Brooks Draft 106 10 am

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, 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 November 8, 2016 was 39,838,975.

 

 


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

INDEX

 

 

 

 

 

 

 

    

PAGE
NUMBER

 

 

 

 

 

 

PART I FINANCIAL INFORMATION 

 

 

 

 

 

Item 1:Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets
as of September 30, 2016 and December 31, 2015
 

 

 

 

 

Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 2016 and 2015
 

 

 

 

 

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

 

 

 

 

Condensed Consolidated Statements of Equity
for the nine months ended September 30, 2016 and 2015
 

 

 

 

 

Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2016 and 2015
 

 

 

 

 

Notes to Condensed Consolidated Financial Statements 

 

 

 

 

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

 

33 

 

 

 

Item 3:Quantitative and Qualitative Disclosures about Market Risk

 

63 

 

 

 

Item 4:Controls and Procedures

 

64 

 

 

 

PART II  OTHER INFORMATION 

 

64 

 

 

 

Item 1:Legal Proceedings

 

64 

 

 

 

Item 1ARisk Factors 

 

64 

 

 

 

Item 6:Exhibits

 

64 

 

 

 

SIGNATURE 

 

65 

 

 

 

EXHIBIT INDEX 

 

66 

 

 

2


 

Table of Contents

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

(In thousands, except share amounts)

    

2016

    

2015

Assets:

 

 

 

 

 

 

Investment in real estate:

 

 

 

 

 

 

Master Planned Community assets

 

$

1,660,523

 

$

1,642,842

Land

 

 

314,400

 

 

322,462

Buildings and equipment

 

 

1,900,172

 

 

1,772,401

Less: accumulated depreciation

 

 

(242,034)

 

 

(232,969)

Developments

 

 

976,209

 

 

1,036,927

Net property and equipment

 

 

4,609,270

 

 

4,541,663

Investment in Real Estate and Other Affiliates

 

 

78,890

 

 

57,811

Net investment in real estate

 

 

4,688,160

 

 

4,599,474

Cash and cash equivalents

 

 

653,041

 

 

445,301

Accounts receivable, net 

 

 

38,241

 

 

32,203

Municipal Utility District receivables, net

 

 

171,691

 

 

139,946

Notes receivable, net

 

 

69

 

 

1,664

Deferred expenses, net

 

 

64,053

 

 

61,804

Prepaid expenses and other assets, net

 

 

820,240

 

 

441,190

Property held for sale

 

 

34,888

 

 

 —

Total assets

 

$

6,470,383

 

$

5,721,582

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Mortgages, notes and loans payable

 

$

2,847,002

 

$

2,443,962

Deferred tax liabilities

 

 

156,882

 

 

89,221

Warrant liabilities

 

 

329,390

 

 

307,760

Uncertain tax position liability

 

 

19,987

 

 

1,396

Accounts payable and accrued expenses

 

 

603,237

 

 

515,354

Total liabilities

 

 

3,956,498

 

 

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, 39,851,036 shares issued and 39,838,975 outstanding as of September 30, 2016 and 39,714,838 shares issued and outstanding as of December 31, 2015

 

 

398

 

 

398

Additional paid-in capital

 

 

2,856,335

 

 

2,847,823

Accumulated deficit

 

 

(321,507)

 

 

(480,215)

Accumulated other comprehensive loss

 

 

(23,818)

 

 

(7,889)

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

 

 

(1,295)

 

 

 —

Total stockholders' equity

 

 

2,510,113

 

 

2,360,117

Noncontrolling interests

 

 

3,772

 

 

3,772

Total equity

 

 

2,513,885

 

 

2,363,889

Total liabilities and equity

 

$

6,470,383

 

$

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 September 30, 

 

Nine Months Ended September 30, 

(In thousands, except per share amounts)

    

2016

    

2015

    

2016

    

2015

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Condominium rights and unit sales

 

$

115,407

 

$

78,992

 

$

362,613

 

$

200,362

Master Planned Community land sales

 

 

44,128

 

 

45,423

 

 

147,168

 

 

138,937

Minimum rents

 

 

44,910

 

 

37,814

 

 

128,255

 

 

109,997

Builder price participation

 

 

4,483

 

 

6,680

 

 

15,631

 

 

20,285

Tenant recoveries

 

 

11,657

 

 

10,706

 

 

33,108

 

 

31,074

Hospitality revenues

 

 

14,088

 

 

11,772

 

 

46,126

 

 

35,256

Other land revenues

 

 

2,595

 

 

4,617

 

 

8,387

 

 

11,055

Other rental and property revenues

 

 

3,538

 

 

7,438

 

 

11,335

 

 

20,729

Total revenues

 

 

240,806

 

 

203,442

 

 

752,623

 

 

567,695

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses and other income:

 

 

 

 

 

 

 

 

 

 

 

 

Condominium rights and unit cost of sales

 

 

83,218

 

 

47,573

 

 

237,759

 

 

126,747

Master Planned Community cost of sales

 

 

21,432

 

 

19,674

 

 

66,128

 

 

67,806

Master Planned Community operations

 

 

9,216

 

 

10,349

 

 

26,616

 

 

32,295

Other property operating costs

 

 

16,535

 

 

16,680

 

 

47,513

 

 

54,459

Rental property real estate taxes

 

 

7,033

 

 

6,908

 

 

21,110

 

 

19,676

Rental property maintenance costs

 

 

3,332

 

 

3,094

 

 

9,217

 

 

8,738

Hospitality costs

 

 

12,662

 

 

8,767

 

 

37,379

 

 

26,738

Provision for doubtful accounts

 

 

1,940

 

 

1,007

 

 

4,629

 

 

3,082

Demolition costs

 

 

256

 

 

1,024

 

 

1,218

 

 

2,637

Development-related marketing costs

 

 

4,716

 

 

7,639

 

 

15,586

 

 

19,476

General and administrative

 

 

21,128

 

 

18,526

 

 

61,505

 

 

57,095

Other (income) expense, net

 

 

(432)

 

 

659

 

 

(9,858)

 

 

(1,204)

Gain on sale of 80 South Street Assemblage

 

 

(70)

 

 

 —

 

 

(140,549)

 

 

 —

Depreciation and amortization

 

 

23,322

 

 

24,998

 

 

71,246

 

 

71,577

Provision for impairment

 

 

35,734

 

 

 —

 

 

35,734

 

 

 —

Total expenses, net of other income

 

 

240,022

 

 

166,898

 

 

485,233

 

 

489,122

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

784

 

 

36,544

 

 

267,390

 

 

78,573

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

196

 

 

109

 

 

900

 

 

516

Interest expense

 

 

(16,102)

 

 

(15,212)

 

 

(48,628)

 

 

(43,143)

Warrant liability (loss) gain

 

 

(7,300)

 

 

123,640

 

 

(21,630)

 

 

57,450

Gain on acquisition of joint venture partner's interest

 

 

27,087

 

 

 —

 

 

27,087

 

 

 —

Gain on sale of The Club at Carlton Woods

 

 

 —

 

 

29,073

 

 

 —

 

 

29,073

Equity in earnings from Real Estate and Other Affiliates

 

 

13,493

 

 

295

 

 

35,700

 

 

3,164

Income before taxes

 

 

18,158

 

 

174,449

 

 

260,819

 

 

125,633

Provision for income taxes

 

 

10,162

 

 

18,237

 

 

102,088

 

 

24,795

Net income

 

 

7,996

 

 

156,212

 

 

158,731

 

 

100,838

Net (income) loss attributable to noncontrolling interests

 

 

(23)

 

 

12

 

 

(23)

 

 

 —

Net income attributable to common stockholders

 

$

7,973

 

$

156,224

 

$

158,708

 

$

100,838

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income per share:

 

$

0.20

 

$

3.96

 

$

4.02

 

$

2.55

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted income per share:

 

$

0.19

 

$

0.76

 

$

3.72

 

$

1.01

 

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, 

(In thousands)

    

2016

    

2015

    

2016

    

2015

Net income

 

$

7,996

 

$

156,212

 

$

158,731

 

$

100,838

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps (a)

 

 

497

 

 

(411)

 

 

(14,876)

 

 

297

Capitalized swap interest expense (b)

 

 

154

 

 

(42)

 

 

(163)

 

 

(154)

Pension adjustment (c)

 

 

(317)

 

 

 —

 

 

(890)

 

 

 —

Other comprehensive income (loss)

 

 

334

 

 

(453)

 

 

(15,929)

 

 

143

Comprehensive income

 

 

8,330

 

 

155,759

 

 

142,802

 

 

100,981

Comprehensive (income) loss attributable to noncontrolling interests

 

 

(23)

 

 

12

 

 

(23)

 

 

 —

Comprehensive income attributable to common stockholders

 

$

8,307

 

$

155,771

 

$

142,779

 

$

100,981

(a)

Amounts are shown net of deferred tax expense of $0.2 million and deferred tax benefit of $8.1 million for the three and nine months ended September 30, 2016, respectively. For the three and nine months ended September 30, 2015, amounts are shown net of deferred tax expense of $0.2 million and $0.8 million, respectively.

(b)

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

(c)

Net of deferred tax benefit of $0.1 million and $0.5 million for the three and nine months ended September 30, 2016, respectively. For both the three and nine months ended September 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 income

 

 

 

 

 —

 

 

 —

 

 

100,838

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

100,838

Adjustment 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

 

39,714,838

 

$

398

 

$

2,847,823

 

$

(480,215)

 

$

(7,889)

 

 —

 

$

 —

 

$

3,772

 

$

2,363,889

Net income

 

 

 

 

 —

 

 

 —

 

 

158,708

 

 

 —

 

 

 

 

 —

 

 

23

 

 

158,731

Preferred dividend payment on behalf of subsidiary

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23)

 

 

(23)

Interest rate swaps, net of tax of  $8,120

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

(14,876)

 

 

 

 

 —

 

 

 —

 

 

(14,876)

Pension adjustment, net of tax of $543

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

(890)

 

 

 

 

 —

 

 

 —

 

 

(890)

Capitalized swap interest, net of tax benefit of $88

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

(163)

 

 

 

 

 —

 

 

 —

 

 

(163)

Stock plan activity

 

136,198

 

 

 —

 

 

8,512

 

 

 —

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

8,512

Treasury stock activity

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

(12,061)

 

 

(1,295)

 

 

 —

 

 

(1,295)

Balance, September 30, 2016

 

39,851,036

 

$

398

 

$

2,856,335

 

$

(321,507)

 

$

(23,818)

 

(12,061)

 

$

(1,295)

 

$

3,772

 

$

2,513,885

 

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, 

(In thousands)

    

2016

    

2015

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net income (loss)

 

$

158,731

 

$

100,838

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

 

 

 

 

 

 

Depreciation

 

 

60,834

 

 

58,257

Amortization

 

 

10,412

 

 

13,320

Amortization of deferred financing costs

 

 

5,385

 

 

4,104

Amortization of intangibles other than in-place leases

 

 

(1,333)

 

 

679

Straight-line rent amortization

 

 

(6,668)

 

 

(3,255)

Deferred income taxes

 

 

102,088

 

 

23,065

Restricted stock and stock option amortization

 

 

6,324

 

 

5,269

Gain on disposition of assets

 

 

(140,549)

 

 

(29,073)

Gain on acquisition of partner's interest in Millennium Six Pines Apartments

 

 

(27,087)

 

 

 —

Warrant liability loss (gain)

 

 

21,630

 

 

(57,450)

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

 

 

(21,952)

 

 

1,426

Provision for doubtful accounts

 

 

4,629

 

 

3,082

Master Planned Community land acquisitions

 

 

(69)

 

 

(6,028)

Master Planned Community development expenditures

 

 

(106,501)

 

 

(129,298)

Master Planned Community cost of sales

 

 

60,600

 

 

65,692

Condominium development expenditures

 

 

(245,547)

 

 

(137,369)

Condominium rights and unit cost of sales

 

 

237,759

 

 

126,747

Provision for impairment

 

 

35,734

 

 

 —

Deferred rental income

 

 

 —

 

 

37,472

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

 

 

(362,613)

 

 

(200,362)

      Net changes:

 

 

 

 

 

 

Accounts and notes receivable

 

 

(33)

 

 

(1,192)

Prepaid expenses and other assets

 

 

(753)

 

 

(9,838)

Condominium deposits received

 

 

440,076

 

 

52,001

Deferred expenses

 

 

(3,349)

 

 

(5,562)

Accounts payable and accrued expenses

 

 

(19,019)

 

 

39,065

Condominium deposits held in escrow

 

 

(440,076)

 

 

(52,001)

Condominium deposits released from escrow

 

 

17,574

 

 

132,086

Other, net

 

 

(4,533)

 

 

969

Cash provided by (used in) operating activities

 

 

(218,306)

 

 

32,644

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Property and equipment expenditures

 

 

(8,649)

 

 

(9,505)

Operating property improvements

 

 

(12,184)

 

 

(5,856)

Property developments and redevelopments

 

 

(301,843)

 

 

(488,713)

Proceeds from grant to reimburse development costs

 

 

4,945

 

 

 —

Proceeds from dispositions

 

 

378,257

 

 

25,139

Proceeds from insurance claims

 

 

3,107

 

 

 —

Investment in KR Holdings, LLC

 

 

 —

 

 

9,121

Acquisition of partner's interest in Millennium Six Pines Apartments (net of cash acquired)

 

 

(3,105)

 

 

 —

Distributions from Real Estate and Other Affiliates

 

 

16,550

 

 

 —

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

 

 

(10,947)

 

 

(635)

Change in restricted cash

 

 

(215)

 

 

(1,568)

Other

 

 

 —

 

 

1,263

Cash provided by (used in) investing activities

 

 

65,916

 

 

(470,754)

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

Proceeds from mortgages, notes and loans payable

 

 

422,661

 

 

370,342

Principal payments on mortgages, notes and loans payable

 

 

(62,996)

 

 

(40,066)

Special Improvement District bond funds held in escrow

 

 

6,258

 

 

 —

Deferred financing costs

 

 

(4,678)

 

 

(1,970)

Taxes paid on vested restricted stock

 

 

(1,295)

 

 

 —

Stock Options Exercised

 

 

180

 

 

 —

Cash provided by financing activities

 

 

360,130

 

 

328,306

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

207,740

 

 

(109,804)

Cash and cash equivalents at beginning of period

 

 

445,301

 

 

560,451

Cash and cash equivalents at end of period

 

$

653,041

 

$

450,647

7


 

Table of Contents

 

 

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

(In thousands)

    

2016

    

2015

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

Interest paid

 

$

77,666

 

$

60,805

Interest capitalized

 

 

46,198

 

 

35,237

Income taxes paid

 

 

6,234

 

 

2,593

 

 

 

 

 

 

 

Non-Cash Transactions:

 

 

 

 

 

 

Special Improvement District bond transfers associated with land sales

 

 

5,528

 

 

2,114

Property developments and redevelopments

 

 

 —

 

 

(15,747)

Accrued interest on construction loan borrowing

 

 

3,748

 

 

1,616

MPC Land contributed to Real Estate Affiliates

 

 

 —

 

 

15,234

Special Improvement District bond transfer to Real Estate Affiliate

 

 

 —

 

 

(1,518)

Capitalized stock compensation

 

 

2,008

 

 

2,072

Acquisition of Millennium Six Pines Apartments

 

 

 

 

 

 

Land

 

 

(11,225)

 

 

 —

Building

 

 

(54,492)

 

 

 —

Other assets

 

 

(1,261)

 

 

 —

Mortgages, notes and loans payable

 

 

37,700

 

 

 —

Other liabilities

 

 

(913)

 

 

 —

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

8


 

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

NOTE 1 BASIS OF PRESENTATION AND ORGANIZATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), with intercompany transactions between consolidated subsidiaries eliminated. 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 nine months ended September 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 2 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” The standard addresses how certain cash receipts and payments are presented and classified in the statement of cash flows. The effective date of this standard is for fiscal years, and interim periods within those years, beginning after December 15, 2017 with early adoption permitted. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.

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 years, beginning after December 15, 2019 with early adoption permitted. 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. The effective date of this standard is for fiscal years, and interim periods within those years, beginning after December 15, 2016 with early adoption 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. The effective date of this standard is for

9


 

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption 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. 

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 with early adoption permitted. 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 any other impacts on our consolidated financial statements, and we expect to select the implementation methodology by the filing of our annual report on 2016 Form 10-K.

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. The effective date of this standard is for fiscal years, and interim periods within those years, beginning after December 15, 2016 with early adoption permitted. We do not expect the adoption of this ASU to have an impact on our consolidated financial statements.

 

NOTE 3 SPONSOR 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 former 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.

 

10


 

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

As of September 30, 2016, the estimated $124.3 million fair value for the Sponsor Warrants representing warrants to purchase 1,916,667 shares and the estimated $205.1 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 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.

 

On October 7, 2016, we entered into a management warrant agreement with our new Chief Financial Officer, David R. O’Reilly, prior to his appointment to the position.  This warrant represents 50,125 underlying shares with an exercise price of $112.08 per share and was issued at fair value in exchange for $1.0 million in cash.

 

NOTE 4 EARNINGS 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:

11


 

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

(In thousands, except per share amounts)

    

2016

    

2015

    

2016

    

2015

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income 

 

$

7,996

 

$

156,212

 

$

158,731

 

$

100,838

Net (income) loss attributable to noncontrolling interests

 

 

(23)

 

 

12

 

 

(23)

 

 

 —

Net income attributable to common stockholders

 

$

7,973

 

$

156,224

 

$

158,708

 

$

100,838

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

 

39,502

 

 

39,473

 

 

39,489

 

 

39,469

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

7,973

 

$

156,224

 

$

158,708

 

$

100,838

Less: Warrant liability gain

 

 

 —

 

 

(123,640)

 

 

 —

 

 

(57,450)

Adjusted net income attributable to common stockholders

 

$

7,973

 

$

32,584

 

$

158,708

 

$

43,388

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

 

39,502

 

 

39,473

 

 

39,489

 

 

39,469

Restricted stock and stock options

 

 

366

 

 

405

 

 

338

 

 

415

Warrants

 

 

2,892

 

 

3,035

 

 

2,892

 

 

3,035

Weighted average diluted common shares outstanding

 

 

42,760

 

 

42,913

 

 

42,719

 

 

42,919