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, 2013

 

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. x Yes o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

The number of shares of common stock, $0.01 par value, outstanding as of May 5, 2013 was 39,498,912.

 

 

 



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 March 31, 2013 and December 31, 2012

3

 

 

 

 

Condensed Consolidated Statements of Operations
for the three months ended March 31, 2013 and 2012

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)
for the three months ended March 31, 2013 and 2012

5

 

 

 

 

Condensed Consolidated Statements of Equity
for the three months ended March 31, 2013 and 2012

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2013 and 2012

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

 

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

30

 

 

 

 

Item 3: Quantitative and Qualitative Disclosures about Market Risk

52

 

 

 

 

Item 4: Controls and Procedures

52

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

Item 1: Legal Proceedings

52

 

 

 

 

Item 1A: Risk Factors

53

 

 

 

 

Item 6: Exhibits

53

 

 

 

 

SIGNATURE

54

 

 

 

 

EXHIBIT INDEX

55

 

2



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

UNAUDITED

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands, except share amounts)

 

Assets:

 

 

 

 

 

Investment in real estate:

 

 

 

 

 

Master Planned Community assets

 

$

1,561,668

 

$

1,563,122

 

Land

 

252,593

 

252,593

 

Buildings and equipment

 

660,412

 

657,268

 

Less: accumulated depreciation

 

(117,972

)

(112,491

)

Developments

 

326,866

 

273,613

 

Net property and equipment

 

2,683,567

 

2,634,105

 

Investment in Real Estate Affiliates

 

33,646

 

32,179

 

Net investment in real estate

 

2,717,213

 

2,666,284

 

Cash and cash equivalents

 

200,536

 

229,197

 

Accounts receivable, net

 

16,640

 

13,905

 

Municipal Utility District receivables, net

 

102,166

 

89,720

 

Notes receivable, net

 

26,272

 

27,953

 

Tax indemnity receivable, including interest

 

319,617

 

319,622

 

Deferred expenses, net

 

9,731

 

12,891

 

Prepaid expenses and other assets, net

 

154,237

 

143,470

 

Total assets

 

$

3,546,412

 

$

3,503,042

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Mortgages, notes and loans payable

 

$

696,761

 

$

688,312

 

Deferred tax liabilities

 

77,925

 

77,147

 

Warrant liabilities

 

156,600

 

123,573

 

Uncertain tax position liability

 

134,568

 

132,492

 

Accounts payable and accrued expenses

 

187,842

 

170,521

 

Total liabilities

 

1,253,696

 

1,192,045

 

 

 

 

 

 

 

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, 39,498,912 shares issued and outstanding as of March 31, 2013 and December 31, 2012

 

395

 

395

 

Additional paid-in capital

 

2,825,174

 

2,824,031

 

Accumulated deficit

 

(532,737

)

(509,613

)

Accumulated other comprehensive loss

 

(9,567

)

(9,575

)

Total stockholders’ equity

 

2,283,265

 

2,305,238

 

Noncontrolling interests

 

9,451

 

5,759

 

Total equity

 

2,292,716

 

2,310,997

 

Total liabilities and equity

 

$

3,546,412

 

$

3,503,042

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

UNAUDITED

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

 

 

(In thousands, except per share amounts)

 

Revenues:

 

 

 

 

 

Master Planned Community land sales

 

$

47,226

 

$

36,089

 

Builder price participation

 

1,275

 

813

 

Minimum rents

 

18,926

 

18,898

 

Tenant recoveries

 

5,325

 

5,864

 

Condominium unit sales

 

 

134

 

Resort and conference center revenues

 

11,104

 

9,657

 

Other land revenues

 

2,802

 

3,568

 

Other rental and property revenues

 

3,433

 

4,742

 

Total revenues

 

90,091

 

79,765

 

Expenses:

 

 

 

 

 

Master Planned Community cost of sales

 

25,699

 

18,739

 

Master Planned Community operations

 

8,496

 

10,988

 

Other property operating costs

 

15,520

 

14,210

 

Rental property real estate taxes

 

3,757

 

3,839

 

Rental property maintenance costs

 

1,805

 

1,955

 

Condominium unit cost of sales

 

 

59

 

Resort and conference center operations

 

7,476

 

7,414

 

Provision for doubtful accounts

 

429

 

 

General and administrative

 

11,171

 

8,399

 

Depreciation and amortization

 

6,444

 

5,058

 

Total expenses

 

80,797

 

70,661

 

 

 

 

 

 

 

Operating income

 

9,294

 

9,104

 

 

 

 

 

 

 

Interest income

 

2,356

 

2,332

 

Interest expense

 

(143

)

 

Warrant liability loss

 

(33,027

)

(121,851

)

Reduction in tax indemnity receivable

 

(1,904

)

 

Equity in earnings from Real Estate Affiliates

 

2,733

 

2,677

 

Loss before taxes

 

(20,691

)

(107,738

)

Provision for income taxes

 

2,479

 

3,784

 

Net loss

 

(23,170

)

(111,522

)

Net income (loss) attributable to noncontrolling interests

 

46

 

(736

)

Net loss attributable to common stockholders

 

$

(23,124

)

$

(112,258

)

 

 

 

 

 

 

Basic/diluted loss per share:

 

$

(0.59

)

$

(2.96

)

 

See Notes to  Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

UNAUDITED

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Comprehensive loss, net of tax:

 

 

 

 

 

Net loss

 

$

(23,170

)

$

(111,522

)

Other comprehensive income (loss):

 

 

 

 

 

Interest rate swaps (a)

 

421

 

102

 

Capitalized swap interest (b)

 

(413

)

(410

)

Other comprehensive income (loss)

 

8

 

(308

)

Comprehensive loss

 

(23,162

)

(111,830

)

Comprehensive income (loss) attributable to noncontrolling interests

 

46

 

(736

)

Comprehensive loss attributable to common stockholders

 

$

(23,116

)

$

(112,566

)

 


(a)   Net of deferred tax expense of $0.1 million for the three months ended March 31, 2013 and 2012.

(b)   Net of deferred tax benefit of $0.2 million for the three months ended March 31, 2013 and 2012.

 

See Notes to  Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

 

 

 

 

Common

 

Paid-In

 

Accumulated

 

Comprehensive

 

Noncontrolling

 

Total

 

(In thousands, except shares) 

 

Shares

 

Stock

 

Capital

 

Deficit

 

Income (Loss)

 

Interests

 

Equity

 

Balance, January 1, 2012

 

37,945,707

 

$

379

 

$

2,711,109

 

$

(381,325

)

$

(5,578

)

$

5,014

 

$

2,329,599

 

Net income (loss)

 

 

 

 

 

(112,258

)

 

736

 

(111,522

)

Interest rate swaps, net of tax of $101

 

 

 

 

 

 

102

 

 

102

 

Capitalized swap interest, net of tax of $244

 

 

 

 

 

 

(410

)

 

(410

)

Stock plan activity

 

 

 

871

 

 

 

 

871

 

Balance, March 31, 2012

 

37,945,707

 

$

379

 

$

2,711,980

 

$

(493,583

)

$

(5,886

)

$

5,750

 

$

2,218,640

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2013

 

39,498,912

 

$

395

 

$

2,824,031

 

$

(509,613

)

$

(9,575

)

$

5,759

 

$

2,310,997

 

Net income (loss)

 

 

 

 

 

(23,124

)

 

(46

)

(23,170

)

Adjustment to noncontrolling interest

 

 

 

 

 

 

 

3,750

 

3,750

 

Preferred dividend payment on behalf of REIT subsidiary

 

 

 

 

 

 

 

(12

)

(12

)

Interest rate swaps, net of tax of $80

 

 

 

 

 

 

421

 

 

421

 

Capitalized swap interest, net of tax of $198

 

 

 

 

 

 

(413

)

 

(413

)

Stock plan activity

 

 

 

1,143

 

 

 

 

1,143

 

Balance, March 31, 2013

 

39,498,912

 

$

395

 

$

2,825,174

 

$

(532,737

)

$

(9,567

)

$

9,451

 

$

2,292,716

 

 

See Notes to Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

UNAUDITED

 

 

 

Three months ended March 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net loss

 

$

(23,170

)

$

(111,522

)

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

 

 

 

 

 

Provision for doubtful accounts

 

429

 

 

Depreciation

 

5,483

 

4,214

 

Amortization

 

961

 

844

 

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

 

144

 

156

 

Amortization of intangibles other than in-place leases

 

260

 

(44

)

Straight-line rent amortization

 

70

 

(265

)

Deferred income taxes

 

2,196

 

3,728

 

Restricted stock and stock option amortization

 

1,143

 

871

 

Warrant liability loss

 

33,027

 

121,851

 

Reduction in tax indemnity receivable

 

1,904

 

 

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

 

70

 

(151

)

Master Planned Community and condominium development expenditures

 

(33,329

)

(24,284

)

Master Planned Community and condominium cost of sales

 

22,553

 

17,857

 

Net changes:

 

 

 

 

 

Accounts and notes receivable

 

(3,472

)

3,770

 

Prepaid expenses and other assets

 

463

 

(2,791

)

Deferred expenses

 

2,397

 

(1,432

)

Accounts payable and accrued expenses

 

4,940

 

(13,193

)

Other, net

 

570

 

(487

)

Cash provided by (used in) operating activities

 

16,639

 

(878

)

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Real estate and property expenditures

 

(43,940

)

(7,605

)

Investments in Real Estate Affiliates, net

 

(1,537

)

(345

)

Increase in restricted cash

 

(11,121

)

(1,001

)

Cash used in investing activities

 

(56,598

)

(8,951

)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from issuance of mortgages, notes and loans payable

 

68,313

 

217

 

Principal payments on mortgages, notes and loans payable

 

(57,003

)

(7,465

)

Deferred financing costs

 

 

(515

)

Preferred dividend payment on behalf of REIT subsidiary

 

(12

)

 

Cash provided by (used in) financing activities

 

11,298

 

(7,763

)

Net change in cash and cash equivalents

 

(28,661

)

(17,592

)

Cash and cash equivalents at beginning of period

 

229,197

 

227,566

 

Cash and cash equivalents at end of period

 

$

200,536

 

$

209,974

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

7,348

 

$

6,070

 

Interest capitalized

 

9,869

 

6,692

 

Income taxes paid

 

885

 

132

 

 

 

 

 

 

 

Non-Cash Transactions:

 

 

 

 

 

Special Improvement District bond transfers associated with land sales

 

3,146

 

978

 

Real estate and property expenditures

 

17,136

 

1,711

 

 

See Notes to 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 and Combined Financial Statements for the year ended December 31, 2012 which are included in the Company’s Annual Report on Form 10-K (the “Annual Report”) for the fiscal year ended December 31, 2012. 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 2012 to conform to the 2013 presentation. We reclassified $1.4 million of certain salaries and overhead costs related to land development activities for The Woodlands from general and administrative expenses to Master Planned Community operations. In addition, we reclassified $0.2 million of operating costs related to the Columbia office properties from Master Planned Community operations to other property costs. The results for the interim period ended March 31, 2013 and 2012 are not necessarily indicative of the results to be expected for the full fiscal year.

 

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 was 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 our 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. On December 7, 2012, the affiliates of Blackstone Real Estate Partners and the Fairholme Fund and the Fairholme Focused Income Fund, each sold their sponsor warrants totaling 333,333 and 1,916,667, respectively, to HHC for $30.00 cash per warrant. These transactions were accounted for as the settlement of a liability for cash consideration of $67.5 million. On November 9, 2012, Brookfield Asset Management, Inc. (“Brookfield”), one of our sponsors, exercised their 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, Brookfield sold their remaining warrants to purchase 2,308,061 shares of our common stock to HHC for $89.3 million. The cash consideration paid to Brookfield net of the exercise price was $13.0 million. As a result of these transactions, $108.6 million of additional paid-in capital was recorded in our financial statements in the year ended December 31, 2012.  The Sponsors Warrants expire on November 9, 2017.

 

In November 2010 and February 2011, we entered into certain 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, to purchase shares of our common stock. 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.

 

8



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

The estimated $71.3 million fair value for the Sponsors Warrants representing warrants to purchase 1,916,667 shares and estimated $85.3 million fair value for the Management Warrants representing warrants to purchase 2,862,687 shares outstanding as of March 31, 2013, 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 estimated fair values for the outstanding Sponsors Warrants and Management Warrants were $58.5 million and $65.1 million, respectively, as of December 31, 2012. The fair values were estimated using an option pricing model and Level 3 inputs due to the unavailability of comparable market data, as further discussed in Note 5. Decreases and increases in the fair value of the Sponsors Warrants and the Management Warrants are recognized as either warrant liability gains or losses, respectively, in the Condensed Consolidated Statements of Operations.

 

NOTE 3                         EARNINGS PER SHARE

 

Basic loss per share (“EPS”) is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of all potentially dilutive common shares. The dilutive effect of options and nonvested stock issued under stock-based compensation plans is computed using the “treasury stock” method. The dilutive effect of the Sponsors Warrants and Management Warrants is computed using the if-converted method. Gains 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 March 31,

 

 

 

2013

 

2012

 

 

 

(In thousands, except per share amounts)

 

Basic and Diluted EPS:

 

 

 

 

 

Numerator:

 

 

 

 

 

Net loss

 

$

(23,170

)

$

(111,522

)

Net income (loss) attributable to noncontrolling interests

 

46

 

(736

)

Net loss attributable to common stockholders

 

$

(23,124

)

$

(112,258

)

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Weighted average basic common shares outstanding

 

39,441

 

37,903

 

 

 

 

 

 

 

Basic and diluted EPS:

 

$

(0.59

)

$

(2.96

)

 

The diluted EPS computation for the three months ended March 31, 2013 excludes 890,040 stock options, 57,933 shares of restricted stock, 1,916,667 shares of common stock underlying the Sponsors 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 March 31, 2012 excludes 731,437 stock options and 42,553 shares of restricted stock and 10,682,687 Sponsors and Management Warrants because their inclusion would have been anti-dilutive.

 

9



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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

NOTE 4                         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. GAAP requires 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 charge should be recorded to write down the carrying amount of such asset to fair value (or for land held for sale, fair value less cost to sell). 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.

 

No impairment charges were recorded during the three months ended March 31, 2013 or 2012. We continually evaluate our strategic alternatives with respect to each of our properties and may revise our strategy from time to time, including our intent to hold the asset on a long-term basis or the timing of potential asset dispositions. For example, we may decide to sell property that is held for use and the sale price may be less than the carrying amount.  As a result, these changes in strategy could result in impairment charges in future periods.

 

NOTE 5                                           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.

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

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

 

$

156,600

 

$

 

$

 

$

156,600

 

$

123,573

 

$

 

$

 

$

123,573

 

Interest rate swaps

 

6,691

 

 

6,691

 

 

7,183

 

 

7,183

 

 

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

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. 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) which are our Sponsors and Management Warrants:

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Balance as of January 1,

 

$

123,573

 

$

127,764

 

Warrant liability loss

 

33,027

 

121,851

 

Balance as of March 31,

 

$

156,600

 

$

249,615

 

 

The fair values were estimated using an option pricing model and Level 3 inputs due to the unavailability of comparable market data. Changes in the fair value of the Sponsors Warrants and the Management Warrants are recognized in earnings as a warrant liability gain or loss.

 

The significant unobservable input used in the fair value measurement of our warrants designated as Level 3 as of March 31, 2013 is as follows:

 

 

 

Fair Value

 

Valuation
Technique

 

Unobservable
Input

 

Average

 

 

 

(In thousands)

 

 

 

 

 

 

 

Warrants

 

$

156,600

 

Option Pricing Valuation Model

 

Expected Volatility (a)

 

22.0

%

 


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

 

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.

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

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

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

Carrying
Amount

 

Estimated
Fair Value

 

Carrying
Amount

 

Estimated
Fair Value

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Notes receivable, net

 

$

26,272

 

$

26,272

 

$

27,953

 

$

27,953

 

Tax indemnity receivable, including interest

 

319,617

 

 

(a)

319,622

 

 

(a)

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Fixed-rate debt

 

$

158,610

 

$

159,916

 

$

158,636

 

$

158,879

 

Variable-rate debt (b)

 

491,894

 

491,894

 

479,964

 

479,964

 

SID bonds

 

46,257

 

48,775

 

49,712

 

56,475

 

Total mortgages, notes and loans payable

 

$

696,761

 

$

700,585

 

$

688,312

 

$

695,318

 

 


(a) 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.

(b) 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.

 

Notes receivable 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 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 6                                           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 (“ASC 810”).

 

In accordance with ASC 810, as amended, we assess our joint ventures at inception to determine if any meet the qualifications of a variable interest entity (“VIE”). We consider a partnership or joint venture a VIE if: (a) the total

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

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. The company concludes that it is the primary beneficiary and consolidates the VIE if the company has both (a) the power to direct the economically significant activities of the entity and (b) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. The company considers the contractual agreements that define the ownership structure, distribution of profits and losses, risks, responsibilities, indebtedness, voting rights and board representation of the respective parties in determining if the company is the primary beneficiary. As required by ASC 810, management’s assessment of whether the company is the primary beneficiary of a VIE is continuously performed.

 

We account for investments in joint ventures deemed to be VIEs 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.

 

In certain cases, the company is required to consolidate certain VIEs. As of March 31, 2013, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $20.0 million and $2.8 million, respectively. As of December 31, 2012, the carrying values of the assets and liabilities associated with the operations of the consolidated VIE were $11.7 million and $1.0 million, respectively. The assets of the VIE are restricted for use only by the particular VIE and are not available for our general operations.

 

Our recent and more significant VIEs are discussed below.

 

ONE Ala Moana Condominium Development Project

 

On October 11, 2011, we and an entity jointly owned by two local development partners formed a joint venture called HHMK Development, LLC (“HHMK Development”). The joint venture was created to explore the development of a luxury condominium tower at the Ala Moana Center in Honolulu, HI. We own 50% and our partners jointly own the remaining 50% of the venture and unanimous consent of the partners is required for all major decisions. On June 14, 2012, we formed another 50/50 joint venture, KR Holdings, LLC (“KR Holdings”), with the same development partners. The initial capital contribution which, is due at closing of the construction loan, will include our interest in the condominium declaration and condominium rights for the condominium tower, owned by our wholly-owned subsidiary and cash from our partner for their 50% interest. We expect the construction loan to close in the second quarter of 2013. On September 17, 2012, KR Holdings closed on two $20.0 million non-recourse mezzanine loan commitments with List Island Properties 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 both have a profit interest in KR Holdings, 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. The venture drew $3.0 million of the $40.0 million provided by the mezzanine lenders to fund the predevelopment 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 predevelopment costs, $3.0 million has been funded as of March 31, 2013, of which $2.0 million is non-interest bearing. Total predevelopment costs through March 31, 2013 for both KR Holdings and HHMK, are $5.4 million, and our share of the predevelopment costs is $2.7 million.

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

Millennium Woodlands Phase II, LLC

 

On May 14, 2012, we entered into a joint venture, Millennium Woodlands Phase II, LLC (“Millennium Phase II”), with The Dinerstein Companies, the same joint venture partner related to the Millennium Waterway Apartments I project for the construction of a new 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. 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.

 

Columbia Parcel D Joint Venture

 

On October 27, 2011, we entered into a joint venture, Parcel D Development, LLC, with a local developer, Kettler, Inc., to construct a Class A apartment building with ground floor retail space in downtown Columbia, MD. We and our partner each own 50% of the venture, and unanimous consent of the partners is required for all major decisions.

 

We are not the primary beneficiary of any of the VIEs discussed above because we do not have the unilateral power to direct activities that most significantly impact the economic performance of the joint venture and therefore we report our interests on the equity method.

 

HHMK Development, KR Holdings, Millennium Phase II, 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 $9.4 million and $7.8 million as of March 31, 2013 and December 31, 2012, respectively, and was classified as Investments in Real Estate Affiliates in the Condensed Consolidated Balance Sheets. These joint ventures are in the pre development stage, therefore there were no earnings for the three months ended March 31, 2013 and 2012, respectively. 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 or otherwise made firm commitments to fund amounts on behalf of these VIEs.

 

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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

 

 

 

March 31,

 

December 31,

 

March 31,

 

December 31,

 

Three Months Ended March 31,

 

Equity Method Investments

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

 

 

(In percentages)

 

(In thousands)

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Circle T

 

50.00

%

50.00

%

$

9,004

 

$

9,004

 

$

 

$

 

Forest View/Timbermill Apartments

 

 

 

 

 

 

4

 

HHMK Development, LLC

 

50.00

%

50.00

%

1,796

 

1,257

 

 

 

KR Holdings, LLC

 

50.00

%

50.00

%

 

 

 

 

Millennium Waterway Apartments

 

100.00

%

100.00

%

 

 

 

220

 

Millennium Woodlands Phase II, LLC

 

81.43

%

81.43

%

2,190

 

2,190

 

 

 

Parcel D Development, LLC

 

50.00

%

50.00

%

5,410

 

4,330

 

 

 

Stewart Title

 

50.00

%

50.00

%

3,762

 

3,871

 

191

 

59

 

Woodlands Sarofim #1

 

20.00

%

20.00

%

2,489

 

2,450

 

39

 

18

 

Other investments

 

 

 

 

 

300

 

300

 

 

 

 

 

 

 

 

 

24,951

 

23,402

 

230

 

301

 

Cost basis investments (a) 

 

 

 

 

 

8,695

 

8,777

 

2,503

 

2,376

 

Investment in Real Estate Affiliates

 

 

 

 

 

$

33,646

 

$

32,179

 

$

2,733

 

$

2,677

 

 


(a) Includes distribution received from Summerlin Hospital Medical Center.

 

As of March 31, 2013, approximately $15.9 million of indebtedness was secured by the properties owned by our Real Estate Affiliates of which our share was approximately $7.9 million based upon our economic ownership. The debt is non-recourse to us.

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

NOTE 7                                                                                                MORTGAGES, NOTES AND LOANS PAYABLE

 

Mortgages, notes and loans payable are summarized as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Fixed-rate debt:

 

 

 

 

 

Collateralized mortgages, notes and loans payable

 

$

158,610

 

$

158,636

 

Special Improvement District bonds

 

46,257

 

49,712

 

Variable-rate debt:

 

 

 

 

 

Collateralized mortgages, notes and loans payable (a)

 

491,894

 

479,964

 

Total mortgages, notes and loans payable

 

$

696,761

 

$

688,312

 

 


(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.

 

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

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

 

 

 

 

 

 

Maximum

 

Carrying Value

 

 

 

 

 

Interest

 

Facility

 

March 31,

 

December 31,

 

$ In Thousands 

 

Maturity (a)

 

Rate

 

Amount

 

2013

 

2012

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

110 N. Wacker (b)

 

October 2019

 

5.21

%

 

 

$

29,000

 

$

29,000

 

 

 

 

 

 

 

 

 

 

 

 

 

70 Columbia Corporate Center

 

August 2017

 

4.25

%

 

 

16,037

 

16,037

 

 

 

 

 

 

 

 

 

 

 

 

 

Columbia Regional Building (c)

 

March 2018

 

3.25

%

$

23,008

 

212

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Financing Arrangements

 

July 2015

 

 

 

 

897

 

612

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridgeland

 

 

 

 

 

 

 

 

 

 

 

Land Loan (d)

 

June 2022

 

5.50

%

 

 

18,066

 

18,066

 

Development Loan (e)

 

June 2015

 

5.00

%

$

30,000

 

4,963

 

 

Bridgeland Total

 

 

 

 

 

 

 

23,029

 

18,066

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Improvement District bonds

 

 

 

 

 

 

 

 

 

 

 

Summerlin South - S108

 

December 2016

 

5.95

%

 

 

1,067

 

1,067

 

Summerlin South - S124

 

December 2019

 

5.95

%

 

 

324

 

324

 

Summerlin South - S128

 

December 2020

 

7.30

%

 

 

787

 

787

 

Summerlin South - S128C

 

December 2030

 

6.05

%

 

 

5,739

 

5,739

 

Summerlin South - S132

 

December 2020

 

6.00

%

 

 

4,757

 

4,822

 

Summerlin South - S151

 

June 2025

 

6.00

%

 

 

7,419

 

10,501

 

Summerlin West - S810

 

April 2031

 

7.13

%

 

 

21,877

 

22,185

 

The Shops at Summerlin Centre - S108

 

December 2016

 

5.95

%

 

 

586

 

586

 

The Shops at Summerlin Centre - S128

 

December 2030

 

6.05

%

 

 

3,701

 

3,701

 

Special Improvement District bonds Total

 

 

 

 

 

 

 

46,257

 

49,712

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

Master Credit Facility (f)

 

March 2015

 

5.00

%

$

270,000

 

176,663

 

176,704

 

Resort and Conference Center (g)

 

February 2019

 

3.70

%

$

95,000

 

36,100

 

36,100

 

Capital lease obligation

 

various

 

3.31

%

 

 

26

 

41

 

4 Waterway Square

 

December 2023

 

4.88

%

$

41,000

 

39,919

 

40,140

 

9303 New Trails

 

December 2023

 

4.88

%

$

14,000

 

13,631

 

13,706

 

3 Waterway Square (h)

 

January 2017

 

2.85

%

$

43,295

 

15,946

 

9,150

 

One Hughes Landing (h)

 

November 2017

 

2.85

%

$

38,000

 

10

 

10

 

20/25 Waterway Avenue

 

May 2022

 

4.79

%

$

14,450

 

14,450

 

14,450

 

Millennium Waterway Apartments

 

June 2022

 

3.75

%

$

55,600

 

55,584

 

55,584

 

The Woodlands Total

 

 

 

 

 

 

 

352,329

 

345,885

 

 

 

 

 

 

 

 

 

 

 

 

 

Ward Centers (i)

 

September 2016

 

3.39

%

$

250,000

 

229,000

 

229,000

 

 

 

 

 

 

 

 

 

$

696,761

 

$

688,312

 

 


(a)         Maturity date includes any extension periods which can be exercised at our option.

(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)          Loan bears interest at prime rate for draws less than $0.5 million. For draws over $0.5 million, we make election to use LIBOR+2.00% or the prime rate. Loan payments are interest only until March 2016.

(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 aggregate draws not to exceed $140.0 million. The loan bears interest at the greater of 5.00% or LIBOR + 3.25%.

(f)           Loan bears interest at one-month LIBOR + 4.00% and has a 5.00% minimum rate.

(g)          Loan was refinanced in February 2013 and bears interest at one-month LIBOR + 3.50%.

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

(i)             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.

 

The weighted average interest rate on our mortgages, notes and loans payable was 4.30% and 4.49% as of March 31, 2013 and December 31, 2012, respectively.

 

Mortgages, Notes and Loans Payable

 

As of March 31, 2013, we had $696.8 million of mortgages, notes and loans payable. All of the debt is secured by the individual properties as listed in the table above and is non-recourse to HHC, except for a $7.0 million parent guarantee associated with the 110 N. Wacker mortgage. The Woodlands Master Credit Facility and Resort and

 

17



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

Conference Center loans are also recourse to the partnerships that directly own The Woodlands operations. 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 impact our operations in 2013. 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.

 

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 March 31, 2013, 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.  As of March 31, 2013, leverage was approximately 25.0%. There was $58.3 million of undrawn and available borrowing capacity under the TWL Facility based on the collateral underlying the facility and covenants as of March 31, 2013. The TWL Facility also requires mandatory principal amortization payments during its initial term and during the extension period, if exercised.  Repayments of $30.0 million are required on March 29, 2014. Furthermore, $10.0 million is due on each of June 29, September 29 and December 29, 2014 during the extension period.

 

On September 30, 2011, we closed on a $250.0 million non-recourse first mortgage financing secured by Ward Centers in Honolulu, Hawaii, that bears interest at one month LIBOR plus 2.50%.  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 10.0% debt yield in order to draw additional loan proceeds under the facility. The loan also permits partial repayment during its term in connection with property releases for development. 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 3.39% as of March 31, 2013. The unused portion of this mortgage was $21.0 million as of March 31, 2013.

 

The Woodlands Resort and Conference Center loan had a $36.1 million outstanding balance as of December 31, 2012. On February 8, 2013, we closed on a $95.0 million of non-recourse construction financing which repaid the existing $36.1 million mortgage and provides funding for the redevelopment of The Woodlands Resort and Conference Center. The loan bears interest at one month LIBOR plus 3.50% and has an initial maturity of February 8, 2016, with three one-year extensions at our option. 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 after completion of construction.

 

On May 31, 2012, as part of our acquisition of our former 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 February 2, 2012, we closed on a non-recourse financing totaling $43.3 million for the construction of 3 Waterway Square, an eleven-story, 232,000-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 one month LIBOR plus 2.65%.

 

On December 5, 2011, we obtained 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%.

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

On November 14, 2012, we closed on a non-recourse financing totaling $38.0 million for the construction of One Hughes Landing, an eight-story, 195,000 square foot office building in The Woodlands.  The loan matures on November 15, 2015 and has two, one-year extension options.  The loan bears interest at LIBOR plus 2.65%.

 

On March 15, 2013, we closed on a non-recourse financing totaling $23.0 million for the redevelopment of The Columbia Regional Building (also known as The Rouse Building), an office building located in Columbia, Maryland. The loan bears interest at LIBOR plus 2.00% and is interest only through the initial maturity date of March 15, 2016. The loan has two one-year extension options.

 

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 of which $31.4 million has been utilized 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.

 

On August 15, 2012, we assumed a $16.0 million loan as part of the acquisition of 70 Columbia Corporate Center (“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. The loan includes a participation right to the lender for 30% of the appreciation in the market value of the property after our preferred our 10% cumulative preferred return and repayment of the outstanding debt and our contributed equity. This participation obligation is fair valued each quarter and the change in fair value is recorded through interest expense. For the three months ended March 31, 2013, $2.6 million relating to the increase in value of the participation due to increased leasing of the property was recorded as interest expense. Virtually all of the interest was capitalized due to our development activities.

 

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.

 

As of March 31, 2013, $1.5 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 March 31, 2013, we were in compliance with all of the financial covenants related to our debt agreements.

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

NOTE 8                                           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 as of March 31, 2013 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 months ended March 31, 2013, the ineffective portion 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 March 31, 2013, 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.

 

If the interest rate swap agreements are terminated prior to their maturity, the amounts previously recorded in AOCI are recognized into earnings over the period that the hedged transaction impacts earnings. If the hedging relationship is discontinued because it is probable that the forecasted transaction will not occur according to the original strategy, any related amounts previously recorded in AOCI are recognized in earnings immediately.

 

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:

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Interest Rate Swaps

 

$

6,691

 

$

7,183

 

Total derivatives designated as hedging instruments

 

$

6,691

 

$

7,183

 

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

The table below presents the effect of our derivative financial instruments on the Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012:

 

 

 

Three months ended March 31,

 

 

 

Three months ended March 31,

 

 

 

2013

 

2012

 

Location of Gain

 

2013

 

2012

 

Cash Flow Hedges

 

Amount of (Loss)
Recognized in OCI

 

Amount of (Loss)
Recognized in OCI

 

(Loss) Reclassified
from AOCI into
Earnings

 

Amount of (Loss)
Reclassified from
AOCI into Earnings

 

Amount of (Loss)
Reclassified from
AOCI into Earnings

 

 

 

(In thousands)

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

$

(98

)

$

(391

)

Interest Expense

 

$

(519

)

$

(493

)

 

 

$

(98

)

$

(391

)

 

 

$

(519

)

$

(493

)

 

NOTE 9                                           INCOME TAXES

 

Several of our subsidiaries are involved in a dispute with the IRS relating to years in which those subsidiaries were owned by General Growth Properties (“GGP”), and in connection therewith, 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 United States Tax Court (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 March 31, 2013 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 $38.4 million and $36.4 million as of March 31, 2013 and December 31, 2012, 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 months ended March 31, 2013, the reduction in tax indemnity receivable of $1.9 million 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 Tax Court to consolidate the cases of the two former taxable REIT

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

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 Tax Court granted the motion to consolidate. The case was heard by the Tax Court in November 2012.  We expect the Tax Court to rule on the case within the next 12 months.

 

Unrecognized tax benefits recorded pursuant to uncertain tax positions were $95.9 million as of March 31, 2013 and December 31, 2012, excluding interest, of which this entire amount would not impact our effective tax rate. Accrued interest related to these unrecognized tax benefits amounted to $38.7 million and $36.6 million as of March 31, 2013 and December 31, 2012, respectively. We recognized an increase in interest expense related to the unrecognized tax benefits of $2.1 million for the three months ended March 31, 2013. 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 12 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 2012, and presently we intend to continue to operate Ward as a REIT.

 

NOTE 10              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, 2012. The following table summarizes our stock option plan activity for the three months ended March 31, 2013:

 

 

 

Stock Options

 

Weighted
Average
Exercise Price

 

Stock Options Outstanding at December 31, 2012

 

861,940

 

$

59.17

 

Granted

 

36,100

 

81.80

 

Forfeited

 

(8,000

)

59.37

 

Stock Options Outstanding at March 31, 2013

 

890,040

 

$

60.08

 

 

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

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

NOTE 11                                    OTHER ASSETS AND LIABILITIES

 

Prepaid Expenses and Other Assets

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Special Improvement District receivable

 

$

39,666

 

$

39,659

 

Other receivables

 

829

 

2,346

 

Federal income tax receivable

 

5,580

 

5,367

 

Prepaid expenses

 

6,497

 

4,757

 

Below-market ground leases

 

20,256

 

20,341

 

Condominium deposits

 

33,349

 

19,616

 

Security and escrow deposits

 

10,356

 

12,865

 

Above-market tenant leases

 

1,981

 

1,896

 

Uncertain tax position asset

 

13,528

 

12,801

 

In-place leases

 

10,336

 

11,516

 

Intangibles

 

3,714

 

3,714

 

Other

 

8,145

 

8,592

 

 

 

$

154,237

 

$

143,470

 

 

The increase of $13.7 million in condominium deposits as of March 31, 2013 as compared to December 31, 2012 is attributed to the cash deposits received for the condominium pre-sales at ONE Ala Moana condominium tower. The asset and liability for these condominium deposits will be contributed, along with our condominium declaration and condominium rights, to the joint venture at closing of the construction loan.  See also Note 6 — Real Estate Affiliates. The decrease of $2.5 million in security and escrow deposits is primarily related to the utilization of $2.1 million of escrow funds established at the acquisition of 70 CCC.

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

Accounts Payable and Accrued Expenses

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Construction payable

 

$

18,249

 

$

17,501

 

Accounts payable and accrued expenses

 

52,504

 

39,634

 

Condominium deposits

 

33,349

 

19,616

 

Membership deposits

 

21,166

 

20,248

 

Above-market ground leases

 

2,550

 

2,590

 

Deferred gains/income

 

7,445

 

7,767

 

Accrued interest

 

2,368

 

2,425

 

Accrued real estate taxes

 

3,883

 

6,622

 

Tenant and other deposits

 

9,906

 

8,096

 

Insurance reserve

 

4,876

 

9,037

 

Accrued payroll and other employee liabilities

 

5,889

 

11,514

 

Interest rate swaps

 

6,691

 

7,183

 

Special assessment

 

2,868

 

2,868

 

Other

 

16,098

 

15,420

 

 

 

$

187,842

 

$

170,521

 

 

The increase of $12.9 million in accounts payable and accrued expenses as of March 31, 2013 as compared to December 31, 2012 is primarily due to a lease termination payment obligation relating to one of the properties under development. Payments of approximately $3.3 million are due in 2014 and 2015. The decrease of $5.6 million in accrued payroll and other employee liabilities is primarily due to the annual incentive compensation payout in the first quarter of 2013.

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

NOTE 12                                    ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The following table summarizes Accumulated other comprehensive income (loss) for the period indicated (amounts in thousands):

 

Changes in Accumulated Other Comprehensive Income (Loss) by Component (a)

For the period ended March 31, 2013

 

 

 

Gains and Losses on
Cash flow hedges

 

 

 

(In Thousands)

 

Balance as of January 1, 2013

 

$

(9,575

)

 

 

 

 

Other comprehensive income (loss) before reclassifications

 

(511

)

Amounts reclassified from accumulated other comprehensive income

 

519

 

 

 

 

 

Net current-period other comprehensive income

 

8

 

Balance as of March 31, 2013

 

$

(9,567

)

 


(a) All amounts are net of tax. Amounts in parentheses indicate debits.

 

The following table summarizes the amounts reclassified out of Accumulated other comprehensive income (loss) for the period indicated (amounts in thousands):

 

Reclassifications out of Accumulated Other Comprehensive Income (loss) (a)

For the period ended March 31, 2013

 

Accumulated Other Comprehensive Income
(Loss) Components

 

Amounts reclassified
from Accumulated
Other Comprehensive
Income (Loss)

 

Affected line item in the
Statement of Operations

 

Gains and losses on cash flow hedges

 

 

 

 

 

Interest rate swap contracts

 

$

(449

)

Interest income/(expense)

 

 

 

(70

)

Tax (expense) or benefit

 

Total reclassifications for the period

 

$

(519

)

Net of tax

 

 


(a) Amounts in parentheses indicate debits to profit/loss.

 

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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 $43.4 million and $49.3 million as of March 31, 2013 and December 31, 2012, respectively. These letters of credit and bonds were issued primarily in connection with insurance requirements, special real estate assessments and construction obligations.

 

See Note 9 — Income Taxes for additional contingencies related to our uncertain tax positions.

 

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”). On March 21, 2013, we received unanimous approval from the New York City Council under the Uniform Land Use Review Procedure (“ULURP”) for the redevelopment of Pier 17 at the South Street Seaport. The restated ground lease will become effective when we meet certain milestones, the most important of which is the commencement of construction by October 1, 2013. Following commencement of construction of the Renovation Project, annual ground rent will be fixed at $1.2 million with an escalation of 3.0% annually. We will also be entitled to a total $1.5 million rent credit, to be taken monthly over a 30-month period. However, we 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.

 

In the fourth quarter of 2012, as a result of Superstorm Sandy, the Uplands portion of South Street Seaport suffered damage due to flooding, but the Pier 17 structure was not damaged. Reconstruction efforts are ongoing and the property is only partially operating. We have received $5.0 million in insurance recoveries at South Street Seaport related to property damage recoveries through March 31, 2013. Remediation costs incurred through March 31, 2013 were $2.4 million, and we expect recoveries to be in excess of our carrying value. We believe that our insurance will cover substantially all of the cost of repairing the property and will also compensate us for any revenue that has been lost as a result of the storm.

 

NOTE 14                                    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 which have no substantial operations.

 

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Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

UNAUDITED

 

The assets included in each segment as of March 31, 2013, are contained in the following chart:

 

 

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. We believe 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, corporate interest and depreciation expense, provision for income taxes, warrant liability loss and the reduction in tax indemnity receivable. 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.

 

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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 March 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Master Planned Communities

 

 

 

 

 

Land sales

 

$

47,226

 

$

36,089

 

Builder price participation

 

1,275

 

813

 

Minimum rents

 

195

 

132

 

Other land revenues

 

2,802

 

3,485

 

Other rental and property revenues

 

 

16

 

Total revenues

 

51,498

 

40,535

 

Cost of sales - land

 

25,699

 

18,679

 

Land sales operations

 

6,953

 

8,903

 

Land sales real estate and business taxes

 

1,543

 

2,085

 

Depreciation and amortization

 

7

 

2

 

Interest income

 

(15

)

(70

)

Interest expense (*)

 

(5,960

)

(3,414

)

Total expenses

 

28,227

 

26,185

 

MPC EBT

 

23,271

 

14,350

 

 

 

 

 

 

 

Operating Assets

 

 

 

 

 

Minimum rents

 

18,511

 

18,522

 

Tenant recoveries

 

5,252

 

5,830

 

Resort and conference center revenues

 

11,104

 

9,657

 

Other rental and property revenues

 

3,433

 

4,726

 

Total revenues

 

38,300

 

38,735

 

Other property operating costs

 

14,965

 

13,804

 

Rental property real estate taxes

 

2,983

 

2,620

 

Rental property maintenance costs

 

1,656

 

1,840

 

Resort and conference center operations

 

7,476

 

7,414

 

Provision for doubtful accounts

 

429

 

 

Depreciation and amortization

 

6,118

 

4,857

 

Interest income

 

(46

)

(45

)

Interest expense

 

6,805

 

3,346

 

Equity in Earnings from Real Estate Affiliates

 

(2,733

)

(2,677

)

Total expenses

 

37,653

 

31,159

 

Operating Assets EBT

 

647

 

7,576

 

 

 

 

 

 

 

Strategic Developments

 

 

 

 

 

Minimum rents

 

220

 

243

 

Tenant recoveries

 

73

 

34

 

Overage rent revenue

 

 

52

 

Condominium unit sales

 

 

134

 

Other land revenues

 

 

32

 

Total revenues

 

293

 

495

 

Condominium unit cost of sales

 

 

59

 

Condominium sales operations

 

 

58

 

Other property operating costs

 

555

 

408

 

Real estate taxes

 

774

 

1,219

 

Rental property maintenance costs

 

149

 

115

 

Depreciation and amortization

 

43

 

59

 

Interest expense *

 

(287

)

74

 

Total expenses

 

1,234

 

1,992

 

Strategic Developments EBT

 

(941

)

(1,497

)

REP EBT

 

$

22,977

 

$

20,429

 

 


(*) Negative interest expense amounts relate to interest capitalized on debt assigned to our Operating Assets Segments.

 

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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 March 31,

 

income (loss) 

 

2013

 

2012

 

 

 

(In thousands)

 

 

 

 

 

 

 

REP EBT

 

$

22,977

 

$

20,429

 

General and administrative

 

(11,171

)

(8,399

)

Corporate interest income, net

 

2,710

 

2,223

 

Warrant liability loss

 

(33,027

)

(121,851

)

Provision for income taxes

 

(2,479

)

(3,784

)

Reduction in tax indemnity receivable

 

(1,904

)

 

Corporate depreciation

 

(276

)

(140

)

Net loss

 

$

(23,170

)

$

(111,522

)

 

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

 

Reconciliation of Segment Basis Revenues to 

 

Three Months Ended March 31,

 

GAAP Revenues 

 

2013

 

2012

 

 

 

(In thousands)

 

 

 

 

 

 

 

Master Planned Communities

 

$

51,498

 

$

40,535

 

Operating Assets

 

38,300

 

38,735

 

Strategic Developments

 

293

 

495

 

Total revenues - GAAP basis

 

$

90,091

 

$

79,765

 

 

The assets by segment and the reconciliation of total segment assets to the total assets in the condensed consolidated balance sheets as of March 31, 2013 and December 31, 2012 are summarized as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Master Planned Communities

 

$

1,781,811

 

$

1,756,625

 

Operating Assets

 

967,088

 

944,562

 

Strategic Developments

 

321,012

 

288,287

 

Total segment assets

 

3,069,911

 

2,989,474

 

Corporate and other *

 

476,501

 

513,568

 

Total assets

 

$

3,546,412

 

$

3,503,042

 

 


* Assets included in Corporate and other consist primarily of the Tax indemnity receivable, including interest, and Cash and cash equivalents.

 

The increase in the Strategic Development segment’s asset balance as of March 31, 2013 of $32.7 million as compared to December 31, 2012 is primarily due to approximately $9.6 million of costs incurred related to our Woodlands development projects and the collection of an additional $13.7 million of pre-sale condominium deposits from our ONE Ala Moana project.  The balance of the increase is due to costs incurred related to our other development projects.

 

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Table of Contents

 

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

 

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

 

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:

 

·