REAL ESTATE AFFILIATES

6 Months Ended

Jun. 30, 2012

REAL ESTATE AFFILIATES

REAL ESTATE AFFILIATES

NOTE 7REAL ESTATE AFFILIATES

In the ordinary course of business, we enter into partnerships or joint ventures primarily for the development and operations of real estate assets.  These partnerships or joint ventures are typically characterized by a non-controlling ownership interest with decision making and distribution of expected gains and losses being proportionate to the ownership interest.  We account for these partnerships and joint ventures in accordance with ASC 810, as amended (“ASC 810”).

In accordance with ASC 810, we assess our partnerships or joint ventures at inception to determine if any meet the qualifications of a variable interest entity (“VIE”). We consider a partnership or joint venture to be a VIE if: (a) the total equity investment is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) characteristics of a controlling financial interest are missing (either the ability to make decisions through voting or other rights, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity); or (c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity and/or their rights to receive the expected residual returns of the entity, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights. Upon the occurrence of certain events outlined in ASC 810, we reassess our initial determination of whether the partnership or joint venture is a VIE. We also perform a qualitative assessment of each VIE to determine if we are the primary beneficiary, as required by ASC 810.

We account for investments in joint ventures deemed to be variable interest entities for which we are not considered to be the primary beneficiary using the equity method, and investments in joint ventures where we have virtually no influence on the joint venture’s operating and financial policies, on the cost method. Generally, the operating agreements with respect to our Real Estate Affiliates provide that assets, liabilities and funding obligations are shared in accordance with our ownership percentages.

On May 14, 2012, we entered into a joint venture, Millennium Woodlands Phase II, LLC (“Millennium Phase II”), with the same partner from Millennium Waterway Apartments as discussed in Note 4 on the construction of a 314-unit Class A multi-family unit in The Woodlands Town Center. Our partner is the managing member of Millennium Phase II.  As the managing member, our partner controls, directs, manages and administers the affairs of Millennium Phase II. Millennium Phase II is a variable interest entity, and although we have the majority ownership interest in the joint venture, we determined that we are not the primary beneficiary because our partner has the power to direct activities that most significantly impact the economic performance of the joint venture. On July 5, 2012, Millennium Phase II was capitalized by our contribution of 4.8 acres of land valued at $15.5 million to the joint venture, our partner’s contribution of $3.0 million in cash, and by a construction loan in the amount of $37.7 million which is guaranteed by our partner. Currently, there is no outstanding balance on this loan. The development of Millennium Phase II further expands our portfolio in the vibrant Woodlands Town Center.

The Bridges at Mint Hill, LLC, Parcel D Development, LLC, and the HHMK Development, LLC joint venture entities included in the table below are VIEs. The aggregate carrying value of the unconsolidated VIEs was $4.6 million and $3.2 million as of June 30, 2012 and December 31, 2011, respectively, and was classified as Investments in Real Estate Affiliates in the Condensed Consolidated Balance Sheet. Because these joint ventures are in the pre-development stage, there were no earnings for the three and six months ended June 30, 2012. We did not hold an interest in any VIEs as of or during the three and six months ended June 30, 2011. Our maximum exposure to loss as a result of these investments is limited to the aggregate carrying value of the investment as we have not provided any guarantees on behalf of these VIEs. Our initial ownership in the Bridges at Mint Hill, LLC is 79.0%, and our ownership percentage could increase to 90.5% if we are required to make a $4.5 million cash contribution to the venture related to a mortgage secured by land to be contributed by our partner.

Below is a summary of our Investments in Real Estate Affiliates:

	Economic Ownership				Carrying Value				Share of Earnings/Dividends
									Three Months Ended				Six Months Ended
	June 30,		December 31,		June 30,		December 31,		June 30,				June 30,
	2012		2011		2012		2011		2012		2011		2012		2011
	(In percentages)				(In thousands)				(In thousands)
The Woodlands (a)					$	—	$	—	$	—	$	2,110	$	—	$	3,729
Bridges at Mint Hill, LLC	79.00	%	79.00	%	503		180		—		—		—		—
Circle T	50.00	%	50.00	%	9,004		9,004		—		—		—		—
Forest View (b) (c)	—		50.00	%	—		5,358		1		—		2		—
HHMK Development, LLC	50.00	%	50.00	%	418		—		—		—		—		—
Millennium Waterway Apartments (d)	100.00	%	83.55	%	—		21,998		185		—		406		—
Millennium Woodlands Phase II, LLC (e)	81.43	%	—		—		—		—		—		—		—
Parcel D Development, LLC	50.00	%	50.00	%	3,673		2,990		—		—		—		—
Stewart Title (b)	50.00	%	50.00	%	3,684		3,643		257		—		316		—
Timbermill Apartments (b) (c)	—		50.00	%	—		3,988		1		—		2		—
Woodlands Sarofim#1 (b)	20.00	%	20.00	%	2,476		2,456		2		—		20		—
					19,758		49,617		446		2,110		746		3,729
Cost basis investments (f)					12,839		12,978		—		—		2,376		3,894
Total					$	32,597	$	62,595	$	446	$	2,110	$	3,122	$	7,623

(a)As of July 1, 2011, The Woodlands is consolidated and no longer a Real Estate Affiliate (Refer to Note 4). For the three and six months ended June 30, 2011, we owned 52.5% economic interest in The Woodlands.

(b)Equity investment consolidated into our financial statements as part of the acquisition of our partner’s economic interest in The Woodlands on July 1, 2011.

(c)On April 19, 2012, the joint ventures owning the Forest View and Timbermill Apartments completed their sale to a third party. Our share of the distributable cash, after repayment of debt and transaction expenses, was $8.6 million. Also in April, we received approximately $0.8 million in distributions from earnings from these joint

(d)On May 31, 2012, we acquired our partner’s interest for $6.9 million. We now consolidate this property.

(e)Represents our ownership percentage as of July 5, 2012, the date that the partners contributed capital to the venture.

(f)Includes dividends received from Summerlin Hospital Medical Center.

As of June 30, 2012, approximately $6.9 million of indebtedness was secured by the properties owned by our Real Estate Affiliates in which our share was approximately $1.4 million (Woodlands Sarofim #1) based upon our economic ownership. All of this debt is non-recourse to us.