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 September 30, 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 November 4, 2015 was 39,714,838.

 

 


 

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 September 30, 2015 and December 31, 2014
 

 

3

 

 

 

Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 2015 and 2014
 

 

4

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)
for the three and nine months ended September 30, 2015 and 2014
 

 

5

 

 

 

Condensed Consolidated Statements of Equity
for the nine months ended September 30, 2015 and 2014
 

 

6

 

 

 

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

 

34

 

 

 

Item 3:Quantitative and Qualitative Disclosures about Market Risk 

 

61

 

 

 

Item 4:Controls and Procedures 

 

62

 

 

 

PART II  OTHER INFORMATION 

 

62

 

 

 

Item 1:Legal Proceedings 

 

62

 

 

 

Item 1A: Risk Factors 

 

62

 

 

 

Item 6:Exhibits 

 

63

 

 

 

SIGNATURE 

 

64

 

 

 

EXHIBIT INDEX 

 

65

 

 

2


 

Table of Contents

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2015

    

2014

 

 

(In thousands, except share amounts)

Assets:

 

 

 

 

 

 

Investment in real estate:

 

 

 

 

 

 

Master Planned Community assets

 

$

1,672,763

 

$

1,641,063

Land

 

 

305,634

 

 

317,211

Buildings and equipment

 

 

1,478,489

 

 

1,243,979

Less: accumulated depreciation

 

 

(213,040)

 

 

(157,182)

Developments

 

 

1,205,124

 

 

914,303

Net property and equipment

 

 

4,448,970

 

 

3,959,374

Investment in Real Estate and Other Affiliates

 

 

56,191

 

 

53,686

Net investment in real estate

 

 

4,505,161

 

 

4,013,060

Cash and cash equivalents

 

 

450,647

 

 

560,451

Accounts receivable, net 

 

 

32,051

 

 

28,190

Municipal Utility District receivables, net

 

 

136,196

 

 

104,394

Notes receivable, net

 

 

23,610

 

 

28,630

Deferred expenses, net

 

 

73,263

 

 

75,070

Prepaid expenses and other assets, net

 

 

323,596

 

 

310,136

Total assets

 

$

5,544,524

 

$

5,119,931

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Mortgages, notes and loans payable

 

$

2,322,296

 

$

1,993,470

Deferred tax liabilities

 

 

84,214

 

 

62,205

Warrant liabilities

 

 

308,630

 

 

366,080

Uncertain tax position liability

 

 

4,823

 

 

4,653

Accounts payable and accrued expenses

 

 

489,035

 

 

466,017

Total liabilities

 

 

3,208,998

 

 

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, 39,714,838 shares issued and outstanding as of September 30, 2015 and 39,638,094 shares issued and outstanding as of December 31, 2014

 

 

398

 

 

396

Additional paid-in capital

 

 

2,845,021

 

 

2,838,013

Accumulated deficit

 

 

(506,096)

 

 

(606,934)

Accumulated other comprehensive loss

 

 

(7,569)

 

 

(7,712)

Total stockholders' equity

 

 

2,331,754

 

 

2,223,763

Noncontrolling interests

 

 

3,772

 

 

3,743

Total equity

 

 

2,335,526

 

 

2,227,506

Total liabilities and equity

 

$

5,544,524

 

$

5,119,931

 

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, 

 

    

2015

    

2014

    

2015

    

2014

 

 

(In thousands, except per share amounts)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Master Planned Community land sales

 

$

45,423

 

$

59,351

 

$

138,937

 

$

260,186

Builder price participation

 

 

6,680

 

 

5,311

 

 

20,285

 

 

13,251

Minimum rents

 

 

37,814

 

 

24,380

 

 

109,997

 

 

66,929

Tenant recoveries

 

 

10,706

 

 

7,601

 

 

31,074

 

 

20,509

Condominium rights and unit sales

 

 

78,992

 

 

4,032

 

 

200,362

 

 

11,516

Resort and conference center revenues

 

 

11,772

 

 

8,150

 

 

35,256

 

 

27,198

Other land revenues

 

 

4,617

 

 

4,112

 

 

11,055

 

 

9,322

Other rental and property revenues

 

 

7,438

 

 

6,291

 

 

20,729

 

 

18,601

Total revenues

 

 

203,442

 

 

119,228

 

 

567,695

 

 

427,512

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Master Planned Community cost of sales

 

 

19,674

 

 

27,743

 

 

67,806

 

 

93,540

Master Planned Community operations

 

 

10,349

 

 

10,995

 

 

32,295

 

 

31,645

Other property operating costs

 

 

16,680

 

 

15,198

 

 

54,459

 

 

45,603

Rental property real estate taxes

 

 

6,908

 

 

4,559

 

 

19,676

 

 

12,540

Rental property maintenance costs

 

 

3,094

 

 

2,313

 

 

8,738

 

 

6,402

Condominium rights and unit cost of sales

 

 

47,573

 

 

2,026

 

 

126,747

 

 

5,788

Resort and conference center operations

 

 

8,767

 

 

8,910

 

 

26,738

 

 

22,833

Provision for doubtful accounts

 

 

1,007

 

 

119

 

 

3,082

 

 

293

Demolition costs

 

 

1,024

 

 

760

 

 

2,637

 

 

6,711

Development-related marketing costs

 

 

7,639

 

 

6,387

 

 

19,476

 

 

15,909

General and administrative

 

 

18,526

 

 

14,759

 

 

57,095

 

 

49,138

Other income, net

 

 

659

 

 

(11,409)

 

 

(1,204)

 

 

(27,468)

Depreciation and amortization

 

 

24,998

 

 

13,018

 

 

71,577

 

 

35,000

Total expenses

 

 

166,898

 

 

95,378

 

 

489,122

 

 

297,934

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

36,544

 

 

23,850

 

 

78,573

 

 

129,578

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

109

 

 

(1,162)

 

 

516

 

 

19,651

Interest expense

 

 

(15,212)

 

 

(12,136)

 

 

(43,143)

 

 

(28,354)

Warrant liability gain (loss)

 

 

123,640

 

 

24,690

 

 

57,450

 

 

(139,120)

Gain on sale of The Club at Carlton Woods

 

 

29,073

 

 

 —

 

 

29,073

 

 

 —

Increase (reduction) in tax indemnity receivable

 

 

 —

 

 

5,454

 

 

 —

 

 

(5,473)

Equity in earnings from Real Estate and Other Affiliates

 

 

295

 

 

5,509

 

 

3,164

 

 

18,164

Income (loss) before taxes

 

 

174,449

 

 

46,205

 

 

125,633

 

 

(5,554)

Provision for income taxes

 

 

18,237

 

 

590

 

 

24,795

 

 

49,895

Net income (loss)

 

 

156,212

 

 

45,615

 

 

100,838

 

 

(55,449)

Net loss (income) attributable to noncontrolling interests

 

 

12

 

 

 —

 

 

 —

 

 

(12)

Net income (loss) attributable to common stockholders

 

$

156,224

 

$

45,615

 

$

100,838

 

$

(55,461)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share:

 

$

3.96

 

$

1.16

 

$

2.55

 

$

(1.41)

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per share:

 

$

0.76

 

$

0.48

 

$

1.01

 

$

(1.41)

 

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, 

 

    

2015

    

2014

    

2015

    

2014

 

 

(In thousands)

Comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

156,212

 

$

45,615

 

$

100,838

 

$

(55,449)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps (a)

 

 

(411)

 

 

784

 

 

297

 

 

902

Capitalized swap interest (b)

 

 

(42)

 

 

(180)

 

 

(154)

 

 

(357)

Other comprehensive income

 

 

(453)

 

 

604

 

 

143

 

 

545

Comprehensive income (loss)

 

 

155,759

 

 

46,219

 

 

100,981

 

 

(54,904)

Comprehensive (income) loss attributable to noncontrolling interests

 

 

12

 

 

 —

 

 

 —

 

 

(12)

Comprehensive income (loss) attributable to common stockholders

 

$

155,771

 

$

46,219

 

$

100,981

 

$

(54,916)

(a)

Amount is shown net of deferred tax expense of $0.2 million and $0.8 million for the three and nine months ended September 30, 2015, respectively. For the three and nine months ended September 30, 2014, amounts are shown net of deferred tax benefit of $0.1 million and $0.2 million, respectively.

(b)

Net of deferred tax benefit of $0.1 million for the three and nine months ended September 30, 2015, respectively. For the three and nine months ended September 30, 2014, amounts shown net of deferred tax benefit of $0.1 million and $0.2 million, respectively.

 

See Notes to Condensed 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 income (loss)

 

 

 

 

 —

 

 

 —

 

 

(55,461)

 

 

 —

 

 

12

 

 

(55,449)

Preferred dividend payment on behalf of REIT subsidiary

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(12)

 

 

(12)

Interest rate swaps, net of tax of $135

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

902

 

 

 —

 

 

902

Capitalized swap interest, net of tax of $126

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

(357)

 

 

 —

 

 

(357)

Stock plan activity

 

61,750

 

 

 —

 

 

5,940

 

 

 —

 

 

 —

 

 

 —

 

 

5,940

Balance, September 30, 2014

 

39,638,094

 

$

396

 

$

2,835,753

 

$

(638,864)

 

$

(7,677)

 

$

6,562

 

$

2,196,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2015

 

39,638,094

 

$

396

 

$

2,838,013

 

$

(606,934)

 

$

(7,712)

 

$

3,743

 

$

2,227,506

Net income (loss)

 

 

 

 

 —

 

 

 —

 

 

100,838

 

 

 —

 

 

 —

 

 

100,838

Distribution to noncontrolling interest

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

29

 

 

29

Interest rate swaps, net of tax of  $800

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

297

 

 

 —

 

 

297

Capitalized swap interest, net of tax benefit of $83

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

(154)

 

 

 —

 

 

(154)

Stock plan activity

 

76,744

 

 

2

 

 

7,008

 

 

 —

 

 

 —

 

 

 —

 

 

7,010

Balance, September 30, 2015

 

39,714,838

 

$

398

 

$

2,845,021

 

$

(506,096)

 

$

(7,569)

 

$

3,772

 

$

2,335,526

 

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, 

 

    

2015

    

2014

 

 

(In thousands)

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net income (loss)

 

$

100,838

 

$

(55,449)

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

 

 

 

 

 

 

Depreciation

 

 

58,257

 

 

31,330

Amortization

 

 

13,320

 

 

3,670

Amortization of deferred financing costs

 

 

4,104

 

 

2,927

Amortization of intangibles other than in-place leases

 

 

679

 

 

462

Straight-line rent amortization

 

 

(3,255)

 

 

1,113

Deferred income taxes

 

 

23,065

 

 

47,925

Restricted stock and stock option amortization

 

 

5,269

 

 

5,940

Gain on disposition of asset

 

 

(29,073)

 

 

(2,373)

Warrant liability (gain) loss

 

 

(57,450)

 

 

139,120

Reduction in tax indemnity receivable

 

 

 —

 

 

5,473

Interest income related to tax indemnity

 

 

 —

 

 

(18,856)

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

 

 

1,426

 

 

(14,666)

Provision for doubtful accounts

 

 

3,082

 

 

293

Master Planned Community land acquisitions

 

 

(6,028)

 

 

(69,930)

Master Planned Community development expenditures

 

 

(129,298)

 

 

(93,080)

Master Planned Community cost of sales

 

 

65,692

 

 

86,044

Condominium development expenditures

 

 

(137,369)

 

 

(34,358)

Condominium and other cost of sales

 

 

126,747

 

 

5,788

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

 

 

(200,362)

 

 

(11,516)

Non-monetary consideration relating to land sale

 

 

 —

 

 

(13,789)

Deferred rental income

 

 

37,472

 

 

 —

Net changes:

 

 

 

 

 

 

Accounts and notes receivable

 

 

(1,192)

 

 

26,188

Prepaid expenses and other assets

 

 

(9,838)

 

 

(3,436)

Condominium deposits received

 

 

52,001

 

 

125,002

Deferred expenses

 

 

(5,562)

 

 

(32,028)

Accounts payable and accrued expenses

 

 

39,065

 

 

18,055

Condominium deposits held in escrow

 

 

(52,001)

 

 

(125,002)

Condominium deposits released from escrow

 

 

132,086

 

 

 —

Other, net

 

 

969

 

 

(8,888)

Cash provided by operating activities

 

 

32,644

 

 

15,959

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Property and equipment expenditures

 

 

(9,505)

 

 

(6,213)

Operating property improvements

 

 

(5,856)

 

 

(3,581)

Property developments and redevelopments

 

 

(488,713)

 

 

(467,497)

Proceeds from insurance claims

 

 

 —

 

 

12,901

Proceeds from dispositions

 

 

25,139

 

 

11,953

Distribution from KR Holdings, LLC

 

 

9,121

 

 

 —

Investments in Real Estate and Other Affiliates, net

 

 

(635)

 

 

(3,929)

Change in restricted cash

 

 

(1,568)

 

 

(8,136)

Other

 

 

1,263

 

 

(1,484)

Cash used in investing activities

 

 

(470,754)

 

 

(465,986)

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

Proceeds from mortgages, notes and loans payable

 

 

370,342

 

 

414,046

Principal payments on mortgages, notes and loans payable

 

 

(40,066)

 

 

(45,443)

Deferred financing costs

 

 

(1,970)

 

 

(7,906)

Preferred dividend payment on behalf of REIT subsidiary

 

 

 —

 

 

(12)

Cash provided by financing activities

 

 

328,306

 

 

360,685

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(109,804)

 

 

(89,342)

Cash and cash equivalents at beginning of period

 

 

560,451

 

 

894,948

Cash and cash equivalents at end of period

 

$

450,647

 

$

805,606

 

7


 

Table of Contents

 

 

 

 

 

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

    

2015

    

2014

 

 

(In thousands)

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

Interest paid

 

$

60,805

 

$

49,617

Interest capitalized

 

 

35,237

 

 

34,760

Income taxes paid

 

 

2,593

 

 

1,487

 

 

 

 

 

 

 

Non-Cash Transactions:

 

 

 

 

 

 

Special Improvement District bond transfers associated with land sales

 

 

2,114

 

 

7,496

Property developments and redevelopments

 

 

(15,747)

 

 

59,819

Accrued interest on construction loan borrowing

 

 

1,616

 

 

 —

MPC Land contributed to Real Estate Affiliates

 

 

15,234

 

 

 —

Special Improvement District bond transfers to Real Estate Affiliates

 

 

(1,518)

 

 

 —

Capitalized stock compensation

 

 

2,072

 

 

 —

Acquisition of 1701 Lake Robbins:

 

 

 

 

 

 

       Land

 

 

 —

 

 

(1,663)

       Building

 

 

 —

 

 

(3,752)

       Other assets and deferred expenses

 

 

 —

 

 

(848)

       Mortgages, notes and loans payable

 

 

 —

 

 

4,600

       Other liabilities

 

 

 —

 

 

152

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

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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”), with intercompany transactions eliminated between consolidated subsidiaries 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 and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ended December 31, 2015.

 

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 Accounting Standards Update (“ASU”) 2015-03, “Interest – Imputation of Interest (Subtopic 835-30) - 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 to reflect the period-specific effects of applying the new guidance. The Company will begin presenting the carrying value of its debt net of the debt issuance costs in the fourth quarter 2015.  The adoption of this ASU will only impact the presentation of debt issuance costs on the Consolidated Balance Sheet.

   

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810) - Amendments to the Consolidation Analysis.” The standard eliminates the deferral of FAS 167, per ASC 810-10-65-2(a). The standard changes whether: (1) fees paid to a decision maker or service provider represent a variable interest; (2) a limited partnership or similar entity has the characteristics of a VIE; and (3) a reporting entity is the primary beneficiary of a VIE. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 for public companies, and early adoption is permitted. The Company is currently evaluating the new guidance and does not expect it to have a material impact on its Consolidated Financial Statements.

 

In August 2014, the FASB issued 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 a material impact on the Company’s Consolidated Financial Statements.

 

In May 2014, the FASB and the International Accounting Standards Board (“IASB”) issued ASU 2014-09 “Revenues from Contracts with Customers (Topic 606).” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The

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THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

effective date of this standard will be for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted after December 15, 2016. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance in the ASU. The Company is currently evaluating the new guidance to determine the impact it may have on its 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 September 30, 2015, the estimated $126.3 million fair value for the Sponsors Warrants representing warrants to purchase 1,916,667 shares and the estimated $182.3 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 Condensed 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.

 

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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, 

 

    

2015

    

2014

    

2015

    

2014

 

 

(In thousands, except per share amounts)

 

(In thousands, except per share amounts)

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

156,212

 

$

45,615

 

$

100,838

 

$

(55,449)

Net loss (income) attributable to noncontrolling interests

 

 

12

 

 

 —

 

 

 —

 

 

(12)

Net income (loss) attributable to common stockholders

 

$

156,224

 

$

45,615

 

$

100,838

 

$

(55,461)

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

 

39,473

 

 

39,465

 

 

39,469

 

 

39,459

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

 

$

156,224

 

$

45,615

 

$

100,838

 

$

(55,461)

Less: Warrant liability gain

 

 

(123,640)

 

 

(24,690)

 

 

(57,450)

 

 

 —

Adjusted net income (loss) attributable to common stockholders

 

$

32,584

 

$

20,925

 

$

43,388

 

$

(55,461)

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

 

39,473

 

 

39,465

 

 

39,469

 

 

39,459

Restricted stock and stock options

 

 

405

 

 

405

 

 

415

 

 

 —

Warrants

 

 

3,035

 

 

3,301

 

 

3,035

 

 

 —

Weighted average diluted common shares outstanding

 

 

42,913

 

 

43,171

 

 

42,919

 

 

39,459

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share:

 

$

3.96

 

$

1.16

 

$

2.55

 

$

(1.41)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per share:

 

$

0.76

 

$

0.48

 

$

1.01

 

$

(1.41)

 

The diluted EPS computation for the three and nine months ended September 30, 2015 excludes 147,538 and 124,122 stock options, respectively. The diluted EPS computations for the nine months ended September 30, 2014 excludes 1,037,740 stock options, 172,690 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. All such amounts are excluded from the respective diluted EPS computations because their inclusion would have been anti-dilutive.

 

NOTE 5      RECENT TRANSACTIONS

 

On September 4, 2015, the Company sold The Club at Carlton Woods, its 36-hole golf and country club in The Woodlands, for net cash proceeds of $25.1 million, and purchaser’s assumption of net liabilities of $4.0 million, resulting in a pre-tax gain of $29.1 million. The property was comprised of total assets of $20.9 million and total liabilities of $24.9 million. The property was developed and operated by us as an amenity for selling residential lots in a gated community in The Woodlands. Most of the lots have been sold, and the sale of this asset will allow us to redeploy capital to our development activities.

 

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

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THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

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 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 or nine months ended September 30, 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 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

 

$

18

 

$

18

 

$

 —

 

$

 —

 

$

75,027

 

$

75,027

 

$

 —

 

$

 —

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

 

308,630

 

 

 —

 

 

 —

 

 

308,630

 

 

366,080

 

 

 —

 

 

 —

 

 

366,080

Interest rate swaps

 

 

3,651

 

 

 —

 

 

3,651

 

 

 —

 

 

3,144

 

 

 —

 

 

3,144

 

 

 —

 

Cash equivalents consist of 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.

 

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.

 

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THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

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

 

 

 

 

 

 

 

 

 

 

    

2015

    

2014

 

 

(In thousands)

Balance as of January 1

 

$

366,080

 

$

305,560

Warrant liability (gain)/loss (a)

 

 

(57,450)

 

 

139,120

Balance as of September 30

 

$

308,630

 

$

444,680

 


(a)

All gains and 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 September 30, 2015 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unobservable Inputs

 

    

Fair Value

    

Valuation Technique

    

Expected
Volatility (a)

    

Marketability
Discount (b)

 

 

(In thousands)

 

 

 

 

 

 

Warrants

 

$

308,630

 

Option Pricing Valuation Model

 

31.7%

 

13.0% - 15.0%

 


(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.

 

Generally, 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, and the impact of the volatility on fair value diminishes as the market value of the stock increases above the strike price. As the period of restriction lapses, the marketability discount reduces to zero and increases the fair value of the warrants.

 

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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, 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

 

$

450,629

 

$

450,629

 

$

485,424

 

$

485,424

 

Notes receivable, net (a)

Level 3

 

 

23,610

 

 

23,610

 

 

28,630

 

 

28,630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate debt

Level 2

 

$

1,039,571

 

$

1,062,435

 

$

1,030,554

 

$

1,050,333

 

Variable-rate debt

Level 2

 

 

1,282,725

 

 

1,282,725

 

 

962,916

 

 

962,916

 

Total mortgages, notes and loans payable

 

 

$

2,322,296

 

$

2,345,160

 

$

1,993,470

 

$

2,013,249

 

 


(a)

Notes receivable is shown net of an allowance of $0.2 million as of September 30, 2015 and $0.5 million as of December 31, 2014.

 

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 (please refer to 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 values of our Senior Notes, included in fixed rate debt in the table above, are based upon the last trade price closest to the end of the period presented.

 

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 that 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 involve or are conducted on behalf of

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