hhc_Current_Folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2017

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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 

 

Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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 April 28, 2017 was 40,321,379.

 

 

 


 

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 March 31, 2017 and December 31, 2016

3

 

 

 

 

 

 

Condensed Consolidated Statements of Operations
for the three months ended March 31, 2017 and 2016

4

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income
for the three months ended March 31, 2017 and 2016

5

 

 

 

 

 

 

Condensed Consolidated Statements of Equity
for the three months ended March 31, 2017 and 2016

6

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2017 and 2016

7

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

 

 

Item 2:

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

31

 

 

 

 

 

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

58

 

 

 

 

 

Item 4:

Controls and Procedures

59

 

 

 

 

PART II  OTHER INFORMATION 

59

 

 

 

 

 

Item 1:

Legal Proceedings

59

 

 

 

 

 

Item 1A:

Risk Factors

59

 

 

 

 

 

Item 2:

Unregistered Sales of Equity Securities And Use Of Proceeds

60

 

 

 

 

 

Item 3:

Default Upon Senior Securities

60

 

 

 

 

 

Item 4:

Mine Safety Disclosures

60

 

 

 

 

 

Item 5:

Other Information

60

 

 

 

 

 

Item 6:

Exhibits

60

 

 

 

 

 

SIGNATURE

61

 

 

 

 

EXHIBIT INDEX

62

 

 

 

2


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

(In thousands, except share amounts)

 

2017

 

2016

Assets:

    

 

 

 

 

 

Investment in real estate:

 

 

 

 

 

 

Master Planned Community assets

 

$

1,672,484

 

$

1,669,561

Buildings and equipment

 

 

2,131,973

 

 

2,027,363

Land

 

 

314,259

 

 

320,936

Less: accumulated depreciation

 

 

(266,260)

 

 

(245,814)

Developments

 

 

994,864

 

 

961,980

Net property and equipment

 

 

4,847,320

 

 

4,734,026

Investment in Real Estate and Other Affiliates

 

 

70,381

 

 

76,376

Net investment in real estate

 

 

4,917,701

 

 

4,810,402

Cash and cash equivalents

 

 

541,508

 

 

665,510

Accounts receivable, net 

 

 

10,177

 

 

10,038

Municipal Utility District receivables, net

 

 

160,189

 

 

150,385

Deferred expenses, net

 

 

64,155

 

 

64,531

Prepaid expenses and other assets, net

 

 

714,412

 

 

666,516

Total assets

 

$

6,408,142

 

$

6,367,382

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Mortgages, notes and loans payable

 

$

2,750,254

 

$

2,690,747

Deferred tax liabilities

 

 

210,043

 

 

200,945

Warrant liabilities

 

 

313,797

 

 

332,170

Accounts payable and accrued expenses

 

 

516,742

 

 

572,010

Total liabilities

 

 

3,790,836

 

 

3,795,872

 

 

 

 

 

 

 

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, 40,324,040 shares

issued and 40,311,979 outstanding as of March 31, 2017 and 39,802,064 shares

issued and 39,790,003 outstanding as of December 31, 2016

 

 

404

 

 

398

Additional paid-in capital

 

 

2,893,042

 

 

2,853,269

Accumulated deficit

 

 

(272,253)

 

 

(277,912)

Accumulated other comprehensive loss

 

 

(6,428)

 

 

(6,786)

Treasury stock, at cost, 12,061 shares as of March 31, 2017 and December 31, 2016, respectively

 

 

(1,231)

 

 

(1,231)

Total stockholders' equity

 

 

2,613,534

 

 

2,567,738

Noncontrolling interests

 

 

3,772

 

 

3,772

Total equity

 

 

2,617,306

 

 

2,571,510

Total liabilities and equity

 

$

6,408,142

 

$

6,367,382

 

See Notes to Condensed Consolidated Financial Statements.

 

3


 

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THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

(In thousands, except per share amounts)

    

2017

    

2016

Revenues:

 

 

 

 

 

 

Condominium rights and unit sales

 

$

80,145

 

$

122,094

Master Planned Community land sales

 

 

53,481

 

 

41,942

Minimum rents

 

 

46,326

 

 

41,309

Builder price participation

 

 

4,661

 

 

4,647

Tenant recoveries

 

 

11,399

 

 

10,528

Hospitality revenues

 

 

19,711

 

 

12,909

Other land revenues

 

 

10,582

 

 

3,033

Other rental and property revenues

 

 

5,457

 

 

3,204

Total revenues

 

 

231,762

 

 

239,666

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

Condominium rights and unit cost of sales

 

 

60,483

 

 

74,815

Master Planned Community cost of sales

 

 

25,869

 

 

15,688

Master Planned Community operations

 

 

9,394

 

 

9,594

Other property operating costs

 

 

18,508

 

 

15,742

Rental property real estate taxes

 

 

7,537

 

 

6,748

Rental property maintenance costs

 

 

3,028

 

 

3,132

Hospitality operating costs

 

 

13,845

 

 

10,475

Provision for doubtful accounts

 

 

535

 

 

3,041

Demolition costs

 

 

65

 

 

472

Development-related marketing costs

 

 

4,205

 

 

4,531

General and administrative

 

 

18,117

 

 

20,324

Depreciation and amortization

 

 

25,524

 

 

22,972

Total expenses

 

 

187,110

 

 

187,534

 

 

 

 

 

 

 

Operating income before other items

 

 

44,652

 

 

52,132

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

Gains on sales of properties

 

 

32,215

 

 

140,479

Other income, net

 

 

687

 

 

359

Total other

 

 

32,902

 

 

140,838

 

 

 

 

 

 

 

Operating income

 

 

77,554

 

 

192,970

 

 

 

 

 

 

 

Interest income

 

 

622

 

 

269

Interest expense

 

 

(17,858)

 

 

(15,993)

Loss on redemption of senior notes due 2021

 

 

(46,410)

 

 

 —

Warrant liability (loss) gain

 

 

(12,562)

 

 

29,820

Gain on acquisition of joint venture partner's interest

 

 

5,490

 

 

 —

Equity in earnings from Real Estate and Other Affiliates

 

 

8,520

 

 

1,932

Income before taxes

 

 

15,356

 

 

208,998

Provision for income taxes

 

 

(9,697)

 

 

(65,233)

Net income

 

 

5,659

 

 

143,765

Net income attributable to noncontrolling interests

 

 

 —

 

 

 —

Net income attributable to common stockholders

 

$

5,659

 

$

143,765

 

 

 

 

 

 

 

Basic income per share:

 

$

0.14

 

$

3.64

 

 

 

 

 

 

 

Diluted income per share:

 

$

0.13

 

$

2.69

 

See Notes to Condensed Consolidated Financial Statements.

 

4


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

(In thousands)

    

2017

    

2016

Net income

 

$

5,659

 

$

143,765

Other comprehensive income (loss):

 

 

 

 

 

 

Interest rate swaps (a)

 

 

433

 

 

(9,808)

Capitalized swap interest expense (b)

 

 

(75)

 

 

(63)

Other comprehensive income (loss)

 

 

358

 

 

(9,871)

Comprehensive income

 

 

6,017

 

 

133,894

Comprehensive income attributable to noncontrolling interests

 

 

 —

 

 

 —

Comprehensive income attributable to common stockholders

 

$

6,017

 

$

133,894


(a)

Amounts are shown net of deferred tax expense of $0.3 million and deferred tax benefit of $5.3 million for the three months ended March 31, 2017 and 2016, respectively.

(b)

Net of deferred tax benefit of $0.1 million for both the three months ended March 31, 2017 and 2016, respectively.

 

See Notes to Condensed Consolidated Financial Statements.

 

 

5


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Accumulated

 

Comprehensive

 

Treasury Stock

 

Noncontrolling

 

Total

(In thousands, except shares)

    

Shares

    

Amount

    

Capital

    

Deficit

    

Loss

    

Shares

    

Amount

    

Interests

    

Equity

Balance December 31, 2015

 

39,714,838

 

$

398

 

$

2,847,823

 

$

(480,215)

 

$

(7,889)

 

 —

 

$

 —

 

$

3,772

 

$

2,363,889

Net income

 

 —

 

 

 —

 

 

 —

 

 

143,765

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

143,765

Distribution to noncontrolling interest

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

Preferred dividend payment on behalf of subsidiary

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

Interest rate swaps, net of tax $5,268

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(9,808)

 

 —

 

 

 —

 

 

 —

 

 

(9,808)

Capitalized swap interest, net of tax $34

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(63)

 

 —

 

 

 —

 

 

 —

 

 

(63)

Stock plan activity

 

117,338

 

 

 —

 

 

3,520

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

3,520

Treasury stock activity

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

(8,390)

 

 

(840)

 

 

 —

 

 

(840)

Balance, March 31, 2016

 

39,832,176

 

 

398

 

 

2,851,343

 

 

(336,450)

 

 

(17,760)

 

(8,390)

 

 

(840)

 

 

3,772

 

 

2,500,463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2016

 

39,802,064

 

 

398

 

 

2,853,269

 

 

(277,912)

 

 

(6,786)

 

(12,061)

 

 

(1,231)

 

 

3,772

 

 

2,571,510

Net income

 

 —

 

 

 —

 

 

 —

 

 

5,659

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

5,659

Interest rate swaps, net of tax of $254

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

433

 

 —

 

 

 —

 

 

 —

 

 

433

Capitalized swap interest, net of tax of $41

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(75)

 

 —

 

 

 —

 

 

 —

 

 

(75)

Stock plan activity

 

249,378

 

 

 3

 

 

8,841

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

8,844

Exercise of warrants

 

272,598

 

 

 3

 

 

30,932

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

30,935

Balance, March 31, 2017

 

40,324,040

 

$

404

 

$

2,893,042

 

$

(272,253)

 

$

(6,428)

 

(12,061)

 

$

(1,231)

 

$

3,772

 

$

2,617,306

 

See Notes to Condensed Consolidated Financial Statements.

 

 

6


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

(In thousands)

    

2017

    

2016

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net income

 

$

5,659

 

$

143,765

Adjustments to reconcile net income to cash used in operating activities:

 

 

 

 

 

 

Depreciation

 

 

21,540

 

 

19,496

Amortization

 

 

3,984

 

 

3,476

Amortization of deferred financing costs

 

 

1,638

 

 

1,685

Amortization of intangibles other than in-place leases

 

 

(483)

 

 

(186)

Straight-line rent amortization

 

 

(1,291)

 

 

(2,792)

Deferred income taxes

 

 

8,888

 

 

60,571

Restricted stock and stock option amortization

 

 

1,906

 

 

2,722

Gains on sales of properties

 

 

(32,215)

 

 

(140,479)

Gain on acquisition of joint venture partner's interest

 

 

(5,490)

 

 

 —

Warrant liability loss (gain)

 

 

12,562

 

 

(29,820)

Loss on redemption of senior notes due 2021

 

 

46,410

 

 

 —

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

 

 

(4,281)

 

 

944

Provision for doubtful accounts

 

 

535

 

 

3,041

Master Planned Community land acquisitions

 

 

(1,415)

 

 

(69)

Master Planned Community development expenditures

 

 

(43,623)

 

 

(34,468)

Master Planned Community cost of sales

 

 

23,327

 

 

15,450

Condominium development expenditures

 

 

(86,279)

 

 

(64,363)

Condominium rights and unit cost of sales

 

 

60,483

 

 

74,815

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

 

 

(80,145)

 

 

(122,094)

Net changes:

 

 

 

 

 

 

Accounts receivable

 

 

3,178

 

 

4,564

Prepaid expenses and other assets

 

 

(1,538)

 

 

3,139

Condominium deposits received

 

 

11,847

 

 

17,381

Deferred expenses

 

 

(1,682)

 

 

(578)

Accounts payable and accrued expenses

 

 

(59,109)

 

 

8,745

Condominium deposits held in escrow

 

 

(11,847)

 

 

(17,381)

Condominium deposits released from escrow

 

 

69,553

 

 

10,607

Other, net

 

 

128

 

 

(532)

Cash used in operating activities

 

 

(57,760)

 

 

(42,361)

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Property and equipment expenditures

 

 

(2,559)

 

 

(5,855)

Operating property improvements

 

 

(4,722)

 

 

(2,670)

Property developments and redevelopments

 

 

(111,674)

 

 

(110,918)

Acquisition of partner's interest in Las Vegas 51s

 

 

(15,404)

 

 

 —

Proceeds for reimbursement of development costs

 

 

10,597

 

 

 —

Proceeds from sales of properties

 

 

36,000

 

 

378,257

Distributions from Real Estate and Other Affiliates

 

 

 —

 

 

7,070

Note issued to Real Estate Affiliate

 

 

 —

 

 

(25,000)

Investments in Real Estate and Other Affiliates, net

 

 

(724)

 

 

(6,498)

Change in restricted cash

 

 

975

 

 

4,785

Cash (used in) provided by investing activities

 

 

(87,511)

 

 

239,171

 

 

7


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

(In thousands)

 

2017

    

2016

Cash Flows from Financing Activities:

 

 

 

 

 

 

Proceeds from mortgages, notes and loans payable

 

$

944,663

 

$

98,616

Principal payments on mortgages, notes and loans payable

 

 

(881,476)

 

 

(1,981)

Premium paid to redeem 2021 senior notes

 

 

(39,966)

 

 

 —

Special Improvement District bond funds released from (held in) escrow

 

 

581

 

 

 —

Deferred financing costs

 

 

(9,215)

 

 

(1,072)

Taxes paid on vested stock options and restricted stock

 

 

(4,589)

 

 

(840)

Stock options exercised

 

 

11,271

 

 

 —

Cash provided by financing activities

 

 

21,269

 

 

94,723

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(124,002)

 

 

291,533

Cash and cash equivalents at beginning of period

 

 

665,510

 

 

445,301

Cash and cash equivalents at end of period

 

$

541,508

 

$

736,834

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

Interest paid

 

$

42,997

 

$

15,236

Interest capitalized

 

 

16,305

 

 

13,959

Income taxes paid

 

 

429

 

 

181

 

 

 

 

 

 

 

Non-Cash Transactions:

 

 

 

 

 

 

Special Improvement District bond transfers associated with land sales

 

 

2,542

 

 

32

Accrued interest on construction loan borrowing

 

 

1,011

 

 

2,429

Capitalized stock compensation

 

 

531

 

 

798

Acquisition of Las Vegas 51s

 

 

 

 

 

 

Furniture and fixtures

 

 

87

 

 

 —

Developments

 

 

65

 

 

 —

Accounts receivable

 

 

633

 

 

 —

Other assets

 

 

33,313

 

 

 —

Other liabilities

 

 

(2,294)

 

 

 —

 

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 for the fiscal year ended December 31, 2016 (the “Annual Report”), filed on February 23, 2017 with the SEC. Certain amounts in 2016 have been reclassified to conform to 2017 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 months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ended December 31, 2017.

 

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

 

The following is a summary of recently issued and other notable accounting pronouncements which relate to our business.

 

In February 2017, the Financial Accounting Standards Board’s (“FASB”) issued Accounting Standards Update (“ASU”) 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). The standard defines an “in-substance non-financial asset,” as a financial asset promised to a counterparty in a contract if substantially all the fair value of the assets is concentrated in nonfinancial assets. The ASU also provides guidance for accounting for partial sales of non-financial assets. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2017. The new standard must be adopted retrospectively with early adoption permitted. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This standard is intended to simplify the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. Instead, an entity will perform only step one of its quantitative goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and then recognizing the impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. An entity will still have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative step one impairment test is necessary. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2019. The new standard must be adopted prospectively with early adoption permitted. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.

 

In January 2017, the FASB formally issued, and we early adopted ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, as permitted, on a prospective basis. The standard provides criteria to determine when an integrated set of assets and activities is not a business. The criteria requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. However, to be considered a business, the set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. Under the new guidance, the acquisition of a property with an in-place lease generally will no longer be accounted for as an acquisition of a business, but instead as an asset acquisition, meaning the transaction costs of such an acquisition will now be capitalized instead of expensed. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

December 15, 2017. Our adoption did not have a material impact on our accounting for acquisitions in the first quarter.  

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows - Restricted Cash, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flow. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period, but any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The new standard must be adopted retrospectively. ASU 2016-18 will impact the presentation of cash on our consolidated balance sheet and our presentation of operating, investing and financing activities related to restricted cash on our condensed consolidated statement of cash flows.

 

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control. The standard requires reporting entities to evaluate whether they should consolidate a variable interest entity (“VIE”) in certain situations involving entities under common control. Specifically, the standard changes the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a reporting entity that is a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The new standard was effective January 1, 2017 and must be adopted retrospectively. We currently have no VIEs involving entities under common control, and accordingly, adoption of this ASU had no impact on our consolidated financial statements.

 

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, including debt extinguishment costs, distributions from equity method investees and contingent consideration payments made after a business combination. 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. The new standard must be adopted retrospectively. We are still evaluating but 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 ASU 2016-13 on our consolidated financial statements but do not anticipate significant impact on adoption.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718) 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 requires entities to recognize all income tax effects of awards in the income statement when the awards vest or are settled, in contrast to current guidance wherein such effects are recorded in additional paid-in capital (“APIC”). It also allows 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. We adopted the ASU as of January 1, 2017, and it did not have a material impact on our accounting for excess tax benefits and tax deficiencies as our stock compensation plans, which permit net-share settlement, had minimal vesting and exercise activity prior to January 1, 2017. The amounts recorded in APIC prior to our adoption can remain in APIC per the new standard. Our plans allow us, at the employee’s request, to withhold shares with a fair value up to the amount of tax owed using the maximum statutory tax rate for the employee’s applicable jurisdiction. We will continue to estimate forfeitures as allowed by an election under the new guidance. Our condensed consolidated statements of cash

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

flows for the three months ended March 31, 2017 and 2016 present excess tax benefits as an operating activity and employee taxes paid as a financing activity as required by ASU 2016-09.

 

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02, codified in Accounting Standards Codification (“ASC”) 842. The standard 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 fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption permitted. The 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 May 2014, the FASB and International Accounting Standards Board 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. We have concluded 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. Entities have the option of using either a full retrospective or a modified approach. We have elected to apply a full retrospective approach of adoption. We are continuing to evaluate the new guidance to determine any other impacts 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 2,367,985,  315,731 and 178,971 shares, respectively, of our common stock. The Management Warrants represent 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 an exercise price of $42.23 per share and Mr. Richardson’s warrants have an exercise price of $54.50 per share, and all warrants are currently exercisable. Mr. Herlitz exercised his warrants in early January 2017, resulting in the net issuance of 198,184 shares in accordance with the warrant provisions. Mr. Herlitz also donated 6,850 shares to a charitable trust, which were net share settled for 4,400 shares in accordance with the warrant provisions. In February and March 2017, Mr. Richardson exercised 130,000 Management Warrants, resulting in the net issuance of 70,014 shares in accordance with the warrant provisions. Mr. Weinreb’s warrants expire in November 2017, and Mr. Richardson’s remaining warrants expire in February 2018.

 

As of March 31, 2017, the estimated $129.4 million fair value for the Sponsor Warrants representing warrants to purchase 1,916,667 shares and the estimated $184.4 million fair value for the remaining Management Warrants representing warrants to purchase 2,416,956 shares were 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 $123.5 million and $208.7 million, respectively, as of December 31, 2016. The fair values

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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 in our Condensed Consolidated Financial Statements. Decreases and increases in the fair value of the Sponsor Warrants and the Management Warrants are recognized as 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 from Mr. O’Reilly. The new warrants  qualify as equity instruments and are included within additional paid-in capital in the Condensed Consolidated Balance Sheet at March 31, 2017 and December 31, 2016. 

 

NOTE 4 EARNINGS PER SHARE

 

Basic earnings per share (“EPS”) is computed by dividing net income 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 March 31, 

(In thousands, except per share amounts)

    

2017

    

2016

Basic EPS:

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

Net income

 

$

5,659

 

$

143,765

Net income attributable to noncontrolling interests

 

 

 —

 

 

 —

Net income attributable to common stockholders

 

$

5,659

 

$

143,765

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

 

39,799

 

 

39,473

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

5,659

 

$

143,765

Less: Warrant liability gain

 

 

 —

 

 

(29,820)

Adjusted net income attributable to common stockholders

 

$

5,659

 

$

113,945

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

 

39,799

 

 

39,473

Restricted stock and stock options

 

 

317

 

 

357

Warrants

 

 

2,641

 

 

2,570

Weighted average diluted common shares outstanding

 

 

42,757

 

 

42,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income per share:

 

$

0.14

 

$

3.64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted income per share:

 

$

0.13

 

$

2.69

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

 

The diluted EPS computation as of March 31, 2017 excludes 328,500 stock options because their inclusion would have been anti-dilutive and 170,847 shares of restricted stock because market conditions have not been met.

 

The diluted EPS computation for the three months ended March 31, 2016 excluded 392,000 stock options because their inclusion would have been anti-dilutive and 37,440 shares of restricted stock because market conditions had not been met.

 

NOTE 5 RECENT TRANSACTIONS

 

On May 2, 2017, we announced that Bank of America will serve as the lead anchor tenant to the 51 story trophy Class A downtown office building at 110 North Wacker Drive in Chicago, Illinois. The lease accounts for more than a third of the Goettsch-designed 1.35 million square-foot high-rise. With construction planned to start in the spring of 2018, we expect the building to open late 2020.

 

On March 16, 2017, we offered, sold and issued $800.0 million in aggregate principal amount of 5.375% senior notes due March 15, 2025 (the “2025 Notes”) to Qualified Institutional Buyers (as defined in the Securities Act of 1933) in accordance with Rule 144A and Regulation S and completed a tender offer and consent solicitation for any and all of our $750.0 million existing 6.875% senior notes due October 1, 2021. We used the net proceeds to redeem all of the 6.875% senior notes and to pay related transaction fees and expenses. Interest on the 2025 Notes is paid semi-annually, on March 15th and September 15th of each year beginning on September 15, 2017. At any time prior to March 15, 2020, we may redeem all or a portion of the Senior Notes at a redemption price equal to 100% of the principal plus a “make-whole” declining call premium thereafter to maturity. At any time prior to March 15, 2020, we may redeem 35% of the 2025 Notes at a price of 105.375% with net cash proceeds of certain equity offerings, plus accrued and unpaid interest. The notes contain customary terms and covenants and have no maintenance covenants.

 

On March 1, 2017 (the “Acquisition Date”), we acquired our joint venture partner’s 50.0% interest in the Las Vegas 51s minor league baseball team for $16.4 million.  Upon completion of the transaction, we became the sole owner (100%) of this Triple-A baseball team affiliated with the New York Mets. We recognized a gain of $5.4 million in conjunction with this acquisition relating to the step-up to fair value of the assets acquired. The estimated fair value of the assets acquired and liabilities assumed are provisional as of March 31, 2017, pending final determinations of the fair value of the intangible assets existing as of the Acquisition Date. Accordingly, the assets acquired and liabilities assumed may change upon finalization of our valuations and completion of the purchase price allocation, both of which are expected to occur no later than one year from the Acquisition Date. Total assets of $35.6 million and liabilities of $2.3 million were consolidated into our financial statements at fair value as of the Acquisition Date. Prior to the acquisition, we accounted for our investment in the Las Vegas 51s under the equity method within Investment in Real Estate and Other Affiliates and recognized a loss of $0.2 million in equity in earnings. Included in the Condensed Consolidated Statements of Operations from the Acquisition Date through March 31, 2017 are revenues of $1.3 million and pre-tax net income from operations of $0.3 million. 

 

On January 18, 2017, we closed on a land sale of approximately 36 acres of our 100-acre property, The Elk Grove Collection (formerly known as The Outlet Collection at Elk Grove), for gross sales proceeds of $36.0 million, resulting in a pre-tax gain of $32.2 million. We continue to pursue the development of the remaining 64 acres, however, commencement of construction is dependent on meeting internal pre-leasing and financing requirements for the project.

 

On January 6, 2017, we acquired the 11.4-acre Macy’s store and parking lot adjacent to Landmark Mall in Alexandria, VA, for $22.2 million. Landmark Mall, which we own, was closed and transferred to our Strategic Developments segment in January 2017. We intend to transform the property into an open-air, mixed-use community with retail, residential and entertainment components.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

NOTE 6 IMPAIRMENT

 

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. Impairment or disposal of long‑lived assets in accordance with ASC 360 requires that if impairment indicators exist and expected undiscounted cash flows generated by the asset over our anticipated holding period 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 three months ended March 31, 2017 or 2016. We periodically 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 7 FAIR VALUE

 

ASC 820, Fair Value Measurement, emphasizes that fair value is a market-based measurement that should be determined using 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 of judgment used in measuring fair value.

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

 

 

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

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

18

 

$

18

 

$

 —

 

$

 —

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swaps and Caps

 

 

(540)

 

 

 —

 

 

(540)

 

 

 —

 

 

(149)

 

 

 —

 

 

(149)

 

 

 —

Warrants

 

 

313,797

 

 

 —

 

 

 —

 

 

313,797

 

 

332,170

 

 

 —

 

 

 —

 

 

332,170

 

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.

 

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UNAUDITED

 

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates derived from observable market interest rate curves.

 

The valuation of warrants is based on an option pricing valuation model, utilizing inputs which are classified as Level 3 due to the unavailability of comparable market data. The inputs to the valuation model include the fair value of stock related to the warrants, exercise price and term of the warrants, expected volatility, risk-free interest rate and dividend yield. Generally, an increase in expected volatility would increase the fair value of the liability, but 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.

 

The following table presents a rollforward of the valuation of our Sponsor and Management Warrants:

 

 

 

 

 

 

 

 

(In thousands)

    

2017

    

2016

Balance as of January 1

 

$

332,170

 

$

307,760

Warrant liability loss (gain) (a)

 

 

12,562

 

 

(29,820)

Exercises of Management Warrants

 

 

(30,935)

 

 

 —

Balance as of March 31 

 

$

313,797

 

$

277,940


(a)

Represents unrealized gains/losses during 2017 and 2016 relating to outstanding warrants at the end of the period. Changes in the fair value of the Sponsor and Management Warrants were recognized in net income as a warrant liability gain or loss.

 

The significant unobservable inputs used in the fair value measurement of our warrant liabilities as of March 31, 2017 and December 31, 2016 are as follows:

 

 

 

 

 

 

 

 

Unobservable Inputs