented by our outstanding warrants were excluded from diluted EPS as the effect of such items were anti-dilutive due to net losses recognized for all periods presented.

 

As discussed above, in connection with the Separation on November 9, 2010, GGP distributed to its stockholders 32.5 million shares of our common stock and approximately 5.25 million shares were purchased by certain investors sponsoring the Plan.  This share amount is being used in the calculation of basic and diluted EPS for the three months ended March 31, 2010 as our common stock was not traded prior to November 9, 2010 and there were no dilutive securities in the prior periods.

 

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Table of Contents

 

Information related to our EPS calculations is summarized as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2011

 

2010

 

 

 

Basic

 

Diluted

 

Basic

 

Diluted

 

 

 

(In thousands)

 

Numerators:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(114,487

)

$

(114,487

)

$

(20,481

)

$

(20,481

)

Allocation to noncontrolling interests

 

(28

)

(28

)

(48

)

(48

)

Net loss attributable to common stockholders

 

$

(114,515

)

$

(114,515

)

$

(20,529

)

$

(20,529

)

 

 

 

 

 

 

 

 

 

 

Denominators:

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - basic

 

37,905

 

37,905

 

37,716

 

37,716

 

Effect of dilutive securities

 

 

 

 

 

Weighted average number of common shares outstanding - diluted

 

37,905

 

37,905

 

37,716

 

37,716

 

 

Municipal Utility Districts

In Houston, Texas, certain development costs are reimbursable through the creation of Municipal Utility Districts (“MUDS”) and Water Control and Improvement Districts, which are separate political subdivisions authorized by Article 16, Section 59 of the Texas Constitution and governed by the Texas Commission on Environmental Quality (“TCEQ”). MUDs are formed to provide municipal water, waste water, drainage services, recreational facilities and roads to those areas where they are currently unavailable through the regular city services.  Typically, the developer advances funds for the creation of the facilities, which must be designed, bid and constructed in accordance with the City of Houston’s and TCEQ requirements.  The developer initiates the MUD process by filing the applications for the formation of the MUD, and once the applications have been approved, a board of directors is elected for the MUD and given the authority to issue ad valorem tax bonds and the authority to tax residents. The MUD Board authorizes and approves all MUD development contracts and pay estimates. The Company estimates the costs it believes will be eligible for reimbursement for MUD receivables and MUD bond sale proceeds are used to reimburse the developer for its construction costs, including interest. MUD taxes are used to pay the debt service on the bonds and the operating expenses of the MUD. The Company estimates the costs it believes will be eligible for reimbursement as MUD receivables and has not incurred any debt relating to the MUDs.

 

Use of Estimates

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

 

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Table of Contents

 

NOTE 2                 INTANGIBLE ASSETS AND LIABILITIES

 

The following table summarizes our intangible assets and liabilities:

 

 

 

Gross Asset
(Liability)

 

Accumulated
(Amortization)
/ Accretion

 

Net
Carrying
Amount

 

 

 

(In thousands)

 

As of March 31, 2011

 

 

 

 

 

 

 

Tenant leases:

 

 

 

 

 

 

 

In-place value

 

$

11,738

 

$

(10,262

)

$

1,476

 

Above-market

 

1,820

 

(1,768

)

52

 

Below-market

 

 

 

 

Ground leases:

 

 

 

 

 

 

 

Above-market

 

(3,545

)

756

 

(2,789

)

Below-market

 

23,096

 

(2,162

)

20,934

 

 

 

 

 

 

 

 

 

As of December 31, 2010

 

 

 

 

 

 

 

Tenant leases:

 

 

 

 

 

 

 

In-place value

 

$

11,824

 

$

(10,221

)

$

1,603

 

Above-market

 

1,820

 

(1,701

)

119

 

Below-market

 

(77

)

77

 

 

Ground leases:

 

 

 

 

 

 

 

Above-market

 

(3,545

)

638

 

(2,907

)

Below-market

 

23,096

 

(2,078

)

21,018

 

 

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

 

Amortization/accretion of these intangible assets and liabilities decreased our income (excluding the impact of noncontrolling interests and the provision for income taxes) by $0.2 million for the three months ended March 31, 2011 and 2010.

 

Future amortization of these intangible assets and liabilities is estimated to decrease net income (excluding the impact of noncontrolling interests and the provision for income taxes) by approximately $0.3 million in 2011, $0.3 million in 2012, $0.2 million in 2013, $0.1 million in 2014 and zero in 2015.

 

NOTE 3                 REAL ESTATE AFFILIATES

 

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

 

As of March 31, 2011, approximately $331.6 million of indebtedness was secured by the properties owned by our Real Estate Affiliates, our share of which was approximately $141.0 million.

 

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Table of Contents

 

Condensed Combined Financial Information of Certain Real Estate Affiliates

As The Woodlands Partnerships and Circle T are accounted for on the equity method, the following summarized financial information as of March 31, 2011 and December 31, 2010 and for the three months ended March 31, 2011 and 2010, is presented below:

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Condensed Combined Balance Sheets - Certain Real Estate Affiliates

 

 

 

 

 

Assets:

 

 

 

 

 

Land

 

$

31,077

 

$

31,077

 

Building and equipment

 

241,426

 

241,436

 

Less accumulated depreciation

 

(83,164

)

(81,218

)

Developments in progress

 

26,222

 

25,431

 

Net property and equipment

 

215,561

 

216,726

 

Land held for development and sale

 

232,105

 

237,117

 

Net investment in real estate

 

447,666

 

453,843

 

Cash and cash equivalents

 

57,344

 

99,769

 

Accounts and notes receivable, net

 

39,003

 

45,863

 

Deferred expenses, net

 

5,532

 

895

 

Prepaid expenses and other assets

 

41,535

 

41,663

 

Total assets

 

$

591,080

 

$

642,033

 

 

 

 

 

 

 

Liabilities and Owners’ Equity:

 

 

 

 

 

Mortgages, notes and loans payable

 

$

331,650

 

$

372,222

 

Accounts payable, accrued expenses and other liabilities

 

114,868

 

122,877

 

Owners’ equity

 

144,562

 

146,934

 

Total liabilities and owners’ equity

 

$

591,080

 

$

642,033

 

 

 

 

 

 

 

Investment in Real Estate Affiliates, Net

 

 

 

 

 

Owners’ equity

 

$

144,562

 

$

146,934

 

Less joint venture partners’ equity

 

(69,117

)

(70,243

)

Basis differences, loans and cost basis investments

 

75,648

 

72,852

 

Investment in Real Estate Affiliates

 

$

151,093

 

$

149,543

 

 

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Table of Contents

 

 

 

Three Months Ended March 31,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Condensed Combined Statements of Income - Certain Real Estate Affiliates

 

 

 

 

 

Revenue:

 

 

 

 

 

Land sales

 

$

21,973

 

$

23,386

 

Tenant rents

 

1,841

 

921

 

Other

 

12,770

 

11,336

 

Total revenues

 

36,584

 

35,643

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Cost of sales - land

 

11,490

 

12,149

 

Land sales operations

 

5,319

 

6,156

 

Real estate taxes

 

499

 

490

 

Property maintenance costs

 

469

 

(85

)

Other property operating costs

 

11,159

 

10,458

 

Provision for impairment

 

 

(1

)

Depreciation and amortization

 

1,930

 

1,965

 

Total operating expenses

 

30,866

 

31,132

 

Operating income

 

5,718

 

4,511

 

 

 

 

 

 

 

Interest income

 

445

 

769

 

Interest expense

 

(4,009

)

(2,902

)

Provision for income taxes

 

(497

)

(310

)

Net income attributable to joint venture partners

 

$

1,657

 

$

2,068

 

 

 

 

 

 

 

Income from Real Estate Affiliates:

 

 

 

 

 

Net income attributable to joint venture partners

 

$

1,657

 

$

2,068

 

Joint venture partners’ share of income

 

(787

)

(983

)

Amortization of capital or basis differences, and distributions from cost method investments

 

4,643

 

407

 

Income from Real Estate Affiliates

 

$

5,513

 

$

1,492

 

 

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NOTE 4                 MORTGAGES, NOTES AND LOANS PAYABLE

 

Mortgages, notes and loans payable are summarized as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Fixed-rate debt:

 

 

 

 

 

Collateralized mortgages, notes and loans payable

 

$

190,421

 

$

191,037

 

Special Improvement District bonds

 

59,293

 

62,105

 

Variable-rate debt:

 

 

 

 

 

Collateralized mortgages, notes and loans payable

 

65,210

 

65,518

 

Total mortgages, notes and loans payable

 

$

314,924

 

$

318,660

 

 

The weighted average interest rate on our mortgages, notes and loans payable was 5.12% and 5.14% as of March 31, 2011 and December 31, 2010, respectively. The interest rate used in the calculation at both March 31, 2011 and December 31, 2010 for a loan that converted to a variable rate in July, 2010 was 3.50%.

 

Collateralized Mortgages, Notes and Loans Payable

As of March 31, 2011, $334.4 million of land, buildings and equipment and developments in progress (before accumulated depreciation) have been pledged as collateral for our $314.9 million of mortgages, notes and loans payable of which $7.0 million is recourse due to guarantees or other security provisions from HHC for the benefit of the note holder. In addition, certain of our loans contain provisions which grant the lender a security interest in the operating cash flow of the property that represents the collateral for the loan.  Such provisions are not expected to materially impact our operations in 2011.  Certain mortgage notes may be prepaid, but may be subject to a prepayment penalty equal to a yield-maintenance premium, defeasance or a percentage of the loan balance.

 

Letters of Credit and Surety Bonds

We had outstanding letters of credit and surety bonds of $40.2 million as of March 31, 2011 and $38.7 million as of December 31, 2010. These letters of credit and bonds were issued primarily in connection with insurance requirements, special real estate assessments and construction obligations.

 

Special Improvement Districts Bonds

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

 

Mortgage Loan Refinancing

On May 10, 2011, the Company closed a $29.0 million first mortgage financing secured by its office building located at 110 N. Wacker Drive in Chicago, Illinois and bearing interest at a variable rate index plus 2.25%. Simultaneous with the loan closing, the Company entered into an interest rate swap (designated as a hedge) to fix the net interest rate of the financing at approximately 5.21% per annum. The loan matures on October 31, 2019 and its term is coterminous with the expiration of the first term of the existing tenant’s lease (Note 9). The loan has an interest-only period through April 2015 and, thereafter, amortizes ratably to $12.0 million through maturity. The Company guaranteed payments due under the swap and also provided a $7.0 million recourse repayment guarantee for the loan, which is reduced on a dollar for dollar basis during the amortization period. The proceeds from the financing were used to repay the existing $28.2 million mortgage and to pay closing costs and other expenses.

 

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NOTE 5                 INCOME TAXES

 

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

 

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

 

Unrecognized tax benefits recorded pursuant to uncertain tax positions were $120.1 million as of March 31, 2011 and December 31, 2010, excluding interest, of which none would impact our effective tax rate. Accrued interest related to these unrecognized tax benefits amounted to $22.2 million as of March 31, 2011 and $20.0 million as of December 31, 2010. We recognized an increase of interest expense related to the unrecognized tax benefits of $2.2 million for the three months ended March 31, 2011.

 

Based on our assessment of the expected outcome of existing examinations or examinations that may commence, or as a result of the expiration of the statute of limitations for specific jurisdictions, it is reasonably possible that the related unrecognized tax benefits, excluding accrued interest, for tax positions taken regarding previously filed tax returns will materially increase or decrease during the next twelve months. As described in the Annual Report, pursuant to the Tax Matters Agreement, GGP has indemnified us from and against 93.75% of any and all losses, claims, damages, liabilities and reasonable expenses to which we become subject (the “Tax Indemnity Cap”), in each case solely to the extent directly attributable to certain taxes related to sales of certain assets in our Master Planned Communities segment prior to March 31, 2010, in an amount up to $303.8 million, plus interest and penalties related to these amounts so long as GGP controls the action in the Tax Court related to the dispute with the IRS.  The unrecognized tax benefits and related accrued interest recorded through March 31, 2011 are primarily related to the taxes that are the subject of the Tax Indemnity Cap.

 

NOTE 6                 STOCK-BASED PLANS

 

Incentive Stock Plans

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

 

Prior to the Separation, the Predecessors granted qualified and non-qualified stock options and restricted stock to certain GGP officers and key employees whose compensation costs related specifically to our assets.  Accordingly, an allocation of stock-based compensation costs of approximately $0.1 million pertaining to such employees has been reflected in our combined statement of operations and comprehensive income (loss) for the three months ended March 31, 2010.

 

Stock Options

There were no grants of stock options under the Equity Plan in 2010. In the three months ended March 31, 2011, 651,340 options to purchase shares of our common stock were granted to certain of our employees. Such options had a weighted average exercise price of approximately $58.21, vest at the rate of 20% per year on each of the first five anniversaries of the grant date, may not be exercised prior to December 31, 2016 and, unless earlier terminated under certain circumstances, expire ten years from the grant date. None of the options granted in 2011 have been forfeited as of March 31, 2011, and compensation expense related to such options was negligible for the three months ended March 31, 2011.

 

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Pursuant to the Plan, each outstanding option to acquire shares of GGP stock (“Old GGP Options”) was converted on the Effective Date into (i) an option to acquire the same number of shares of common stock of reorganized GGP (“New GGP Options”) and (ii) a separate option to acquire 0.0983 shares of our common stock for each existing option for one share of GGP common stock (“HHC Replacement Options”). The HHC Replacement Options were fully vested as of the Effective Date and have the same terms and conditions as the Old GGP Options except that we have agreed with GGP that all exercises of New GGP Options and HHC Replacement Options in 2011 and beyond would be settled by the respective employer at the time of exercise. As of March 31, 2011 and January 1, 2011, there were 76,411 and 164,138, respectively, HHC Replacement Options outstanding. Of such amounts, only 2,522 of such options represent potentially dilutive shares at such dates as all remaining amounts were held by GGP employees. In addition, 25,653 New GGP Options (with a weighted average exercise price of $47.70 as compared to a March 31, 2010 GGP closing stock price of $15.48 and a weighted average remaining contracted term of 0.8 years) were held by our employees at March 31, 2011 and therefore our potential net share settlement obligation for such New GGP Options is expected to be nominal.

 

The following tables summarize HHC Replacement Option activity as of and for the three months ended March 31, 2011:

 

 

 

2011

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Exercise

 

 

 

Shares

 

Price

 

 

 

 

 

 

 

HHC Replacement Options outstanding at January 1

 

164,138

 

$

133.28

 

Exercised (a)

 

(16,038

)

41.70

 

Expired

 

(71,689

)

131.60

 

HHC Replacement Options outstanding at March 31

 

76,411

 

$

154.09

(b)

 


(a) All net share settled by GGP.

(b) Weighted average remaining contractual term of 0.8 years.

 

Restricted Stock

Pursuant to the Equity Plan, the Company granted 8,247 shares of restricted common stock to certain non-employee directors as part of an annual retainer for their services on the board of directors.  Subsequently, receipt of 1,352 shares of restricted stock was waived by one of the directors as they elected to not receive compensation for their services as a director. The restrictions on all restricted shares of common stock issued lapse on June 1, 2011.

 

There has been no restricted stock activity for the three months ended March 31, 2011, except for the issuance of 20,000 shares to Andrew Richardson, our CFO, at the commencement of his employment in late March 2011. Such shares do not vest until March 28, 2016.

 

Dividends are paid on restricted common stock and are not returnable, even if the underlying common stock does not ultimately vest. The remaining unamortized expense related to our restricted stock at March 31, 2011 is approximately $1.2 million.

 

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NOTE 7                                              OTHER ASSETS AND LIABILITIES

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Special Improvement District receivable

 

$

44,892

 

$

46,250

 

MUD and other receivables

 

40,625

 

33,455

 

Prepaid expenses

 

5,740

 

2,859

 

Below-market ground leases (Note 2)

 

20,934

 

21,018

 

Security and escrow deposits

 

8,055

 

6,814

 

Above-market tenant leases (Note 2)

 

52

 

119

 

Uncertain tax position asset

 

9,733

 

8,945

 

Other

 

7,192

 

7,127

 

 

 

$

137,223

 

$

126,587

 

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Construction payable

 

$

15,124

 

$

15,531

 

Accounts payable and accrued expenses

 

20,872

 

29,745

 

Above-market ground leases (Note 2)

 

2,789

 

2,907

 

Deferred gains/income

 

7,480

 

5,631

 

Accrued interest

 

1,555

 

1,633

 

Accrued real estate taxes

 

4,248

 

3,953

 

Tenant and other deposits

 

3,374

 

3,555

 

Insurance reserve

 

4,220

 

4,229

 

Accrued payroll and other employee liabilities

 

2,043

 

3,930

 

Other

 

7,935

 

7,722

 

Total accounts payable and accrued expenses

 

$

69,640

 

$

78,836

 

 

NOTE 8                                              COMMITMENTS AND CONTINGENCIES

 

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

 

We lease land or buildings at certain properties from third parties.  The leases generally provide us with a right of first refusal in the event of a proposed sale of the property by the landlord.  Rental payments are expensed as incurred and have, to the extent applicable, been straight-lined over the term of the lease.  Contractual rental expense, including participation rent, was $0.6 million for the three months ended March 31, 2011 and 2010, while the amortization of above and below-market ground leases and straight-line rents included in this amount is not significant.

 

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

 

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NOTE 9                                              TRANSACTIONS WITH GGP AND WITH RELATED PARTIES

 

Prior to the Effective Date, we entered into a transition services agreement (the “TSA”) whereby GGP will provide to us, on a transitional basis, certain specified services on an interim basis for various terms not exceeding 24 months following the Separation, subject to our earlier termination. Concurrently, we entered into a reverse transition services agreement (“RTSA”) whereby we will provide GGP with certain income tax and accounting support services, also subject to earlier termination prior to its scheduled expiration of November 9, 2013. For 2011, we incurred approximately $0.2 million of expenses related to the TSA and earned a negligible amount of reimbursements under RTSA. In addition, for the three months ended March 31, 2011 and 2010, approximately $1.5 million of rental income was recognized from GGP and its subsidiaries.

 

During January 2011, the Audit Committee of our Board of Directors approved a Transition Agreement (now terminated) with TPMC Realty Services Group, Inc. (“TPMC”).  David Weinreb, a director and our CEO, is the sole equity owner of TPMC and the chief executive officer of TPMC and Grant Herlitz, our president, is the president of TPMC.  The Transition Agreement provided for, among other things, certain mutual transactions and services that facilitated the continuity of Company management, the net value of which were not material. In addition, the reimbursement to TPMC of approximately $0.9 million of expenses as contemplated by Mr. Weinreb’s employment agreement with us was approved.  Such reimbursements, which are currently unpaid, have been reflected as a current period administrative expense.

 

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

 

NOTE 10                                       SEGMENTS

 

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

 

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

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

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

 

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

 

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

 

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

 

The accounting policies of the segments are the same as those described in Note 1, except that we report the operations of our equity method Real Estate Affiliates using the proportionate share method rather than the equity method.  Under the proportionate share method, our share of the revenues and expenses of these Real Estate Affiliates are aggregated with the revenues and expenses of consolidated or combined properties. Under the equity method, our share of the net revenues and expenses of these Real Estate Affiliates are reported as a single line item, Income (loss) from Real Estate Affiliates, in our Consolidated and Combined Statements of Loss and Comprehensive Loss. This difference affects only the reported revenues and operating expenses of the segments and has no effect on our reported net earnings. Our investment in the Summerlin Hospital Medical Center is accounted for on the cost method. As approximately $3.9 million was received in 2011 as distribution related to this investment, such amount has been reflected as other rental and property revenues for the Operating Assets Segment in the accompanying segment information.

 

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Table of Contents

 

The total cash expenditures for additions to long-lived assets for the Master Planned Communities segment was $18.7 million for the three months ended March 31, 2011 and $11.9 million for the three months ended March 31, 2010. Similarly, cash expenditures for long-lived assets for the Operating Assets and Strategic Developments segments was $7.8 million and $1.3 million, respectively, for the three months ended March 31, 2011 and $9.0 million and $0.3 million, respectively, for the three months ended March 31, 2010. Such amounts for the Master Planned Communities segment and certain amounts in the Strategic Developments segment are included in the amounts listed in our consolidated and combined statements of cash flow as Land/residential development and acquisitions expenditures. With respect to the long-lived assets within the Operating Assets segment and certain other investing amounts in the Strategic Developments segment, such amounts are included in the amounts listed as Development of real estate and property additions/improvements primarily previously accrued, respectively, in our consolidated and combined statements of cash flows.

 

Segment operating results are as follows:

 

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Table of Contents

 

 

 

Three Months Ended March 31, 2011

 

 

 

Consolidated

 

Real Estate

 

Segment

 

 

 

Properties

 

Affiliates

 

Basis

 

 

 

(In thousands)

 

Master Planned Communities

 

 

 

 

 

 

 

Land sales

 

$

23,392

 

$

10,862

 

$

34,254

 

Builder price participation

 

521

 

674

 

1,195

 

Minimum rents

 

393

 

966

 

1,359

 

Other land sale revenues

 

1,248

 

460

 

1,708

 

Other rental and property revenues

 

105

 

6,243

 

6,348

 

Total revenues

 

25,659

 

19,205

 

44,864

 

Cost of sales - land

 

15,436

 

6,032

 

21,468

 

Land sales operations

 

4,117

 

2,286

 

6,403

 

Land sales real estate and business taxes

 

1,511

 

528

 

2,039

 

Rental property real estate taxes

 

54

 

262

 

316

 

Rental property maintenance costs

 

40

 

246

 

286

 

Other property operating costs

 

163

 

5,858

 

6,021

 

Depreciation and amortization

 

78

 

1,076

 

1,154

 

Interest income

 

(1,165

)

(234

)

(1,399

)

Interest expense (1)

 

(2,526

)

1,271

 

(1,255

)

Total expenses

 

17,708

 

17,325

 

35,033

 

MPC EBT

 

7,951

 

1,880

 

9,831

 

 

 

 

 

 

 

 

 

Operating Assets

 

 

 

 

 

 

 

Minimum rents

 

16,113

 

 

16,113

 

Tenant recoveries

 

4,482

 

 

4,482

 

Other rental and property revenues (2)

 

1,794

 

3,894

 

5,688

 

Total revenues

 

22,389

 

3,894

 

26,283

 

Rental property real estate taxes

 

2,434

 

 

2,434

 

Rental property maintenance costs

 

1,316

 

 

1,316

 

Other property operating costs

 

8,118

 

 

8,118

 

Provision for doubtful accounts

 

163

 

 

163

 

Depreciation and amortization

 

3,063

 

 

3,063

 

Interest income

 

(1,347

)

 

(1,347

)

Interest expense

 

2,526

 

 

2,526

 

Total expenses

 

16,273

 

 

16,273

 

Operating Assets EBT

 

6,116

 

3,894

 

10,010

 

 

 

 

 

 

 

 

 

Strategic Developments

 

 

 

 

 

 

 

Minimum rents

 

213

 

 

213

 

Tenant recoveries

 

42

 

 

42

 

Condominium unit sales

 

3,764

 

 

3,764

 

Other rental and property revenues

 

1,034

 

 

1,034

 

Total revenues

 

5,053

 

 

5,053

 

Condominium unit cost of sales

 

2,980

 

 

2,980

 

Real estate taxes

 

986

 

 

986

 

Rental property maintenance costs

 

203

 

 

203

 

Other property operating costs

 

1,311

 

 

1,311

 

Provision for doubtful accounts

 

(152

)

 

(152

)

Depreciation and amortization

 

58

 

 

58

 

Total expenses

 

5,386

 

 

5,386

 

Strategic Developments EBT

 

(333

)

 

(333

)

 

 

 

 

 

 

 

 

Real estate property EBT

 

$

13,734

 

$

5,774

 

$

19,508

 

 


(1) Negative interest expense relates to interest costs of debt at our Operating Assets Segment which are allocated to the MPC segment assets eligible for interest capitalization.

(2) Reflects 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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Table of Contents

 

 

 

Three Months Ended March 31, 2010

 

 

 

Combined

 

Real Estate

 

Segment

 

 

 

Properties

 

Affiliates

 

Basis

 

 

 

(In thousands)

 

Master Planned Communities

 

 

 

 

 

 

 

Land sales

 

$

3,215

 

$

11,872

 

$

15,087

 

Builder price participation

 

744

 

405

 

1,149

 

Minimum rents

 

495

 

484

 

979

 

Other land sale revenues

 

1,111

 

357

 

1,468

 

Other rental and property revenues

 

230

 

5,594

 

5,824

 

Total revenues

 

5,795

 

18,712

 

24,507

 

Cost of sales - land

 

1,326

 

6,378

 

7,704

 

Land sales operations

 

4,197

 

2,968

 

7,165

 

Land sales real estate and business taxes

 

4,294

 

636

 

4,930

 

Rental property real estate taxes

 

254

 

257

 

511

 

Rental property maintenance costs

 

48

 

(48

)

 

Other property operating costs

 

135

 

4,875

 

5,010

 

Depreciation and amortization

 

72

 

1,028

 

1,100

 

Interest income

 

 

(404

)

(404

)

Interest expense *

 

(3,827

)

1,367

 

(2,460

)

Total expenses

 

6,499

 

17,057

 

23,556

 

MPC EBT

 

(704

)

1,655

 

951

 

 

 

 

 

 

 

 

 

Operating Assets

 

 

 

 

 

 

 

Minimum rents

 

16,265

 

 

16,265

 

Tenant recoveries

 

4,720

 

 

4,720

 

Other rental and property revenues

 

1,647

 

 

1,647

 

Total revenues

 

22,632

 

 

22,632

 

Rental property real estate taxes

 

2,540

 

 

2,540

 

Rental property maintenance costs

 

1,620

 

 

1,620

 

Other property operating costs

 

7,298

 

 

7,298

 

Provision for doubtful accounts

 

162

 

 

162

 

Provisions for impairment

 

252

 

 

252

 

Depreciation and amortization

 

4,352

 

 

4,352

 

Interest income

 

(105

)

 

(105

)

Interest expense

 

4,532

 

 

4,532

 

Total expenses

 

20,651

 

 

20,651

 

Operating Assets EBT

 

1,981

 

 

1,981

 

 

 

 

 

 

 

 

 

Strategic Developments

 

 

 

 

 

 

 

Minimum rents

 

271

 

 

271

 

Tenant recoveries

 

99

 

 

99

 

Condominium unit sales

 

 

 

 

Other rental and property revenues

 

(7

)

 

(7

)

Total revenues

 

363

 

 

363

 

Condominium unit cost of sales

 

 

 

 

Real estate taxes

 

184

 

 

184

 

Rental property maintenance costs

 

176

 

 

176

 

Other property operating costs

 

1,039

 

 

1,039

 

Provision for doubtful accounts

 

(61

)

 

(61

)

Provisions for impairment

 

26

 

 

26

 

Depreciation and amortization

 

26

 

 

26

 

Interest expense

 

7

 

 

7

 

Total expenses

 

1,397

 

 

1,397

 

Strategic Developments EBT

 

(1,034

)

 

(1,034

)

 

 

 

 

 

 

 

 

Real estate property EBT

 

$

243

 

$

1,655

 

$

1,898

 

 


* Negative interest expense relates to interest costs of debt at our Operating Assets Segment which are allocated to the MPC segment assets eligible for interest capitalization.

 

27



Table of Contents

 

The following reconciles EBT to GAAP-basis income (loss) from continuing operations:

 

 

 

Three Months Ended March 31,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Reconciliation of EBT to GAAP-basis loss from continuing operations

 

 

 

 

 

 

 

 

 

 

 

Real estate property EBT:

 

 

 

 

 

Segment basis

 

$

19,508

 

$

1,898

 

Real Estate Affiliates

 

(5,774

)

(1,655

)

Consolidated properties

 

13,734

 

243

 

General and administrative

 

(5,232

)

(4,135

)

Warrant liability expense

 

(126,045

)

 

Benefit from (provision for) income taxes

 

(2,457

)

(1,486

)

Income from Real Estate Affiliates

 

5,513

 

1,492

 

Reorganization costs

 

 

(16,595

)

Loss from continuing operations

 

$

(114,487

)

$

(20,481

)

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Reconciliation of segment basis revenues to GAAP revenues

 

 

 

 

 

 

 

 

 

 

 

Master Planned Communities - Total segment

 

$

44,864

 

$

24,507

 

Operating Assets - Total segment

 

26,283

 

22,632

 

Strategic Developments - Total segment

 

5,053

 

363

 

Total segment revenues

 

76,200

 

47,502

 

Less The Woodlands Partnerships revenues, at our ownership share

 

(19,205

)

(18,712

)

Operating Assets Real Estate Affiliates revenues

 

(3,894

)

 

Total revenues - GAAP basis

 

$

53,101

 

$

28,790

 

 

The assets by segment and the reconciliation of total segment assets to the total assets in the consolidated balance sheets at March 31, 2011 and December 31, 2010 are summarized as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Assets by segment