hhc_Current Folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2015

 

or

 

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

 

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)

 

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.

 Yes     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).

 Yes     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 

Accelerated filer 

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

Smaller reporting company 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 Yes     No

 

The number of shares of common stock, $0.01 par value, outstanding as of May 8, 2015 was 39,707,335.

 

 


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

INDEX

 

 

 

 

 

 

 

    

PAGE
NUMBER

 

 

 

 

 

 

PART IFINANCIAL INFORMATION

 

 

 

 

 

Item 1:Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets
as of March 31, 2015 and December 31, 2014
 

 

3

 

 

 

Condensed Consolidated Statements of Operations
for the three months ended March 31, 2015 and 2014
 

 

4

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)
for the three months ended March 31, 2015 and 2014
 

 

5

 

 

 

Condensed Consolidated Statements of Equity
for the three months ended March 31, 2015 and 2014
 

 

6

 

 

 

Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2015 and 2014
 

 

7

 

 

 

Notes to Condensed Consolidated Financial Statements 

 

9

 

 

 

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

 

32

 

 

 

Item 3:Quantitative and Qualitative Disclosures about Market Risk 

 

56

 

 

 

Item 4:Controls and Procedures 

 

56

 

 

 

PART II  OTHER INFORMATION 

 

57

 

 

 

Item 1:Legal Proceedings 

 

57

 

 

 

Item 1A: Risk Factors 

 

57

 

 

 

Item 6:Exhibits 

 

57

 

 

 

SIGNATURE 

 

58

 

 

 

EXHIBIT INDEX 

 

59

 

 

2


 

Table of Contents

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2015

    

2014

 

 

(In thousands, except share amounts)

Assets:

 

 

 

 

 

 

Investment in real estate:

 

 

 

 

 

 

Master Planned Community assets

 

$

1,639,464 

 

$

1,641,063 

Land

 

 

321,176 

 

 

317,211 

Buildings and equipment

 

 

1,295,694 

 

 

1,243,979 

Less: accumulated depreciation

 

 

(173,439)

 

 

(157,182)

Developments

 

 

1,109,109 

 

 

914,303 

Net property and equipment

 

 

4,192,004 

 

 

3,959,374 

Investment in Real Estate and Other Affiliates

 

 

56,127 

 

 

53,686 

Net investment in real estate

 

 

4,248,131 

 

 

4,013,060 

Cash and cash equivalents

 

 

458,372 

 

 

560,451 

Accounts receivable, net 

 

 

37,271 

 

 

28,190 

Municipal Utility District receivables, net

 

 

111,066 

 

 

104,394 

Notes receivable, net

 

 

26,892 

 

 

28,630 

Deferred expenses, net

 

 

73,845 

 

 

75,070 

Prepaid expenses and other assets, net

 

 

293,199 

 

 

310,136 

Total assets

 

$

5,248,776 

 

$

5,119,931 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Mortgages, notes and loans payable

 

$

2,123,617 

 

$

1,993,470 

Deferred tax liabilities

 

 

63,568 

 

 

62,205 

Warrant liabilities

 

 

474,890 

 

 

366,080 

Uncertain tax position liability

 

 

4,709 

 

 

4,653 

Accounts payable and accrued expenses

 

 

458,267 

 

 

466,017 

Total liabilities

 

 

3,125,051 

 

 

2,892,425 

 

 

 

 

 

 

 

Commitments and Contingencies (see Note 15)

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

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

 

 

 —

 

 

 —

Common stock: $.01 par value; 150,000,000 shares authorized, 39,707,335 shares issued and outstanding as of March 31, 2015 and 39,638,094 shares issued and outstanding as of December 31, 2014

 

 

397 

 

 

396 

Additional paid-in capital

 

 

2,839,709 

 

 

2,838,013 

Accumulated deficit

 

 

(712,894)

 

 

(606,934)

Accumulated other comprehensive loss

 

 

(7,259)

 

 

(7,712)

Total stockholders' equity

 

 

2,119,953 

 

 

2,223,763 

Noncontrolling interests

 

 

3,772 

 

 

3,743 

Total equity

 

 

2,123,725 

 

 

2,227,506 

Total liabilities and equity

 

$

5,248,776 

 

$

5,119,931 

 

See Notes to Consolidated Financial Statements.

3


 

Table of Contents

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2015

    

2014

 

 

(In thousands, except per share amounts)

Revenues:

 

 

 

 

 

 

Master Planned Community land sales

 

$

48,081 

 

$

47,671 

Builder price participation

 

 

5,698 

 

 

4,097 

Minimum rents

 

 

35,194 

 

 

20,360 

Tenant recoveries

 

 

9,667 

 

 

6,015 

Condominium rights and unit sales

 

 

34,857 

 

 

3,126 

Resort and conference center revenues

 

 

12,003 

 

 

9,426 

Other land revenues

 

 

3,293 

 

 

2,512 

Other rental and property revenues

 

 

6,297 

 

 

5,446 

Total revenues

 

 

155,090 

 

 

98,653 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

Master Planned Community cost of sales

 

 

23,896 

 

 

23,078 

Master Planned Community operations

 

 

9,983 

 

 

9,261 

Other property operating costs

 

 

18,145 

 

 

13,804 

Rental property real estate taxes

 

 

6,200 

 

 

3,740 

Rental property maintenance costs

 

 

2,744 

 

 

1,915 

Condominium rights and unit cost of sales

 

 

22,409 

 

 

1,571 

Resort and conference center operations

 

 

9,078 

 

 

7,511 

Provision for doubtful accounts

 

 

809 

 

 

143 

Demolition costs

 

 

117 

 

 

2,516 

Development-related marketing costs

 

 

6,243 

 

 

4,224 

General and administrative

 

 

18,963 

 

 

16,882 

Other income, net

 

 

(1,464)

 

 

(10,448)

Depreciation and amortization

 

 

21,510 

 

 

10,509 

Total expenses

 

 

138,633 

 

 

84,706 

 

 

 

 

 

 

 

Operating income

 

 

16,457 

 

 

13,947 

 

 

 

 

 

 

 

Interest income

 

 

136 

 

 

2,188 

Interest expense

 

 

(13,246)

 

 

(7,321)

Warrant liability loss

 

 

(108,810)

 

 

(96,440)

Equity in earnings from Real Estate and Other Affiliates

 

 

1,788 

 

 

6,068 

Loss before taxes

 

 

(103,675)

 

 

(81,558)

Provision for income taxes

 

 

2,284 

 

 

4,773 

Net loss

 

 

(105,959)

 

 

(86,331)

Net income attributable to noncontrolling interests

 

 

 —

 

 

15 

Net loss attributable to common stockholders

 

$

(105,959)

 

$

(86,316)

 

 

 

 

 

 

 

Basic loss per share:

 

$

(2.68)

 

$

(2.19)

 

 

 

 

 

 

 

Diluted loss per share:

 

$

(2.68)

 

$

(2.19)

 

See Notes to Consolidated Financial Statements.

4


 

Table of Contents

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2015

    

2014

 

 

(In thousands)

Comprehensive loss, net of tax:

 

 

 

 

 

 

Net loss

 

$

(105,959)

 

$

(86,331)

Other comprehensive income (loss):

 

 

 

 

 

 

Interest rate swaps (a)

 

 

512 

 

 

199 

Capitalized swap interest (b)

 

 

(59)

 

 

(133)

Other comprehensive income

 

 

453 

 

 

66 

Comprehensive loss

 

 

(105,506)

 

 

(86,265)

Comprehensive income attributable to noncontrolling interests

 

 

 —

 

 

15 

Comprehensive loss attributable to common stockholders

 

$

(105,506)

 

$

(86,250)

 


(a)

Net of deferred tax expense of $0.1 million for the three months ended March 31, 2015 and 2014, respectively.

(b)

Net of deferred tax benefit of $0.1 million for the three months ended March 31, 2015 and 2014, respectively.

 

See Notes to Consolidated Financial Statements.

 

 

 

5


 

Table of Contents

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except share amounts)

 

    

Shares

    

Common
Stock

    

Additional
Paid-In
Capital

    

Accumulated
Deficit

    

Accumulated
Other
Comprehensive
Income (Loss)

    

Noncontrolling
Interests

    

Total
Equity

Balance, January 1, 2014

 

 

39,576,344 

 

$

396 

 

$

2,829,813 

 

$

(583,403)

 

$

(8,222)

 

$

6,562 

 

$

2,245,146 

Net loss

 

 

 

 

 

 — 

 

 

 — 

 

 

(86,316)

 

 

 — 

 

 

(15)

 

 

(86,331)

Interest rate swaps, net of tax of $10

 

 

 

 

 

 — 

 

 

 — 

 

 

 — 

 

 

199 

 

 

 — 

 

 

199 

Capitalized swap interest, net of tax of $75

 

 

 

 

 

 — 

 

 

 — 

 

 

 — 

 

 

(133)

 

 

 — 

 

 

(133)

Stock plan activity

 

 

54,204 

 

 

 — 

 

 

1,764 

 

 

 — 

 

 

 — 

 

 

 — 

 

 

1,764 

Balance, March 31, 2014

 

 

39,630,548 

 

$

396 

 

$

2,831,577 

 

$

(669,719)

 

$

(8,156)

 

$

6,547 

 

$

2,160,645 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2015

 

 

39,638,094 

 

$

396 

 

$

2,838,013 

 

$

(606,934)

 

$

(7,712)

 

$

3,743 

 

$

2,227,506 

Net loss

 

 

 

 

 

 — 

 

 

 — 

 

 

(105,959)

 

 

 — 

 

 

 — 

 

 

(105,959)

Distribution to noncontrolling interest

 

 

 

 

 

 — 

 

 

 — 

 

 

 — 

 

 

 — 

 

 

29 

 

 

29 

Interest rate swaps, net of tax of  $61

 

 

 

 

 

 — 

 

 

 — 

 

 

 — 

 

 

512 

 

 

 — 

 

 

512 

Capitalized swap interest, net of tax of  $31

 

 

 

 

 

 — 

 

 

 — 

 

 

 — 

 

 

(59)

 

 

 — 

 

 

(59)

Stock plan activity

 

 

69,241 

 

 

 

 

1,696 

 

 

(1)

 

 

 — 

 

 

 — 

 

 

1,696 

Balance, March 31, 2015

 

 

39,707,335 

 

$

397 

 

$

2,839,709 

 

$

(712,894)

 

$

(7,259)

 

$

3,772 

 

$

2,123,725 

 

See Notes to Consolidated Financial Statements.

 

 

 

6


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2015

    

2014

 

 

(In thousands)

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net loss

 

$

(105,959)

 

$

(86,331)

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

 

 

 

 

 

 

Depreciation

 

 

17,087 

 

 

9,346 

Amortization

 

 

4,423 

 

 

1,163 

Amortization of deferred financing costs

 

 

1,569 

 

 

1,014 

Amortization of intangibles other than in-place leases

 

 

421 

 

 

161 

Straight-line rent amortization

 

 

(1,886)

 

 

(472)

Deferred income taxes

 

 

2,127 

 

 

4,465 

Restricted stock and stock option amortization

 

 

1,696 

 

 

1,764 

Gain on disposition of asset

 

 

— 

 

 

(2,373)

Warrant liability loss

 

 

108,810 

 

 

96,440 

Equity in earnings from Real Estate and Other Affiliates, net of distributions

 

 

1,264 

 

 

(3,743)

Provision for doubtful accounts

 

 

809 

 

 

143 

Master Planned Community land acquisitions

 

 

(1,101)

 

 

— 

Master Planned Community development expenditures

 

 

(37,343)

 

 

(28,434)

Master Planned Community cost of sales

 

 

21,782 

 

 

20,815 

Condominium development expenditures

 

 

(34,439)

 

 

(5,604)

Condominium and other cost of sales

 

 

22,409 

 

 

1,571 

Percentage of completion revenue recognition from sale of condominium rights and units

 

 

(34,857)

 

 

(3,126)

Net changes:

 

 

 

 

 

 

Accounts and notes receivable

 

 

(2,880)

 

 

19,780 

Prepaid expenses and other assets

 

 

20,294 

 

 

(959)

Condominium deposits received

 

 

9,572 

 

 

37,827 

Deferred expenses

 

 

1,572 

 

 

(3,093)

Accounts payable and accrued expenses

 

 

(7,735)

 

 

320 

Condominium deposits held in escrow

 

 

(9,572)

 

 

(37,827)

Other, net

 

 

35 

 

 

3,378 

Cash provided by (used in) operating activities

 

 

(21,902)

 

 

26,225 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Property and equipment expenditures

 

 

(2,221)

 

 

(2,053)

Operating property improvements

 

 

(1,857)

 

 

(877)

Property developments and redevelopments

 

 

(218,550)

 

 

(137,579)

Proceeds from dispositions

 

 

— 

 

 

5,500 

Investment in KR Holdings, LLC

 

 

8,933 

 

 

— 

Investments in Real Estate and Other Affiliates, net

 

 

(436)

 

 

(807)

Change in restricted cash

 

 

1,707 

 

 

(4,943)

Cash used in investing activities

 

 

(212,424)

 

 

(140,759)

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

Proceeds from issuance of mortgages, notes and loans payable

 

 

137,566 

 

 

48,811 

Principal payments on mortgages, notes and loans payable

 

 

(4,923)

 

 

(2,138)

Deferred financing costs

 

 

(396)

 

 

— 

Cash provided by financing activities

 

 

132,247 

 

 

46,673 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(102,079)

 

 

(67,861)

Cash and cash equivalents at beginning of period

 

 

560,451 

 

 

894,948 

Cash and cash equivalents at end of period

 

$

458,372 

 

$

827,087 

 

 

7


 

Table of Contents

THE HOWARD HUGHES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2015

 

2014

 

 

(In thousands)

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

Interest paid

 

$

10,471 

 

$

7,051 

Interest capitalized

 

 

11,264 

 

 

11,281 

Income taxes paid

 

 

210 

 

 

— 

 

 

 

 

 

 

 

Non-Cash Transactions:

 

 

 

 

 

 

Special Improvement District bond transfers associated with land sales

 

 

2,114 

 

 

2,259 

Property developments and redevelopments

 

 

(3,534)

 

 

25,550 

Accrued interest on construction loan borrowing

 

 

905 

 

 

— 

MPC Land contributed to Real Estate Affiliates

 

 

15,231 

 

 

— 

Special Improvement District bond transfers to Real Estate Affiliates

 

 

(1,518)

 

 

— 

 

See Notes to Consolidated Financial Statements

 

 

 

8


 

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

NOTE 1BASIS 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 Financial Statements which are included in the Company’s Annual Report on Form 10-K (the “Annual Report”) for the fiscal year ended December 31, 2014. 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 months ended March 31, 2015 are not necessarily indicative of the results for the full fiscal year.

Certain amounts in 2014 have been reclassified to conform to 2015 presentation. As a result of the increasing significance of development-related marketing costs in our operations, we present as a separate line item in the Condensed Consolidated Statements of Operations the amount of such costs expensed. Previously, these expenses were included in the line item Other property operating costs.  Development-related marketing costs include salaries, benefits, agency fees, events, advertising, online hosting, marketing-related travel and other costs that we incur for the benefit of our developments and redevelopments.

Management has evaluated for disclosure or recognition 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 2RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The standard requires a retrospective application in order to reflect the period-specific effects of applying the new guidance. The Company is evaluating the impact of the adoption of this ASU on the Company’s Consolidated Financial Statements.

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810) - Amendments to the Consolidation Analysis.” This ASU affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The standard is effective for interim and annual periods beginning after December 15, 2015, and permits the use of a modified retrospective or retrospective approach. The Company is evaluating the impact of the adoption of this ASU on the Company’s Consolidated Financial Statements.

In August 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements – Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This ASU requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards as specified in the guidance. This ASU becomes effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter. Early adoption is permitted. The Company does not expect the adoption of this ASU to have an impact on the Company’s Consolidated Financial Statements.

9


 

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This ASU states that entities should recognize revenue to properly depict the transfer of negotiated goods or services to customers in an amount that properly reflects the agreed upon consideration which the entity expects to be exchanged. The standard is effective for interim and annual periods beginning after December 15, 2016 and permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the impact of the adoption of this ASU on the Company’s Consolidated Financial Statements.

NOTE 3SPONSORS AND MANAGEMENT WARRANTS

On November 9, 2010, 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. In 2012, a sponsor exercised 1,525,272 shares, and we purchased 4,558,061 Sponsor Warrants from certain sponsors for a net cash amount of $80.5 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 represent 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 warrants have an exercise price of $54.50 per share. Generally, the Management Warrants become exercisable in November 2016 and expire in February 2018.

As of March 31, 2015, the estimated $203.2 million fair value for the Sponsors Warrants representing warrants to purchase 1,916,667 shares and the estimated $271.7 million fair value for the Management Warrants representing warrants to purchase 2,862,687 shares 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 $157.1 million and $209.0 million, respectively, as of December 31, 2014. 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 7 – 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 Consolidated Statements of Operations.

 

NOTE 4EARNINGS PER SHARE

Basic earnings (loss) per share (“EPS”) is computed by dividing net income (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 changes in the fair value of 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.

10


 

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

Information related to our EPS calculations is summarized as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2015

    

2014

 

 

(In thousands, except per share amounts)

Basic EPS:

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

Net loss

 

$

(105,959)

 

$

(86,331)

Net income attributable to noncontrolling interests

 

 

 —

 

 

15 

Net loss attributable to common stockholders

 

$

(105,959)

 

$

(86,316)

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

 

39,465 

 

 

39,454 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(105,959)

 

$

(86,316)

Less: Warrant liability gain

 

 

 —

 

 

 —

Adjusted net loss attributable to common stockholders

 

$

(105,959)

 

$

(86,316)

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

 

39,465 

 

 

39,454 

Restricted stock and stock options

 

 

 —

 

 

 —

Warrants

 

 

 —

 

 

 —

Weighted average diluted common shares outstanding

 

 

39,465 

 

 

39,454 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic loss per share:

 

$

(2.68)

 

$

(2.19)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted loss per share:

 

$

(2.68)

 

$

(2.19)

 

The diluted EPS computation for the three months ended March 31, 2015 excludes 1,027,740 stock options, 241,931 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 months ended March 31, 2014 excludes 1,024,940 stock options, 176,536 shares of restricted stock, 1,916,667 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.

 

11


 

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

NOTE 5    RECENT TRANSACTIONS

During the first quarter 2015, we acquired a 58,000 square foot commercial building and air rights with total residential and commercial development rights of 196,133 square feet for $91.4 million.  These acquisitions combined with adjacent property acquisitions in 2014 create a 42,694 square foot lot with 817,784 square feet of available development rights. These properties are collectively referred to as the Seaport District Assemblage and are located in close proximity to our South Street Seaport property. 

NOTE 6    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 and properties 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 and Other 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 and Other Affiliate is deemed to be other-than-temporary, our investment in such Real Estate and Other Affiliate is reduced to its estimated fair value.

 

No impairment charges were recorded during the three months ended March 31, 2015 or 2014. 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 7FAIR VALUE OF FINANCIAL INSTRUMENTS

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

December 31, 2014

 

 

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)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

110,077 

 

$

110,077 

 

$

 —

 

$

 —

 

$

75,027 

 

$

75,027 

 

$

 —

 

$

 —

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

 

474,890 

 

 

 —

 

 

 —

 

 

474,890 

 

 

366,080 

 

 

 —

 

 

 —

 

 

366,080 

Interest rate swaps

 

 

3,307 

 

 

 —

 

 

3,307 

 

 

 —

 

 

3,144 

 

 

 —

 

 

3,144 

 

 

 —

 

Cash equivalents consist primarily of two registered money market mutual funds which invest in United States treasury securities that are valued at the net asset value of the underlying shares in the funds as of the close of business at the end of each period. The fair value approximates carrying value.

12


 

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

The valuation of warrants is based on an option pricing valuation model. The inputs to the model include the fair value of stock related to the warrants, exercise price of the warrants, term, expected volatility, risk-free interest rate and dividend yield and, with respect to the Management Warrants, a discount for lack of marketability.

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:

 

 

 

 

 

 

 

 

 

    

2015

    

2014

 

 

(In thousands)

Balance as of January 1

 

$

366,080 

 

$

305,560 

Warrant liability loss (a)

 

 

108,810 

 

 

96,440 

Balance as of March 31

 

$

474,890 

 

$

402,000 

 


(a)

All losses during 2015 and 2014 were unrealized.

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 values of the Sponsors Warrants and the Management Warrants are recognized in earnings as a warrant liability gain or loss.

The significant unobservable inputs used in the fair value measurement of our warrants designated as Level 3 as of March 31, 2015 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unobservable Inputs

 

    

Fair Value

    

Valuation Technique

    

Expected
Volatility (a)

    

Marketability
Discount (b)

 

 

(In thousands)

 

 

 

 

 

 

Warrants

 

$

474,890 

 

Option Pricing Valuation Model

 

26.3%

 

16.0% - 18.0%

 


(a)

Based on our implied equity volatility.

(b)

Represents the discount rate for lack of marketability of the Management Warrants. The discount rates ranged from 18.0%-20.0% at December 31, 2014.

 

The expected volatility and marketability discount in the table above are significant unobservable inputs 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. As the period of restriction lapses, the marketability discount reduces to zero and increases the fair value of the warrants.

13


 

Table of Contents

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

December 31, 2014

 

 

Fair Value Hierarchy

    

Carrying
Amount

    

Estimated
Fair Value

    

Carrying
Amount

    

Estimated
Fair Value

 

Assets:

 

 

(In thousands)

 

Cash and cash equivalents

Level 1

 

$

348,295 

 

$

348,295 

 

$

485,424 

 

$

485,424 

 

Notes receivable, net (a)

Level 3

 

 

26,892 

 

 

26,892 

 

 

28,630 

 

 

28,630 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate debt

Level 2

 

$

1,049,407 

 

$

1,088,862 

 

$

1,030,554 

 

$

1,050,333 

 

Variable-rate debt

Level 2

 

 

1,074,210 

 

 

1,074,210 

 

 

962,916 

 

 

962,916 

 

Total mortgages, notes and loans payable

 

 

$

2,123,617 

 

$

2,163,072 

 

$

1,993,470 

 

$

2,013,249 

 

 


(a)

Notes receivable is shown net of an allowance of $463  and $471 as of March 31, 2015 and December 31, 2014, respectively.

 

Notes receivable are carried at net realizable value which approximates fair value. The estimated fair values are based on certain factors, such as current interest rates, terms of the note and credit worthiness of the borrower.

The fair value of fixed-rate debt in the table above, not including our Senior Notes (as defined in Note 9 – Mortgages, Notes and Loans Payable), was estimated based on a discounted future cash payment model, which includes risk premiums 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 fair value of our Senior Notes, included in fixed rate debt in the table above, was estimated based upon its most recent trade price.

The carrying amounts for our variable-rate debt approximate fair value given that the interest rates are variable and adjust with current market rates for instruments with similar risks and maturities.

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

 

NOTE 8REAL ESTATE AND OTHER 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 accounted for in accordance with FASB ASC 810 Consolidation.

 

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 substantially all of the entity’s activities either

14


 

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

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 perform a qualitative assessment of each VIE 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 over the joint venture’s operations and financial policies, using 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.

 

Our investment in real estate and other affiliates which are reported on the equity and cost methods are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Economic/ Legal Ownership

 

Carrying Value

 

Share of Earnings/Dividends

 

 

March 31, 

 

 

December 31, 

 

March 31, 

 

December 31, 

 

Three Months Ended March 31, 

 

    

2015

    

 

2014

    

2015

    

2014

    

2015

    

2014

 

 

(In percentages)

 

(In thousands)

 

(In thousands)

Equity Method Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Master Planned Communities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discovery Land

 

N/A

 

 

N/A

 

$

12,052 

 

$

— 

 

$

— 

 

$

— 

Operating Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Millennium Woodlands Phase II, LLC (a) (b)

 

81.43 

%

 

81.43 

%

 

362 

 

 

1,023 

 

 

(661)

 

 

(36)

Stewart Title

 

50.00 

%

 

50.00 

%

 

3,663 

 

 

3,869 

 

 

194 

 

 

93 

Summerlin Las Vegas Baseball Club, LLC (b)

 

50.00 

%

 

50.00 

%

 

10,431 

 

 

10,548 

 

 

(117)

 

 

(126)

The Metropolitan Downtown Columbia (c)

 

50.00 

%

 

50.00 

%

 

4,562 

 

 

4,800 

 

 

(319)

 

 

— 

Woodlands Sarofim

 

20.00 

%

 

20.00 

%

 

2,635 

 

 

2,595 

 

 

40 

 

 

57 

Strategic Developments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Circle T Ranch and Power Center

 

50.00 

%

 

50.00 

%

 

9,004 

 

 

9,004 

 

 

— 

 

 

— 

HHMK Development (b)

 

50.00 

%

 

50.00 

%

 

10 

 

 

10 

 

 

539 

 

 

290 

KR Holdings (b)

 

50.00 

%

 

50.00 

%

 

876 

 

 

9,183 

 

 

365 

 

 

4,009 

Parcel C (b)

 

50.00 

%

 

50.00 

%

 

6,934 

 

 

8,737 

 

 

— 

 

 

— 

Summerlin Apartments, LLC (b)

 

50.00 

%

 

50.00 

%

 

1,661 

 

 

— 

 

 

— 

 

 

— 

 

 

 

 

 

 

 

 

52,190 

 

 

49,769 

 

 

41 

 

 

4,287 

Cost basis investments

 

 

 

 

 

 

 

3,937 

 

 

3,917 

 

 

1,747 

 

 

1,781 

Investment in Real Estate and Other Affiliates

 

 

 

 

 

 

$

56,127 

 

$

53,686 

 

$

1,788 

 

$

6,068 

 


N/A – Not Applicable

(a)

Millennium Woodlands Phase II, LLC was placed into service in the beginning of the third quarter of 2014.

(b)

Equity method variable interest entities.

(c)

The Metropolitan Downtown Columbia was placed into service in the first quarter 2015.

 

We are not the primary beneficiary of any of the equity method variable interest entities listed above because we do not have the power to direct activities that most significantly impact the economic performance of such joint ventures and

15


 

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

therefore we report our interests on the equity method. 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. The aggregate carrying value of the unconsolidated VIEs was $20.3 million and $29.5 million as of March, 31, 2015 and December 31, 2014, respectively, and was classified as Investments in Real Estate and Other Affiliates in the Consolidated Balance Sheets.

As of March 31, 2015, approximately $97.8 million of indebtedness was secured by the properties owned by our Real Estate and Other Affiliates of which our share was approximately $58.9 million based upon our economic ownership. All of this indebtedness is without recourse to us.

The Company is the primary beneficiary of one VIE which is consolidated in the financial statements. The creditors of the consolidated VIE do not have recourse to the Company. As of March 31, 2015, the carrying values of the assets and liabilities associated with the operations of the consolidated VIE were $21.2 million and $0.8 million, respectively. As of December 31, 2014, the carrying values of the assets and liabilities associated with operations of the consolidated VIE were $21.1 million and $0.6 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 investments in Real Estate Affiliates and the related accounting considerations are described below.

Discovery Land

During the second quarter 2014, we announced an agreement to enter into a joint venture with Discovery Land Company (“Discovery Land”) which was formed in the first quarter 2015. We contributed land with a book basis of $13.4 million and transferred SID bonds related to such land with a carrying value of $1.3 million to the joint venture at the agreed upon value of $226,000 per acre, or $125.4 million, in the first quarter of 2015. At the time of our contribution, we assessed if the venture’s equity was sufficient to permit it to finance its activities without additional subordinated support and determined it was not a VIE. In addition, we determined that our partner has substantive participation rights, and therefore we account for this joint venture using the equity method. Discovery Land’s capital contribution funding requirement is up to a maximum of $30.0 million. We have no further capital obligations.

After receipt of our capital contribution and a 5.0% preferred return, Discovery Land is entitled to all remaining cash distributed by the joint venture until two times its equity contribution has been repaid. Any further cash distributions are shared 50/50. Discovery Land is the manager on the project, and development is expected to begin in the second quarter 2015 with the first lot and home sales expected to begin in early 2016.

ONE Ala Moana Condominium Project

KR Holdings is a 50/50 joint venture which was formed to develop a 206-unit luxury condominium tower at the One Ala Moana Center in Honolulu, Hawaii. The venture substantially completed construction in the fourth quarter 2014 and closed on the sale of 201 out of 206 total units. The venture uses the percentage of completion method to recognize earnings. We recorded $0.4 million and $4.0 million in earnings from Real Estate and Other Affiliates for the three months ended March 31, 2015 and 2014 respectively. We received cash distributions of $8.9 million during the three months ended March 31, 2015. All units available for sale as of March 31, 2015 have been sold and closed with the exception of one unit. The one remaining unit is expected to close in the second quarter 2015.

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, 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,

16


 

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

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, 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. During the third quarter 2014, the joint venture completed construction and leasing commenced.

Parcel C

 

On October 4, 2013, we entered into a joint venture agreement with a local developer, Kettler, Inc. (“Kettler”), to construct a 437-unit, Class A apartment building with 31,000 square feet of ground floor retail on Parcel C in downtown Columbia, Maryland. We contributed approximately five acres of land having an approximate book value of $4.0 million to the joint venture. Our land was valued at $23.4 million or $53,500 per constructed unit. When the venture closes on the construction loan and upon completion of certain other conditions, including obtaining completed site development and construction plans and an approved project budget, our partner will be required to contribute cash to the venture.

 

Summerlin Apartments, LLC

On January 24, 2014, we entered into a joint venture with a national multi-family real estate developer, The Calida Group (“Calida”), to construct, own and operate a 124-unit gated luxury apartment development in Summerlin, Nevada. We and our partner each own 50% of the venture, and unanimous consent of the partners is required for all major decisions. This project represents the first residential development in Summerlin’s 400-acre downtown. In the first quarter 2015, we contributed a 4.5-acre parcel of land with an agreed value of $3.2 million in exchange for a 50% interest in the venture. Our partner contributed $3.2 million of cash for their 50% interest, acts as the development manager, funded all pre-development activities, obtained construction financing in the first quarter 2015 and provided guarantees required by the lender. Upon a sale of the property, we are entitled to 50% of the proceeds up to, and 100% of the proceeds in excess of, an amount determined by applying a 7.0% capitalization rate to net operating income (“NOI”). The venture commenced construction in February 2015 with the first units expected to become available for rent by second quarter 2016.

 

Summerlin Las Vegas Baseball Club, LLC

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. As of the date the joint venture acquired the baseball team, we had funded our capital contribution of $10.5 million. Our strategy in owning an interest is to pursue a potential relocation of the team to a to‑be‑built stadium in our Summerlin master planned community. Efforts to relocate the team are ongoing and there can be no assurance that such a stadium will ultimately be built.

The Metropolitan Downtown Columbia Project

On October 27, 2011, we entered into a joint venture, Parcel D Development, LLC (“Parcel D”), with Kettler to construct a 380-unit 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 and $52.3 million is outstanding as of March 31, 2015. The loan bears interest at one-month LIBOR plus 2.40% and matures in July 2020. At loan closing, our land contribution was valued at $53,500 per unit, or $20.3 million, and Kettler contributed $13.3 million in cash, of which $7.0 million was distributed to us. Both we and Kettler made additional 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. The venture substantially completed

17


 

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

construction of The Metropolitan Downtown Columbia Project during the first quarter of 2015 and the property was reclassified into our Operating Assets segment.

 

NOTE 9MORTGAGES, NOTES AND LOANS PAYABLE

Mortgages, notes and loans payable are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2015

    

2014

 

 

(In thousands)

Fixed-rate debt:

 

 

 

 

 

 

Collateralized mortgages, notes and loans payable

 

$

1,030,671 

 

$

1,008,165 

Special Improvement District bonds

 

 

18,736 

 

 

22,389 

Variable-rate debt:

 

 

 

 

 

 

Collateralized mortgages, notes and loans payable (a)

 

 

1,074,210 

 

 

962,916 

Total mortgages, notes and loans payable

 

$

2,123,617 

 

$

1,993,470 

 


(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.

18


 

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maximum

 

Carrying Value

 

 

 

 

Interest

 

Facility

 

March 31, 

 

December 31,

$ In thousands

    

Maturity (a)

    

Rate

    

Amount

    

2015

    

2014

Master Planned Communities

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridgeland Land Loan

 

June 2022

 

5.50 

%