Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

 

For the quarterly period ended September 30, 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.  xYes  o No

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

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

 

Smaller reporting company o

 

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

 

The number of shares of common stock, $0.01 par value, outstanding as of November 5, 2013 was 39,576,344.

 

 

 


 


Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

INDEX

 

 

PAGE

 

NUMBER

PART I

FINANCIAL INFORMATION

 

 

Item 1:

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012

3

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012

4

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2013 and 2012

5

 

 

 

Condensed Consolidated Statements of Equity for the nine months ended September 30, 2013 and 2012

6

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012

7

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

34

 

 

 

 

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

60

 

 

 

Item 4:

Controls and Procedures

60

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1:

Legal Proceedings

61

 

 

 

Item 1A:

Risk Factors

61

 

 

 

Item 6:

Exhibits

62

 

 

 

SIGNATURE

63

 

 

 

EXHIBIT INDEX

64

 

2



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

UNAUDITED

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands, except share amounts)

 

Assets:

 

 

 

 

 

Investment in real estate:

 

 

 

 

 

Master Planned Community assets

 

$

1,560,476

 

$

1,563,122

 

Land

 

255,707

 

252,593

 

Buildings and equipment

 

712,961

 

657,268

 

Less: accumulated depreciation

 

(112,841

)

(112,491

)

Developments

 

380,174

 

273,613

 

Net property and equipment

 

2,796,477

 

2,634,105

 

Investment in Real Estate Affiliates

 

57,673

 

32,179

 

Net investment in real estate

 

2,854,150

 

2,666,284

 

Cash and cash equivalents

 

210,760

 

229,197

 

Accounts receivable, net

 

19,682

 

13,905

 

Municipal Utility District receivables, net

 

125,344

 

89,720

 

Notes receivable, net

 

19,122

 

27,953

 

Tax indemnity receivable, including interest

 

316,504

 

319,622

 

Deferred expenses, net

 

22,234

 

12,891

 

Prepaid expenses and other assets, net

 

151,434

 

143,470

 

Total assets

 

$

3,719,230

 

$

3,503,042

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Mortgages, notes and loans payable

 

$

765,980

 

$

688,312

 

Deferred tax liabilities

 

94,172

 

77,147

 

Warrant liabilities

 

272,279

 

123,573

 

Uncertain tax position liability

 

137,243

 

132,492

 

Accounts payable and accrued expenses

 

223,980

 

170,521

 

Total liabilities

 

1,493,654

 

1,192,045

 

 

 

 

 

 

 

Commitments and Contingencies (see Note 14)

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

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

 

 

 

Common stock: $.01 par value; 150,000,000 shares authorized, 39,576,344 shares issued and outstanding as of September 30, 2013 and 39,498,912 shares issued and outstanding as of December 31, 2012

 

396

 

395

 

Additional paid-in capital

 

2,828,142

 

2,824,031

 

Accumulated deficit

 

(601,956

)

(509,613

)

Accumulated other comprehensive loss

 

(8,479

)

(9,575

)

Total stockholders’ equity

 

2,218,103

 

2,305,238

 

Noncontrolling interests

 

7,473

 

5,759

 

Total equity

 

2,225,576

 

2,310,997

 

Total liabilities and equity

 

$

3,719,230

 

$

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 September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(In thousands, except per share amounts)

 

Revenues:

 

 

 

 

 

 

 

 

 

Master Planned Community land sales

 

$

53,734

 

$

40,218

 

$

166,981

 

$

120,235

 

Builder price participation

 

2,002

 

1,867

 

5,703

 

4,208

 

Minimum rents

 

21,538

 

23,135

 

60,598

 

62,609

 

Tenant recoveries

 

5,291

 

6,065

 

15,681

 

17,932

 

Condominium rights and unit sales

 

810

 

 

31,191

 

267

 

Resort and conference center revenues

 

8,169

 

8,328

 

30,543

 

29,954

 

Other land revenues

 

7,478

 

6,385

 

14,110

 

13,433

 

Other rental and property revenues

 

4,492

 

8,817

 

15,850

 

19,879

 

Total revenues

 

103,514

 

94,815

 

340,657

 

268,517

 

Expenses:

 

 

 

 

 

 

 

 

 

Master Planned Community cost of sales

 

27,063

 

21,439

 

82,616

 

63,096

 

Master Planned Community operations

 

9,764

 

9,936

 

28,054

 

30,962

 

Other property operating costs

 

22,626

 

16,933

 

55,480

 

46,306

 

Rental property real estate taxes

 

3,698

 

3,574

 

10,814

 

10,583

 

Rental property maintenance costs

 

2,048

 

2,263

 

5,996

 

6,304

 

Condominium rights and unit cost of sales

 

406

 

 

15,678

 

96

 

Resort and conference center operations

 

7,381

 

6,965

 

22,537

 

21,750

 

Provision for doubtful accounts

 

204

 

240

 

910

 

285

 

Demolition costs

 

1,386

 

 

1,386

 

 

General and administrative

 

11,914

 

11,464

 

34,310

 

28,021

 

Other income

 

(3,662

)

(2,125

)

(8,118

)

(2,125

)

Depreciation and amortization

 

9,986

 

6,764

 

23,210

 

17,715

 

Total expenses

 

92,814

 

77,453

 

272,873

 

222,993

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

10,700

 

17,362

 

67,784

 

45,524

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

2,061

 

2,375

 

6,484

 

7,048

 

Interest expense

 

(1

)

(445

)

(144

)

(646

)

Warrant liability loss

 

(4,479

)

(64,303

)

(148,706

)

(162,724

)

Increase (reduction) in tax indemnity receivable

 

730

 

(2,873

)

(8,673

)

(11,655

)

Equity in earnings from Real Estate Affiliates

 

3,594

 

310

 

12,034

 

3,432

 

Income (loss) before taxes

 

12,605

 

(47,574

)

(71,221

)

(119,021

)

Provision for income taxes

 

5,172

 

2,618

 

21,012

 

7,703

 

Net income (loss)

 

7,433

 

(50,192

)

(92,233

)

(126,724

)

Net (income) loss attributable to noncontrolling interests

 

(98

)

781

 

(110

)

(637

)

Net income (loss) attributable to common stockholders

 

$

7,335

 

$

(49,411

)

$

(92,343

)

$

(127,361

)

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share:

 

$

0.19

 

$

(1.30

)

$

(2.34

)

$

(3.36

)

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share:

 

$

0.17

 

$

(1.30

)

$

(2.34

)

$

(3.36

)

 

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 September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(In thousands)

 

Comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

7,433

 

$

(50,192

)

$

(92,233

)

$

(126,724

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Interest rate swaps (a)

 

(413

)

(954

)

2,120

 

(3,115

)

Capitalized swap interest (b)

 

(293

)

(328

)

(1,024

)

(897

)

Other comprehensive income (loss)

 

(706

)

(1,282

)

1,096

 

(4,012

)

Comprehensive income (loss)

 

6,727

 

(51,474

)

(91,137

)

(130,736

)

Comprehensive (income) loss attributable to noncontrolling interests

 

(98

)

781

 

(110

)

(637

)

Comprehensive income (loss) attributable to common stockholders

 

$

6,629

 

$

(50,693

)

$

(91,247

)

$

(131,373

)

 


(a)    Net of deferred tax expense of $0.4 million for the  nine months ended September 30, 2013, respectively. Net of deferred tax benefit of $0.1 million and $0.2 million for the three and nine months ended September 30, 2012, respectively.

(b)    Net of deferred tax benefit of $0.2 million and $0.5 million for the three and nine months ended September 30, 2013, respectively. Net of deferred tax benefit of $0.2 million and $0.5 million for the three and nine months ended September 30, 2012, respectively.

 

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 share amounts) 

 

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)

 

 

 

 

 

(127,361

)

 

637

 

(126,724

)

Interest rate swaps, net of tax of $212

 

 

 

 

 

 

(3,115

)

 

(3,115

)

Capitalized swap interest, net of tax of $523

 

 

 

 

 

 

(897

)

 

(897

)

Stock plan activity

 

27,933

 

 

3,149

 

 

 

 

3,149

 

Balance, September 30, 2012

 

37,973,640

 

$

379

 

$

2,714,258

 

$

(508,686

)

$

(9,590

)

$

5,651

 

$

2,202,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2013

 

39,498,912

 

$

395

 

$

2,824,031

 

$

(509,613

)

$

(9,575

)

$

5,759

 

$

2,310,997

 

Net income (loss)

 

 

 

 

 

(92,343

)

 

110

 

(92,233

)

Adjustment to noncontrolling interest

 

 

 

 

 

 

 

1,616

 

1,616

 

Preferred dividend payment on behalf of REIT subsidiary

 

 

 

 

 

 

 

(12

)

(12

)

Interest rate swaps, net of tax of ($376)

 

 

 

 

 

 

2,120

 

 

2,120

 

Capitalized swap interest, net of tax of $542

 

 

 

 

 

 

(1,024

)

 

(1,024

)

Stock plan activity

 

77,432

 

1

 

4,111

 

 

 

 

4,112

 

Balance, September 30, 2013

 

39,576,344

 

$

396

 

$

2,828,142

 

$

(601,956

)

$

(8,479

)

$

7,473

 

$

2,225,576

 

 

See Notes to Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

UNAUDITED

 

 

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

 

 

 

 

 

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net loss

 

$

(92,233

)

$

(126,724

)

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

 

 

 

 

 

Depreciation

 

20,197

 

14,062

 

Amortization

 

3,013

 

3,653

 

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

 

1,060

 

(49

)

Amortization of intangibles other than in-place leases

 

271

 

(263

)

Straight-line rent amortization

 

(2,087

)

(379

)

Deferred income taxes

 

19,712

 

6,454

 

Restricted stock and stock option amortization

 

4,111

 

3,149

 

Warrant liability loss

 

148,706

 

162,724

 

Reduction in tax indemnity receivable

 

8,673

 

11,655

 

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

 

(5,408

)

14

 

Provision for doubtful accounts

 

910

 

285

 

Master Planned Community land acquisitions

 

(5,667

)

 

Master Planned Community development expenditures

 

(95,061

)

(72,741

)

Master Planned Community cost of sales

 

73,201

 

60,407

 

Condominium development expenditures

 

(10,891

)

 

Condominium and other cost of sales

 

15,678

 

 

Deferred revenue from sale of condominium rights

 

16,309

 

 

Net changes:

 

 

 

 

 

Accounts and notes receivable

 

(3,705

)

13,284

 

Prepaid expenses and other assets

 

12,143

 

1,168

 

Deferred expenses

 

(7,156

)

(2,377

)

Accounts payable and accrued expenses

 

5,773

 

(15,341

)

Other, net

 

1,217

 

279

 

Cash provided by operating activities

 

108,766

 

59,260

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Property and equipment expenditures

 

(26,527

)

(2,356

)

Operating property improvements

 

(22,623

)

(7,878

)

Operating property redevelopments

 

(126,819

)

(26,581

)

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

 

 

(2,721

)

Distribution from Millennium Waterway Apartments

 

 

6,876

 

Proceeds from sales of investments in Real Estate Affiliate

 

 

8,579

 

Proceeds from sales of operating assets

 

10,831

 

 

Investment in Summerlin Las Vegas Baseball Club, LLC

 

(10,350

)

 

Investment in KR Holdings, LLC

 

(16,750

)

 

Investments in other Real Estate Affiliates, net

 

(1,031

)

(496

)

Change in restricted cash

 

(18,268

)

4,251

 

Cash used in investing activities

 

(211,537

)

(20,326

)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from issuance of mortgages, notes and loans payable

 

360,788

 

44,828

 

Principal payments on mortgages, notes and loans payable

 

(271,871

)

(37,193

)

Deferred financing costs

 

(2,437

)

(1,281

)

Preferred dividend payment on behalf of REIT subsidiary

 

(12

)

 

Distributions to noncontrolling interests

 

(2,134

)

 

Cash provided provided by financing activities

 

84,334

 

6,354

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(18,437

)

45,288

 

Cash and cash equivalents at beginning of period

 

229,197

 

227,566

 

Cash and cash equivalents at end of period

 

$

210,760

 

$

272,854

 

 

7



Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

UNAUDITED

 

 

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

23,228

 

$

16,398

 

Interest capitalized

 

26,537

 

19,737

 

Income taxes paid

 

2,127

 

966

 

 

 

 

 

 

 

Non-Cash Transactions:

 

 

 

 

 

Acquisition of Millennium Waterway Apartments

 

 

 

 

 

Land

 

 

(15,917

)

Building and equipment

 

 

(56,002

)

Other assets

 

 

(2,669

)

Mortgages, notes and loans payable

 

 

55,584

 

Other liabilities

 

 

754

 

Reduction in investments in real estate affiliates due to the Millennium Waterway Apartments’ acquisition

 

 

22,405

 

Acquisition of 70 CCC

 

 

 

 

 

Land

 

 

(1,281

)

Building and equipment

 

 

(13,089

)

Other assets

 

 

(2,957

)

Mortgages, notes and loans payable

 

 

16,037

 

Other liabilities

 

 

1,290

 

Special Improvement District bond transfers associated with land sales

 

11,549

 

2,689

 

Real estate and property expenditures

 

56,763

 

11,984

 

MPC Land contributed to real estate affiliate

 

 

(2,190

)

Purchase of land from GGP

 

 

(1,315

)

Non-cash increase in property due to consolidation of real estate affiliate

 

3,750

 

 

Transfer of condominium buyer deposits to real estate affiliate

 

34,220

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

8



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 and 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. The results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results 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.

 

Use of Estimates

 

On August 22, 2013, in conjunction with the Hawaii Community Development Authority’s (“HCDA”) unanimous approval for two mixed-use towers at Ward Village, we reevaluated the useful life of the existing buildings and improvements located on the sites where this future development will take place. As a result, the estimated remaining useful lives of the assets were reduced which increased depreciation expense $1.2 million during the three months ended September 30, 2013.

 

Investment in Real Estate - Developments

 

Demolition costs associated with our redevelopments are expensed as incurred. During the three months ended September 30, 2013, we incurred $1.4 million in demolition costs related to the interiors of our Outlet Collection at Riverwalk and Columbia Regional buildings.

 

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 portion of the Sponsors 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, affiliates of 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.

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

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 in February 2018.

 

The estimated $126.6 million fair value for the Sponsors Warrants representing warrants to purchase 1,916,667 shares and estimated $145.7 million fair value for the Management Warrants representing warrants to purchase 2,862,687 shares outstanding as of September 30, 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 6 — Fair Value of Financial Instruments. 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 earnings (loss) per share (“EPS”) is computed by dividing net income (loss) attributable 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.

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

Information related to our EPS calculations is summarized as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(In thousands, except per share amounts)

 

Basic EPS:

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

7,433

 

$

(50,192

)

$

(92,233

)

$

(126,724

)

Net (income) loss attributable to noncontrolling interests

 

(98

)

781

 

(110

)

(637

)

Net income (loss) attributable to common stockholders

 

$

7,335

 

$

(49,411

)

$

(92,343

)

$

(127,361

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

39,454

 

37,916

 

39,447

 

37,909

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

 

$

7,335

 

$

(49,411

)

$

(92,343

)

$

(127,361

)

Less: Warrant liability gain

 

 

 

 

 

Adjusted net income (loss) attributable to common stockholders

 

$

7,335

 

$

(49,411

)

$

(92,343

)

$

(127,361

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

39,454

 

37,916

 

39,447

 

37,909

 

Restricted stock and stock options

 

253

 

 

 

 

Warrants

 

2,732

 

 

 

 

Weighted average diluted common shares oustanding

 

42,439

 

37,916

 

39,447

 

37,909

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share:

 

$

0.19

 

$

(1.30

)

$

(2.34

)

$

(3.36

)

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share:

 

$

0.17

 

$

(1.30

)

$

(2.34

)

$

(3.36

)

 

The diluted EPS computation for the nine months ended September 30, 2013 excludes 930,940 stock options, 122,332 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.

 

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

 

NOTE 4                         RECENT TRANSACTIONS

 

On September 30, 2013, we sold our Rio West Mall property, a 514,253 square foot shopping center on 50 acres of land, located in Gallup, New Mexico for $12.0 million. The sale includes our ground lease interest, all buildings, structures and improvements, machinery, equipment and furnishings, and all leases and security deposits. Our pre-tax gain recognized on the sale was $0.6 million.

 

In 2012, we formed a 50/50 joint venture, KR Holdings, LLC (“KR Holdings”), with an entity jointly owned by two local development partners to develop a 23-story luxury condominium tower, ONE Ala Moana Tower Condominium Project. On September 17, 2012, KR Holdings closed on two $20.0 million non-recourse mezzanine financing commitments with List Island Properties, LLC and A & B Properties, Inc., including funding for $3.0 million of pre-development costs.

 

On May 15, 2013, KR Holdings closed on a first mortgage construction loan. Upon closing and under the terms of our joint venture agreement, we sold to KR Holdings our interest in the condominium rights for $47.5 million and

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

received net cash proceeds of $30.8 million and a 50% equity interest in KR Holdings. Our partner contributed $16.8 million of cash for a 50% equity interest. Due to our continuing involvement in KR Holdings, we accounted for the transaction as a partial sale representing 50% of the $47.5 million sales value of the condominium rights, and accordingly, we recognized net profit of $11.8 million. The remaining $23.7 million sales value of the condominium rights will be recognized on the same percentage of completion basis as KR Holdings. As of September 30, 2013 the project was 31.3% complete, and we recognized an additional $0.4 million and $3.7 million of profit on the sale for the three and nine months ended September 30, 2013. Please refer to Note 7 — Real Estate Affiliates for further discussion of the ONE Ala Moana Tower Condominium Project.

 

NOTE 5                         IMPAIRMENT

 

We review our real estate assets, including operating assets, land held for development and sale and developments in progress, for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. 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 or nine months ended September 30, 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 6                                           FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

 

 

September 30, 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

 

$

272,279

 

$

 

$

 

$

272,279

 

$

123,573

 

$

 

$

 

$

123,573

 

Interest rate swaps

 

4,696

 

 

4,696

 

 

7,183

 

 

7,183

 

 

 

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.

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

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

 

148,706

 

162,724

 

Balance as of September 30,

 

$

272,279

 

$

290,488

 

 

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 September 30, 2013 is as follows:

 

 

 

Fair Value

 

Valuation
Technique

 

Unobservable
Input

 

Volatility

 

 

 

(In thousands)

 

 

 

 

 

 

 

Warrants

 

$

272,279

 

Option Pricing Valuation Model

 

Expected Volatility (a)

 

30.0

%

 


(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

 

UNAUDITED

 

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

 

 

 

September 30, 2013

 

December 31, 2012

 

 

 

Carrying
Amount

 

Estimated
Fair Value

 

Carrying
Amount

 

Estimated
Fair Value

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes receivable, net

 

$

19,122

 

$

19,122

 

$

27,953

 

$

27,953

 

Tax indemnity receivable, including interest

 

316,504

 

 

(a)

319,622

 

 

(a)

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Fixed-rate debt

 

$

231,036

 

$

224,488

 

$

158,636

 

$

158,879

 

Variable-rate debt (b)

 

498,150

 

498,151

 

479,964

 

479,964

 

SID bonds

 

36,794

 

38,669

 

49,712

 

56,475

 

Total mortgages, notes and loans payable

 

$

765,980

 

$

761,308

 

$

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 agreement is highly dependent on numerous future events that cannot be reliably predicted.

 

(b) $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 7                                           REAL ESTATE AFFILIATES

 

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

 

In accordance with ASC 810, 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 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

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

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 on an ongoing basis to determine if we are the primary beneficiary, as required by ASC 810. Under ASC 810, a 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, but have significant influence, using the equity method, and investments in joint ventures where we do not have significant influence on the joint venture’s operations 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 September 30, 2013, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $41.2 million and $3.3 million, respectively. As of December 31, 2012, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $28.3 million and $1.0 million, respectively. The assets of the VIEs are restricted for use only by the particular VIEs and are not available for our general operations.

 

Our recent and more significant VIEs are discussed below.

 

ONE Ala Moana Condominium 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”)  to explore the development of a luxury condominium tower at the Ala Moana Center in Honolulu, Hawaii.  On June 14, 2012, we formed another 50/50 joint venture, KR Holdings, with the same partner.  We own 50% of each venture and our partner jointly owns the remaining 50%.

 

On September 17, 2012, KR Holdings closed on two $20.0 million non-recourse mezzanine loan commitments with List Island Properties, LLC and A & B Properties, Inc. These loans have a blended interest rate of 12%, were drawn in full on May 15, 2013 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 profit interests in KR Holdings, which entitles them to receive a share of the profits, up to a maximum of $3.0 million, after a return of our capital and a 13% preferred return on our capital.

 

KR Holdings closed the first mortgage construction loan on May 15, 2013.  Upon closing and under the terms of the venture agreement, we sold to KR Holdings our interest in the condominium rights for net cash proceeds of $30.8 million and a 50% equity interest in KR Holdings. Our partner contributed $16.8 million of cash for their 50% equity interest.

 

The construction loan will be drawn over the course of construction with the total proceeds not to exceed $132.0 million. The loan is secured by the condominium rights and buyers’ deposits, has no recourse to us, matures on May 15, 2016, and bears interest at one-month LIBOR plus 3.00%. Revenue recognition for individual units in a condominium project requires, among other criteria, that the sales contracts be analyzed to ascertain that the buyer’s initial and continuing investments are adequate. KR Holdings determined that the value of the buyers’ deposits qualified as sufficient investment to recognize revenue using the percentage of completion method.  We recorded

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

$2.7 million and $7.9 million in equity in earnings from Real Estate Affiliates related to KR Holdings in the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2013, respectively.

 

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 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 (The Metropolitan)

 

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, Maryland. We and our partner each own 50% of the venture, and unanimous consent of the partners is required for all major decisions. On July 11, 2013, the joint venture closed a $64.1 million construction loan which is non-recourse to us.  The loan bears interest at one-month LIBOR plus 2.4% and matures in July 2020.  At loan closing, our land contribution was valued at $20.3 million and Kettler contributed $13.3 million in cash, of which $7.0 million was distributed to us. Both we and Kettler are required to each make future contributions of $3.1 million to the joint venture in accordance with the loan agreement, thus increasing our total capital account to $16.4 million. This transaction was accounted for as a partial sale of the land for which we recognized a net profit of $0.7 million. As of September 30, 2013, we have contributed $1.7 million of the $3.1 million to the joint venture.

 

Summerlin Las Vegas Baseball Club

 

On August 6, 2012, we entered into a joint venture for the purpose of acquiring 100% of the operating assets of the Las Vegas 51s, a Triple-A baseball team which is a member of the Pacific Coast League.  We own 50% of the venture and our partners jointly own the remaining 50%. Unanimous consent of the partners is required for all major decisions.  In August 2012, we contributed $0.3 million to the joint venture pending final approval of the acquisition by Major League Baseball.  In May 2013, after approval was received, we funded our remaining capital obligation of $10.2 million and the joint venture completed the acquisition. Our strategy in acquiring an ownership interest is to pursue a potential relocation of the team to a to-be-built stadium in our Summerlin master planned community. There can be no assurance that such a stadium will ultimately be built.

 

HHMK Development, KR Holdings, Millennium Phase II, Parcel D Development, LLC and the Summerlin Las Vegas Baseball Club joint venture entities included in the table below are VIEs. We are not the primary beneficiary of any of these VIEs because we do not have the power to direct activities that most significantly impact the economic performance of such joint ventures and therefore we report our interests on the equity method. The aggregate carrying value of the unconsolidated VIEs was $33.8 million and $8.1 million as of September 30, 2013 and December 31, 2012, respectively, and was classified as Investments in Real Estate Affiliates in the Condensed Consolidated Balance Sheets. 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

 

UNAUDITED

 

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

 

 

 

Economic/ Legal Ownership

 

Carrying Value

 

Share of Earnings/Dividends

 

 

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

Three Months Ended Setpember 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

 

 

(In percentages)

 

(In thousands)

 

(In thousands)

 

Equity Method Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forest View/Timbermill Apartments (a)

 

 

 

$

 

$

 

$

 

$

 

$

 

$

4

 

Millennium Waterway Apartments (b)

 

100.00

%

100.00

%

 

 

 

 

 

406

 

Millennium Woodlands Phase II, LLC (c)

 

81.43

%

81.43

%

2,160

 

2,190

 

(59

)

 

(59

)

 

KR Holdings, LLC (c)

 

50.00

%

50.00

%

16,762

 

 

2,716

 

 

7,907

 

 

Summerlin Las Vegas Baseball Club (c)

 

50.00

%

50.00

%

10,870

 

300

 

220

 

 

220

 

 

Circle T

 

50.00

%

50.00

%

9,004

 

9,004

 

 

 

 

 

Parcel D Development, LLC (c)

 

50.00

%

50.00

%

3,873

 

4,330

 

 

 

 

 

Stewart Title

 

50.00

%

50.00

%

3,769

 

3,871

 

382

 

324

 

899

 

640

 

HHMK Development, LLC (c)

 

50.00

%

50.00

%

110

 

1,257

 

290

 

 

443

 

 

Woodlands Sarofim #1

 

20.00

%

20.00

%

2,570

 

2,450

 

45

 

(14

)

121

 

6

 

 

 

 

 

 

 

49,118

 

23,402

 

3,594

 

310

 

9,531

 

1,056

 

Cost basis investments

 

 

 

 

 

8,555

 

8,777

 

 

 

2,503

(d)

2,376

(d)

Investment in Real Estate Affiliates

 

 

 

 

 

$

57,673

 

$

32,179

 

$

3,594

 

$

310

 

$

12,034

 

$

3,432

 

 


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

(b)  On May 31, 2012, we acquired our partner’s interest for $6.9 million and consolidated this property. See below for further discussion.

(c)   Equity method variable interest entities.

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

 

On May 31, 2012, we acquired our partner’s interest in the 393-unit Millennium Waterway Apartments for $6.9 million, following the funding of a $55.6 million ten-year non-recourse mortgage bearing interest at 3.75%. Prior to the acquisition, we accounted for our investment in Millennium Waterway Apartments under the equity method. We now own 100% of this stabilized Class A multi-family property located in The Woodlands Town Center. Total assets of $78.6 million and liabilities of $56.4 million, including the then recently funded loan, were consolidated into our financial statements at fair value as of the acquisition date.

 

As of September 30, 2013, approximately $61.6 million of indebtedness was secured by the properties owned by our Real Estate Affiliates of which our share was approximately $33.6 million based upon our economic ownership. The debt is non-recourse to us.

 

NOTE 8                                                 MORTGAGES, NOTES AND LOANS PAYABLE

 

Mortgages, notes and loans payable are summarized as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Fixed-rate debt:

 

 

 

 

 

Collateralized mortgages, notes and loans payable

 

$

231,036

 

$

158,636

 

Special Improvement District bonds

 

36,794

 

49,712

 

Variable-rate debt:

 

 

 

 

 

Collateralized mortgages, notes and loans payable (a)

 

498,150

 

479,964

 

Total mortgages, notes and loans payable

 

$

765,980

 

$

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.

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

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

 

 

 

 

 

 

 

 

 

Carrying Value

 

 

 

 

 

Interest

 

Maximum

 

September 30,

 

December 31,

 

$ In thousands

 

Maturity (a)

 

Rate

 

Facility Amount

 

2013

 

2012

 

 

 

 

 

 

 

 

 

(In thousands)

 

Master Planned Communities

 

 

 

 

 

 

 

 

 

 

 

The Woodlands Master Credit Facility (b)

 

August 2018

 

2.93

%

$

250,000

 

$

176,662

 

$

176,704

 

Bridgeland Land Loan (c)

 

June 2022

 

5.50

%

 

 

18,066

 

18,066

 

Bridgeland Development Loan (d)

 

June 2015

 

5.00

%

30,000

 

5,950

 

 

Summerlin West SID Bonds - S808/S810

 

April 2031

 

7.13

%

 

 

13,704

 

22,185

 

Summerlin South SID Bonds - S151

 

June 2025

 

6.00

%

 

 

6,889

 

10,501

 

Summerlin South SID Bonds - S128C

 

December 2030

 

6.05

%

 

 

5,625

 

5,739

 

Summerlin South SID Bonds - S132

 

December 2020

 

6.00

%

 

 

4,423

 

4,822

 

Summerlin South SID Bonds - S108

 

December 2016

 

5.95

%

 

 

946

 

1,067

 

Summerlin South SID Bonds - S128

 

December 2020

 

7.30

%

 

 

747

 

787

 

Summerlin South SID Bonds - S124

 

December 2019

 

5.95

%

 

 

305

 

324

 

Master Planned Communities Total

 

 

 

 

 

 

 

233,317

 

240,195

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Assets

 

 

 

 

 

 

 

 

 

 

 

Victoria Ward (e)

 

September 2016

 

3.38

%

250,000

 

228,716

 

229,000

 

Millennium Waterway Apartments

 

June 2022

 

3.75

%

 

 

55,584

 

55,584

 

3 Waterway Square (f)

 

August 2028

 

3.94

%

 

 

52,000

 

9,150

 

4 Waterway Square

 

December 2023

 

4.88

%

 

 

39,467

 

40,140

 

The Woodlands Resort and Conference Center (g)

 

February 2019

 

3.68

%

95,000

 

36,100

 

36,100

 

110 N. Wacker (h)

 

October 2019

 

5.21

%

 

 

29,000

 

29,000

 

One Hughes Landing (i)

 

November 2017

 

2.83

%

38,000

 

17,467

 

10

 

70 Columbia Corporate Center

 

August 2017

 

4.25

%

 

 

16,287

 

16,037

 

20/25 Waterway Avenue

 

May 2022

 

4.79

%

 

 

14,450

 

14,450

 

9303 New Trails

 

December 2023

 

4.88

%

 

 

13,476

 

13,706

 

Columbia Regional Building (j)

 

March 2018

 

2.18

%

23,008

 

4,255

 

 

Capital lease obligation

 

various

 

3.60

%

 

 

12

 

41

 

Operating Assets Total

 

 

 

 

 

 

 

506,814

 

443,218

 

 

 

 

 

 

 

 

 

 

 

 

 

Strategic Developments

 

 

 

 

 

 

 

 

 

 

 

Two Hughes Landing (i)

 

September 2018

 

2.83

%

41,230

 

 

 

The Shops at Summerlin SID Bonds - S128

 

December 2030

 

6.05

%

 

 

3,635

 

3,701

 

The Shops at Summerlin SID Bonds - S108

 

December 2016

 

5.95

%

 

 

520

 

586

 

Strategic Developments Total

 

 

 

 

 

 

 

4,155

 

4,287

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Corporate Financing Arrangements (k)

 

Various

 

Various

 

 

 

21,694

 

612

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

765,980

 

$

688,312

 

 


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

(b)         On August 8, 2013, the loan was modified and extended to a August 2018 final maturity date. The interest rate was reduced from one-month LIBOR + 4.00%, with a 5.00% minimum rate to a LIBOR + 2.75% with no floor. The maximum available balance was reduced to $250.0 million from $270.0 million.

(c)          Loan is fixed at 5.50% through June 2017 and is floating based on three-month LIBOR +2.75% thereafter.

(d)         Revolving development loan provides for a maximum of $30.0 million outstanding balance at any time with all draws not exceeding $140.0 million. The loan bears interest at the greater of 5.00% or LIBOR + 3.25%.

(e)          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.

(f)           On August 2, 2013, the loan was refinanced with a $52.0 million loan bearing interest at 3.94% and maturity in August 2028.

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

(h)         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.

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

(j)            Loan bears interest at prime rate for draws less than $0.5 million. For draws over $0.5 million, we make election to use one-month LIBOR + 2.00% or the prime rate.

(k)         Includes the partial funding of a $22.7 million loan used to acquire a company airplane. The loan bears interest at 3.00% and requires approximately $1.0 million annual amortization through maturity in July 2018.

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

The weighted average interest rate on our mortgages, notes and loans payable was 3.75% and 4.49% as of September 30, 2013 and December 31, 2012, respectively.

 

As of September 30, 2013, we had $766.0 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 us, except for a $7.0 million parent guarantee associated with the 110 N. Wacker mortgage. The Woodlands Master Credit Facility and Resort and Conference Center loans are recourse to the entities 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. As of September 30, 2013, land, buildings and equipment and developments in progress with a cost basis of $1.6 billion have been pledged as collateral for our mortgages, notes and loans payable.  On July 26, 2013, we closed on a $22.7 million loan to acquire a company airplane. The loan bears interest at 3.0%, requires approximately $1.0 million annual amortization and matures in July 2018.

 

As of September 30, 2013, we were in compliance with all of the financial covenants related to our debt agreements.

 

Master Planned Communities

 

On August 8, 2013 the Woodlands refinanced its existing Master Credit Facility with a $250.0 million credit facility consisting of a $125.0 million term loan and a $125.0 million revolver (together, the “TWL Facility”). The TWL Facility bears interest at one-month LIBOR plus 2.75% and has an initial three-year term with two one-year extension options. The extension options require a reduction of the total commitment to $220.0 million for the first extension and $185.0 for the second extension. The TWL Facility also contains certain restrictions or covenants that, among other things, require the maintenance of specified financial ratios, limit the incurrence of additional recourse indebtedness at The Woodlands, and limit distributions from The Woodlands to us. There was $73.3 million of undrawn and available borrowing capacity under the TWL Facility based on the collateral underlying the facility and covenants as of September 30, 2013.

 

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 $39.2 million has been utilized and which has a $30.0 million maximum outstanding loan amount at any time. New residential lot development has been delayed while we pursue a permit from the U.S. Army Corps of Engineers to develop an additional 806 acres of land in Bridgeland. Due to the delayed lot development and low level of lot inventory, we can no longer draw upon the revolving credit facility until the permit is received.  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 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 revolving credit facility has no outstanding balance and one year of real estate taxes and debt service on the term loan have been escrowed with the lender.

 

The Summerlin Master Planned Community uses Special Improvement District (“SID”) 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, and the Summerlin Master Planned Community pays the debt service on the bonds semi-annually. As Summerlin sells land,

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

the buyers assume a proportionate share of the bond obligation at closing, and the residential sales contracts provide for the reimbursement of the principal amounts that we previously paid with respect to such proportionate share of the bond.

 

Operating Assets

 

On February 2, 2012, we closed on a non-recourse financing totaling $43.3 million for the construction of 3 Waterway Square, an 11-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 August 2, 2013, we refinanced the loan with a $52.0 million non-recourse first mortgage financing bearing interest at 3.94% and maturing on August 11, 2028.

 

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 one-month 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.

 

On February 8, 2013, we closed on a $95.0 million non-recourse construction loan 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 November 14, 2012, we closed on a non-recourse financing totaling $38.0 million for the construction of One Hughes Landing, an eight-story, 197,000 square foot office building in The Woodlands.  The loan matures on November 14, 2015 and has two, one-year extension options.  The loan bears interest at one-month LIBOR plus 2.65%.

 

On August 15, 2012, we assumed a $16.0 million loan as part of the acquisition of 70 Columbia Corporate Center (“70 CCC”), located in Columbia, MD. 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 10% cumulative preferred return and repayment of the outstanding debt and our contributed equity. The fair value of the participation obligation is remeasured each quarter and the change in fair value is recorded through interest expense. For the nine months ended September 30, 2013, $2.8 million relating to the estimated increase in value of the participation right is due to increased leasing of the property and was recorded in interest expense. Virtually all of the interest was capitalized due to our development activities.

 

On May 31, 2012, as part of the acquisition of our former partner’s interest in Millennium Waterway Apartments, located within The Woodlands, 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 September 2017, then monthly principal and interest payments of $257,418 with the unpaid principal balance due at maturity.

 

On April 26, 2012, we closed on a $14.5 million non-recourse financing secured by 20/25 Waterway Avenue, located within The Woodlands. The loan bears interest at 4.79% and matures on May 1, 2022.

 

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, both located within The Woodlands. These 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

 

UNAUDITED

 

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 to draw additional loan proceeds under the facility.  The loan permits partial repayment during its term in connection with property releases for development. In the third quarter of 2013, certain properties securing the loan were approved for condominium development. As a result, the properties were removed from the collateral pool and a minor principal paydown of the loan was required. 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 3.38% as of September 30, 2013. The unused portion of this mortgage was $21.3 million as of September 30, 2013.

 

On May 10, 2011, we closed a $29.0 million first mortgage financing secured by our office building located at 110 N. Wacker Drive in Chicago, IL. The loan term is coterminous with the expiration of the first term of the existing tenant’s lease. The loan has an interest-only period through April 2015 and, thereafter, amortizes ratably to $12.0 million through maturity.  We provided a $7.0 million repayment guarantee for the loan, which is reduced on a dollar for dollar basis during the amortization period.

 

Strategic Developments

 

On September 11, 2013, we closed on a non-recourse financing totaling $41.2 million for the construction of Two Hughes Landing, the second Class A office building in the 66-acre mixed-use development of Hughes Landing on Lake Woodlands, located in The Woodlands. Two Hughes Landing will be a 197,000 square foot, eight-story office building with an adjacent parking garage containing approximately 630 spaces and is the second of up to 11 office buildings planned for Hughes Landing. The loan matures on September 11, 2016 and has two, one-year extension options.  The loan bears interest at one-month LIBOR plus 2.65% due monthly.

 

Corporate

 

On October 2, 2013, we issued $750.0 million of Senior Notes at 6.875% maturing October 2021. Net proceeds from the transaction totaled approximately $739.6 million. Please refer to Note 20 — Subsequent Events for a more complete description of the notes.

 

NOTE 9                                          DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

We are primarily exposed to interest rate risks related to our variable interest debt, and we 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, 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’s 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 ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended September 30, 2013, the ineffective portion recorded in earnings was insignificant.

 

As of September 30, 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.

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

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.

 

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.

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Interest Rate Swaps

 

$

4,696

 

$

7,183

 

Total derivatives designated as hedging instruments

 

$

4,696

 

$

7,183

 

 

The table below presents the effect of our derivative financial instruments on the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012:

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

Three Months Ended September 30,

 

Location of Gain

 

2013

 

2012

 

 

 

2013

 

2012

 

(Loss) Reclassified

 

Amount of Gain

 

Amount of (Loss)

 

Cash Flow Hedges

 

Amount of (Loss)
Recognized in OCI

 

Amount of (Loss)
Recognized in OCI

 

from AOCI into
Earnings

 

Reclassified from
AOCI into Earnings

 

Reclassified from
AOCI into Earnings

 

 

 

(In thousands)

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

$

(407

)

$

(1,466

)

Interest Expense

 

$

6

 

$

(512

)

 

 

$

(407

)

$

(1,466

)

 

 

$

6

 

$

(512

)

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

Nine Months Ended September 30,

 

Location of Gain

 

2013

 

2012

 

 

 

2013

 

2012

 

(Loss) Reclassified

 

Amount of (Loss)

 

Amount of (Loss)

 

Cash Flow Hedges

 

Amount of Gain
Recognized in OCI

 

Amount of (Loss)
Recognized in OCI

 

from AOCI into
Earnings

 

Reclassified from
AOCI into Earnings

 

Reclassified from
AOCI into Earnings

 

 

 

(In thousands)

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

$

1,079

 

$

(4,627

)

Interest Expense

 

$

(1,041

)

$

(1,512

)

 

 

$

1,079

 

$

(4,627

)

 

 

$

(1,041

)

$

(1,512

)

 

NOTE 10            INCOME TAXES

 

Several of our subsidiaries are involved in a dispute with the IRS relating to years in which those subsidiaries were owned by 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 with GGP, GGP has indemnified us from and against 93.75% of any and all losses, claims, damages, liabilities and reasonable expenses

 

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Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

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 September 30, 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 $42.1 million and $36.4 million as of September 30, 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 material changes to the Master Planned Community deferred gains and the timing of utilization of the tax assets, both of which could result in material 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 September 30, 2013, the Tax Indemnity receivable increased by $2.5 million. This increase was due to the increase in the related interest income of $1.8 million and a remeasurement gain of $0.7 million resulting from a reduction in our planned utilization of tax assets that contractually limit the amount we can receive pursuant to the Tax Matters Agreement.  During the nine months ended September 30, 2013, the reduction in Tax Indemnity receivable of $3.1 million related to interest income that was offset by 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 subsidiaries of GGP subject to litigation with the IRS 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 $95.1 million and $95.9 million as of September 30, 2013 and December 31, 2012, respectively, excluding interest, of which this entire amount would not impact our effective tax rate. Accrued interest related to these unrecognized tax benefits amounted to $42.2 million and $36.6 million as of September 30, 2013 and December 31, 2012, respectively. We recognized interest expense related to the unrecognized tax benefits of $1.7 million and $5.6 million for the three and nine months ended September 30, 2013, respectively. A significant amount of the unrecognized tax benefits recorded in the financial statements are related to the Tax Court litigation and are expected to be resolved within the next 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.

 

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Table of Contents

 

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

NOTE 11              STOCK-BASED PLANS

 

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.

 

Stock Options

 

The following table summarizes our stock option plan:

 

 

 

Stock Options

 

Weighted
Average Exercise
Price

 

Stock Options outstanding at January 1, 2013

 

861,940

 

$

59.17

 

Granted

 

93,600

 

94.81

 

Forfeited

 

(24,600

)

58.41

 

Stock Options outstanding at September 30, 2013

 

930,940

 

$

62.77

 

 

Generally, options granted vest ratably over requisite service periods, 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.  In May 2013, certain key employees were granted options whereby half vest after four years of service and the remaining half vest on a graduated scale based on total shareholder return in 2017.

 

Restricted Stock

 

The following table summarizes restricted stock activity:

 

 

 

Restricted
Stock

 

Weighted
Average Grant
Date Fair Value

 

Restricted stock outstanding at January 1, 2013

 

57,933

 

$

65.72

 

Granted

 

77,432

 

79.77

 

Vested

 

(13,033

)

60.15

 

Restricted Stock outstanding at September 30, 2013

 

122,332

 

$

75.21