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 June 30, 2016

 

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 August 8, 2016 was 39,833,975.

 

 


 

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 June 30, 2016 and December 31, 2015
 

 

 

 

 

Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 2016 and 2015
 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)
for the three and six months ended June 30, 2016 and 2015
 

 

 

 

 

Condensed Consolidated Statements of Equity
for the six months ended June 30, 2016 and 2015
 

 

 

 

 

Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2016 and 2015
 

 

 

 

 

Notes to Condensed Consolidated Financial Statements 

 

 

 

 

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

 

32 

 

 

 

Item 3:Quantitative and Qualitative Disclosures about Market Risk 

 

59 

 

 

 

Item 4:Controls and Procedures 

 

60 

 

 

 

PART II  OTHER INFORMATION 

 

60 

 

 

 

Item 1:Legal Proceedings 

 

60 

 

 

 

Item 1A: Risk Factors 

 

60 

 

 

 

Item 6:Exhibits 

 

60 

 

 

 

SIGNATURE 

 

61 

 

 

 

EXHIBIT INDEX 

 

62 

 

 

2


 

Table of Contents

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

(In thousands, except share amounts)

    

2016

    

2015

Assets:

 

 

 

 

 

 

Investment in real estate:

 

 

 

 

 

 

Master Planned Community assets

 

$

1,652,056

 

$

1,642,842

Land

 

 

315,617

 

 

322,462

Buildings and equipment

 

 

1,910,016

 

 

1,772,401

Less: accumulated depreciation

 

 

(271,451)

 

 

(232,969)

Developments

 

 

915,157

 

 

1,036,927

Net property and equipment

 

 

4,521,395

 

 

4,541,663

Investment in Real Estate and Other Affiliates

 

 

65,834

 

 

57,811

Net investment in real estate

 

 

4,587,229

 

 

4,599,474

Cash and cash equivalents

 

 

670,800

 

 

445,301

Accounts receivable, net 

 

 

40,152

 

 

32,203

Municipal Utility District receivables, net

 

 

163,639

 

 

139,946

Notes receivable, net

 

 

69

 

 

1,664

Deferred expenses, net

 

 

63,099

 

 

61,804

Prepaid expenses and other assets, net

 

 

692,631

 

 

441,190

Total assets

 

$

6,217,619

 

$

5,721,582

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Mortgages, notes and loans payable

 

$

2,651,805

 

$

2,443,962

Deferred tax liabilities

 

 

158,177

 

 

89,221

Warrant liabilities

 

 

322,090

 

 

307,760

Uncertain tax position liability

 

 

9,588

 

 

1,396

Accounts payable and accrued expenses

 

 

572,772

 

 

515,354

Total liabilities

 

 

3,714,432

 

 

3,357,693

 

 

 

 

 

 

 

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, 39,846,036 shares issued and 39,833,975 outstanding as of June 30, 2016 and 39,714,838 shares issued and outstanding as of December 31, 2015

 

 

398

 

 

398

Additional paid-in capital

 

 

2,853,880

 

 

2,847,823

Accumulated deficit

 

 

(329,480)

 

 

(480,215)

Accumulated other comprehensive loss

 

 

(24,152)

 

 

(7,889)

Treasury stock, at cost, 12,061 shares as of June 30, 2016 and 0 shares as of December 31, 2015

 

 

(1,231)

 

 

 —

Total stockholders' equity

 

 

2,499,415

 

 

2,360,117

Noncontrolling interests

 

 

3,772

 

 

3,772

Total equity

 

 

2,503,187

 

 

2,363,889

Total liabilities and equity

 

$

6,217,619

 

$

5,721,582

 

See Notes to Condensed Consolidated Financial Statements.

3


 

Table of Contents

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

(In thousands, except per share amounts)

    

2016

    

2015

    

2016

    

2015

    

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Condominium rights and unit sales

 

$

125,112

 

$

86,513

 

$

247,206

 

$

121,370

 

Master Planned Community land sales

 

 

61,098

 

 

45,433

 

 

103,040

 

 

93,514

 

Minimum rents

 

 

42,036

 

 

36,989

 

 

83,345

 

 

72,183

 

Builder price participation

 

 

6,501

 

 

7,907

 

 

11,148

 

 

13,605

 

Tenant recoveries

 

 

10,923

 

 

10,701

 

 

21,451

 

 

20,368

 

Hospitality revenues

 

 

19,129

 

 

11,481

 

 

32,038

 

 

23,484

 

Other land revenues

 

 

2,759

 

 

3,145

 

 

5,792

 

 

6,438

 

Other rental and property revenues

 

 

4,593

 

 

6,994

 

 

7,797

 

 

13,291

 

Total revenues

 

 

272,151

 

 

209,163

 

 

511,817

 

 

364,253

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Condominium rights and unit cost of sales

 

 

79,726

 

 

56,765

 

 

154,541

 

 

79,174

 

Master Planned Community cost of sales

 

 

29,008

 

 

24,236

 

 

44,696

 

 

48,132

 

Master Planned Community operations

 

 

7,806

 

 

11,963

 

 

17,400

 

 

21,946

 

Other property operating costs

 

 

15,236

 

 

19,634

 

 

30,978

 

 

37,779

 

Rental property real estate taxes

 

 

7,329

 

 

6,568

 

 

14,077

 

 

12,768

 

Rental property maintenance costs

 

 

2,753

 

 

2,900

 

 

5,885

 

 

5,644

 

Hospitality costs

 

 

14,242

 

 

8,893

 

 

24,717

 

 

17,971

 

Provision for doubtful accounts

 

 

(352)

 

 

1,266

 

 

2,689

 

 

2,075

 

Demolition costs

 

 

490

 

 

1,496

 

 

962

 

 

1,613

 

Development-related marketing costs

 

 

6,339

 

 

5,594

 

 

10,870

 

 

11,837

 

General and administrative

 

 

20,053

 

 

19,606

 

 

40,377

 

 

38,569

 

Other income, net

 

 

(9,067)

 

 

(399)

 

 

(9,426)

 

 

(1,863)

 

Gain on sale of 80 South Street Assemblage

 

 

 —

 

 

 —

 

 

(140,479)

 

 

 —

 

Depreciation and amortization

 

 

24,952

 

 

25,069

 

 

47,924

 

 

46,579

 

Total expenses, net of other income

 

 

198,515

 

 

183,591

 

 

245,211

 

 

322,224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

73,636

 

 

25,572

 

 

266,606

 

 

42,029

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

435

 

 

271

 

 

704

 

 

407

 

Interest expense

 

 

(16,533)

 

 

(14,685)

 

 

(32,526)

 

 

(27,931)

 

Warrant liability (loss) gain

 

 

(44,150)

 

 

42,620

 

 

(14,330)

 

 

(66,190)

 

Equity in earnings from Real Estate and Other Affiliates

 

 

20,275

 

 

1,081

 

 

22,207

 

 

2,869

 

Income (loss) before taxes

 

 

33,663

 

 

54,859

 

 

242,661

 

 

(48,816)

 

Provision for income taxes

 

 

26,693

 

 

4,274

 

 

91,926

 

 

6,558

 

Net income (loss)

 

 

6,970

 

 

50,585

 

 

150,735

 

 

(55,374)

 

Net income attributable to noncontrolling interests

 

 

 —

 

 

(12)

 

 

 —

 

 

(12)

 

Net income (loss) attributable to common stockholders

 

$

6,970

 

$

50,573

 

$

150,735

 

$

(55,386)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share:

 

$

0.18

 

$

1.28

 

$

3.82

 

$

(1.40)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per share:

 

$

0.16

 

$

0.18

 

$

3.53

 

$

(1.40)

 

 

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 June 30, 

 

Six Months Ended June 30, 

(In thousands)

    

2016

    

2015

    

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

6,970

 

$

50,585

 

$

150,735

 

$

(55,374)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps (a)

 

 

(5,565)

 

 

196

 

 

(15,373)

 

 

708

Capitalized swap interest expense (b)

 

 

(254)

 

 

(53)

 

 

(317)

 

 

(112)

Pension adjustment (c)

 

 

(573)

 

 

 —

 

 

(573)

 

 

 —

Other comprehensive income (loss)

 

 

(6,392)

 

 

143

 

 

(16,263)

 

 

596

Comprehensive income (loss)

 

 

578

 

 

50,728

 

 

134,472

 

 

(54,778)

Comprehensive income attributable to noncontrolling interests

 

 

 —

 

 

(12)

 

 

 —

 

 

(12)

Comprehensive income (loss) attributable to common stockholders

 

$

578

 

$

50,716

 

$

134,472

 

$

(54,790)

(a)

Amounts are shown net of deferred tax benefit of $3.0 million and deferred tax benefit of $8.3 million for the three and six months ended June 30, 2016, respectively. For the three and six months ended June 30, 2015, amounts are shown net of deferred tax expense of $0.1 million and $0.6 million, respectively.

(b)

Net of deferred tax benefit of $0 and $0.1 million for the three and six months ended June 30, 2016, respectively. For the three and six months ended June 30, 2015, amounts shown net of deferred tax benefit of both $0.1 million, respectively.

(c)

Net of deferred tax benefit of $0.4 million for both the three and six months ended June 30, 2016, respectively. For both the three and six months ended June 30, 2015, amounts shown net of deferred tax benefit of $0, respectively.

 

See Notes to Condensed Consolidated Financial Statements.

 

 

.

 

 

 

 

5


 

Table of Contents

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Common stock

    

Additional
paid-in

 

Accumulated

    

Accumulated
other
comprehensive

 

Treasury stock

    

Noncontrolling

    

Total

(In thousands, except share amounts)

 

Shares

    

Amount

    

capital

    

deficit

    

income (loss)

    

Shares

    

Amount

    

interests

    

equity

Balance, December 31, 2014

 

39,638,094

 

$

396

 

$

2,838,013

 

$

(606,934)

 

$

(7,712)

 

 —

 

$

 —

 

$

3,743

 

$

2,227,506

Net loss

 

 

 

 

 —

 

 

 —

 

 

(55,386)

 

 

 —

 

 —

 

 

 —

 

 

12

 

 

(55,374)

Preferred dividend payment on behalf of REIT subsidiary

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

29

 

 

29

Interest rate swaps, net of tax of $555

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

708

 

 —

 

 

 —

 

 

 —

 

 

708

Capitalized swap interest, net of tax benefit of $41

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

(112)

 

 —

 

 

 —

 

 

 —

 

 

(112)

Stock plan activity

 

76,911

 

 

2

 

 

4,253

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

4,255

Issuances of treasury stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

Balance, June 30, 2015

 

39,715,005

 

$

398

 

$

2,842,266

 

$

(662,320)

 

$

(7,116)

 

 —

 

$

 —

 

$

3,784

 

$

2,177,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

 

39,714,838

 

$

398

 

$

2,847,823

 

$

(480,215)

 

$

(7,889)

 

 —

 

$

 —

 

$

3,772

 

$

2,363,889

Net income

 

 

 

 

 —

 

 

 —

 

 

150,735

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

150,735

Interest rate swaps, net of tax of  $8,245

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

(15,373)

 

 —

 

 

 —

 

 

 —

 

 

(15,373)

Pension adjustment, net of tax of $350

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

(573)

 

 —

 

 

 —

 

 

 —

 

 

(573)

Capitalized swap interest, net of tax benefit of $61

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

(317)

 

 —

 

 

 —

 

 

 —

 

 

(317)

Stock plan activity

 

131,198

 

 

0

 

 

6,057

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

6,057

Treasury stock activity

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

(12,061)

 

 

(1,231)

 

 

 —

 

 

(1,231)

Balance, June 30, 2016

 

39,846,036

 

$

398

 

$

2,853,880

 

$

(329,480)

 

$

(24,152)

 

(12,061)

 

$

(1,231)

 

$

3,772

 

$

2,503,187

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

6


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

(In thousands)

    

2016

    

2015

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net income (loss)

 

$

150,735

 

$

(55,374)

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

 

 

 

 

 

 

Depreciation

 

 

41,126

 

 

37,155

Amortization

 

 

6,798

 

 

9,424

Amortization of deferred financing costs

 

 

3,747

 

 

3,192

Amortization of intangibles other than in-place leases

 

 

(710)

 

 

472

Straight-line rent amortization

 

 

(5,187)

 

 

(2,727)

Deferred income taxes

 

 

85,927

 

 

6,135

Restricted stock and stock option amortization

 

 

4,670

 

 

3,232

Gain on disposition of 80 South Street Assemblage

 

 

(140,479)

 

 

 —

Warrant liability loss

 

 

14,330

 

 

66,190

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

 

 

(8,212)

 

 

1,437

Provision for doubtful accounts

 

 

2,689

 

 

2,075

Master Planned Community land acquisitions

 

 

(69)

 

 

(1,928)

Master Planned Community development expenditures

 

 

(70,678)

 

 

(83,868)

Master Planned Community cost of sales

 

 

41,310

 

 

44,792

Condominium development expenditures

 

 

(155,222)

 

 

(79,500)

Condominium rights and unit cost of sales

 

 

154,541

 

 

75,991

Percentage of completion revenue recognition from sale of condominium rights and unit sales

 

 

(247,206)

 

 

(121,370)

Net changes:

 

 

 

 

 

 

Accounts and notes receivable

 

 

(3,230)

 

 

(1,115)

Prepaid expenses and other assets

 

 

2,616

 

 

15,520

Condominium deposits received

 

 

51,573

 

 

18,423

Deferred expenses

 

 

(1,659)

 

 

240

Accounts payable and accrued expenses

 

 

(24,798)

 

 

(11,030)

Condominium deposits held in escrow

 

 

(51,573)

 

 

(18,423)

Condominium deposits released from escrow

 

 

15,661

 

 

90,425

Other, net

 

 

(3,535)

 

 

(325)

Cash used in operating activities

 

 

(136,835)

 

 

(957)

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Property and equipment expenditures

 

 

(7,339)

 

 

(3,863)

Operating property improvements

 

 

(5,712)

 

 

(4,401)

Property developments and redevelopments

 

 

(214,276)

 

 

(364,044)

Proceeds from grant to reimburse development costs

 

 

2,915

 

 

 —

Proceeds from disposition of 80 South Street Assemblage, net

 

 

378,257

 

 

 —

Proceeds from insurance claims

 

 

3,107

 

 

 —

Investment in KR Holdings, LLC

 

 

 —

 

 

9,121

Distributions from Real Estate and Other Affiliates

 

 

12,002

 

 

 —

Note issued to Real Estate Affiliate

 

 

(25,000)

 

 

 —

Proceeds from repayment of note to Real Estate Affiliate

 

 

25,000

 

 

 —

Investments in Real Estate and Other Affiliates, net

 

 

(11,813)

 

 

(501)

Change in restricted cash

 

 

4,658

 

 

(1,485)

Cash provided by (used in) investing activities

 

 

161,799

 

 

(365,173)

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

Proceeds from mortgages, notes and loans payable

 

 

207,561

 

 

310,822

Principal payments on mortgages, notes and loans payable

 

 

(4,492)

 

 

(14,900)

Deferred financing costs

 

 

(1,303)

 

 

(1,614)

Taxes paid on vested restricted stock

 

 

(1,231)

 

 

 —

Cash provided by financing activities

 

 

200,535

 

 

294,308

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

225,499

 

 

(71,822)

Cash and cash equivalents at beginning of period

 

 

445,301

 

 

560,451

Cash and cash equivalents at end of period

 

$

670,800

 

$

488,629

 

 

 

 

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THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

(In thousands)

    

2016

    

2015

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

Interest paid

 

$

57,335

 

$

48,460

Interest capitalized

 

 

28,681

 

 

23,074

Income taxes paid

 

 

3,067

 

 

2,067

 

 

 

 

 

 

 

Non-Cash Transactions:

 

 

 

 

 

 

Special Improvement District bond transfers associated with land sales

 

 

3,386

 

 

3,340

Property developments and redevelopments

 

 

 —

 

 

(4,534)

Accrued interest on construction loan borrowing

 

 

3,005

 

 

1,359

MPC Land contributed to Real Estate Affiliates

 

 

 —

 

 

15,234

Special Improvement District bond transfer to Real Estate Affiliate

 

 

 —

 

 

(1,518)

Capitalized stock compensation

 

 

1,387

 

 

1,262

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

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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 between consolidated subsidiaries eliminated for interim financial statements. 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”), these condensed consolidated financial statements do not include all of the information and disclosures required by GAAP for complete financial statements. 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, 2015, filed on February 29, 2016 with the SEC. Certain amounts in 2015 have been reclassified to conform to 2016 presentation. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations, comprehensive income (loss), cash flows and equity for the interim periods have been included. The results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ended December 31, 2016.

 

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 June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses.” The standard modifies the impairment model for most financial assets, including trade accounts receivables and loans, and will require the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. The effective date of the standard is for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019 for public companies. We are currently evaluating the impact of adopting ASU 2016-13 on our consolidated financial statements. 

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” The standard amends several aspects of accounting for share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new guidance will require entities to recognize all income tax effects of awards in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU 2016-09 will be effective as of January 1, 2017. Early adoption is permitted. We are currently evaluating the impact of adopting ASU 2016-09 on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02, codified in Accounting Standards Codification (“ASC”) 842, amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective beginning in the first quarter of 2019. Early adoption of ASU 2016-02 is permitted. The new Leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application. We are currently evaluating the impact of adopting ASU 2016-02 on our consolidated financial statements. 

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THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810) - Amendments to the Consolidation Analysis.” The standard modifies 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 variable interest entity (“VIE”) per consolidation guidance in ASC 810-10-65; and (3) a reporting entity is the primary beneficiary of a VIE. The effective date of the standard is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 for public companies. We adopted the standard as of January 1, 2016, and there was no impact on our consolidated financial statements.

In May 2014, the FASB and 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 effective date of this standard is 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. Preliminary assessments of our revenue streams indicate that after adoption we will not be able to recognize revenue for condominium projects on a percentage of completion basis and generally revenue will be recognized when the units close and the title has transferred to the buyer. We are continuing to evaluate the new guidance to determine the impact on our 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. This ASU is effective for the annual and interim periods ending after December 15, 2016 and for annual and interim periods thereafter. We do not expect the adoption of this ASU to have an impact on our consolidated financial statements.

 

NOTE 3SPONSOR AND MANAGEMENT WARRANTS

On November 9, 2010, we issued warrants to purchase shares of our common stock to certain of our sponsors (the “Sponsor Warrants”). The 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. The 1,916,667 of Sponsor Warrants outstanding are exercisable at any time and 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 June 30, 2016, the estimated $124.1 million fair value for the Sponsor Warrants representing warrants to purchase 1,916,667 shares and the estimated $198.0 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 Sponsor Warrants and Management Warrants were $123.1 million and $184.7 million, respectively, as of December 31, 2015. The fair values

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THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

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 Sponsor 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 Sponsor Warrants and Management Warrants is computed using the if‑converted method. Gains associated with the changes in the fair value of the Sponsor Warrants and Management Warrants are excluded from the numerator in computing diluted earnings per share because inclusion of such gains in the computation would be anti‑dilutive.

 

Information related to our EPS calculations is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

(In thousands, except per share amounts)

    

2016

    

2015

    

2016

    

2015

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

6,970

 

$

50,585

 

$

150,735

 

$

(55,374)

 

Net income attributable to noncontrolling interests

 

 

 —

 

 

(12)

 

 

 —

 

 

(12)

 

Net income (loss) attributable to common stockholders

 

$

6,970

 

$

50,573

 

$

150,735

 

$

(55,386)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

 

39,492

 

 

39,468

 

 

39,483

 

 

39,467

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

 

$

6,970

 

$

50,573

 

$

150,735

 

$

(55,386)

 

Less: Warrant liability gain

 

 

 —

 

 

(42,620)

 

 

 —

 

 

 —

 

Adjusted net income (loss) attributable to common stockholders

 

$

6,970

 

$

7,953

 

$

150,735

 

$

(55,386)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

 

39,492

 

 

39,468

 

 

39,483

 

 

39,467

 

Restricted stock and stock options

 

 

337

 

 

438

 

 

324

 

 

 —

 

Warrants

 

 

2,835

 

 

3,291

 

 

2,835

 

 

 —

 

Weighted average diluted common shares outstanding

 

 

42,664

 

 

43,197

 

 

42,642

 

 

39,467

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share:

 

$

0.18

 

$

1.28

 

$

3.82

 

$

(1.40)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per share:

 

$

0.16

 

$

0.18

 

$

3.53

 

$

(1.40)

 

The diluted EPS computation for the three and six months ended June 30, 2016 excludes 363,000 stock options and 402,500 stock options, respectively, because their inclusion would have been anti-dilutive. The diluted EPS computation for the

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THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

three and six months ended June 30, 2016 excludes 8,729 shares of restricted stock and 9,254 shares of restricted stock, respectively, because performance conditions have not been met.

The diluted EPS computation for the three months ended June 30, 2015 excludes 125,769 stock options. The diluted EPS computation for the six months ended June 30, 2015 excludes 1,048,750 stock options, 242,055 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. 

 

NOTE 5RECENT TRANSACTIONS

 

On March 16, 2016, we sold the 80 South Street Assemblage (“80 South Street”) for net cash proceeds of $378.3 million, resulting in a pre-tax gain of $140.5 million. 80 South Street was comprised of a 42,694 square foot lot with certain air rights, providing total residential and commercial development rights of 817,784 square feet that had been acquired over the course of 2014 and 2015.

 

NOTE 6IMPAIRMENT

 

We review our real estate assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. GAAP related to the impairment or disposal of long‑lived assets requires that if impairment indicators exist and expected undiscounted cash flows generated by the asset are less than its carrying amount, an impairment provision should be recorded to write down the carrying amount of the asset to its fair value. The impairment analysis does not consider the timing of future cash flows and whether the asset is expected to earn an above or below market rate of return.

 

Each investment in Real Estate and Other Affiliates as discussed in Note 8 – 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 six months ended June 30, 2016 or June 30, 2015. 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

ASC 820, Fair Value Measurement, emphasizes that fair value is a market-based measurement that should be determined on the assumptions market participants would use in pricing an asset or liability. The standard establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring assets or liabilities at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the asset or liability. Assets or liabilities with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree or judgment used in measuring fair value.

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THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

The following table presents the fair value measurement hierarchy levels required under ASC 820 for each of our assets and liabilities that are measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

December 31, 2015

 

 

Fair Value Measurements Using

 

Fair Value Measurements Using

(In thousands)

    

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)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

378,535

 

$

378,535

 

$

 —

 

$

 —

 

$

18

 

$

18

 

$

 —

 

$

 —

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

 

322,090

 

 

 —

 

 

 —

 

 

322,090

 

 

307,760

 

 

 —