UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2014
or
o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
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 |
13355 Noel Road, 22nd Floor, Dallas, Texas 75240
(Address of principal executive offices, including zip code)
(214) 741-7744
(Registrants telephone number, including area code)
N / A
(Former name, former address and former fiscal year, if changed since last report)
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. x Yes o 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). x Yes o 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 x |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
The number of shares of common stock, $0.01 par value, outstanding as of May 5, 2014 was 39,630,548.
THE HOWARD HUGHES CORPORATION
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PAGE | |
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NUMBER | |
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PART I |
FINANCIAL INFORMATION |
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Item 1: |
Condensed Consolidated Financial Statements (Unaudited) |
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Condensed Consolidated Balance Sheets |
3 |
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Condensed Consolidated Statements of Operations |
4 |
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5 | |
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Condensed Consolidated Statements of Equity |
6 |
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Condensed Consolidated Statements of Cash Flows |
7 |
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9 | |
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Managements Discussion and Analysis of |
34 | |
|
|
|
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|
57 | ||
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58 | ||
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58 | ||
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58 | ||
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58 | ||
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59 | ||
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60 |
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
|
|
March 31, |
|
December 31, |
| ||
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands, except share amounts) |
| ||||
Assets: |
|
|
|
|
| ||
Investment in real estate: |
|
|
|
|
| ||
Master Planned Community assets |
|
$ |
1,537,167 |
|
$ |
1,537,758 |
|
Land |
|
244,041 |
|
244,041 |
| ||
Buildings and equipment |
|
769,606 |
|
754,878 |
| ||
Less: accumulated depreciation |
|
(120,727 |
) |
(111,728 |
) | ||
Developments |
|
634,973 |
|
488,156 |
| ||
Net property and equipment |
|
3,065,060 |
|
2,913,105 |
| ||
Investment in Real Estate and Other Affiliates |
|
67,323 |
|
61,021 |
| ||
Net investment in real estate |
|
3,132,383 |
|
2,974,126 |
| ||
Cash and cash equivalents |
|
827,087 |
|
894,948 |
| ||
Accounts receivable, net |
|
24,259 |
|
21,409 |
| ||
Municipal Utility District receivables, net |
|
106,669 |
|
125,830 |
| ||
Notes receivable, net |
|
19,051 |
|
20,554 |
| ||
Tax indemnity receivable, including interest |
|
322,350 |
|
320,494 |
| ||
Deferred expenses, net |
|
51,623 |
|
36,567 |
| ||
Prepaid expenses and other assets, net |
|
216,319 |
|
173,940 |
| ||
Total assets |
|
$ |
4,699,741 |
|
$ |
4,567,868 |
|
|
|
|
|
|
| ||
Liabilities: |
|
|
|
|
| ||
Mortgages, notes and loans payable |
|
$ |
1,559,381 |
|
$ |
1,514,623 |
|
Deferred tax liabilities |
|
92,582 |
|
89,365 |
| ||
Warrant liabilities |
|
402,000 |
|
305,560 |
| ||
Uncertain tax position liability |
|
131,042 |
|
129,183 |
| ||
Accounts payable and accrued expenses |
|
354,091 |
|
283,991 |
| ||
Total liabilities |
|
2,539,096 |
|
2,322,722 |
| ||
|
|
|
|
|
| ||
Commitments and Contingencies (see Note 14) |
|
|
|
|
| ||
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|
|
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Equity: |
|
|
|
|
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Preferred stock: .01 par value; 50,000,000 shares authorized, none issued |
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|
|
|
| ||
Common stock: .01 par value; 150,000,000 shares authorized, 39,630,548 shares issued and outstanding as of March 31, 2014 and 39,576,344 shares issued and outstanding as of December 31, 2013 |
|
396 |
|
396 |
| ||
Additional paid-in capital |
|
2,831,577 |
|
2,829,813 |
| ||
Accumulated deficit |
|
(669,719 |
) |
(583,403 |
) | ||
Accumulated other comprehensive loss |
|
(8,156 |
) |
(8,222 |
) | ||
Total stockholders equity |
|
2,154,098 |
|
2,238,584 |
| ||
Noncontrolling interests |
|
6,547 |
|
6,562 |
| ||
Total equity |
|
2,160,645 |
|
2,245,146 |
| ||
Total liabilities and equity |
|
$ |
4,699,741 |
|
$ |
4,567,868 |
|
See Notes to Condensed Consolidated Financial Statements.
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
|
|
Three Months Ended March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands, except per share amounts) |
| ||||
Revenues: |
|
|
|
|
| ||
Master Planned Community land sales |
|
$ |
47,671 |
|
$ |
47,226 |
|
Builder price participation |
|
4,097 |
|
1,275 |
| ||
Minimum rents |
|
20,360 |
|
18,926 |
| ||
Tenant recoveries |
|
6,015 |
|
5,325 |
| ||
Condominium rights and unit sales |
|
3,126 |
|
|
| ||
Resort and conference center revenues |
|
9,426 |
|
11,104 |
| ||
Other land revenues |
|
2,512 |
|
2,802 |
| ||
Other rental and property revenues |
|
5,446 |
|
3,433 |
| ||
Total revenues |
|
98,653 |
|
90,091 |
| ||
Expenses: |
|
|
|
|
| ||
Master Planned Community cost of sales |
|
23,078 |
|
25,699 |
| ||
Master Planned Community operations |
|
9,482 |
|
8,496 |
| ||
Other property operating costs |
|
17,807 |
|
15,520 |
| ||
Rental property real estate taxes |
|
3,740 |
|
3,757 |
| ||
Rental property maintenance costs |
|
1,915 |
|
1,805 |
| ||
Condominium rights and unit cost of sales |
|
1,571 |
|
|
| ||
Resort and conference center operations |
|
7,511 |
|
7,476 |
| ||
Provision for doubtful accounts |
|
143 |
|
429 |
| ||
Demolition costs |
|
2,516 |
|
|
| ||
General and administrative |
|
16,882 |
|
11,171 |
| ||
Other income |
|
(10,448 |
) |
|
| ||
Depreciation and amortization |
|
10,509 |
|
6,444 |
| ||
Total expenses |
|
84,706 |
|
80,797 |
| ||
|
|
|
|
|
| ||
Operating income |
|
13,947 |
|
9,294 |
| ||
|
|
|
|
|
| ||
Interest income |
|
2,188 |
|
2,356 |
| ||
Interest expense |
|
(7,321 |
) |
(143 |
) | ||
Warrant liability loss |
|
(96,440 |
) |
(33,027 |
) | ||
Reduction in tax indemnity receivable |
|
|
|
(1,904 |
) | ||
Equity in earnings from Real Estate and Other Affiliates |
|
6,068 |
|
2,733 |
| ||
Loss before taxes |
|
(81,558 |
) |
(20,691 |
) | ||
Provision for income taxes |
|
4,773 |
|
2,479 |
| ||
Net loss |
|
(86,331 |
) |
(23,170 |
) | ||
Net loss attributable to noncontrolling interests |
|
15 |
|
46 |
| ||
Net loss attributable to common stockholders |
|
$ |
(86,316 |
) |
$ |
(23,124 |
) |
|
|
|
|
|
| ||
Basic loss per share: |
|
$ |
(2.19 |
) |
$ |
(0.59 |
) |
|
|
|
|
|
| ||
Diluted loss per share: |
|
$ |
(2.19 |
) |
$ |
(0.59 |
) |
See Notes to Condensed Consolidated Financial Statements.
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
UNAUDITED
|
|
Three Months Ended March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands) | |||||
Comprehensive loss, net of tax: |
|
|
|
|
| ||
Net loss |
|
$ |
(86,331 |
) |
$ |
(23,170 |
) |
Other comprehensive income (loss): |
|
|
|
|
| ||
Interest rate swaps (a) |
|
199 |
|
421 |
| ||
Capitalized swap interest (b) |
|
(133 |
) |
(413 |
) | ||
Other comprehensive income |
|
66 |
|
8 |
| ||
Comprehensive loss |
|
(86,265 |
) |
(23,162 |
) | ||
Comprehensive loss attributable to noncontrolling interests |
|
15 |
|
46 |
| ||
Comprehensive loss attributable to common stockholders |
|
$ |
(86,250 |
) |
$ |
(23,116 |
) |
(a) Net of deferred tax expense of zero and $0.1 million for the three months ended March 31, 2014 and 2013, respectively.
(b) Net of deferred tax benefit of $0.1 million and $0.2 million for the three months ended March 31, 2014 and 2013, respectively.
See Notes to Condensed Consolidated Financial Statements.
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
UNAUDITED
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
| ||||||
|
|
|
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Additional |
|
|
|
Other |
|
|
|
|
| ||||||
|
|
|
|
Common |
|
Paid-In |
|
Accumulated |
|
Comprehensive |
|
Noncontrolling |
|
Total |
| ||||||
(In thousands, except share amounts) |
|
Shares |
|
Stock |
|
Capital |
|
Deficit |
|
Income (Loss) |
|
Interests |
|
Equity |
| ||||||
Balance, January 1, 2013 |
|
39,498,912 |
|
$ |
395 |
|
$ |
2,824,031 |
|
$ |
(509,613 |
) |
$ |
(9,575 |
) |
$ |
5,759 |
|
$ |
2,310,997 |
|
Net loss |
|
|
|
|
|
|
|
(23,124 |
) |
|
|
(46 |
) |
(23,170 |
) | ||||||
Adjustment to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
3,750 |
|
3,750 |
| ||||||
Preferred dividend payment on behalf of REIT subsidiary |
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
(12 |
) | ||||||
Interest rate swaps, net of tax of $80 |
|
|
|
|
|
|
|
|
|
421 |
|
|
|
421 |
| ||||||
Capitalized swap interest, net of tax of $198 |
|
|
|
|
|
|
|
|
|
(413 |
) |
|
|
(413 |
) | ||||||
Stock plan activity |
|
|
|
|
|
1,143 |
|
|
|
|
|
|
|
1,143 |
| ||||||
Balance, March 31, 2013 |
|
39,498,912 |
|
$ |
395 |
|
$ |
2,825,174 |
|
$ |
(532,737 |
) |
$ |
(9,567 |
) |
$ |
9,451 |
|
$ |
2,292,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance, January 1, 2014 |
|
39,576,344 |
|
$ |
396 |
|
$ |
2,829,813 |
|
$ |
(583,403 |
) |
$ |
(8,222 |
) |
$ |
6,562 |
|
$ |
2,245,146 |
|
Net loss |
|
|
|
|
|
|
|
(86,316 |
) |
|
|
(15 |
) |
(86,331 |
) | ||||||
Interest rate swaps, net of tax of $10 |
|
|
|
|
|
|
|
|
|
199 |
|
|
|
199 |
| ||||||
Capitalized swap interest, net of tax of $75 |
|
|
|
|
|
|
|
|
|
(133 |
) |
|
|
(133 |
) | ||||||
Stock plan activity |
|
54,204 |
|
|
|
1,764 |
|
|
|
|
|
|
|
1,764 |
| ||||||
Balance, March 31, 2014 |
|
39,630,548 |
|
$ |
396 |
|
$ |
2,831,577 |
|
$ |
(669,719 |
) |
$ |
(8,156 |
) |
$ |
6,547 |
|
$ |
2,160,645 |
|
See Notes to Condensed Consolidated Financial Statements.
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
|
|
Three Months Ended March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands) |
| ||||
Cash Flows from Operating Activities: |
|
|
|
|
| ||
Net loss |
|
$ |
(86,331 |
) |
$ |
(23,170 |
) |
Adjustments to reconcile net loss to cash provided by operating activities: |
|
|
|
|
| ||
Depreciation |
|
9,346 |
|
5,483 |
| ||
Amortization |
|
1,163 |
|
961 |
| ||
Amortization of deferred financing costs and debt market rate adjustments, net |
|
1,014 |
|
144 |
| ||
Amortization of intangibles other than in-place leases |
|
161 |
|
260 |
| ||
Straight-line rent amortization |
|
(472 |
) |
70 |
| ||
Deferred income taxes |
|
4,465 |
|
2,196 |
| ||
Restricted stock and stock option amortization |
|
1,764 |
|
1,143 |
| ||
Gain on disposition of asset |
|
(2,373 |
) |
|
| ||
Warrant liability loss |
|
96,440 |
|
33,027 |
| ||
Reduction in tax indemnity receivable |
|
|
|
1,904 |
| ||
Equity in earnings from Real Estate and Other Affiliates, net of distributions |
|
(3,743 |
) |
70 |
| ||
Provision for doubtful accounts |
|
143 |
|
429 |
| ||
Master Planned Community development expenditures |
|
(28,434 |
) |
(33,329 |
) | ||
Master Planned Community cost of sales |
|
20,815 |
|
22,553 |
| ||
Condominium development expenditures |
|
(5,604 |
) |
|
| ||
Condominium and other cost of sales |
|
1,571 |
|
|
| ||
Percentage of completion revenue recognition from sale of condominium rights |
|
(3,126 |
) |
|
| ||
Net changes: |
|
|
|
|
| ||
Accounts and notes receivable |
|
19,780 |
|
(3,472 |
) | ||
Prepaid expenses and other assets |
|
(38,786 |
) |
463 |
| ||
Deferred expenses |
|
(3,093 |
) |
2,397 |
| ||
Accounts payable and accrued expenses |
|
38,147 |
|
4,940 |
| ||
Other, net |
|
3,378 |
|
570 |
| ||
Cash provided by operating activities |
|
26,225 |
|
16,639 |
| ||
|
|
|
|
|
| ||
Cash Flows from Investing Activities: |
|
|
|
|
| ||
Property and equipment expenditures |
|
(2,053 |
) |
(1,563 |
) | ||
Operating property improvements |
|
(877 |
) |
(2,313 |
) | ||
Operating property redevelopments |
|
(137,579 |
) |
(40,064 |
) | ||
Investments in Real Estate and Other Affiliates, net |
|
(807 |
) |
(1,537 |
) | ||
Proceeds from dispositions |
|
5,500 |
|
|
| ||
Change in restricted cash |
|
(4,943 |
) |
(11,121 |
) | ||
Cash used in investing activities |
|
(140,759 |
) |
(56,598 |
) | ||
|
|
|
|
|
| ||
Cash Flows from Financing Activities: |
|
|
|
|
| ||
Proceeds from issuance of mortgages, notes and loans payable |
|
48,811 |
|
68,313 |
| ||
Principal payments on mortgages, notes and loans payable |
|
(2,138 |
) |
(57,003 |
) | ||
Preferred dividend payment on behalf of REIT subsidiary |
|
|
|
(12 |
) | ||
Cash provided provided by financing activities |
|
46,673 |
|
11,298 |
| ||
|
|
|
|
|
| ||
Net change in cash and cash equivalents |
|
(67,861 |
) |
(28,661 |
) | ||
Cash and cash equivalents at beginning of period |
|
894,948 |
|
229,197 |
| ||
Cash and cash equivalents at end of period |
|
$ |
827,087 |
|
$ |
200,536 |
|
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
|
|
Three Months Ended March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands) |
| ||||
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
| ||
Interest paid |
|
$ |
7,051 |
|
$ |
7,348 |
|
Interest capitalized |
|
11,281 |
|
9,869 |
| ||
Income taxes paid |
|
|
|
885 |
| ||
|
|
|
|
|
| ||
Non-Cash Transactions: |
|
|
|
|
| ||
Special Improvement District bond transfers associated with land sales |
|
2,259 |
|
3,146 |
| ||
Real estate and property expenditures |
|
25,550 |
|
17,136 |
| ||
See Notes to Condensed Consolidated Financial Statements.
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) for interim financial statements and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as issued by the Securities and Exchange Commission (the SEC). Such condensed consolidated financial statements do not include all of the information and disclosures required by GAAP for complete financial statements. In addition, readers of this Quarterly Report on Form 10-Q (Quarterly Report) should refer to The Howard Hughes Corporations (HHC or the Company) audited Consolidated Financial Statements for the year ended December 31, 2013 which are included in the Companys Annual Report on Form 10-K (the Annual Report) for the fiscal year ended December 31, 2013. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. The results for the three months ended March 31, 2014 are not necessarily indicative of the results for the full fiscal year.
Management has evaluated 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 SPONSORS AND MANAGEMENT WARRANTS
On November 9, 2010 (the Effective Date), we issued warrants to purchase 8.0 million shares of our common stock to certain of our sponsors (the Sponsors Warrants) of which 1.9 million remain outstanding. The initial exercise price for the warrants of $50.00 per share and the number of shares of common stock underlying each warrant are subject to adjustment for future stock dividends, splits or reverse splits of our common stock or certain other events. The Sponsors Warrants expire on November 9, 2017.
In November 2010 and February 2011, we entered into certain agreements (the Management Warrants) with David R. Weinreb, our Chief Executive Officer, Grant Herlitz, our President, and Andrew C. Richardson, our Chief Financial Officer, in each case prior to his appointment to such position, to purchase shares of our common stock. The Management Warrants representing 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. Herlitzs warrants have exercise prices of $42.23 per share and Mr. Richardsons warrant has an exercise price of $54.50 per share. Generally, the Management Warrants become exercisable in November 2016 and expire by February 2018.
The estimated $182.2 million fair value for the Sponsors Warrants representing warrants to purchase 1,916,667 shares and estimated $219.8 million fair value for the Management Warrants representing warrants to purchase 2,862,687 shares outstanding as of March 31, 2014, have been recorded as liabilities because the holders of these warrants could require us to settle such warrants in cash upon a change of control. The estimated fair values for the outstanding Sponsors Warrants and Management Warrants were $141.8 million and $163.8 million, respectively, as of December 31, 2013. 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 6 Fair Value of Financial Instruments. Decreases and increases in the fair value of the Sponsors Warrants and the Management Warrants are recognized as either warrant liability gains or losses, respectively, in the Condensed Consolidated Statements of Operations.
NOTE 3 EARNINGS PER SHARE
Basic earnings (loss) per share (EPS) is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of all potentially dilutive common shares. The dilutive effect of options and nonvested stock issued under stock-based compensation plans is computed using the treasury stock method. The dilutive effect of the Sponsors Warrants and Management Warrants is computed using the if-converted method. Gains associated with the Sponsors Warrants and Management Warrants are excluded from the numerator in computing diluted earnings per share because inclusion of such gains in the computation would be anti-dilutive.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Information related to our EPS calculations is summarized as follows:
|
|
Three Months Ended March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands, except per share amounts) |
| ||||
Basic EPS: |
|
|
|
|
| ||
Numerator: |
|
|
|
|
| ||
Net loss |
|
$ |
(86,331 |
) |
$ |
(23,170 |
) |
Net loss attributable to noncontrolling interests |
|
15 |
|
46 |
| ||
Net loss attributable to common stockholders |
|
$ |
(86,316 |
) |
$ |
(23,124 |
) |
|
|
|
|
|
| ||
Denominator: |
|
|
|
|
| ||
Weighted average basic common shares outstanding |
|
39,454 |
|
39,441 |
| ||
|
|
|
|
|
| ||
Diluted EPS: |
|
|
|
|
| ||
Numerator: |
|
|
|
|
| ||
Net loss attributable to common stockholders |
|
$ |
(86,316 |
) |
$ |
(23,124 |
) |
Less: Warrant liability gain |
|
|
|
|
| ||
|
|
|
|
|
| ||
Adjusted net income (loss) attributable to common stockholders |
|
$ |
(86,316 |
) |
$ |
(23,124 |
) |
Denominator: |
|
|
|
|
| ||
Weighted average basic common shares outstanding |
|
39,454 |
|
39,441 |
| ||
Restricted stock and stock options |
|
|
|
|
| ||
Warrants |
|
|
|
|
| ||
Weighted average diluted common shares outstanding |
|
39,454 |
|
39,441 |
| ||
|
|
|
|
|
| ||
Basic earnings (loss) per share: |
|
$ |
(2.19 |
) |
$ |
(0.59 |
) |
|
|
|
|
|
| ||
Diluted earnings (loss) per share: |
|
$ |
(2.19 |
) |
$ |
(0.59 |
) |
The diluted EPS computation for the three months ended March 31, 2014 excludes 1,024,940 stock options, 176,536 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.
The diluted EPS computations for the three months ended March 31, 2013 excludes 890,040 stock options, 57,933 shares of restricted stock, 1,916,667 shares of common stock underlying the Sponsor Warrants and 2,862,687 shares of common stock underlying the Management Warrants because their inclusion would have been anti-dilutive.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 4 RECENT TRANSACTIONS
On February 28, 2014, we sold our Redlands Promenade property, consisting of approximately 10 acres of land located in Redlands, California, for $5.5 million. The pre-tax gain recognized on the sale was $2.4 million.
NOTE 5 IMPAIRMENT
We review our real estate assets, including operating assets, land held for development and sale and developments in progress, for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. GAAP requires that if impairment indicators exist and the undiscounted cash flows expected to be generated by an asset are less than its carrying amount, an impairment charge should be recorded to write down the carrying amount of such asset to fair value (or for land held for sale, fair value less cost to sell). 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.
Our investment in each of the Real Estate and Other Affiliates is evaluated periodically and as deemed necessary 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, 2014 or 2013. 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 6 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents, for each of the fair value hierarchy levels required under Accounting Standards Codification (ASC) 820, (ASC 820) Fair Value Measurement our assets and liabilities that are measured at fair value on a recurring basis.
|
|
March 31, 2014 |
|
December 31, 2013 |
| ||||||||||||||||||||
|
|
Fair Value Measurements Using |
|
Fair Value Measurements Using |
| ||||||||||||||||||||
|
|
Total |
|
Quoted Prices |
|
Significant |
|
Significant |
|
Total |
|
Quoted Prices |
|
Significant |
|
Significant |
| ||||||||
|
|
(In thousands) |
|
|
|
(In thousands) |
| ||||||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Cash equivalents |
|
$ |
200,004 |
|
$ |
200,004 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Warrants |
|
402,000 |
|
|
|
|
|
402,000 |
|
305,560 |
|
|
|
|
|
305,560 |
| ||||||||
Interest rate swaps |
|
3,956 |
|
|
|
3,956 |
|
|
|
4,164 |
|
|
|
4,164 |
|
|
| ||||||||
Cash equivalents consist primarily of two registered money market mutual funds which invests in United States treasury securities that are valued at the net asset value of the underlying shares in the funds as of the close of business at the end of each period. The fair value approximates carrying value.
The valuation of warrants is based on an option pricing valuation model. The inputs to the model include the fair value of the stock related to the warrants, exercise price of the warrants, term, expected volatility, risk-free interest rate and dividend yield.
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 HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
The following table presents a reconciliation of the beginning and ending balances of the fair value measurements using significant unobservable inputs (Level 3) which are our Sponsors and Management Warrants:
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands) |
| ||||
Balance as of January 1, |
|
$ |
305,560 |
|
$ |
123,573 |
|
Warrant liability loss |
|
96,440 |
|
33,027 |
| ||
Balance as of March 31, |
|
$ |
402,000 |
|
$ |
156,600 |
|
The fair values were estimated using an option pricing model and Level 3 inputs due to the unavailability of comparable market data. Changes in the fair value of the Sponsors Warrants and the Management Warrants are recognized in earnings as a warrant liability gain or loss.
The significant unobservable input used in the fair value measurement of our warrants designated as Level 3 as of March 31, 2014 is as follows:
|
|
Fair Value |
|
Valuation |
|
Unobservable |
|
Volatility |
| |
|
|
(In thousands) |
|
|
|
|
|
|
| |
Warrants |
|
$ |
402,000 |
|
Option Pricing Valuation Model |
|
Expected Volatility (a) |
|
28.3 |
% |
(a) Based on the equity volatility of comparable companies.
The expected volatility in the table above is a significant unobservable input used to estimate the fair value of our warrant liabilities. An increase in expected volatility would increase the fair value of the liability, while a decrease in expected volatility would decrease the fair value of the liability.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
The estimated fair values of our financial instruments that are not measured at fair value on a recurring basis are as follows:
|
|
March 31, 2014 |
|
December 31, 2013 |
| ||||||||
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
| ||||
|
|
(In thousands) |
| ||||||||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents (a) |
|
$ |
627,083 |
|
$ |
627,083 |
|
$ |
894,948 |
|
$ |
894,948 |
|
Notes receivable, net |
|
19,051 |
|
19,051 |
|
20,554 |
|
20,554 |
| ||||
Tax indemnity receivable, including interest |
|
322,350 |
|
|
(b) |
320,494 |
|
|
(b) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Fixed-rate debt |
|
$ |
971,559 |
|
$ |
1,011,965 |
|
$ |
971,786 |
|
$ |
1,012,461 |
|
Variable-rate debt (c) |
|
556,981 |
|
556,981 |
|
509,737 |
|
509,737 |
| ||||
SID bonds |
|
30,841 |
|
30,616 |
|
33,100 |
|
32,837 |
| ||||
Total mortgages, notes and loans payable |
|
$ |
1,559,381 |
|
$ |
1,599,562 |
|
$ |
1,514,623 |
|
$ |
1,555,035 |
|
(a) Consists of bank deposits with original maturities of 90 days or less.
(b) It is not practicable to estimate the fair value of the tax indemnity receivable, including interest, as the timing and ultimate amount received under the agreement is highly dependent on numerous future events that cannot be reliably predicted.
(c) $172.0 million of variable-rate debt has been swapped to a fixed rate for the term of the related debt.
Notes receivable are carried at net realizable value, which approximates fair value. The estimated fair values of these notes receivable are categorized as Level 3 due to certain factors, such as current interest rates, terms of the note and credit worthiness of the borrower.
The fair value of debt in the table above, not including our Senior Notes, was estimated based on a discounted future cash payment model using Level 2 inputs, which includes risk premiums for loans of comparable quality and a risk free rate derived from the current London Interbank Offered Rate (LIBOR) or U.S. Treasury obligation interest rates. The discount rates reflect our judgment as to what the approximate current lending rates for loans or groups of loans with similar maturities and credit quality would be if credit markets were operating efficiently and assuming that the debt is outstanding through maturity.
The fair value of our Senior Notes included in Fixed-rate debt in the table above was estimated based on quoted market prices for similar issues.
The carrying amounts of cash and cash equivalents and accounts receivable approximate fair value because of the short-term maturity of these instruments.
NOTE 7 REAL ESTATE AND OTHER AFFILIATES
In the ordinary course of business, we enter into partnerships or joint ventures primarily for the development and operations of real estate assets which are referred to as Real Estate Affiliates. 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 (ASC 810) Consolidations.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
In accordance with ASC 810, we assess our joint ventures at inception to determine if any meet the qualifications of a variable interest entity (VIE). We consider a partnership or joint venture a VIE if: (a) the total equity investment is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) characteristics of a controlling financial interest are missing (either the ability to make decisions through voting or other rights, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity); or (c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity and/or their rights to receive the expected residual returns of the entity, and substantially all of the entitys 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 perform a qualitative assessment of each VIE to determine if we are the primary beneficiary, as required by ASC 810. Under ASC 810, a company concludes that it is the primary beneficiary and consolidates the VIE if the company has both (a) the power to direct the economically significant activities of the entity and (b) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. The company considers the contractual agreements that define the ownership structure, distribution of profits and losses, risks, responsibilities, indebtedness, voting rights and board representation of the respective parties in determining if the company is the primary beneficiary. As required by ASC 810, managements assessment of whether the company is the primary beneficiary of a VIE is continuously performed.
We account for investments in joint ventures deemed to be VIEs for which we are not considered to be the primary beneficiary but have significant influence using the equity method, and investments in joint ventures where we do not have significant influence over the joint ventures operations 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.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Our investment in real estate and other affiliates which are reported on the equity and cost methods are as follows:
|
|
Economic/ Legal Ownership |
|
Carrying Value |
|
Share of Earnings/Dividends |
| ||||||||||
|
|
March 31, |
|
December 31, |
|
March 31, |
|
December 31, |
|
Three Months Ended March 31, |
| ||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
(In percentages) |
|
(In thousands) |
|
(In thousands) |
| ||||||||||
Equity Method Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Circle T Ranch and Power Center |
|
50.00 |
% |
50.00 |
% |
$ |
9,004 |
|
$ |
9,004 |
|
$ |
|
|
$ |
|
|
HHMK Development, LLC (a) |
|
50.00 |
% |
50.00 |
% |
13 |
|
13 |
|
290 |
|
|
| ||||
KR Holdings, LLC (a) |
|
50.00 |
% |
50.00 |
% |
25,478 |
|
19,764 |
|
4,009 |
|
|
| ||||
Millennium Woodlands Phase II, LLC (a) |
|
81.43 |
% |
81.43 |
% |
2,171 |
|
2,174 |
|
(36 |
) |
|
| ||||
Parcel C (a) |
|
50.00 |
% |
50.00 |
% |
6,531 |
|
5,801 |
|
|
|
|
| ||||
Stewart Title |
|
50.00 |
% |
50.00 |
% |
3,736 |
|
3,843 |
|
93 |
|
191 |
| ||||
Summerlin Apartments, LLC (a) |
|
50.00 |
% |
|
|
|
|
|
|
|
|
|
| ||||
Summerlin Las Vegas Baseball Club, LLC (a) |
|
50.00 |
% |
50.00 |
% |
10,510 |
|
10,636 |
|
(126 |
) |
|
| ||||
The Metropolitan Downtown Columbia Project (b) |
|
50.00 |
% |
50.00 |
% |
3,505 |
|
3,461 |
|
|
|
|
| ||||
Woodlands Sarofim #1 |
|
20.00 |
% |
20.00 |
% |
2,582 |
|
2,579 |
|
57 |
|
39 |
| ||||
|
|
|
|
|
|
63,530 |
|
57,275 |
|
4,287 |
|
230 |
| ||||
Cost basis investments |
|
|
|
|
|
3,793 |
|
3,746 |
|
1,781 |
(c) |
2,503 |
(c) | ||||
Investment in Real Estate and Other Affiliates |
|
|
|
|
|
$ |
67,323 |
|
$ |
61,021 |
|
$ |
6,068 |
|
$ |
2,733 |
|
(a) |
Equity method variable interest entities. |
(b) |
This entity was previously considered a VIE, whose reassessment in 2013 caused it to no longer be considered a VIE. Please refer to the discussion in the section following the table. |
(c) |
Includes distribution received from Summerlin Hospital Medical Center. |
We are not the primary beneficiary of any of the VIEs listed above because we do not have the power to direct activities that most significantly impact the economic performance of such joint ventures and therefore we report our interests on the equity method. 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 or otherwise made firm commitments to fund amounts on behalf of these VIEs. The aggregate carrying value of the unconsolidated VIEs was $44.7 million and $38.4 million as of March 31, 2014 and December 31, 2013, respectively. As of March 31, 2014, approximately $81.5 million of indebtedness was secured by the properties owned by our Real Estate Affiliates of which our share was approximately $46.9 million based upon our economic ownership. All of this debt is without recourse to us.
At March 31, 2014, the Company was the primary beneficiary of one VIE which we therefore consolidated. The creditors of the consolidated VIE do not have recourse to the Companys general credit. As of both March 31, 2014 and December 31, 2013 the carrying values of the assets and liabilities associated with the operations of the consolidated VIE were $20.6 million and $0.1 million, respectively. As of December 31, 2013, the carrying values of the assets and liabilities associated with operations of the consolidated VIE were $20.6 million and $0.1 million, respectively. The assets of the VIEs are restricted for use only by the particular VIEs and are not available for our general operations.
Our recent and more significant investments in Real Estate Affiliates and the related accounting considerations are described below.
ONE Ala Moana Condominium Project
On October 11, 2011, we and an entity jointly owned by two local development partners formed a joint venture called HHMK Development, LLC (HHMK Development) to explore the development of a luxury condominium tower at the Ala Moana Center in Honolulu, Hawaii. On June 14, 2012, we formed another 50/50 joint venture, KR Holdings, with the same partner. We own 50% of each venture and our partners jointly own the remaining 50%.
On September 17, 2012, KR Holdings closed on two $20.0 million non-recourse mezzanine loan commitments with List Island Properties, LLC and A & B Properties, Inc. These loans have a blended interest rate of 12%, were drawn in full on May 15, 2013 and mature on April 30, 2018 with the option to extend for one year. In addition to the mezzanine loans, A & B Properties and List Island Properties both have profit interests in KR Holdings, which entitles them to receive a share of the profits, after a return of our capital plus a 13% preferred return on our capital. A & B Properties participation is capped at $3.0 million.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
KR Holdings closed the first mortgage construction loan on May 15, 2013. Upon closing and under the terms of the venture agreement, we sold to KR Holdings our interest in the condominium rights for net cash proceeds of $30.8 million and a 50% equity interest in KR Holdings. Our partner contributed $16.8 million of cash for their 50% equity interest.
The construction loan will be drawn over the course of construction with the total proceeds not to exceed $132.0 million. The loan is secured by the condominium rights and buyers deposits, has no recourse to us, matures on May 15, 2016, and bears interest at one-month LIBOR plus 3.00%.
Millennium Woodlands Phase II, LLC
On May 14, 2012, we entered into a joint venture, Millennium Woodlands Phase II, LLC (Millennium Phase II), with The Dinerstein Companies, the same joint venture partner in the Millennium Waterway Apartments I project, for the construction of a new 314-unit Class A multi-family complex 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. 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 partners contribution of $3.0 million in cash and a construction loan in the amount of $37.7 million which is guaranteed by our partner. The development of Millennium Phase II further expands our multi-family portfolio in The Woodlands Town Center.
Parcel C
On October 4, 2013, we entered into a joint venture agreement with a local developer, Kettler, Inc. (Kettler), to construct a 437-unit, Class A apartment building with 31,000 square feet of ground floor retail on Parcel C in downtown Columbia, Maryland. We contributed approximately five acres of land having an approximate book value of $4.0 million to the joint venture. Our land was valued at $23.4 million or $53,500 per constructed unit. When the venture closes on the construction loan and upon completion of certain other conditions, including obtaining completed site development and construction plans and an approved project budget, our partner will be required to contribute cash to the venture.
Summerlin Apartments, LLC
On January 24, 2014, we entered into a joint venture with a national multi-family real estate developer, The Calida Group (Calida), to construct, own and operate a 124-unit gated luxury apartment development. We and our partner each own 50% of the venture, and unanimous consent of the partners is required for all major decisions. This project represents the first residential development in Summerlins 400-acre downtown and is located within walking distance to The Shops at Summerlin. We will contribute a 5.5-acre parcel of land with an agreed value of $3.2 million in exchange for a 50% interest in the venture when construction financing closes. Our partner will contribute cash for their 50% interest, act as the development manager, fund all pre-development activities, obtain construction financing and provide any guarantees required by the lender. Upon a sale of the property, we are entitled to 100% of the proceeds in excess of an amount determined by applying a 7.0% capitalization rate to NOI. The venture is expected to begin construction in the fall of 2014 with a projected second quarter 2015 opening for the first phase and the final phase being opened by the end of 2015.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Summerlin Las Vegas Baseball Club, LLC
On August 6, 2012, we entered into a joint venture for the purpose of acquiring 100% of the operating assets of the Las Vegas 51s, a Triple-A baseball team which is a member of the Pacific Coast League. We own 50% of the venture and our partners jointly own the remaining 50%. Unanimous consent of the partners is required for all major decisions. In August 2012, we contributed $0.3 million to the joint venture pending final approval of the acquisition by Major League Baseball. In May 2013, after approval was received, we funded our remaining capital obligation of $10.2 million and the joint venture completed the acquisition of the baseball team. Our strategy in acquiring an ownership interest is to pursue a potential relocation of the team to a to-be-built stadium in our Summerlin master planned community. There can be no assurance that such a stadium will ultimately be built.
The Metropolitan Downtown Columbia Project
On October 27, 2011, we entered into a joint venture, Parcel D Development, LLC (Parcel D), with Kettler, to construct a Class A apartment building with ground floor retail space in downtown Columbia, Maryland. We and our partner each own 50% of the venture, and unanimous consent of the partners is required for all major decisions. On July 11, 2013, the joint venture closed a $64.1 million construction loan which is non-recourse to us. The loan bears interest at one-month LIBOR plus 2.4% and matures in July 2020. At loan closing, our land contribution was valued at $53,500 per unit, or $20.3 million, and Kettler contributed $13.3 million in cash, of which $7.0 million was distributed to us. Both we and Kettler made additional contributions of $3.1 million to the joint venture in accordance with the loan agreement, thus increasing our total capital account to $16.4 million. This transaction was accounted for as a partial sale of the land for which we recognized a net profit of $0.7 million.
Upon formation of the joint venture, we determined that Parcel D was a VIE, and that we were not the primary beneficiary. Accordingly, we accounted for our investment in Parcel D using the equity method. Upon closing of the first mortgage construction loan, the entity was recapitalized resulting in a reconsideration of the initial determination of VIE status. As a result of the reconsideration, we determined that Parcel D was no longer considered a VIE. We still account for our investment in Parcel D using the equity method.
Other
Our interest in Westlake Retail Associates, Ltd. (Circle T Ranch) and 170 Retail Associates (Circle T Power Center), and together with Circle T Ranch, (Circle T), located in the Dallas/Fort Worth, Texas area are held through joint venture entities in which we own non-controlling interests. Woodlands Sarofim #1 Ltd. (Woodlands Sarofim) industrial buildings and Stewart Title of Montgomery County, Inc. (Stewart Title) are reflected in our financial statements as non-consolidated joint ventures and are accounted for on the equity method.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 8 MORTGAGES, NOTES AND LOANS PAYABLE
Mortgages, notes and loans payable are summarized as follows:
|
|
March 31, |
|
December 31, |
| ||
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands) |
| ||||
Fixed-rate debt: |
|
|
|
|
| ||
Collateralized mortgages, notes and loans payable |
|
$ |
971,559 |
|
$ |
971,786 |
|
Special Improvement District bonds |
|
30,841 |
|
33,100 |
| ||
Variable-rate debt: |
|
|
|
|
| ||
Collateralized mortgages, notes and loans payable (a) |
|
556,981 |
|
509,737 |
| ||
Total mortgages, notes and loans payable |
|
$ |
1,559,381 |
|
$ |
1,514,623 |
|
(a) As more fully described below, $172.0 million of variable-rate debt has been swapped to a fixed rate for the term of the related debt.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
The following table presents our mortgages, notes, and loans payable by property:
|
|
|
|
|
|
Maximum |
|
Carrying Value |
| |||||
|
|
|
|
Interest |
|
Facility |
|
March 31, |
|
December 31, |
| |||
$ In thousands |
|
Maturity (a) |
|
Rate |
|
Amount |
|
2014 |
|
2013 |
| |||
Master Planned Communities |
|
|
|
|
|
|
|
|
|
|
| |||
Bridgeland Land Loan (b) |
|
June 2022 |
|
5.50 |
% |
|
|
$ |
18,084 |
|
$ |
18,066 |
| |
Bridgeland Development Loan (c) |
|
June 2015 |
|
5.00 |
% |
$ |
30,000 |
|
|
|
|
| ||
Summerlin West SID Bonds - S808/S810 |
|
April 2031 |
|
7.13 |
% |
|
|
8,974 |
|
11,168 |
| |||
Summerlin South SID Bonds - S151 |
|
June 2025 |
|
6.00 |
% |
|
|
6,625 |
|
6,623 |
| |||
Summerlin South SID Bonds - S128C |
|
December 2030 |
|
6.05 |
% |
|
|
5,511 |
|
5,511 |
| |||
Summerlin South SID Bonds - S132 |
|
December 2020 |
|
6.00 |
% |
|
|
3,895 |
|
3,962 |
| |||
Summerlin South SID Bonds - S108 |
|
December 2016 |
|
5.95 |
% |
|
|
823 |
|
823 |
| |||
Summerlin South SID Bonds - S128 |
|
December 2020 |
|
7.30 |
% |
|
|
707 |
|
707 |
| |||
Summerlin South SID Bonds - S124 |
|
December 2019 |
|
5.95 |
% |
|
|
285 |
|
285 |
| |||
The Woodlands Master Credit Facility |
|
August 2018 |
|
2.90 |
% |
250,000 |
|
176,663 |
|
176,663 |
| |||
Master Planned Communities Total |
|
|
|
|
|
|
|
221,567 |
|
223,808 |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
Operating Assets |
|
|
|
|
|
|
|
|
|
|
| |||
70 Columbia Corporate Center (d) |
|
August 2017 |
|
4.25 |
% |
|
|
16,287 |
|
16,287 |
| |||
Columbia Regional Building |
|
March 2018 |
|
2.15 |
% |
23,008 |
|
14,926 |
|
9,207 |
| |||
One Hughes Landing (e) |
|
November 2017 |
|
2.80 |
% |
38,000 |
|
27,593 |
|
19,128 |
| |||
Millennium Waterway Apartments |
|
June 2022 |
|
3.75 |
% |
|
|
55,584 |
|
55,584 |
| |||
110 N. Wacker (f) |
|
October 2019 |
|
5.21 |
% |
|
|
29,000 |
|
29,000 |
| |||
9303 New Trails |
|
December 2023 |
|
4.88 |
% |
|
|
13,318 |
|
13,398 |
| |||
Outlet Collection at Riverwalk |
|
October 2018 |
|
2.90 |
% |
64,400 |
|
14,733 |
|
|
| |||
The Woodlands Resort & Conference Center |
|
February 2019 |
|
3.65 |
% |
95,000 |
|
45,036 |
|
36,100 |
| |||
Victoria Ward (g) |
|
September 2016 |
|
3.35 |
% |
250,000 |
|
238,716 |
|
238,716 |
| |||
20/25 Waterway Avenue |
|
May 2022 |
|
4.79 |
% |
|
|
14,450 |
|
14,450 |
| |||
3 Waterway Square |
|
August 2028 |
|
3.94 |
% |
|
|
52,000 |
|
52,000 |
| |||
4 Waterway Square |
|
December 2023 |
|
4.88 |
% |
|
|
39,004 |
|
39,237 |
| |||
Capital lease obligations |
|
Various |
|
3.60 |
% |
|
|
186 |
|
205 |
| |||
Operating Assets Total |
|
|
|
|
|
|
|
560,833 |
|
523,312 |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
Strategic Developments |
|
|
|
|
|
|
|
|
|
|
| |||
Hughes Landing Retail |
|
December 2018 |
|
2.10 |
% |
36,575 |
|
918 |
|
913 |
| |||
Two Hughes Landing (e) |
|
September 2018 |
|
2.80 |
% |
41,230 |
|
9,396 |
|
10 |
| |||
One Lakes Edge |
|
November 2018 |
|
2.65 |
% |
73,525 |
|
|
|
|
| |||
The Shops at Summerlin SID Bonds - S128 |
|
December 2030 |
|
6.05 |
% |
|
|
3,569 |
|
3,569 |
| |||
The Shops at Summerlin SID Bonds - S108 |
|
December 2016 |
|
5.95 |
% |
|
|
452 |
|
452 |
| |||
Strategic Developments Total |
|
|
|
|
|
|
|
14,335 |
|
4,944 |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
Other Corporate Financing Arrangements |
|
Various |
|
3.00 |
% |
22,700 |
|
21,052 |
|
21,309 |
| |||
Senior Notes |
|
October 2021 |
|
6.88 |
% |
|
|
750,000 |
|
750,000 |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
Unamortized underwriting fees |
|
|
|
|
|
|
|
(8,406 |
) |
(8,750 |
) | |||
|
|
|
|
|
|
|
|
$ |
1,559,381 |
|
$ |
1,514,623 |
| |
(a) |
|
Maturity date includes any extension periods which can be exercised at our option. |
(b) |
|
Loan is fixed at 5.50% through June 2017 and is floating based on three-month LIBOR plus 2.75% thereafter. |
(c) |
|
Revolving development loan provides for a maximum of $30.0 million outstanding balance at any one time with all draws not exceeding $140.0 million. The loan bears interest at the greater of 5.00% or LIBOR plus 3.25%. |
(d) |
|
On April 15, 2014 this loan was fully repaid using cash on hand. Please refer to Note 16 Subsequent Events for a description of the repayment. |
(e) |
|
Loan bears interest at one-month LIBOR plus 2.65%. |
(f) |
|
Loan has a stated interest rate of one-month LIBOR plus 2.25%. The $29.0 million outstanding principal balance is swapped to a 5.21% fixed rate through maturity. |
(g) |
|
Loan has a stated interest rate of one-month LIBOR plus 2.50%. $143.0 million of the outstanding principal balance is swapped to a 3.80% fixed rate through maturity. |
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
The weighted average interest rate on our mortgages, notes and loans payable was 5.18% and 5.25% as of March 31, 2014 and December 31, 2013, respectively.
As of March 31, 2014, we had $1,559.4 million of mortgages, notes and loans payable. All of the mortgage debt is secured by the individual properties as listed in the table above and is non-recourse to HHC, except for a $7.0 million parent guarantee associated with the 110 N. Wacker mortgage and $14.7 million of construction financing for the Outlet Collection at Riverwalk. The $750.0 million of Senior Notes and $21.1 million of Other Corporate Financing Arrangements are also recourse to us. The Woodlands Master Credit Facility and The Woodlands Resort & Conference Center loans are recourse to the entities that directly own The Woodlands operations. Certain of our loans contain provisions which grant the lender a security interest in the operating cash flow of the property that represents the collateral for the loan. Such provisions are not expected to impact our operations in 2014. Certain mortgage notes may be prepaid, but may be subject to a prepayment penalty equal to a yield-maintenance premium, defeasance, or a percentage of the loan balance. As of March 31, 2014, land, buildings and equipment and developments in progress with a cost basis of $1.7 billion have been pledged as collateral for our mortgages, notes and loans payable.
As of March 31, 2014, we were in compliance with all of the financial covenants related to our debt agreements.
Master Planned Communities
On August 8, 2013, The Woodlands refinanced its existing Master Credit Facility with a $250.0 million credit facility consisting of a $125.0 million term loan and a $125.0 million revolver (together, the TWL Facility). The TWL Facility bears interest at one-month LIBOR plus 2.75% and has an initial three-year term through August 2016 with two, one-year extension options. The extension options require a reduction of the total commitment to $220.0 million for the first extension and $185.0 million for the second extension. The TWL Facility also contains certain covenants that, among other things, require the maintenance of specified financial ratios, limit the incurrence of additional recourse indebtedness at The Woodlands, and limit distributions from The Woodlands to us based on a loan-to-value test. There was $73.3 million of undrawn and available borrowing capacity under the TWL Facility based on the collateral underlying the facility and loan covenants as of March 31, 2014.
During the second quarter of 2012, we refinanced $18.1 million of existing debt related to our Bridgeland Master Planned Community with a ten-year term loan facility at a fixed interest rate of 5.50% for the first five years and three-month LIBOR plus 2.75% for the remaining term and maturing on June 29, 2022. Beginning on June 29, 2014, annual principal payments are required in the amount of 5.00% of the then outstanding principal balance. In addition, we simultaneously entered into a three-year revolving credit facility with aggregate borrowing capacity of $140.0 million of which $39.2 million has been utilized and which has a $30.0 million maximum outstanding loan amount at any time. The revolving loan bears interest at the greater of 5.00% or one-month LIBOR plus 3.25% and matures on June 29, 2015. This loan is intended to provide working capital at Bridgeland to accelerate development efforts to meet the demand of homebuilders for finished lots in the community. The Bridgeland loans are cross-collateralized and cross-defaulted and the Bridgeland Master Planned Community serves as collateral for the loans. The loans also require that Bridgeland maintain a minimum $3.0 million cash balance and a minimum net worth of $250.0 million. Additionally, we are restricted from making cash distributions from Bridgeland unless the revolving credit facility has no outstanding balance and one year of real estate taxes and debt service on the term loan have been escrowed with the lender.
The Summerlin Master Planned Community uses Special Improvement District (SID) bonds to finance certain common infrastructure improvements. These bonds are issued by the municipalities and, although unrated, are secured by the assessments on the land. The majority of proceeds from each bond issued is held in a construction escrow and disbursed to us as infrastructure projects are completed, inspected by the municipalities and approved for reimbursement. Accordingly, the SID bonds have been classified as debt, and the Summerlin Master Planned Community pays the debt service on the bonds semi-annually. As Summerlin sells land, the buyers assume a proportionate share of the bond obligation at closing, and the residential sales contracts provide for the reimbursement of the principal amounts that we previously paid with respect to such proportionate share of the bond.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Operating Assets
On October 24, 2013, we closed on a $64.4 million partial recourse construction loan for the Outlet Collection at Riverwalk. The loan bears interest at one-month LIBOR plus 2.75%, with an initial maturity date of October 24, 2016 with two, one-year extension options.
On August 2, 2013, we refinanced a non-recourse first mortgage financing totaling $52.0 million for the construction of 3 Waterway Square, an 11-story, 232,000 square foot office building in The Woodlands. The loan bears interest at 3.94% and matures on August 11, 2028.
On March 15, 2013, we closed on a non-recourse financing totaling $23.0 million for the redevelopment of The Columbia Regional Building (also known as The Rouse Building), an office building located in Columbia, Maryland. The loan bears interest at prime rate for borrowings of less than $0.5 million. For borrowings over $0.5 million, we elect to use one-month LIBOR plus 2.00%. The loan is interest only through the initial maturity date of March 15, 2016. The loan has two, one-year extension options.
On February 8, 2013, we closed on a $95.0 million non-recourse construction loan which repaid the existing $36.1 million mortgage and provides funding for the redevelopment of The Woodlands Resort & Conference Center. The loan bears interest at one-month LIBOR plus 3.50% and has an initial maturity of February 8, 2016, with three one-year extensions at our option. The loan is secured by a 440-room and 40-acre conference center and resort located within The Woodlands, and requires the maintenance of specified financial ratios after completion of construction.
On November 14, 2012, we closed on a non-recourse financing totaling $38.0 million for the construction of One Hughes Landing, an eight-story, 197,000 square foot office building in The Woodlands. The loan matures on November 14, 2015 and has two, one-year extension options. The loan bears interest at one-month LIBOR plus 2.65%.
On August 15, 2012, we assumed a $16.0 million loan as part of the acquisition of 70 Columbia Corporate Center (70 CCC), located in Columbia, MD. The non-recourse, interest only promissory note matures on August 31, 2017, has a fixed rate of 4.25% and is secured by the property. The loan includes a participation right to the lender for 30% of the appreciation in the market value of the property after our 10% cumulative preferred return and repayment of the outstanding debt and our contributed equity. The fair value of the participation obligation is re-measured each quarter and the resulting change in the fair value of the participation right is recorded as interest expense. For the three months ended March 31, 2014, $2.1 million relating to the decrease in the value of the participation right was recorded in interest expense resulting from the repayment of the loan. On April 15, 2014 the loan was repaid in full. See Note 16 Subsequent Events for further information.
On May 31, 2012, as part of the acquisition of our former partners interest in Millennium Waterway Apartments, located within The Woodlands, we consolidated a $55.6 million non-recourse first mortgage loan. The proceeds from the mortgage were used to refinance the joint ventures existing debt and to fund our acquisition of the partners interest in the property. The loan matures on June 1, 2022 and has a fixed interest rate of 3.75%. Payments are interest only until September 2017, then monthly principal and interest payments of $257,418 with the unpaid principal balance due at maturity.
On April 26, 2012, we closed on a $14.5 million non-recourse financing secured by 20/25 Waterway Avenue, located within The Woodlands. The loan bears interest at 4.79% and matures on May 1, 2022.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
On December 5, 2011, we obtained a $41.0 million loan for 4 Waterway Square and a $14.0 million loan for 9303 New Trails, both located within The Woodlands. These non-recourse mortgages mature on December 11, 2023 and have fixed interest rates of 4.88%.
On September 30, 2011, we closed on a $250.0 million non-recourse first mortgage financing secured by Ward Village in Honolulu, Hawaii, that bears interest at one-month LIBOR plus 2.50%. The loan may be drawn to a maximum $250.0 million to fund capital expenditures at the property, provided that the outstanding principal balance cannot exceed 65% of the propertys appraised value, and the borrowers are required to have a minimum 10.0% debt yield to draw additional loan proceeds under the facility. The loan permits partial repayment during its term in connection with property releases for development. In the third quarter of 2013, certain properties securing the loan were approved for condominium development. As a result, the properties were removed from the collateral pool and a minor principal paydown of the loan was required. The loan matures on September 29, 2016, and $143.0 million of the principal balance was swapped to a 3.80% fixed rate for the term of the loan. The unused portion of this mortgage was $11.3 million as of March 31, 2014.
On May 10, 2011, we closed a $29.0 million first mortgage financing secured by our office building located at 110 N. Wacker Drive in Chicago, IL. The loan term is coterminous with the expiration of the first term of the existing tenants lease. The loan has an interest-only period through April 2015 and, thereafter, amortizes ratably to $12.0 million through maturity on October 31, 2019. We provided a $7.0 million repayment guarantee for the loan, which is reduced on a dollar for dollar basis during the amortization period.
Strategic Developments
On December 20, 2013, we closed on a $36.6 million non-recourse loan for the construction of Hughes Landing Retail, a 123,000 square foot retail component of Hughes Landing. The loan bears interest at one-month LIBOR plus 1.95% with an initial maturity date of December 20, 2016, with two, one-year extension options.
On November 25, 2013, we closed on a $73.5 million non-recourse loan for the construction of an eight-story, Class A, multi-family project within Hughes Landing called One Lakes Edge. One Lakes Edge will be comprised of 390 multi-family units (averaging 984 square feet per unit), 22,289 square feet of retail and an approximately 750 space parking garage, all situated on 2.92 acres of land. The loan bears interest at one-month LIBOR plus 2.50% with an initial maturity date of November 25, 2016, with two, one-year extension options.
On September 11, 2013, we closed on a non-recourse financing totaling $41.2 million for the construction of Two Hughes Landing, the second Class A office building in the 66-acre mixed-use development of Hughes Landing on Lake Woodlands, located in The Woodlands. Two Hughes Landing will be a 197,000 square foot, eight-story office building with an adjacent parking garage containing approximately 630 spaces and is the second of up to 11 office buildings planned for Hughes Landing. The loan matures on September 11, 2016 and has two, one-year extension options. The loan bears interest at one-month LIBOR plus 2.65% due monthly.
Corporate
On October 2, 2013, we issued $750.0 million in aggregate principal amount of 6.875% Senior Notes due 2021 (the Senior Notes) and raised approximately $741.3 million of net cash proceeds. Interest is payable semiannually, on April 1 and October 1 of each year starting in April 2014. At any time prior to October 1, 2016, we may redeem up to 35% of the Senior Notes at a price equal to 106.875% using the proceeds from equity offerings. We may redeem all or part of the Senior Notes at any time on or after October 1, 2016 with a declining call premium thereafter to maturity. The Senior Notes contain customary terms and covenants for non-investment grade senior notes and have no maintenance covenants.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 9 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We are primarily exposed to interest rate risks related to our variable interest debt, and we manage this risk by utilizing interest rate derivatives. Our objectives in using interest rate derivatives are to add stability to interest costs by reducing our exposure to interest rate movements. To accomplish this objective, we use interest rate swaps and caps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Companys fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income (AOCI) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2014, the ineffective portion recorded in earnings was insignificant.
As of March 31, 2014, we had gross notional amounts of $172.0 million for interest rate swaps and a $100.0 million interest rate cap that were designated as cash flow hedges of interest rate risk. The fair value of the interest rate cap derivative was insignificant.
If the interest rate swap agreements are terminated prior to their maturity, the amounts previously recorded in AOCI are recognized into earnings over the period that the hedged transaction impacts earnings. If the hedging relationship is discontinued because it is probable that the forecasted transaction will not occur according to the original strategy, any related amounts previously recorded in AOCI are recognized in earnings immediately.
Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. Over the next 12 months, we estimate that an additional $2.4 million will be reclassified as an increase to interest expense.
The table below presents the fair value of our derivative financial instruments which are included in accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheets:
|
|
March 31, |
|
December 31, |
| ||
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands) |
| ||||
Interest Rate Swaps |
|
$ |
3,956 |
|
$ |
4,164 |
|
Total derivatives designated as hedging instruments |
|
$ |
3,956 |
|
$ |
4,164 |
|
The table below presents the effect of our derivative financial instruments on the Condensed Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013:
|
|
Three Months Ended March 31, |
|
|
|
Three Months Ended March 31, |
| ||||||||
|
|
2014 |
|
2013 |
|
|
|
2014 |
|
2013 |
| ||||
Cash Flow Hedges |
|
Amount of Loss |
|
Amount of Loss |
|
Location of Loss |
|
Amount of Loss |
|
Amount of Loss |
| ||||
|
|
(In thousands) |
|
|
|
(In thousands) |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest Rate Swaps |
|
$ |
(342 |
) |
$ |
(98 |
) |
Interest Expense |
|
$ |
(541 |
) |
$ |
(519 |
) |
|
|
$ |
(342 |
) |
$ |
(98 |
) |
|
|
$ |
(541 |
) |
$ |
(519 |
) |
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 10 INCOME TAXES
Several of our subsidiaries are involved in a dispute with the IRS relating to years in which those subsidiaries were owned by General Growth Properties (GGP), and in connection therewith, GGP has provided us with an indemnity against certain potential tax liabilities. Pursuant to the Tax Matters Agreement, GGP has indemnified us from and against 93.75% of any and all losses, claims, damages, liabilities and reasonable expenses to which we become subject (the Tax Indemnity), in each case solely to the extent directly attributable to certain taxes related to sales of certain assets in our Master Planned Communities segment prior to March 31, 2010 (MPC Taxes), in an amount up to $303.8 million, plus interest and penalties related to these amounts (the Indemnity Cap) so long as GGP controls the action in the United States Tax Court (the Tax Court) related to the dispute with the IRS as described below. We recorded the Tax Indemnity receivable at the Indemnity Cap amount as of the spinoff date. The unrecognized tax benefits and related accrued interest recorded through March 31, 2014 are primarily related to the taxes that are the subject of the Tax Indemnity. We have recorded interest income receivable on the Tax Indemnity receivable in the amounts of $40.5 million and $38.6 million as of March 31, 2014 and December 31, 2013, respectively.
The timing of the utilization of the tax assets attributable to indemnified and non-indemnified gains results in changes to the Tax Indemnity receivable and is dependent on numerous future events, such as the timing of recognition of indemnified and non-indemnified gains, the amount of each type of gain recognized in each year, the use of specific deductions and the ultimate amount of indemnified gains recognized. These non-cash changes could be material to our financial statements. Resolution of the Tax Court case noted below could also result in material changes to the Master Planned Community deferred gains and the timing of utilization of the tax assets, both of which could result in changes to the Tax Indemnity receivable. We record the Tax Indemnity receivable based on the amounts indemnified which are determined in accordance with the provisions set forth in ASC 740 (ASC 740) Income Taxes.
During the three months ended March 31, 2014, the tax indemnity receivable increased by $1.9 million. This increase was due to the increase in the related interest income of $1.9 million. There is no remeasurement income or loss in the quarter ended March 31, 2014.
On May 6, 2011, GGP filed Tax Court petitions on behalf of the two former taxable REIT subsidiaries of GGP seeking a redetermination of federal income tax for the years 2007 and 2008. The petitions seek to overturn determinations by the IRS that the taxpayers were liable for combined deficiencies totaling $144.1 million. On October 20, 2011, GGP filed a motion in the Tax Court to consolidate the cases of the two former taxable REIT subsidiaries of GGP subject to litigation with the Internal Revenue Service due to the common nature of the cases facts and circumstances and the issues being litigated. The Tax Court granted the motion to consolidate. The case was heard by the Tax Court in November 2012. We expect the Tax Court to rule on the case within the next 12 months.
Unrecognized tax benefits recorded pursuant to uncertain tax positions were $90.5 million as of March 31, 2014 and December 31, 2013, excluding interest, of which this entire amount would not impact our effective tax rate. Accrued interest related to these unrecognized tax benefits amounted to $40.5 million and $38.7 million as of March 31, 2014 and December 31, 2013, respectively. We recognized an increase in interest expense related to the unrecognized tax benefits of $1.9 million for the three months ended March 31, 2014. A significant amount of the unrecognized tax benefits recorded in the financial statements are related to the Tax Court litigation and are expected to be resolved within the next 12 months.
We file a consolidated corporate tax return which includes all of our subsidiaries with the exception of Victoria Ward, Limited (Ward), substantially all of which is owned by us. Ward elected to be taxed as a REIT, commencing with the taxable year beginning January 1, 2002. Ward has satisfied the REIT distribution requirements for 2013. In connection with the planned condominium development of Ward that was approved by the Hawaii Real Estate Commission during the fourth quarter of 2013, the Company now intends to revoke the REIT election within the next few years, before future phases of condominium development commence. As a result of our intention to revoke the REIT status, we recorded deferred tax liabilities in the fourth quarter 2013 of $48.0 million for book and tax basis differences that we no longer expect to reverse while Victoria Ward Limited is a REIT.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 11 STOCK-BASED PLANS
Our stock based plans are described, and informational disclosures are provided, in the Notes to the Consolidated Financial Statements included in our Form 10-K for the year ended December 31, 2013.
Stock Options
The following table summarizes our stock option plan:
|
|
Stock Options |
|
Weighted |
| |
Stock Options outstanding at January 1, 2014 |
|
965,440 |
|
$ |
64.57 |
|
Granted |
|
63,000 |
|
144.38 |
| |
Forfeited |
|
(3,500 |
) |
61.30 |
| |
Stock Options outstanding at March 31, 2014 |
|
1,024,940 |
|
$ |
69.49 |
|
In February 2014, certain employees were granted stock options, half of which cliff vest on December 31, 2018. The remaining options also cliff vest on December 31, 2018, however, the amount of options are diminished if certain prescribed shareholder return hurdles are not met. Option grantees must be employed by the Company on the vesting date to be eligible to receive the award.
Restricted Stock
Restricted stock awards issued under the Equity Plan provide that shares awarded may not be sold or otherwise transferred until restrictions have lapsed as established by the Committee. For the three months ended March 31, 2014, compensation expense of $0.8 million is included in general and administrative expense related to restricted stock awards. The balance of unamortized restricted stock expense as of March 31, 2014 was $12.4 million, which is expected to be recognized over a weighted-average period of 4.11 years.
The following table summarizes restricted stock activity:
|
|
Restricted |
|
Weighted |
| |
Restricted stock outstanding at January 1, 2014 |
|
122,332 |
|
$ |
75.21 |
|
Granted |
|
54,204 |
|
123.43 |
| |
Vested |
|
|
|
|
| |
Restricted Stock outstanding at March 31, 2014 |
|
176,536 |
|
$ |
90.01 |
|
In addition to the granting of restricted stock to certain members of management, we award restricted stock to our non-employee directors as part of their annual retainer. The restriction on the non-employee director shares lapse in May of each year. In February 2014, certain employees were granted restricted stock, half of which cliff vest on December 31, 2018. The remaining restricted stock awards also cliff vest on December 31, 2018, however, the amount of restricted stock awards are diminished if certain prescribed shareholder return hurdles are not met. Generally, upon termination of employment, the restricted shares that have not vested are forfeited.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 12 OTHER ASSETS AND LIABILITIES
Prepaid Expenses and Other Assets
The following table summarizes the significant components of prepaid expenses and other assets.
|
|
March 31, |
|
December 31, |
| ||
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands) |
| ||||
Special Improvement District receivable |
|
$ |
39,712 |
|
$ |
39,688 |
|
Equipment, net of accumulated depreciation of $1.1 million and $0.7 million, respectively |
|
21,551 |
|
21,978 |
| ||
Tenant incentives and other receivables |
|
5,750 |
|
6,757 |
| ||
Federal income tax receivable |
|
6,099 |
|
6,053 |
| ||
Prepaid expenses |
|
8,528 |
|
4,744 |
| ||
Below-market ground leases |
|
19,917 |
|
20,002 |
| ||
Condominium deposits |
|
50,232 |
|
12,405 |
| ||
Security and escrow deposits |
|
32,762 |
|
28,082 |
| ||
Above-market tenant leases |
|
1,042 |
|
1,095 |
| ||
Uncertain tax position asset |
|
14,178 |
|
13,528 |
| ||
In-place leases |
|
8,755 |
|
9,306 |
| ||
Intangibles |
|
3,683 |
|
3,714 |
| ||
Other |
|
4,110 |
|
6,588 |
| ||
|
|
$ |
216,319 |
|
$ |
173,940 |
|
The $42.4 million increase as of March 31, 2014 compared to December 31, 2013 primarily relates to the increase of $37.8 million in restricted condominium cash deposits for the two new market rate towers at Ward Village for which we began public sales on February 1, 2014.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Accounts Payable and Accrued Expenses
The following table summarizes the significant components of accounts payable and accrued expenses.
|
|
March 31, |
|
December 31, |
| ||
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands) |
| ||||
Construction payables |
|
$ |
140,724 |
|
$ |
106,741 |
|
Accounts payable and accrued expenses |
|
37,770 |
|
46,998 |
| ||
Condominium deposits |
|
50,232 |
|
12,405 |
| ||
Membership deposits |
|
26,167 |
|
24,830 |
| ||
Above-market ground leases |
|
2,391 |
|
2,431 |
| ||
Deferred income |
|
23,893 |
|
18,963 |
| ||
Accrued interest |
|
28,338 |
|
17,463 |
| ||
Accrued real estate taxes |
|
4,811 |
|
8,581 |
| ||
Tenant and other deposits |
|
10,374 |
|
9,490 |
| ||
Insurance reserve |
|
577 |
|
1,417 |
| ||
Accrued payroll and other employee liabilities |
|
7,919 |
|
15,666 |
| ||
Special assessment |
|
2,603 |
|
4,164 |
| ||
Interest rate swaps |
|
3,956 |
|
2,603 |
| ||
Other |
|
14,336 |
|
12,239 |
| ||
|
|
$ |
354,091 |
|
$ |
283,991 |
|
The $70.1 million increase as of March 31, 2014 compared to December 31, 2013 is primarily due to the increase of $37.8 million in condominium deposits for the two new market rate towers at Ward Village and a $34.0 million increase in construction payables primarily due to increased development activities at The Shops at Summerlin, The Woodlands Resort & Conference Center, Outlet Collection at Riverwalk, South Street Seaport and One Hughes Landing.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 13 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes AOCI for the period indicated:
Changes in Accumulated Other Comprehensive Income (Loss) by Component (a)
For the Three Months Ended March 31, 2014
|
|
Gains and |
| |
|
|
(In Thousands) |
| |
Balance as of January 1, 2014 |
|
$ |
(8,222 |
) |
|
|
|
| |
Other comprehensive income before reclassifications |
|
(475 |
) | |
Amounts reclassified from accumulated other comprehensive loss |
|
541 |
| |
Net current-period other comprehensive income |
|
66 |
| |
Balance as of March 31, 2014 |
|
$ |
(8,156 |
) |
(a) All amounts are net of tax. Amounts in parentheses indicate debits to profit (loss).
The following table summarizes the amounts reclassified out of AOCI for the period indicated:
Reclassifications out of Accumulated Other Comprehensive Income (Loss) (a)
For the period ended March 31, 2014
Accumulated Other Comprehensive |
|
Amounts reclassified from |
|
Affected line item in the |
| |
|
|
(In Thousands) |
|
|
| |
Gains and losses on cash flow hedges |
|
|
|
|
| |
Interest rate swap contracts |
|
$ |
(614 |
) |
Interest expense |
|
|
|
73 |
|
Provision for income taxes |
| |
Total reclassifications for the period |
|
$ |
(541 |
) |
Net of tax |
|
(a) Amounts in parentheses indicate debits to profit (loss).
NOTE 14 COMMITMENTS AND CONTINGENCIES
In the normal course of business, from time to time, we are involved in legal proceedings relating to the ownership and operations of our properties. In managements opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a material effect on our consolidated financial position, results of operations or liquidity.
We had outstanding letters of credit and surety bonds of $53.1 million and $58.7 million as of March 31, 2014 and December 31, 2013, respectively. These letters of credit and bonds were issued primarily in connection with insurance requirements, special real estate assessments and construction obligations.
On June 27, 2013, the City of New York executed the amended and restated ground lease for South Street Seaport. The restated lease terms provide for annual fixed rent of $1.2 million starting July 1, 2013 with an expiration of December 30, 2072, including our option to extend. The annual rent escalates 3.0% compounded annually. In addition to the annual base rent of $1.2 million, we are required to make annual payments of $210,000 as additional rent through the term of the lease. The additional rent escalates annually based on the Consumer Price Index. We are entitled to a total rent credit of $1.5 million, to be taken monthly over a 30-month period. Simultaneously with the execution of the lease, we executed a completion guaranty for the redevelopment of Pier 17. The completion guaranty requires us to perform certain obligations under the lease, including the commencement of construction by October 1, 2013 with a scheduled completion date in 2016.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
In the fourth quarter of 2012, the Uplands portion of South Street Seaport suffered damage due to flooding as a result of Superstorm Sandy. Reconstruction efforts are ongoing and the property is only partially operating. We have received $28.3 million in insurance proceeds through March 31, 2014 at South Street Seaport related to our claim of which we have recognized $20.0 million in Other income to date, including $7.8 million during the three months ended March 31, 2014. We believe that our insurance will reimburse substantially all of the costs of repairing the property and will also compensate us for substantially all lost income resulting from the storm.
Please refer to Note 10 Income Taxes for additional contingencies related to our uncertain tax positions.
NOTE 15 SEGMENTS
We have three business segments which offer different products and services. Our three segments are managed separately because each requires different operating strategies or management expertise and are reflective of managements operating philosophies and methods. In addition, our segments or assets within such segment could change in the future as development of certain properties commences or other operational or management changes occur. We do not distinguish or group our combined operations on a geographic basis. Furthermore, all operations are within the United States and no customer or tenant comprises more than 10% of revenues. Our reportable segments are as follows:
· Master Planned Communities (MPCs) includes the development and sale of land in large-scale, long-term community development projects in and around Las Vegas, Nevada; Houston, Texas; and Columbia, Maryland.
· Operating Assets includes retail, office and industrial properties, a multi-family property, The Woodlands Resort & Conference Center and other real estate investments. These assets are currently generating revenues, and we believe there is an opportunity to redevelop or reposition many of these assets to improve operating performance.
· Strategic Developments includes all properties held for development or redevelopment which have no substantial operations.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
The assets included in each segment as of March 31, 2014, are contained in the following chart:
Master Planned |
|
Operating Assets |
|
Strategic Developments | |||||||
Communities |
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
| ||
|
|
Retail |
Office / Other |
Under Construction |
|
| |||||
· Bridgeland |
· Cottonwood Square |
· Arizona 2 Lease * |
· Creekside Village Green |
· Alameda Plaza | |||||||
· Maryland Communities |
· Landmark Mall |
· 70 Columbia Corporate Center |
· ExxonMobil Build-to-Suit |
· AllenTowne | |||||||
· Summerlin |
· Park West |
· Columbia Office Properties **** |
· Hughes Landing Retail |
· Bridges at Mint Hill | |||||||
· The Woodlands |
· Outlet Collection at Riverwalk |
· Golf Courses at Summerlin |
· Millennium Woodlands Phase II, LLC ** |
· Century Plaza Mall | |||||||
|
· South Street Seaport |
and TPC Las Vegas (participation interest) |
· ONE Ala Moana *** |
· Circle T Ranch and Power Center ** | |||||||
|
· Ward Village |
· 2201 Lake Woodlands Drive |
· One Lakes Edge |
· Cottonwood Mall | |||||||
|
· 20/25 Waterway Avenue |
· Millennium Waterway Apartments |
· The Metropolitan Downtown |
· Elk Grove Promenade | |||||||
|
· Waterway Garage Retail |
· 9303 New Trails Office |
Columbia Project ** |
· 80% Interest in Fashion | |||||||
|
|
· 110 N Wacker |
· 3831 Technology Forest Drive |
Show Air Rights | |||||||
|
|
· One Hughes Landing |
· The Shops at Summerlin |
· Kendall Town Center | |||||||
|
|
· Stewart Title of Montgomery County, TX ** |
· Two Hughes Landing |
· Lakemoor (Volo) Land | |||||||
|
|
· Summerlin Hospital Medical Center ** |
|
· Maui Ranch Land | |||||||
|
|
· Summerlin Las Vegas Baseball Club ** |
|
· Parcel C ** | |||||||
|
|
· The Club at Carlton Woods |
|
· Redlands Mall | |||||||
|
|
· The Woodlands Resort & |
|
· Summerlin Apartments, LLC ** | |||||||
|
|
Conference Center (under construction) |
|
· West Windsor | |||||||
|
|
· Woodlands Sarofim #1 ** |
|
| |||||||
|
|
· 1400 Woodloch Forest |
|
| |||||||
|
|
· Waterway Square Garage |
|
| |||||||
|
|
· 3 Waterway Square Office |
|
| |||||||
|
|
· 4 Waterway Square Office |
|
| |||||||
* |
Notes receivable. |
** |
An equity or cost method investment. |
*** |
Asset consists of two equity method investments. |
**** |
Includes the Columbia Regional Building which is under construction. |
As our segments are managed separately, different operating measures are utilized to assess operating results and allocate resources among the segments. The one common operating measure used to assess operating results for the business segments is Real Estate Property Earnings Before Taxes (REP EBT), which represents the operating revenues of the properties less property operating expenses and adjustments for interest, as further described below. We believe REP EBT provides useful information about the operating performance for all of our properties.
REP EBT, as it relates to our business, is defined as net income (loss) excluding general and administrative expenses, other income, corporate interest income, corporate interest and depreciation expense, provision for income taxes, warrant liability loss and the reduction in tax indemnity receivable. We present REP EBT because we use this measure, among others, internally to assess the operating performance of our assets. We also present this measure because we believe certain investors use it as a measure of a companys historical operating performance and its ability to service and incur debt. We believe that the inclusion of certain adjustments to net income (loss) to calculate REP EBT is appropriate to provide additional information to investors.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Segment operating results are as follows:
|
|
Three Months Ended March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands) |
| ||||
Master Planned Communities |
|
|
|
|
| ||
Land sales |
|
$ |
47,671 |
|
$ |
47,226 |
|
Builder price participation |
|
4,097 |
|
1,275 |
| ||
Minimum rents |
|
197 |
|
195 |
| ||
Other land revenues |
|
2,504 |
|
2,802 |
| ||
Other rental and property revenues |
|
67 |
|
|
| ||
Total revenues |
|
54,536 |
|
51,498 |
| ||
|
|
|
|
|
| ||
Cost of sales - land |
|
23,078 |
|
25,699 |
| ||
Land sales operations |
|
7,304 |
|
6,953 |
| ||
Land sales real estate and business taxes |
|
1,954 |
|
1,543 |
| ||
Depreciation and amortization |
|
100 |
|
7 |
| ||
Interest income |
|
(57 |
) |
(15 |
) | ||
Interest expense (*) |
|
(5,066 |
) |
(5,960 |
) | ||
Total expenses |
|
27,313 |
|
28,227 |
| ||
MPC EBT |
|
27,223 |
|
23,271 |
| ||
|
|
|
|
|
| ||
Operating Assets |
|
|
|
|
| ||
Minimum rents |
|
19,900 |
|
18,511 |
| ||
Tenant recoveries |
|
5,884 |
|
5,252 |
| ||
Resort and conference center revenues |
|
9,426 |
|
11,104 |
| ||
Other rental and property revenues |
|
5,110 |
|
3,433 |
| ||
Total revenues |
|
40,320 |
|
38,300 |
| ||
|
|
|
|
|
| ||
Other property operating costs |
|
15,260 |
|
14,965 |
| ||
Rental property real estate taxes |
|
3,107 |
|
2,983 |
| ||
Rental property maintenance costs |
|
1,800 |
|
1,656 |
| ||
Resort and conference center operations |
|
7,511 |
|
7,476 |
| ||
Provision for doubtful accounts |
|
143 |
|
429 |
| ||
Demolition costs |
|
2,494 |
|
|
| ||
Depreciation and amortization |
|
9,010 |
|
6,118 |
| ||
Interest income |
|
(119 |
) |
(46 |
) | ||
Interest expense |
|
2,044 |
|
6,805 |
| ||
Equity in Earnings from Real Estate and Other Affiliates |
|
(1,805 |
) |
(2,733 |
) | ||
Total expenses |
|
39,445 |
|
37,653 |
| ||
Operating Assets EBT |
|
875 |
|
647 |
| ||
|
|
|
|
|
| ||
Strategic Developments |
|
|
|
|
| ||
Minimum rents |
|
263 |
|
220 |
| ||
Tenant recoveries |
|
131 |
|
73 |
| ||
Condominium rights and unit sales |
|
3,126 |
|
|
| ||
Other land revenues |
|
8 |
|
|
| ||
Other rental and property revenues |
|
269 |
|
|
| ||
Total revenues |
|
3,797 |
|
293 |
| ||
|
|
|
|
|
| ||
Condominium rights and unit cost of sales |
|
1,571 |
|
|
| ||
Other property operating costs |
|
2,771 |
|
555 |
| ||
Real estate taxes |
|
633 |
|
774 |
| ||
Rental property maintenance costs |
|
115 |
|
149 |
| ||
Provision for doubtful accounts |
|
|
|
|
| ||
Demolition costs |
|
22 |
|
|
| ||
Depreciation and amortization |
|
424 |
|
43 |
| ||
Other income |
|
(2,373 |
) |
|
| ||
Interest expense (*) |
|
(2,649 |
) |
(287 |
) | ||
Equity in Earnings from Real Estate and Other Affiliates |
|
(4,263 |
) |
|
| ||
Total expenses |
|
(3,749 |
) |
1,234 |
| ||
Strategic Developments EBT |
|
7,546 |
|
(941 |
) | ||
REP EBT |
|
$ |
35,644 |
|
$ |
22,977 |
|
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
The following reconciles REP EBT to GAAP-basis net income (loss):
Reconciliation of REP EBT to GAAP-net |
|
Three Months Ended March 31, |
| ||||
income (loss) |
|
2014 |
|
2013 |
| ||
|
|
(In thousands) |
| ||||
|
|
|
|
|
| ||
REP EBT |
|
$ |
35,644 |
|
$ |
22,977 |
|
General and administrative |
|
(16,882 |
) |
(11,171 |
) | ||
Corporate interest (expense)/income, net |
|
(10,980 |
) |
2,710 |
| ||
Warrant liability loss |
|
(96,440 |
) |
(33,027 |
) | ||
Provision for income taxes |
|
(4,773 |
) |
(2,479 |
) | ||
Reduction in tax indemnity receivable |
|
|
|
(1,904 |
) | ||
Other income |
|
8,075 |
|
|
| ||
Corporate depreciation |
|
(975 |
) |
(276 |
) | ||
Net loss |
|
$ |
(86,331 |
) |
$ |
(23,170 |
) |
The following reconciles segment revenue to GAAP-basis consolidated revenues:
Reconciliation of Segment Basis Revenues to |
|
Three Months Ended March 31, |
| ||||
GAAP Revenues |
|
2014 |
|
2013 |
| ||
|
|
(In thousands) |
| ||||
|
|
|
|
|
| ||
Master Planned Communities |
|
$ |
54,536 |
|
$ |
51,498 |
|
Operating Assets |
|
40,320 |
|
38,300 |
| ||
Strategic Developments |
|
3,797 |
|
293 |
| ||
Total revenues |
|
$ |
98,653 |
|
$ |
90,091 |
|
The assets by segment and the reconciliation of total segment assets to the total assets in the Condensed Consolidated Balance Sheets are summarized as follows:
|
|
March 31, |
|
December 31, |
| ||
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands) |
| ||||
Master Planned Communities |
|
$ |
1,749,030 |
|
$ |
1,760,639 |
|
Operating Assets (a) |
|
1,170,079 |
|
1,158,337 |
| ||
Strategic Developments |
|
658,317 |
|
462,525 |
| ||
Total segment assets |
|
3,577,426 |
|
3,381,501 |
| ||
Corporate and other (b) |
|
1,122,315 |
|
1,186,367 |
| ||
Total assets |
|
$ |
4,699,741 |
|
$ |
4,567,868 |
|
(a) Certain assets included in our Operating Assets segment are in various stages of redevelopment and are included in Developments on our Condensed Consolidated Balance Sheets.
(b) Assets included in Corporate and other consist primarily of Cash and cash equivalents and the Tax Indemnity receivable, including accrued interest.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
A portion of the tax indemnification asset in the amount of $185.7 million was incorrectly included in the Operating Assets segment at December 31, 2013 rather than the Corporate segment. The amounts in the table above at December 31, 2013 have been corrected to appropriately include the entire tax indemnification asset of $320.5 million in the Corporate segment.
The increase in the Strategic Developments segments asset balance as of March 31, 2014 of $195.8 million compared to December 31, 2013 is primarily due to $37.8 million of deposits collected on the sale of condominium units for both our market rate towers at Ward Village, $18.0 million in buildings and equipment from the completion of the transformation of the IBM building at Ward Village into an information center and sales gallery and development and other costs of $72.8 million for The Shops at Summerlin, $10.0 million for Hughes Landing multi-family and $16.7 million for Ward Village.
NOTE 16 SUBSEQUENT EVENTS
On April 15, 2014, we paid $17.0 million cash in full satisfaction of the $16.0 million loan that we assumed as part of the acquisition of 70 Columbia Corporate Center (70 CCC) in August 2012. The non-recourse, interest only promissory note was due to mature on August 31, 2017, and included a participation right to the lender for 30% of the appreciation in the market value of the property after our 10% cumulative preferred return and repayment of the outstanding debt and our contributed equity. The final payment included approximately $0.7 million of this participation right based upon $28.0 million appraised value for the property. We intend to seek long-term mortgage financing for this asset.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes. All references to numbered Notes are to specific notes to our Condensed Consolidated Financial Statements included in this Quarterly Report.
Forward-looking information
We may make forward-looking statements in this Quarterly Report and in other reports that we file with the SEC. In addition, our management may make forward-looking statements orally to analysts, investors, creditors, the media and others.
Forward-looking statements include:
· projections of our revenues, operating income, net income, earnings per share, REP EBT, capital expenditures, income tax, other contingent liabilities, dividends, leverage, capital structure or other financial items;
· forecasts of our future economic performance; and
· descriptions of assumptions underlying or relating to any of the foregoing.
In this Quarterly Report, for example, we make forward-looking statements discussing our expectations about:
· capital required for our operations and development opportunities for the properties in our Operating Assets and Strategic Developments segments;
· expected performances of our Master Planned Communities segment and other current income producing properties; and
· future liquidity, development opportunities, development spending and management plans.
Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements often include words such as anticipate, believe, can, could, estimate, expect, forecast, intend, may, likely, plan, project, realize, should, target, would, and other words of similar expressions. Forward-looking statements should not be unduly relied upon. They give our expectations about the future and are not guarantees.
There are several factors, many beyond our control, which could cause results to differ materially from our expectations. These risk factors are described in our Annual Report on Form 10-K for the year ended December 31, 2013 (the Annual Report) and are incorporated herein by reference. Any factor could, by itself, or together with one or more other factors, adversely affect our business, results of operations or financial condition. There may also be other factors that we have not described in this Quarterly Report or in our Annual Report that could cause results to differ from our expectations. These forward-looking statements present our estimates and assumptions only as of the date of this Quarterly Report. Except as may be required by law, we undertake no obligation to modify or revise any forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report.
Real Estate Property Earnings Before Taxes
We use a number of operating measures for assessing operating performance of our communities, assets, properties and projects within our segments, some of which may not be common among all three of our segments. We believe that investors may find some operating measures more useful than others when separately evaluating each segment. One common operating measure used to assess operating results for our business segments is Real Estate Property Earnings Before Taxes (REP EBT). We believe REP EBT provides useful information about our operating performance because it excludes certain non-recurring and non-cash items which we believe are not indicative of our core business.
REP EBT, as it relates to our business, is defined as net income (loss) excluding general and administrative expenses, corporate interest income, corporate interest and depreciation expense, provision for income taxes, warrant liability gain (loss), other income and the changes in tax indemnity receivable. We present REP EBT because we use this measure, among others, internally to assess the core operating performance of our assets. We also present this measure because we believe certain investors use it as a measure of a companys historical operating performance and its ability to service existing and obtain additional debt. We believe that the inclusion of certain adjustments to net income (loss) to calculate REP EBT is appropriate to provide additional information to investors. A reconciliation of REP EBT to consolidated net income (loss) as computed in accordance with GAAP has been presented in Note 15 Segments.
REP EBT should not be considered as an alternative to GAAP net income (loss) attributable to common stockholders or GAAP net income (loss), as it has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of the limitations of this metric are that it does not include the following:
· cash expenditures, or future requirements for capital expenditures or contractual commitments;
· corporate general and administrative expenses;
· interest expense on our corporate debt;
· income taxes that we may be required to pay;
· any cash requirements for replacement of depreciated or amortized assets or that these assets have different useful lives; and
· limitations on, or costs related to, transferring earnings from our Real Estate Affiliates to us.
Operating Assets Net Operating Income
We believe that net operating income (NOI) is a useful supplemental measure of the performance of our Operating Assets because it provides a performance measure that, when compared year over year, reflects the revenues and expenses directly associated with owning and operating real estate properties and the impact on operations from trends in rental and occupancy rates and operating costs. We define NOI as revenues (rental income, tenant recoveries and other income) less expenses (real estate taxes, repairs and maintenance, marketing and other property expenses). NOI also excludes straight line rents and tenant incentives amortization, net interest expense, ground rent, demolition costs, amortization, depreciation and equity in earnings from Real Estate Affiliates. We use NOI to evaluate our operating performance on a property-by-property basis because NOI allows us to evaluate the impact that factors such as lease structure, lease rates and tenant base, which vary by property, have on our operating results, gross margins and investment returns.
Although we believe that NOI provides useful information to the investors about the performance of our Operating Assets, due to the exclusions noted above, NOI should only be used as an alternative measure of the financial performance of such assets and not as an alternative to GAAP net income (loss). For reference, and as an aid in understanding our computation of NOI, a reconciliation of NOI to REP EBT has been presented in the Operating Assets segment discussion below.
Results of Operations
Consolidated revenues for the three months ended March 31, 2014 increased $8.6 million compared to the same period in 2013, primarily due to higher revenues in our MPCs and Strategic Developments segments. MPC builder price participation revenues increased $2.8 million for the three months ended March 31, 2014 compared to the same period in 2013, due to increased demand for home sales at higher prices in Summerlin and higher home sales prices in The Woodlands. Strategic Developments revenue increased $3.5 million for the three months ended March 31, 2014 compared to the same period in 2013, due to the recognition during the first quarter of 2014 of deferred revenue from the sale of our ONE Ala Moana condominium air rights into a 50/50 joint venture in the second quarter 2013.
The net loss attributable to common stockholders was $86.3 million, or $2.19 loss per diluted share, for the three months ended March 31, 2014 compared to a net loss attributable to common stockholders of $23.1 million, or $0.59 loss per diluted share, for the same period in 2013. The $63.2 million higher net loss for the three months ended March 31, 2014 compared to the same period in 2013 was primarily due to a warrant liability loss of $96.4 million for the three months ended March 31, 2014 compared to a warrant liability loss of $33.0 million for the same period in 2013, higher corporate net interest expense of $13.7 million and general and administrative expenses of $5.7 million offset by other income of $7.8 million from South Street Seaport insurance proceeds and higher earnings of $8.5 million and $4.0 million from the Strategic Development and MPC segments, respectively.
Segment Operations
Please refer to Note 15 - Segments for additional information including reconciliations of our segment basis results to generally accepted accounting principles (GAAP) basis results.
Master Planned Communities Segment
MPC revenues vary between periods based on economic conditions and several factors such as, but not limited to, location, availability of land for sale, development density and residential or commercial use. Although our business does not involve the sale or resale of homes, we believe that net new home sales are an important indicator of future demand for our superpad sites and lots; therefore, we use this statistic in the discussion of our MPCs below. Net new home sales reflect home sales made by home builders, less cancelations. Cancelations occur when a home buyer signs a contract to purchase a home, but later fails to qualify for a home mortgage or is unable to provide an adequate down payment to complete the home sale. Reported results may differ significantly from actual cash flows generated principally because cost of sales for GAAP purposes is derived from margins calculated using carrying values, projected future improvements and other capitalized project costs in relation to projected future land sale revenues. Carrying values, generally, represent acquisition and development costs, less adjustments for previous impairment charges. Development expenditures are capitalized and generally not reflected in the Condensed Consolidated Statements of Operations in the current year.
MPC sales for the three months ended March 30, 2014 and 2013 is summarized as follows:
|
|
MPC Sales Summary |
| ||||||||||||||||||||||||
|
|
Land Sales |
|
Acres Sold |
|
Number of Lots/Units |
|
Price per Acre |
|
Price per Lot/Units |
| ||||||||||||||||
|
|
Three Months Ended March 31, |
| ||||||||||||||||||||||||
($ in thousands) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Columbia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
No land sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Bridgeland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Single family - detached |
|
$ |
136 |
|
$ |
3,589 |
|
0.5 |
|
12.0 |
|
3 |
|
52 |
|
$ |
272 |
|
$ |
299 |
|
$ |
45 |
|
$ |
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Summerlin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Superpad sites |
|
16,281 |
|
21,075 |
|
31.3 |
|
89.4 |
|
121 |
|
401 |
|
520 |
|
236 |
|
135 |
|
53 |
| ||||||
Custom lots |
|
5,036 |
|
1,007 |
|
3.8 |
|
1.2 |
|
8 |
|
2 |
|
1,325 |
|
839 |
|
630 |
|
504 |
| ||||||
Single family - detached |
|
4,800 |
|
6,099 |
|
6.9 |
|
8.4 |
|
25 |
|
63 |
|
696 |
|
726 |
|
192 |
|
97 |
| ||||||
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Not-for-profit |
|
2,250 |
|
|
|
10.0 |
|
|
|
|
|
|
|
225 |
|
|
|
|
|
|
| ||||||
|
|
28,367 |
|
28,181 |
|
52.0 |
|
99.0 |
|
154 |
|
466 |
|
546 |
|
285 |
|
170 |
|
60 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
The Woodlands |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Single family - detached |
|
17,271 |
|
12,231 |
|
23.8 |
|
25.2 |
|
83 |
|
112 |
|
726 |
|
485 |
|
208 |
|
109 |
| ||||||
Single family - attached |
|
938 |
|
702 |
|
1.4 |
|
1.7 |
|
14 |
|
18 |
|
670 |
|
413 |
|
67 |
|
39 |
| ||||||
|
|
18,209 |
|
12,933 |
|
25.2 |
|
26.9 |
|
97 |
|
130 |
|
723 |
|
481 |
|
188 |
|
99 |
| ||||||
Total acreage sales revenue |
|
46,712 |
|
44,703 |
|
77.7 |
|
137.9 |
|
254 |
|
648 |
|
|
|
|
|
|
|
|
| ||||||
Deferred revenue* |
|
(1,658 |
) |
(1,604 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Special Improvement District revenue* |
|
2,617 |
|
4,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total land sales revenue - GAAP basis |
|
$ |
47,671 |
|
$ |
47,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
* Applicable exclusively to Summerlin
MPC land sales, including Special Improvement District (SID) transfers and reimbursements and deferred revenue adjustments, increased 0.9%, or $0.4 million, to $47.7 million for the three months ended March 31, 2014 compared to $47.2 million for the same period in 2013. Land sales increased 40.8%, or $5.3 million, to $18.2 million at The Woodlands for the three months ended March 31, 2014 compared to the same period in 2013, offset by a decrease in land sales of $3.5 million and $1.4 million at Bridgeland and Summerlin, respectively, compared to the same period in 2013. The increase in residential land sales at The Woodlands is primarily due to strong economic conditions and homebuilder demand for lots at prices that are approximately 89.9% higher in the first quarter of 2014 compared to the same period in 2013. Bridgeland lot sales were lower in the first quarter of 2014 as compared to the same period in 2013 as a result of a lack of lot inventory because we could not develop lots in 2013 pending receipt of a wetlands permit. On February 27, 2014, we received the wetlands permit and expect to begin delivering new finished lots by mid-2014. Summerlins land sales revenues remained relatively unchanged for the first quarter of 2014 compared to the same period in 2013 as a result of per acre pricing that is 91.6% higher, due primarily to low lot inventory levels in the Las Vegas market, offset by lower acreage sold in the first quarter 2014 compared to the first quarter 2013.
For large MPCs such as ours, sales prices on a per lot basis and per acre basis generally increase as the size of the developed lot grows. This is because smaller lots are more commodity-like and larger lots may have more unique features. Additionally, the average homebuyer finds more competition for new and resale homes on the lower end of the price range in the broader residential market. As lot sizes and prices increase, the number of potential customers and developers decreases. Barring a softening in market conditions, when a MPC reaches the level whereby land is scarce, pricing begins to escalate on a per lot and per acre basis due to a scarcity premium resulting from the market's realization that new home site inventory will be depleted.
The Woodlands and Bridgeland
The Woodlands land sales increased $5.3 million, or 40.8% to $18.2 million for the three months ended March 31, 2014 compared to $12.9 million for the same period in 2013. The increase was due to the increase in the average lot price as there were fewer acres sold during the first quarter 2014 compared to the first quarter 2013. The average price per acre at The Woodlands increased 50.3%, or $242,000 to $723,000 for the three months ended March 31, 2014 compared to $481,000 for the same period in 2013. The average lot price increased 89.9%, or $89,000, to $188,000 for the three months ended March 31, 2014 compared to $99,000 for the same period in 2013.
Bridgelands land sales decreased $3.5 million to $0.1 million for the three months ended March 31, 2014 compared to $3.6 million for the same period in 2013. The decrease in lot sales revenues for the three months ended March 31, 2014, compared to the same period in 2013 relates primarily to the lack of finished lot inventory. Bridgelands finished lot inventory is expected to increase significantly during 2014 due to receiving the wetlands permit as discussed above. We recently received bids from homebuilders for the sale of 509 lots at an average price of $90,000 per lot, or approximately 17.4% higher than the average finished lot prices during 2013, of which we currently expect 448 lots to close in 2014.
We expect the completion of construction of the Grand Parkway to positively impact the surrounding areas. The Grand Parkway is an approximate 180-mile circumferential highway traversing seven counties and encircling the Greater Houston region. The new 385-acre ExxonMobil campus is located just south of The Woodlands and is in close proximity to the Grand Parkway. The segment connecting Bridgeland to I-45 near the ExxonMobil campus is expected to be completed by late 2015. The ExxonMobil campus is expected to include approximately 20 buildings, representing three million square feet of space, and we believe it is one of the largest construction projects currently under way in the United States. Additionally, ExxonMobil began relocating employees to its new location in March 2014 and will continue with relocation continuing into 2015. Upon completion of the relocation, ExxonMobil expects approximately 10,000 employees will be employed at the new campus. The direct and indirect jobs related to this relocation are positively impacting The Woodlands and Bridgeland due to increased housing demand, as well as commercial space needs for companies servicing ExxonMobil.
As more fully discussed in the Strategic Developments segment, ExxonMobil has pre-leased 478,000 square feet in two Class A office buildings currently under construction at Hughes Landing in The Woodlands.
Summerlin
Summerlins land sales revenue increased $0.2 million, or 0.7% to $28.4 million for the three months ended March 31, 2014 compared to $28.2 million for the same period in 2013, comprised of a 120.3% increase in average price per superpad acre sold and 47.5% lower acreage volume. First quarter 2014 volume decreased due to timing of the development and delivery of parcels for sale. Homebuilder demand for land in Summerlin remains strong, and our strategy is to manage the development and delivery of parcels for sale to increase the long-term value of the project. Superpad sites are generally 20 to 25 acre parcels of unimproved land where we develop and construct the major utilities (water, sewer and drainage) and roads to the borders of the parcel and the homebuilder completes the on-site utilities, roads and finished lots. The average price per superpad acre increased $284,000 to $520,000 for the three months ended March 31, 2014 compared to $236,000 for the same period in 2013. The increase in average price per acre is primarily due to a scarcity of attractive developable residential land in the Las Vegas market and the continued strong growth in demand for new housing.
Summerlin had 109 new home sales for the three months ended March 31, 2014, representing a 31.9% decrease compared to the 160 new home sales for the same period in 2013. This decrease is the result of a temporary lack of moderately priced homes available in Summerlin, as well as a limited number of product choices. Homebuilders in Summerlin are currently working to bring several new neighborhoods online in 2014 that will greatly increase the range of product choices and price points available to homebuyers.
Total revenues and expenses for the MPC segment are summarized as follows:
Master Planned Communities Revenues and Expenses (*)
|
|
Three Months Ended March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands) |
| ||||
Land sales |
|
$ |
47,671 |
|
$ |
47,226 |
|
Builder price participation |
|
4,097 |
|
1,275 |
| ||
Other land revenues and minimum rents |
|
2,768 |
|
2,997 |
| ||
Total revenues |
|
54,536 |
|
51,498 |
| ||
|
|
|
|
|
| ||
Cost of sales - land |
|
23,078 |
|
25,699 |
| ||
Land sales operations |
|
9,258 |
|
8,496 |
| ||
Depreciation and amortization |
|
100 |
|
7 |
| ||
Interest expense, net |
|
(5,123 |
) |
(5,975 |
) | ||
Total expenses |
|
27,313 |
|
28,227 |
| ||
MPC REP EBT |
|
$ |
27,223 |
|
$ |
23,271 |
|
(*) For a detailed breakdown of our MPC segment EBT, please refer to Note 15 - Segments of our Condensed Consolidated Financial Statements.
Builder price participation represents the contractual amount we collect from home builders when the homes they have constructed sell for greater than an agreed upon amount when the land was sold to them. Builder price participation increased $2.8 million for the three months ended March 31, 2014 compared to the same period in 2013, primarily due to more home closings at higher prices at Summerlin and The Woodlands.
Cost of sales - land decreased $2.6 million for the three months ended March 31, 2014 compared to the same period in 2013, primarily due to increased margins at Summerlin as a result of achieving higher per-acre prices on all superpads sold, and higher margins at The Woodlands as a result of the new competitive bid process that began in 2012. Our total land sales gross margins, which include builder price participation, increased to 55.4% for the three months ended March 31, 2014 compared to 47.0% for the same period in 2013. The increase in gross margin relates primarily to higher lot prices at The Woodlands and Summerlin and higher builder price participation.
Land sales operations increased $0.8 million for the three months ended March 31, 2014 compared to the same period in 2013. The majority of this increase is attributable to higher legal fees in The Woodlands and higher real estate taxes in The Woodlands and Summerlin due to retail lot prices increasing.
Interest expense, net reflects the amount of interest from other segments that is capitalized at the project level. The primary reason for the $0.9 million decrease for the three months ended March 31, 2014, compared to the same period in 2013 is due to the transfer of land from the MPC segment to the Strategic Developments segment related to our internally developed projects resulting in a lower basis for interest capitalization.
In addition to REP EBT for the MPCs, we believe that certain investors measure the value of the assets in this segment based on their contribution to liquidity and capital available for investment. Although MPC Net Contribution can be computed from GAAP elements of income and cash flows, it is not a GAAP-based operational metric and should not be used to measure operating performance of the MPC assets as a substitute for GAAP measures of such performance. A reconciliation of REP EBT to consolidated net income (loss) as computed in accordance with GAAP has been presented in Note 15 - Segments. The following table sets forth the MPC Net Contribution for the three months ended March 31, 2014 and 2013. MPC Net Contribution is defined as MPC REP EBT, plus MPC cost of sales and depreciation and amortization reduced by MPC development and acquisition expenditures.
|
|
Three Months Ended March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands) |
| ||||
MPC REP EBT (*) |
|
$ |
27,223 |
|
$ |
23,271 |
|
Plus: |
|
|
|
|
| ||
Cost of sales - land |
|
23,078 |
|
25,699 |
| ||
Depreciation and amortization |
|
100 |
|
7 |
| ||
Less: |
|
|
|
|
| ||
MPC land/residential development and acquisitions expenditures |
|
28,434 |
|
33,329 |
| ||
MPC Net Contribution |
|
$ |
21,967 |
|
$ |
15,648 |
|
(*) For a detailed breakdown of our MPC segment EBT, please refer to Note 15 - Segments of our Condensed Consolidated Financial Statements.
The MPC Net Contribution increased by $6.3 million for the three months ended March 31, 2014 compared to the same period in 2013. The increase was primarily attributable to higher builder price participation revenues at Summerlin and The Woodlands, as well as a reduction in net development costs due to increased MUD reimbursements at The Woodlands in the first quarter 2014 compared to the first quarter 2013.
Operating Assets Segment
These assets typically generate rental revenues sufficient to cover their operating costs except when a substantial portion, or all, of the property is being redeveloped or vacated for development. Variances between years in net operating income typically result from changes in rental rates, occupancy, tenant mix and operating expenses. The table below shows NOI for our Operating Assets. We view NOI as an important measure of the operating performance of our Operating Assets. Beginning in the first quarter 2014, we reclassified certain retail Operating Assets that are substantially shutdown due to redevelopment-related construction activities underway to the Redevelopments section in the table below.
Operating Assets NOI and REP EBT
|
|
Three Months Ended March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands) |
| ||||
Retail |
|
|
|
|
| ||
Cottonwood Square |
|
$ |
153 |
|
$ |
100 |
|
Landmark Mall (a) |
|
549 |
|
143 |
| ||
Park West |
|
564 |
|
283 |
| ||
Ward Village (b) |
|
5,629 |
|
5,979 |
| ||
20/25 Waterway Avenue |
|
421 |
|
314 |
| ||
Waterway Garage Retail |
|
168 |
|
(13 |
) | ||
Total Retail |
|
7,484 |
|
6,806 |
| ||
Office |
|
|
|
|
| ||
70 Columbia Corporate Center |
|
144 |
|
52 |
| ||
Columbia Office Properties (c) |
|
88 |
|
392 |
| ||
2201 Lake Woodlands Drive |
|
(33 |
) |
42 |
| ||
One Hughes Landing (d) |
|
469 |
|
|
| ||
9303 New Trails |
|
467 |
|
477 |
| ||
110 N. Wacker |
|
1,520 |
|
1,496 |
| ||
4 Waterway Square |
|
1,441 |
|
1,601 |
| ||
3 Waterway Square (d) |
|
1,567 |
|
|
| ||
1400 Woodloch Forest |
|
240 |
|
382 |
| ||
Total Office |
|
5,903 |
|
4,442 |
| ||
|
|
|
|
|
| ||
Millennium Waterway Apartments |
|
1,060 |
|
1,196 |
| ||
The Woodlands Resort & Conference Center (e) |
|
1,915 |
|
3,628 |
| ||
Total Retail, Office, Multi-family, Resort & Conference Center |
|
16,362 |
|
16,072 |
| ||
|
|
|
|
|
| ||
The Club at Carlton Woods (f) |
|
(1,213 |
) |
(1,118 |
) | ||
The Woodlands Ground leases |
|
110 |
|
103 |
| ||
The Woodlands Parking Garages |
|
(179 |
) |
(164 |
) | ||
Other Properties |
|
280 |
|
(64 |
) | ||
Total Other |
|
(1,002 |
) |
(1,243 |
) | ||
Operating Assets NOI - Consolidated and Owned as of March 31, 2014 |
|
15,360 |
|
14,829 |
| ||
|
|
|
|
|
| ||
Redevelopments |
|
|
|
|
| ||
Outlet Collection at Riverwalk |
|
(252 |
) |
(433 |
) | ||
South Street Seaport (g) |
|
(2,222 |
) |
(1,661 |
) | ||
Total Operating Asset Redevelopments |
|
(2,474 |
) |
(2,094 |
) | ||
|
|
|
|
|
| ||
Dispositions |
|
|
|
|
| ||
Rio West Mall (h) |
|
49 |
|
346 |
| ||
Total Operating Asset Dispositions |
|
49 |
|
346 |
| ||
Total Operating Assets NOI - Consolidated |
|
12,935 |
|
13,081 |
| ||
|
|
|
|
|
| ||
Straight-line lease amortization |
|
(436 |
) |
(177 |
) | ||
Demolition costs |
|
(2,494 |
) |
|
| ||
Depreciation and amortization |
|
(9,010 |
) |
(6,118 |
) | ||
Write-off of lease intangibles and other |
|
|
|
(2,113 |
) | ||
Equity in earnings from Real Estate Affiliates |
|
1,805 |
|
2,733 |
| ||
Interest, net |
|
(1,925 |
) |
(6,759 |
) | ||
Total Operating Assets REP EBT (i) |
|
$ |
875 |
|
$ |
647 |
|
|
|
Three Months Ended March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands) |
| ||||
Operating Assets NOI - Equity and Cost Method Investments |
|
|
|
|
| ||
Stewart Title (title company) |
|
$ |
198 |
|
$ |
399 |
|
Summerlin Baseball Club Member, LLC |
|
(247 |
) |
|
| ||
Woodlands Sarofim # 1 |
|
401 |
|
317 |
| ||
Total NOI - equity investees |
|
352 |
|
716 |
| ||
|
|
|
|
|
| ||
Adjustments to NOI (j) |
|
(31 |
) |
(33 |
) | ||
Equity Method Investments REP EBT |
|
321 |
|
683 |
| ||
Less: Joint Venture Partners Share of REP EBT |
|
(297 |
) |
(453 |
) | ||
Equity in earnings from Real Estate and Other Affiliates |
|
24 |
|
230 |
| ||
|
|
|
|
|
| ||
Distributions from Summerlin Hospital Investment (k) |
|
1,781 |
|
2,503 |
| ||
Segment equity in earnings from Real Estate and Other Affiliates |
|
$ |
1,805 |
|
$ |
2,733 |
|
|
|
|
|
|
| ||
Companys Share of Equity Method Investments NOI |
|
|
|
|
| ||
Stewart Title (title company) |
|
$ |
99 |
|
$ |
200 |
|
Summerlin Baseball Club Member, LLC |
|
(124 |
) |
|
| ||
Woodlands Sarofim # 1 |
|
80 |
|
63 |
| ||
Total NOI - equity investees |
|
$ |
55 |
|
$ |
263 |
|
|
|
Economic |
|
March 31, 2014 |
| ||||
|
|
Ownership |
|
Debt |
|
Cash |
| ||
|
|
|
|
(In thousands) |
| ||||
Stewart Title (title company) |
|
50.00 |
% |
$ |
|
|
$ |
653 |
|
Summerlin Las Vegas Baseball Club |
|
50.00 |
% |
|
|
566 |
| ||
Woodlands Sarofim #1 |
|
20.00 |
% |
6,470 |
|
588 |
| ||
(a) The NOI increase for Landmark Mall for the three months ended March 31, 2014 compared to 2013 is due to a favorable property tax settlement with the City of Alexandria for $0.7 million, offset by reduced rental rates on tenant renewals as a result of the upcoming redevelopment.
(b) The NOI decrease for Ward Village for the three months ended March 31, 2014 compared to 2013 was primarily attributable to additional utility costs at the property.
(c) The NOI decrease for Columbia Office Properties for the three months ended March 31, 2014 compared to 2013 is due to relocation of a major tenant to 70 Columbia Corporate Center in addition to increased utilities and snow removal due to the extreme winter weather.
(d) Both One Hughes Landing and 3 Waterway Square were placed in service during mid-2013. Please refer to the discussion in the section following the table.
(e) The NOI decrease for The Woodlands Resort & Conference Center for the three months ended March 31, 2014 compared to 2013 is due to lower occupied room nights and lower banquet and catering revenues resulting from the ongoing renovation project.
(f) During the first quarter 2014 and 2013 the Club at Carlton Woods collected $1.1 million and $0.9 million, respectively, of membership deposits not included in NOI because they are not recognized as revenue when collected, but are recognized over the expected life of the membership which is estimated to be a 12-year period.
(g) The NOI decrease for South Street Seaport for the three months ended March 31, 2014 compared to 2013 is due to the continued redevelopment of this property. During the first quarter 2014, SEE/CHANGE-related expenses were approximately $1.1 million. Please refer to the discussion in the section following the table.
(h) Rio West Mall was sold on September 30, 2013.
(i) For a detailed breakdown of our Operating Asset segment REP EBT, please refer to Note 15 - Segments in the Condensed Consolidated Financial Statements.
(j) Adjustments to NOI include straight-line and market lease amortization, depreciation and amortization and non-real estate taxes.
(k) The lower distribution from Summerlin Hospital Investment in the first quarter 2014 compared to the same period in 2013 is primarily attributable to the hospitals revenue being down due to a higher mix of uninsured patients in 2014 compared to 2013.
Reconciliation of Operating Assets Segment Equity in Earnings
|
|
Three Months Ended March 31, |
| ||||
(In thousands) |
|
2014 |
|
2013 |
| ||
Equity Method investments |
|
24 |
|
230 |
| ||
Cost basis investments and dividends |
|
1,781 |
|
2,503 |
| ||
Operating Assets segment Equity in Earnings from Real Estate and Other Affiliates |
|
1,805 |
|
2,733 |
| ||
Strategic Developments segment Equity in Earnings from Real Estate and Other Affiliates |
|
4,263 |
|
|
| ||
Equity in Earnings from Real Estate and Other Affiliates |
|
$ |
6,068 |
|
$ |
2,733 |
|
Retail Properties
Retail NOI for the three months ended March 31, 2014 increased $0.7 million to $7.5 million compared to $6.8 million for the same period in 2013. The increase was primarily attributable to a favorable real estate tax settlement at Landmark and increased revenue due to higher occupancy at 20/25 Waterway, Waterway Garage, and Park West offset by a decrease at Ward Village due to higher energy costs which are highly correlated to the price of oil.
The following table summarizes the leases we executed at our retail properties during the three months ended March 31, 2014:
|
|
|
|
|
|
Square Footage |
|
Per Square Foot |
|
Annual (thousands) |
| ||||||||||||||||||
Retail Properties (a) |
|
Total |
|
Avg. Lease |
|
Total |
|
Associated with |
|
Associated with |
|
Avg. Starting |
|
Total Tenant |
|
Total Leasing |
|
Avg. |
|
Tenant |
|
Leasing |
| ||||||
Pre-leased (b) |
|
31 |
|
108 |
|
148,785 |
|
131,976 |
|
34,461 |
|
$ |
41.74 |
|
$ |
107.27 |
|
$ |
11.49 |
|
$ |
6,210 |
|
$ |
14,157 |
|
$ |
396 |
|
Comparable (c) |
|
8 |
|
54 |
|
12,640 |
|
|
|
|
|
35.16 |
|
|
|
|
|
444 |
|
|
|
|
| ||||||
Non-comparable (d) |
|
4 |
|
46 |
|
6,881 |
|
6,881 |
|
6,881 |
|
25.08 |
|
8.34 |
|
3.72 |
|
173 |
|
57 |
|
26 |
| ||||||
Total |
|
|
|
|
|
168,306 |
|
138,857 |
|
41,342 |
|
|
|
|
|
|
|
$ |
6,827 |
|
$ |
14,214 |
|
$ |
422 |
| |||
(a) Excludes executed leases with a term of 12 months or less.
(b) Pre-leased information is associated with projects under development at March 31, 2014.
(c) Comparable information is associated with stabilized assets whereby the square footage was occupied by a tenant within 12 months prior to the executed agreement. These leases represent an increase in average cash rents from $34.35 per square foot to $35.16 per square foot, or 2.3% over previous rents.
(d) Non-comparable information is associated with stabilized assets whereby the square footage was previously vacant for more than 12 months.
Landmark Mall
During 2013, we reached an agreement with Lord & Taylor for the early termination of its leasehold interest. We also received unanimous rezoning approval from the City of Alexandria for Phase I of the redevelopment which includes converting 11 acres of our 22 acre site, located within the center of the property between Macys and Sears, from a traditional enclosed mall to a vibrant outdoor mixed-use environment with street retail shops and restaurants with high density residential. The redevelopment requires the consent of Macys and Sears, and within Phase I we expect to construct approximately 285,000 square feet of new retail including an upscale dine-in movie theater, and up to 400 residential units. We have submitted a development permit application to the City of Alexandria and anticipate approval later in 2014 at which time construction will commence. Future phases may include the balance of the mall site with mixed-use densities to total up to 5.5 million square feet as prescribed in the City of Alexandrias 2009 Van Dorn Small Area Plan. Future redevelopment will also be subject to approval of the anchor tenants as part of a reciprocal easement agreement that governs the property. As of March 31, 2014, we have incurred $14.6 million of development costs on this project, including the early termination of the anchor lease. On January 24, 2014, an agreement was reached with the City of Alexandria regarding the tax assessment for years 2007, 2010, 2011 and 2013. As a result of the settlement we were awarded a tax credit of $0.7 million. This credit will be used to offset future real estate taxes for this property.
Ward Village
In November 2013, we substantially completed construction of the Auahi Shops, a 57,000 square foot, two-story retail center. We expect our final investment to be approximately $24.2 million, and as of March 31, 2014, we have incurred $23.8 million. Pier 1 Imports and Nordstrom Rack occupy 100% of this retail center and in the fourth quarter 2013 we relocated these tenants from other areas within Ward Village. Pier 1 Imports and Nordstrom Rack are contributing an incremental $1.0 million of combined annual NOI over their previously leased space in Ward Village. The Pier 1 Imports former location is the site of one of the first two planned market rate condominium towers for which we have begun pre-sales.
In October 2012, we announced plans to transform the property formerly known as Ward Centers into Ward Village, a vibrant neighborhood offering unique retail experiences, dining and entertainment, along with exceptional residences and workforce housing set among open public spaces and pedestrian-friendly streets. Our master plan development agreement with the Hawaii Community Development Authority (HCDA) allows for up to 9.3 million square feet, including up to 7.6 million square feet of residential (approximately 4,000 units which are initially estimated to average approximately 1,500 square feet per unit), and over 1.7 million square feet of retail, office, commercial and other uses. Full build-out is estimated to occur over 12-15 years, but will ultimately depend on market absorption and many other factors that are difficult to estimate.
The first phase of the master plan includes the renovation of the IBM Building, which has been substantially completed, and the development of approximately 482 condominium units in two mixed-use residential towers and development of a workforce residential tower having unit sale prices lower than the market rate towers.
The IBM Building, whose renovation was completed in January 2014, serves as a world class information center and sales gallery for the entire Ward Village project. The sales center dedicates a section to telling the story of the history of the land, while another section showcases our vision for Ward Village. Total development costs are expected to be approximately $24.4 million. As of March 31, 2014 we have incurred $22.8 million of development costs on this project.
Development permit applications and detailed plans for the first three residential towers were approved by the HCDA and condominium documents have been approved by the Hawaii Real Estate Commission for two market rate towers in 2013. The first of the two market rate towers, Waiea, meaning water of life in Hawaiian, is planned to be developed at a surface parking lot on Ala Moana Boulevard and will have 171 market rate condominium units for sale, six levels of parking and approximately 8,000 square feet of new retail space. Waiea will consist of one, two and three-plus bedroom units, villas and penthouses ranging from approximately 1,100 to 17,500 square feet. Construction is expected to commence in 2014 with projected completion by the end of 2016. As of March 31, 2014, we have incurred $13.2 million of development costs on this project.
The second market rate tower, Anaha, meaning reflection of light, is planned for Auahi Street and will have 311 market rate condominium units for sale, six levels of parking and approximately 17,000 square feet of new retail space. Anaha will consist of studios, one, two and three-bedroom units, townhomes and penthouses ranging from approximately 450 to 6,500 square feet. Construction is expected to commence in 2014 with projected completion by the end of 2016. As of March 31, 2014, we have incurred $10.6 million of development costs on this project.
On February 1, 2014 we began public presales of the first two market rate residential condominium towers at Ward Village. Sales contracts are subject to a 30-day rescission period, and the buyers are required to make a deposit equal to 5% of the purchase price at signing and an additional 5% deposit 30 days later at which point their total deposit of 10% of the purchase price becomes non-refundable. Buyers are required to make an additional 10% deposit within approximately four months of signing.
As of May 1, 2014, we had received $55 million of buyer deposits, representing $609 million of gross sales revenue assuming the buyers close on the units when completed. As of May 1, 2014, approximately 52% of the 482 total units in the two towers have been contracted and passed their 30-day rescission period for which the buyers have made 10% non-refundable deposits (61% in the Waiea tower and 47% in the Anaha tower). Including signed contracts that have not passed their 30-day rescission period, approximately 70% of units in Waiea and 54% of units in Anaha have been sold.
The workforce housing tower is planned for a site on Ward Avenue and preliminary designs include 424 condominium units, six levels of parking and approximately 25,000 square feet of new retail space. We are finalizing plans for this tower. As of March 31, 2014 we have incurred $2.6 million of development costs on this project.
Office Properties
All of the office properties listed in the NOI schedule, except for 110 N. Wacker, the Columbia Office Properties and 70 Columbia Corporate Center are located in The Woodlands. Leases related to our office properties, except those located in Columbia, Maryland, are generally triple net leases. Triple net leases typically require tenants to pay their pro-rata share of certain property operating costs, such as real estate taxes, utilities and insurance.
Office property NOI increased $1.5 million to $5.9 million as compared to $4.4 million for the same period in 2013. The increase was primarily attributable to placing One Hughes Landing and 3 Waterway into service in 2013, partially offset by higher operating costs at the Columbia Office Properties and 70 Columbia Corporate Center.
The following table summarizes our executed office property leases during the three months ended March 31, 2014:
|
|
|
|
|
|
Square Footage |
|
Per Square Foot |
|
Annual (thousands) |
| ||||||||||||||||||
Office Properties (a) |
|
Total |
|
Avg. Lease |
|
Total |
|
Associated |
|
Associated |
|
Avg. Starting |
|
Total Tenant |
|
Total Leasing |
|
Avg. |
|
Tenant |
|
Leasing |
| ||||||
Pre-leased (b) |
|
5 |
|
127 |
|
108,595 |
|
108,595 |
|
92,701 |
|
$ |
24.85 |
|
$ |
53.98 |
|
$ |
21.32 |
|
$ |
2,699 |
|
$ |
5,862 |
|
$ |
1,976 |
|
Comparable (c) |
|
3 |
|
44 |
|
19,673 |
|
19,673 |
|
19,673 |
|
21.90 |
|
6.16 |
|
5.37 |
|
$ |
431 |
|
$ |
121 |
|
$ |
106 |
| |||
Total |
|
|
|
|
|
128,268 |
|
128,268 |
|
112,374 |
|
|
|
|
|
|
|
$ |
3,130 |
|
$ |
5,983 |
|
$ |
2,082 |
| |||
(a) Excludes executed leases with a term of 12 months or less.
(b) Pre-leased information is associated with projects under development at March 31, 2014.
(c) Comparable information is associated with stabilized assets whereby the square footage was occupied by a tenant within 12 months prior to the executed agreement. These leases represent an increase in average cash rents from $19.04 per square foot to $21.90 per square foot, or 15.0% over previous rents.
The Woodlands
During 2013, we opened One Hughes Landing, the first office building in Hughes Landing, a 66-acre, mixed-use development situated on the 200-acre Lake Woodlands. One Hughes Landing is a 197,719 square foot Class A office building that is 97.8% leased as of March 31, 2014. Based on leases in place, we expect the property to reach stabilized annual NOI of approximately $5.6 million by the second quarter of 2014. Total costs are expected to be $47.1 million for this project. As of March 31, 2014, we have incurred $44.4 million (exclusive of land value) of which the remaining amounts to be spent represent tenant improvements. The project is financed by a $38.0 million non-recourse mortgage at one-month LIBOR plus 2.65% with an initial maturity date of November 14, 2015 with two, one-year extension options.
During 2013, we opened 3 Waterway Square, a 232,000 square foot Class A office building. Final costs are expected to be approximately $47.0 million for this project. The building is 98.4% leased as of March 31, 2014. Based on leases in place, the property reached stabilized annual NOI of $6.5 million as of March 31, 2014.
Columbia Office Properties
In March 2013, we began a complete restoration and redevelopment of the Columbia Regional Building, which we believe will serve as a catalyst for future development in the Downtown Columbia. Construction remains on schedule and we anticipate completion of the renovation during the fourth quarter of 2014. Total development costs are expected to be $25 million (exclusive of land value), and we have incurred $20.3 million as of March 31, 2014. The project is financed by a $23.0 million construction loan bearing interest at one-month LIBOR plus 2.0% and having an initial maturity of March 15, 2016, with two, one-year extension options. We have pre-leased a majority of the 89,000 square foot building to Whole Foods Market, Inc. and The Columbia Association and we expect to reach annual NOI of $2.1 million in the second quarter of 2015.
On August 15, 2012, we acquired 70 Columbia Corporate Center (70 CCC), a 168,000 square foot Class A office building located in Columbia, Maryland by assuming a $16.0 million participating mortgage at 4.25% that we repaid in full with cash on hand on April 15, 2014. The current occupancy is 94.7% and we expect annual NOI to increase to approximately $2.5 million by the fourth quarter 2015 based on leases in place as of March 31, 2014.
The Woodlands Resort & Conference Center
The Woodlands Resort & Conference Centers NOI of $1.9 million for the three months ended March 31, 2014, decreased $1.7 million compared to $3.6 million for the same period in 2013, primarily due to a decrease of 3,500 occupied room nights and lower banquet and catering business, all caused by the ongoing renovation project. During the first quarter of 2013, we announced the expansion and redevelopment of The Woodlands Resort & Conference Center and construction is expected to be completed during the summer of 2014. The renovation will encompass 222 existing guest rooms, the replacement of 218 rooms with a new wing consisting of 184 guest rooms and suites, a new lobby, the revitalization of 60,000 square feet of meeting and event facilities, an addition of a new Steak House, and the development of a 1,000 linear foot lazy river. We expect the renovation, when complete, will have a significant positive impact on NOI due to the replacement of a majority of the older rooms which have the lowest revenue per available room (RevPAR) of the existing rooms available and the addition of amenities such as the Steak House and lazy river, which should increase weekend occupancy. RevPAR is calculated based on dividing total room revenues by total occupied rooms for the period. Construction costs are expected to total approximately $77 million and as of March 31, 2014, we have incurred $40.0 million. This project is financed by a $95.0 million non-recourse mortgage bearing interest at one-month LIBOR plus 3.5% and having an initial maturity date of February 8, 2016 with three, one-year extensions at our option.
Other
The Club at Carlton Woods (the Club) is a 36-hole golf and country club at The Woodlands with 725 total members as of March 31, 2014, consisting of 595 golf memberships and 130 sports memberships. The Club sold 19 new golf memberships during the three months ended March 31, 2014. We estimate the Club requires approximately 800 golf members to achieve break even NOI, and therefore, we expect to continue to incur NOI losses for the foreseeable future. The Club had a $1.2 million NOI loss for the three months ended March 31, 2014, an increase in loss of $0.1 million compared to the $1.1 million NOI loss for the same period in 2013. For the three months ended March 31, 2014 and 2013, cash membership deposits collected but not recognized in revenue or included in NOI were $1.1 million and $0.9 million, respectively.
The Woodlands Parking Garages comprise nearly 3,000 parking spaces in two separate parking structures. The Waterway Square Garage has 1,933 spaces and is located in The Woodlands Town Center. The Waterway Square Garage has excess parking capacity for future commercial development. Woodloch Forest garage has approximately 1,000 total spaces with 300 spaces available for future adjacent office development.
Partially Owned
During the first quarters of 2014 and 2013, we received distributions of $1.8 million and $2.5 million, respectively, from our Summerlin Hospital investment. Distributions from the Summerlin Hospital are typically made one time per year in the first quarter.
Redevelopments
Outlet Collection at Riverwalk
During June 2013, tenants were vacated to transform the property into the Outlet Collection at Riverwalk, an urban upscale outlet center located in New Orleans, Louisiana. We believe the Outlet Collection at Riverwalk will be the nations first outlet center located in the downtown of a major city. The redevelopment will feature a tenant mix of top national retailers with established outlet stores, local retailers and several dining and entertainment options. We have expanded the current leasable area by approximately 50,000 square feet to 250,000 square feet. Total development costs are expected to be approximately $82 million (exclusive of our land value), with an announced opening date in May 2014. As of March 31, 2014, we have incurred $53.7 million of development costs of which $1.0 million were demolition costs that we expensed as incurred. The project is financed by a $64.4 million partial recourse construction loan bearing interest at one-month LIBOR plus 2.75% with an initial maturity date of October 24, 2016 with two, one-year extension options.
During the redevelopment, approximately 6,700 square feet of space remained occupied and operating. The space under redevelopment has been 99.2% pre-leased with a strong roster of retailers and restaurants that will appeal to both locals and visitors to New Orleans. When stabilized, the project is expected to reach annual NOI of $7.8 million based on leases in place.
South Street Seaport
NOI for the three months ended March 31, 2014 decreased $0.6 million to negative $(2.2) million compared to negative $(1.7) million for the same period in 2013. NOI for 2013 includes a $15.2 million negative impact from the closure of a majority of the property due to Superstorm Sandy in October 2012. NOI for 2014 includes the negative impact from closing Pier 17 and the majority of the historic area for redevelopment. Revenues for the approximately 53,000 square feet of space that have reopened since Superstorm Sandy and are not planned for renovation were $1.0 million for the three months ended March 31, 2014.
On October 29, 2012, as a result of Superstorm Sandy, the historic area of South Street Seaport (area west of FDR Drive) suffered significant damages due to flooding. During 2013, we filed a claim with our insurance carriers for property damages, lost income and other expenses resulting from the storm and we believe insurance will cover substantially all of these losses. We are continuing to work through the claims process with the insurance carriers and have collected $28.3 million in insurance proceeds through March 31, 2014. Insurance recoveries to date have exceeded the book value of the buildings and equipment at the date of the storm. For the three months ended March 31, 2014, we recorded $7.8 million in Other income from insurance recoveries, which is excluded from NOI.
During the first half of 2013, we established the SEE/CHANGE program in an effort to revitalize the South Street Seaport following the damage caused by Superstorm Sandy. SEE/CHANGE is an innovative seasonal program developed to re-energize and re-activate the Seaport area and to create a gathering place for the community that did not exist in the aftermath of the storm. The program includes bringing to Seaport for each season an array of new retail, culinary and cultural events to attract local residents and tourists, and an intensive social media campaign to advertise the events.
On June 27, 2013, the City of New York executed the amended and restated ground lease for South Street Seaport and we provided a completion guarantee to New York City for the Renovation Project (as defined below). The execution of the amended and restated ground lease was the final step necessary for the commencement of the renovation and reconstruction of the existing Pier 17 Building (Renovation Project). Construction began during September 2013 and is expected to conclude in 2016. The Renovation Project will increase the leasable area of Pier 17 to approximately 182,000 square feet, features a complete rebuild of the Pier 17 building and is designed to include a vibrant open rooftop, upscale retail and outdoor entertainment venues. Additionally, we plan to re-tenant a significant portion of the 180,000 square feet of retail space in the historic area.
The redevelopment of Pier 17 and renovation of the historic area is expected to cost approximately $425 million, $11.0 million of which are expected to be demolition costs that will be expensed as incurred. As of March 31, 2014, we have incurred $34.6 million of development costs on this project, which includes $3.0 million of demolition costs and $1.5 million of marketing costs
On December 11, 2013, we executed a 20-year anchor lease with iPic Entertainment for 46,145 square feet in the Fulton Market Building located in the historic area. iPic Theatres will serve as an anchor attraction for residents, workers and tourists.
On November 20, 2013, we announced plans for further redevelopment of the South Street Seaport district which includes approximately 700,000 square feet of additional space, East River Esplanade improvements, a marina, restoration of the historic Tin Building, and the creation of a dynamic food market, replacement of wooden platform piers adjacent to Pier 17 and a newly constructed mixed-use building. The plans are subject to a Uniform Land Use Review Procedure (ULURP) that requires approval by the New York City Council, the New York City Landmarks Preservation Commission and other various government agencies. We have begun outreach and consultation with community stakeholders and public officials and expect to begin the formal approval process in mid-2014.
Dispositions
Rio West Mall
On September 30, 2013, we sold the property for $12.0 million and received $10.8 million of net proceeds. The net book value of the property was $10.2 million and we recognized a pre-tax gain of $0.6 million which was included in other income in the third quarter of 2013.
Total revenues and expenses for the Operating Assets segment are summarized as follows:
|
|
Three Months Ended March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands) |
| ||||
|
|
|
|
|
| ||
Minimum rents |
|
$ |
19,900 |
|
$ |
18,511 |
|
Tenant recoveries |
|
5,884 |
|
5,252 |
| ||
Resort and conference center revenues |
|
9,426 |
|
11,104 |
| ||
Other rental and property revenues |
|
5,110 |
|
3,433 |
| ||
Total revenues |
|
40,320 |
|
38,300 |
| ||
|
|
|
|
|
| ||
Other property operating costs |
|
15,260 |
|
14,965 |
| ||
Rental property real estate taxes |
|
3,107 |
|
2,983 |
| ||
Rental property maintenance costs |
|
1,800 |
|
1,656 |
| ||
Resort and conference center operations |
|
7,511 |
|
7,476 |
| ||
Provison for doubtful accounts |
|
143 |
|
429 |
| ||
Demolition costs |
|
2,494 |
|
|
| ||
Depreciation and amortization |
|
9,010 |
|
6,118 |
| ||
Interest expense, net |
|
1,925 |
|
6,759 |
| ||
Equity in Earnings from Real Estate and Other Affiliates |
|
(1,805 |
) |
(2,733 |
) | ||
Total expenses |
|
39,445 |
|
37,653 |
| ||
Operating Assets REP EBT |
|
$ |
875 |
|
$ |
647 |
|
Minimum rents for the three months ended March 31, 2014 of $19.9 million increased $1.4 million compared to $18.5 million for the same period in 2013. The increase was primarily due to One Hughes Landing and 3 Waterway Square being placed into service in 2013. These increases were offset by decreased rents for the three months ended March 31, 2014 of ($0.6) million related to the closing of the Outlet Collection at Riverwalk for redevelopment.
Resort and conference center revenues for the three months ended March 31, 2014 of $9.4 million decreased $1.7 million compared to $11.1 million for the same period in 2013. The decrease was primarily due to lower occupied room nights and lower banquet and catering business, all caused by the ongoing renovation project.
Other rental and property revenues for the three months ended March 31, 2014 of $5.1 million increased $1.7 million compared to $3.4 million in the same period in 2013. The increase was primarily due to the opening of One Hughes Landing and 3 Waterway Square and special events at Seaport related to the SEE/CHANGE program.
The $2.5 million in demolition costs for the three months ended March 31, 2014 are due to the demolition of Pier 17 as part of the Renovation Project at the South Street Seaport.
Depreciation expense for the three months ended March 31, 2014 of $9.0 million increased $2.9 million compared to $6.1 million in the same period in 2013 primarily due to a shortened useful life of the building and improvements at Landmark related to the upcoming redevelopment, and the opening of 3 Waterway Square and One Hughes Landing. Additionally increases in leasehold improvements at Park West and 70 CCC resulted in additional depreciation.
Net interest expense decreased $4.8 million for the three months ended March 31, 2014 compared to the same period in 2013. The decrease is mostly due to the change in the value of the participation right which is recorded in interest expense resulting from the repayment of the 70 CCC loan.
Strategic Developments Segment
Our Strategic Development assets generally require substantial future development to achieve their highest and best use. For our redevelopment and development projects, the total estimated costs of a project including the construction costs are exclusive of our land value unless otherwise noted. Most of the properties and projects in this segment generate no revenues with the exception of our condominium projects. Our expenses relating to these assets are primarily related to carrying costs, such as property taxes and insurance, and other ongoing costs relating to maintaining the assets in their current condition. If we decide to redevelop or develop a Strategic Development asset, we would expect that, upon completion of development, the asset would either be sold or reclassified to the Operating Assets segment and NOI would become an important measure of its operating performance.
Total revenues and expenses for the Strategic Developments segment are summarized as follows:
Strategic Developments Revenues and Expenses (*) |
| ||||||
|
|
|
| ||||
|
|
Three Months Ended March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands) |
| ||||
|
|
|
|
|
| ||
Minimum rents |
|
$ |
263 |
|
$ |
220 |
|
Condominium rights and unit sales |
|
3,126 |
|
|
| ||
Other land, rental and property revenues |
|
408 |
|
73 |
| ||
Total revenues |
|
3,797 |
|
293 |
| ||
|
|
|
|
|
| ||
Condominium rights and unit cost of sales |
|
1,571 |
|
|
| ||
Other property operating costs |
|
3,541 |
|
1,478 |
| ||
Provision for doubtful accounts |
|
|
|
|
| ||
Depreciation and amortization |
|
424 |
|
43 |
| ||
Other income |
|
(2,373 |
) |
|
| ||
Interest expense (*) |
|
(2,649 |
) |
(287 |
) | ||
Equity in Earnings from Real Estate and Other Affiliates |
|
(4,263 |
) |
|
| ||
Total expenses |
|
(3,749 |
) |
1,234 |
| ||
Strategic Developments REP EBT |
|
$ |
7,546 |
|
$ |
(941 |
) |
(*) For a detailed breakdown of our Strategic Developments segment of EBT, refer to Note 15 - Segments.
Revenues increased $3.5 million to $3.8 million for the three months ended March 31, 2014 compared to March 31, 2013. The increase is primarily due to the recognition of $3.1 million of deferred revenue related to One Ala Moana which is recognized on the percentage of completion basis. The condominium rights and unit cost of sales of $1.6 million for the three months ended March 31, 2014 represents our book basis of the condominium rights sold to KR Holdings that is associated with the deferred revenues recognized during the quarter, as discussed below under the One Ala Moana Tower Condominium Project.
Other property operating costs increased $2.1 million for the three months ended March 31, 2014 compared to the same period in 2013. During the first quarter 2014, we expensed $1.9 million in marketing costs primarily related to our Ward Village, Downtown Columbia and The Shops at Summerlin development projects.
Other income of $2.4 million for the three months ended March 31, 2014 relates to the sale of the Redlands Promenade land.
Net interest (income) expense increased for the three months ended March 31, 2014 as compared to same period in 2013 due to higher capitalized interest from projects under construction. In addition, the Equity in Earnings from Real Estate Affiliates primarily represents our share of the profit from the ONE Ala Moana condominium venture.
The following describes the status of our active Strategic Development Projects as of March 31, 2014:
The Woodlands
Hughes Landing
During the third quarter 2013, we began construction of Two Hughes Landing, the second Class A office building in Hughes Landing and anticipate completion of construction during the second quarter of 2014. Two Hughes Landing will be a 197,000 square foot, eight-story office building with an adjacent parking garage containing approximately 630 spaces. The building and the garage will be situated on 3.6 acres of land and are estimated to cost approximately $49 million. As of March 31, 2014 we have incurred $26.7 million of development costs for this project. The project is financed by a $41.2 million non-recourse construction loan bearing interest at one-month LIBOR plus 2.65% with an initial maturity date of September 11, 2016, with two, one-year extension options.
In October 2013, we began construction of an eight-story, Class A, multi-family project within Hughes Landing called One Lakes Edge and anticipate completion of construction in the first quarter of 2015. One Lakes Edge will be comprised of 390 multi-family units (averaging 984 square feet per unit), 22,289 square feet of retail and a 750 space parking garage, all situated on 2.92 acres of land. Additionally, the project will feature an amenity deck on the third floor which will feature a pool, courtyard and other amenities overlooking Lake Woodlands. Total development costs are expected to be approximately $88 million. As of March 31, 2014, we have incurred $15.9 million of development costs. The project is financed by a $73.5 million non-recourse construction loan bearing interest at one-month LIBOR plus 2.50% with an initial maturity date of November 25, 2016, with two, one-year extension options.
During the fourth quarter 2013, we began construction of Hughes Landing Retail, the 123,000 square foot retail component of Hughes Landing. The project will consist of Whole Foods, an anchor tenant with 40,000 square feet of space, 32,900 square feet of retail, and a 50,100 square foot restaurant row. Total development costs are expected to be approximately $36 million and as of March 31, 2014 we have incurred $7.2 million of development costs. The project is financed by a $36.6 million non-recourse construction loan bearing interest at one-month LIBOR plus 1.95% with an initial maturity date of December 20, 2016, with two, one-year extension options. The project is expected to be completed in the fourth quarter of 2014. The majority of the restaurants on restaurant row will open during the first quarter 2015. We have pre-leased 43.1% of the project as of March 31, 2014.
On December 16, 2013, we announced that we would begin construction on a Class A office project comprised of two adjacent buildings for Exxon Mobil Corporation (ExxonMobil). The project is expected to be completed by the fourth quarter of 2015. The West Building will be 12-stories and approximately 318,000 leasable square feet and the East Building will be 13-stories and approximately 329,000 leasable square feet. A 2,617-car structured parking garage will also be located on the 4.3 acre site and will be exclusive to the office project. Total development costs are expected to be approximately $172 million. As of March 31, 2014, we have incurred $15.2 million of development costs of which $6.7 million is related to leasing. ExxonMobil has executed leases to occupy the entire West Building for twelve years, and 160,000 square feet in the East Building for eight years with an option to lease the remaining space before the building opens. We expect to reach stabilized annual NOI, based on ExxonMobils current 478,000 square foot commitment, of approximately $10.7 million in 2018. If ExxonMobil exercises their option for the remaining space, stabilized annual NOI will increase to approximately $14.5 million.
Creekside Village Green
Creekside Village Green is located within the 100-acre mixed-use commercial development that is anchored by HEB grocery store and based on current planning will ultimately include 400,000 square feet of retail and office space, 800 units of multi-family, 200 units of senior living facility and an 85,000 square foot campus within the Lone Star College System. Creekside Village Green is a 74,500 square foot retail center which will consist of retail, restaurant and professional office space across two main buildings and a centrally located restaurant building.
Creekside Village Green will also include a one-acre tree-lined park designed to be the hub of all activity within the greater 100-acre development. During the fourth quarter 2013 we began construction, and we anticipate the project will open in the fourth quarter of 2014. Total development costs are expected to be approximately $19 million. As of March 31, 2014, we have incurred $5.1 million of development costs. We plan to fund the development by using The Woodlands Master Credit Facility (described in Note 8 - Mortgages, Notes and Loan Payable). We have pre-leased 37.4% of the project as of March 31, 2014.
3831 Technology Forest Drive
In March 2014, we began development of a 95,000-square foot, four story office building which is expected to be completed by December of 2014. Kiewit Energy Group (Kiewit) executed a ten-year lease to occupy approximately 71,000 square feet and has an option to lease the remainder of the building. The building will be located on a 5.74-acre land parcel at 3831 Technology Forest Drive. Total development costs are expected to be approximately $20 million. As of March 31, 2014, we have incurred $1.6 million of development costs on this project of which $1.4 is related to leasing commissions. We expect the property to generate annual NOI of approximately $1.7 million in the first quarter of 2015 based on Kiewits current commitment of 71,000 square feet. If Kiewit exercises their option to take the remaining space or we lease this space at a comparable rent, we expect stabilized annual NOI to increase to approximately $2.1 million.
Millennium Woodlands Phase II
Millennium Woodlands Phase II, a joint venture with The Dinerstein Companies, began construction of a 314-unit Class A multi-family complex in The Woodlands Town Center in 2012 that is expected to be completed in June 2014. On July 5, 2012, Millennium Phase II was capitalized by our contribution of 4.8 acres of land valued at $15.5 million (compared to $2.2 million book value), our partners contribution of $3.0 million in cash and a construction loan in the amount of $37.7 million, which is guaranteed by our partner. Development costs are estimated to be approximately $38 million and as of March 31, 2014, the project has incurred $25.9 million of development costs.
ONE Ala Moana Tower Condominium Project
In 2012, we formed a 50/50 joint venture, KR Holdings, LLC (KR Holdings), with two local development partners. The venture is responsible for the construction of a luxury 23-story, 206-unit condominium tower consisting of one, two and three-bedroom units ranging from 760 to 4,100 square feet. All of the available condominium units have been sold at an average price of $1.6 million, or approximately $1,170 per square foot and as of March 31, 2014, the venture had collected $68.0 million of buyer deposits, representing 20% of contracted sales prices. The tower is being constructed above an existing parking structure at Ala Moana Center, a successful regional mall owned by a third party. Construction commenced in April of 2013 and is expected to be completed by the end of 2014. The venture expects to invest a total of $265.1 million, which includes construction, selling and all financing costs. As of March 31, 2014 the venture had incurred $143.4 million (inclusive of condominium rights) of total development costs. The project is financed by a $132.0 million construction loan and two $20.0 million non-recourse mezzanine loans with List Island Properties and A & B Properties. The construction loan is non-recourse, bears interest at one-month LIBOR plus 3.00%, is secured by the condominiums and buyers deposits, and matures May 15, 2016, with the option to extend for one year. The mezzanine loans have a blended interest rate of 12% and mature on April 30, 2018 with the option to extend for one year. In addition to the mezzanine loans, A & B Properties and List Island Properties both have a profit interest in KR Holdings, which entitles them to receive a share of the profit, after a return of our capital plus a 13% preferred return on our capital. A & B Properties participation is capped at $3.0 million. As of March 31, 2014, the project was approximately 52% complete, and for the three months then ended our share of the earnings was $4.0 million.
Upon closing of the construction loan on May 15, 2013 and pursuant to the terms of the venture agreement, we sold our condominium rights to KR Holdings for $47.5 million and received net cash proceeds of $30.8 million and an equity interest of 50% in KR Holdings. Our partner contributed cash of $16.8 million for its 50% equity interest. Due to our continuing involvement in KR Holdings, we accounted for the transaction as a partial sale representing 50% of the $47.5 million sales value of the condominium rights, and the remaining 50% is being recognized on the same percentage of completion basis as KR Holdings. Since the construction loan closing through March 31, 2014, we have recognized $36.1 million of the $47.5 million sales value of the condominium rights. For the three months ended March 31, 2014 we recognized $3.1 million sales value for a profit of $1.6 million.
Summerlin
The Shops at Summerlin
During the second quarter of 2013, we commenced construction of The Shops at Summerlin, an approximate 106-acre project within our 400-acre site located in downtown Summerlin and anticipate completion in the fall of 2014. The Shops at Summerlin will be approximately 1.6 million square feet and will consist of a 1.1 million square foot Fashion Center which is designed to have three anchor tenants, small-shop retail and restaurants. Additionally, the project will include an approximate 200,000 square foot office building and approximately 280,000 square feet of big box and junior anchor retail space adjacent to the Fashion Center. Total estimated development costs are $391 million and as of March 31, 2014, we have incurred $181.1 million of development costs (exclusive of land value). Approximately 48.2% of the space has been committed which includes executed agreements with two major department store anchors, Macys and Dillards, for approximately 380,000 square feet and leasing commitments from a strong roster of retailers and restaurants, including Michael Kors, Sephora, True Religion, Victoria Secret, Nordstrom Rack, American Eagle, The Art of Shaving, Bath & Body Works, Buckle, Clarks, Everything But Water, Its Sugar, Old Navy, Pandora, Resto Lounge, Sur La Table, Teavana, Ulta, Chicos, Francescas Collection, Kay Jewelers, New Balance, Soma, White House/Black Market, Trader Joes and Crave Restaurant.
Summerlin Apartments, LLC
On January 24, 2014, we entered into a joint venture with a national multi-family real estate developer, The Calida Group (Calida), to construct, own and operate a 124-unit gated luxury apartment development, which we believe will be the first of its kind in the Las Vegas Valley. We and our partner each own 50% of the venture, and unanimous consent of the partners is required for all major decisions. This project represents the first residential development in Summerlins 400-acre downtown and is located within walking distance to The Shops at Summerlin. We will contribute a 5.5-acre parcel of land with an agreed value of $3.2 million in exchange for a 50% interest in the venture when construction financing closes. Our partner will contribute cash for their 50% interest, act as the development manager, fund all pre-development activities, obtain construction financing and provide any guarantees required by the lender. Upon a sale of the property, we are entitled to 100% of the proceeds in excess of an amount determined by applying a 7.0% capitalization rate to NOI. The venture is expected to begin construction in the fall of 2014 with a projected second quarter 2015 opening for the first phase and the final phase being opened by the end of 2015.
The Metropolitan Downtown Columbia Project
On April 12, 2012, Columbia Parcel D venture, in which we are a 50% partner with Kettler, received approval of the final development plan component of the entitlement process for the first phase. The entitlement provides a density plan for up to 817 residential units, and up to 76,000 square feet of retail to be developed on two parcels. One parcel includes The Metropolitan (Parcel D) which will be a 380-unit apartment building, and the second parcel will include a 437-unit apartment building (Parcel C).
The Columbia Parcel D venture began construction of The Metropolitan in February 2013 and completion is expected in the fourth quarter of 2014. The total estimated development costs are approximately $97 million including land value and as of March 31, 2014 the venture has incurred $46.5 million of development costs. In 2013, we contributed land to the venture valued at $20.3 million and received a net distribution of $3.9 million. Our total capital balance in the venture is $16.4 million and our total net investment for this project is $3.5 million. The joint venture obtained a $64.1 million construction loan which is non-recourse to us. The loan bears interest at one-month LIBOR plus 2.4% and matures in July 2020.
On October 4, 2013, we entered into a joint venture agreement with Kettler to construct a 437-unit, Class A apartment building with 31,000 square feet of ground floor retail on Parcel C. We contributed approximately five acres of land having a book value of $4.0 million, in exchange for a 50% interest in the venture. Our partner will provide construction and property management services, including the funding and oversight of development activities, as well as obtaining construction financing. When the joint venture closes on a construction loan our interest in the joint venture will be increased to $23.4 million or $53,500 per constructed unit. As of March 31, 2014, our total net investment in this project was $6.5 million.
The following table summarizes our projects under construction, and related debt, for Operating Assets and Strategic Developments as of March 31, 2014. As further described in the footnotes below, we are documenting construction financing of approximately $312.0 million for our Summerlin project and are seeking construction financing of approximately $143.0 million for our ExxonMobil Build-to-Suit project at Hughes Landing. We expect to close construction financing on both of these projects by the end of the second quarter 2014.
($ in thousands)
Announced Project |
|
Total Estimated |
|
Costs Paid Through |
|
Estimated Remaining |
|
Committed/ |
|
Amount Drawn |
|
Remaining Debt |
|
Estimated Costs Remaining in |
|
Estimated |
| |||||||
Operating Assets |
|
(A) |
|
(B) |
|
(A) - (B) = (C) |
|
(D) |
|
(E) |
|
(D) - (E) = (F) |
|
(C) - (F) = (G) |
|
|
| |||||||
Columbia Regional Building |
|
$ |
24,616 |
|
$ |
17,330 |
|
$ |
7,286 |
|
$ |
23,008 |
|
$ |
14,926 |
|
$ |
8,082 |
|
$ |
(796 |
) |
Q4 2014 |
|
One Hughes Landing |
|
49,615 |
|
40,365 |
|
9,250 |
|
38,000 |
|
27,593 |
|
10,407 |
|
(1,157 |
) |
Complete(e) |
| |||||||
Outlet Collection at Riverwalk |
|
81,778 |
|
37,757 |
|
44,021 |
|
60,000 |
|
14,733 |
|
45,267 |
|
(1,246 |
) |
Q2 2014 |
| |||||||
Seaport - Pier 17 |
|
424,880 |
|
27,037 |
|
397,843 |
|
|
|
|
|
|
|
397,843 |
|
Q4 2016 |
| |||||||
The Woodlands Resort & Conference Center |
|
76,714 |
|
32,609 |
|
44,105 |
|
48,900 |
|
8,936 |
|
39,964 |
|
4,141 |
|
Q3 2014 |
| |||||||
Total Operating Assets |
|
657,603 |
|
155,098 |
|
502,505 |
|
169,908 |
|
66,188 |
|
103,720 |
|
398,785 |
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Strategic Developments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Two Hughes Landing |
|
48,603 |
|
21,497 |
|
27,106 |
|
41,230 |
|
9,396 |
|
31,834 |
|
(4,728 |
) |
Q2 2014 |
| |||||||
Creekside Village Green |
|
18,536 |
|
2,796 |
|
15,740 |
|
18,536 |
|
2,796 |
|
15,740 |
|
|
(f) |
Q4 2014 |
| |||||||
ExxonMobil Build-to-Suit |
|
171,489 |
|
9,670 |
|
161,819 |
|
|
|
|
|
|
|
161,819 |
(g) |
Q4 2015 |
| |||||||
Hughes Landing Retail |
|
36,207 |
|
4,727 |
|
31,480 |
|
36,575 |
|
918 |
|
35,657 |
|
(4,177 |
) |
Q4 2014 |
| |||||||
One Lakes Edge |
|
88,494 |
|
11,348 |
|
77,146 |
|
73,525 |
|
|
|
73,525 |
|
3,621 |
|
Q1 2015 |
| |||||||
3831 Technology Forest Drive |
|
19,518 |
|
175 |
|
19,343 |
|
19,518 |
|
175 |
|
19,343 |
|
|
(h) |
Q4 2014 |
| |||||||
The Shops at Summerlin |
|
391,369 |
|
115,534 |
|
275,835 |
|
|
|
|
|
|
|
275,835 |
(i) |
Q4 2014 |
| |||||||
Total Strategic Developments |
|
774,216 |
|
165,747 |
|
608,469 |
|
189,384 |
|
13,285 |
|
176,099 |
|
432,370 |
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Combined Total at March 31, 2014 |
|
$ |
1,431,819 |
|
$ |
320,845 |
|
$ |
1,110,974 |
|
$ |
359,292 |
|
$ |
79,473 |
|
$ |
279,819 |
|
$ |
831,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
Projects For Which We Are Seeking Financing: |
|
|
|
|
| |||||||||||||
|
|
|
|
|
|
Exxon Mobil Corp Build-to-Suit |
|
142,900 |
(g) |
|
| |||||||||||||
|
|
|
|
|
|
The Shops at Summerlin |
|
311,800 |
(i) |
|
| |||||||||||||
|
|
|
|
|
|
Est. Costs to be funded net of financing assuming closing on Exxon Mobil Corp Build-to-Suit and The Shops at Summerlin |
|
$ |
376,455 |
|
|
|
(a) Total Estimated Costs represent all costs to be incurred on the project which includes, construction costs, demolition costs, marketing costs, capitalized leasing and deferred financing and excludes capitalized interest allocated to the project.
(b) Costs Paid Through March 31, 2014 includes construction costs, demolition costs, marketing costs, capitalized leasing, payroll and deferred financing costs, but excludes retainage payable and capitalized corporate interest.
(c) Committed Debt details:
· Riverwalk - total commitment of $64,400, which includes $60,000 for construction and a $4,400 earnout which is available after completion and the achievement of operational covenants.
·- The Woodlands Resort & Conference Center - a total commitment of $95,000, which includes $48,900 for construction, a $10,000 earnout and $36,100 which refinanced prior mortgage debt.
(d) Negative balances represent cash to be received in excess of Estimated Remaining to be Spent as we had costs, primarily related to March spending that had not been financed. We expect to finance these costs in the future.
(e) This project was placed in service during 2013 but still requires some remaining capital to be invested.
(f) Creekside Village will be financed by The Woodlands master credit facility.
(g) We are seeking financing and expect to close on a $143 million construction loan during the second quarter of 2014.
(h) 3831 Technology Forest Drive will be financed by The Woodlands Master Credit Facility.
(i) We are currently documenting construction financing approximating $312 million and expect to close during the second quarter of 2014.
General and Administrative and Other Expenses
General and administrative, warrant liability loss, reduction in tax indemnity receivable, provision for income taxes and equity in earnings from Real Estate Affiliates are summarized as follows:
|
|
Three Months Ended March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(In thousands) |
| ||||
General and administrative |
|
$ |
16,882 |
|
$ |
11,171 |
|
Warrant liability loss |
|
96,440 |
|
33,027 |
| ||
Reduction in tax indemnity receivable |
|
|
|
1,904 |
| ||
Other income |
|
(8,075 |
) |
|
| ||
Provision for income taxes |
|
4,773 |
|
2,479 |
| ||
Equity in earnings from Real Estate and Other Affiliates |
|
(6,068 |
) |
(2,733 |
) | ||
General and administrative expenses increased $5.7 million during the three months ended March 31, 2014 compared to the same period in 2013. Non-cash stock based compensation amortization included in general and administrative expenses was $1.8 million and $1.1 million for the three months ended March 31, 2014 and 2013, respectively. The $5.7 million overall increase is primarily due to $2.0 million of additional performance awards relating to 2013 that were approved during the first quarter 2014, $0.9 million of additional compensation costs due to increased headcount, $1.1 million of increased travel related expenses and additional legal fees of $0.5 million.
Other income for the three months ended March 31, 2014 includes a $7.8 million pre-tax gain recognized on insurance proceeds received relating to South Street Seaport.
The warrant liability loss for the three months ended March 31, 2014 and 2013 was due to appreciation in our stock price, thereby increasing the values of the warrants.
The increase in provision for income taxes of $2.3 million for the three months ended March 31, 2014 was attributable to increases in operating income as compared to 2013, reduction of valuation allowances in 2013, and other permanent items.
We have significant permanent differences, primarily from warrant liability gains and losses, interest income on the tax indemnity receivable, and changes in valuation allowances that cause our effective tax rate to deviate greatly from statutory rates. The effective tax rates based upon actual operating results were (5.9)% for the three months ended March 31, 2014 compared to (12)% for the three months ended March 31, 2013. The changes in the tax rate were primarily attributable to the changes in the warrant liability, the valuation allowance, and other permanent items.
The equity in earnings from Real Estate Affiliates of $6.1 million for the three months ended March 31, 2014 increased for the same period in 2013 primarily due to the recognition of $4.0 million representing our share of the profit related to the ONE Ala Moana condominium project.
The following table represents our capitalized internal costs by segment for the three months ended March 31, 2014 and 2013:
|
|
Capitalized internal costs |
|
Capitalized internal costs related |
| ||||||||
|
|
Three Months Ended March 31, |
|
Three Months Ended March 31, |
| ||||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
(In millions) |
|
(In millions) |
| ||||||||
MPC segment |
|
$ |
1.5 |
|
$ |
2.0 |
|
$ |
1.3 |
|
$ |
1.4 |
|
Operating Assets segment |
|
2.6 |
|
1.0 |
|
2.2 |
|
0.8 |
| ||||
Strategic Developments segment |
|
3.1 |
|
1.1 |
|
2.7 |
|
0.9 |
| ||||
Total |
|
$ |
7.2 |
|
$ |
4.1 |
|
$ |
6.2 |
|
$ |
3.1 |
|
Capitalized internal costs (which include compensation costs) have increased with respect to our Operating Assets and Strategic Developments segments as we have increased staffing and related costs from 2013 to correspond with our increase in development activities.
Liquidity and Capital Resources
Our primary sources of cash include cash flow from land sales in our MPC segment, and cash generated from our operating assets, first mortgage financings secured by our assets and proceeds from our Senior Notes offering. Our primary uses of cash include working capital, overhead, debt service, property improvements and development costs. We believe that our sources of cash, including existing cash on hand, will provide sufficient liquidity to meet our existing non-discretionary obligations and anticipated ordinary course operating expenses for at least the next twelve months. The development and re-development opportunities in our Operating Assets and Strategic Developments segments are capital intensive and will require significant additional funding. Most of these costs are currently discretionary, which means that we could discontinue spending on these activities if our liquidity profile, economic conditions or the feasibility of projects changes. We currently intend to raise this additional funding with a mix of construction, bridge and long-term financings, by entering into joint venture arrangements and the sale of non-core assets at the appropriate time.
As of March 31, 2014, our consolidated debt was $1,559.4 million and our share of the debt of our Real Estate Affiliates aggregated $46.9 million. Please refer to Note 8 Mortgages, Notes and Loans Payable to our condensed consolidated financial statements for a table showing our debt maturity dates.
On October 2, 2013, we issued $750.0 million in aggregate principal amount of 6.875% Senior Notes due 2021. We have used and will continue to use the net proceeds for development, acquisitions and other general corporate purposes. Interest is payable semiannually, on April 1 and October 1 of each year starting in April 2014. The Senior Notes contain customary terms and covenants including events of default.
The following table summarizes our Net Debt on a segment basis as of March 31, 2014. Net Debt is defined as our share of mortgages, notes and loans payable, at our ownership share, reduced by short-term liquidity sources to satisfy such obligations such as our ownership share of cash and cash equivalents and SID receivables. Although Net Debt is not a recognized GAAP financial measure, it is readily computable from existing GAAP information and we believe, as with our other non-GAAP measures, that such information is useful to our investors and other users of our financial statements.
|
|
Master |
|
|
|
|
|
|
|
|
|
Total |
| ||||||
|
|
Planned |
|
Operating |
|
Strategic |
|
Segment |
|
Non-Segment |
|
March 31, |
| ||||||
Segment Basis (a) |
|
Communities |
|
Assets |
|
Developments |
|
Totals |
|
Amounts |
|
2014 |
| ||||||
|
|
(In thousands) |
| ||||||||||||||||
Mortgages, notes and loans payable |
|
$ |
221,567 |
|
$ |
562,008 |
(b) |
$ |
59,965 |
(c) |
$ |
843,540 |
|
$ |
762,764 |
|
$ |
1,606,304 |
|
Less: cash and cash equivalents |
|
(38,422 |
) |
(41,725 |
)(d) |
(11,015 |
)(e) |
(91,162 |
) |
(737,288 |
) |
(828,450 |
) | ||||||
Special Improvement District receivables |
|
(39,712 |
) |
|
|
|
|
(39,712 |
) |
|
|
(39,712 |
) | ||||||
Municipal Utility District receivables |
|
(106,669 |
) |
|
|
|
|
(106,669 |
) |
|
|
(106,669 |
) | ||||||
Net Debt |
|
$ |
36,764 |
|
$ |
520,283 |
|
$ |
48,950 |
|
$ |
605,997 |
|
$ |
25,476 |
|
$ |
631,473 |
|
(a) |
Please refer to Note 15 - Segments. |
(b) |
Includes our $1.3 million share of debt of our Real Estate and Other Affliates in Operating Assets segment (Woodlands-Sarofim #1). |
(c) |
Includes our $45.6 million share of debt of our Real Estate and Other Affliates in Strategic Developments segment (KR Holdings, LLC, Millennium Woodlands Phase II, LLC and The Metropolitan Downtown Columbia Project). |
(d) |
Includes our $0.7 million share of cash and cash equivalents of our Real Estate and Other Affliates in Operating Assets segment (Woodlands-Sarofim #1, Summerlin Las Vegas Baseball Club, LLC, and Stewart Title). |
(e) |
Includes our $0.6 million share of cash and cash equivalent of our Real Estate and Other Affliates in Strategic Developments segment (KR Holdings, LLC, HHMK Development, LLC, Parcel C and The Metropolitan Downtown Columbia Project). |
Cash Flows
Operating Activities
Master Planned Community development has a significant impact on our business. The cash flows and earnings from the business vary more than from our operating assets because the MPC business generates revenues from land sales rather than recurring contractual revenues from operating leases. MPC Land sales are a substantial portion of our cash flows from operating activities and are partially offset by MPC development expenditures.
Net cash provided by operating activities was $26.2 million for the three months ended March 31, 2014 compared to net cash provided by operating activities of $16.6 million for the three months ended March 31, 2013. The $9.6 million increase in cash provided by operating activities was primarily the result of higher MUD collections of $22.5 million and $7.8 million in proceeds received in the first quarter 2014 from our insurance carriers related to the Superstorm Sandy claim at South Street Seaport offset by increased condominium expenditures of $5.6 million, increased general and administrative expenses of $5.7 million, higher leasing commissions of $5.5 million at our projects under development and demolition costs of $2.5 million.
Investing Activities
Net cash used in investing activities was $140.8 million and $56.6 million for the three months ended March 31, 2014 and 2013, respectively. Cash used for development of real estate and property expenditures was $140.5 million and $43.9 million for the three months ended March 31, 2014 and 2013, respectively. The increased development expenditures in 2014 compared to the same periods in 2013 relate primarily to the construction of The Shops at Summerlin, Hughes Landing Multi-family, Two Hughes Landing, South Street Seaport, The Woodlands Resort & Conference Center and the Outlet Collection at Riverwalk.
Financing Activities
Net cash provided by financing activities was $46.7 million and $11.3 million for the three months ended March 31, 2014 and 2013, respectively. Cash provided by financing activities for 2014 period includes loan proceeds of $48.8 million from draws on construction loans. Comparatively, for the three months ended March 31, 2013, we received loan proceeds of $68.3 million. Principal payments on mortgages, notes and loans payable were $2.1 million and $57.0 million for the three months ended March 31, 2014 and 2013, respectively.
Off-Balance Sheet Financing Arrangements
We do not have any material off-balance sheet financing arrangements. Although we have interests in certain property owning non-consolidated ventures which have mortgage financing, the financings are non-recourse to us and totaled $81.5 million as of March 31, 2014.
REIT Requirements
In order for Victoria Ward to remain qualified as a REIT for federal income tax purposes, Victoria Ward must meet a number of organizational and operational requirements, including a requirement that it distribute or pay tax on 100% of its capital gains and distribute at least 90% of its ordinary taxable income to its stockholders, including us. We intend to revoke Victoria Wards REIT status sometime in the next few years, at which time Victoria Ward will become a regular C corporation subsidiary. Please refer to Note 9 Income Taxes for more detail on Victoria Wards ability to remain qualified as a REIT.
Seasonality
Generally, revenues from our Operating Assets segment, Master Planned Communities segment and Strategic Developments segment are not subject to seasonal variations; however, rental incomes for certain retail tenants are subject to overage rent terms, which are based on tenant sales. These retail tenants are generally subject to seasonal variations, with a significant portion of their sales and earnings occurring during the last two months of the year. As such, our rental income is higher in the fourth quarter of each year.
Critical Accounting Policies
Critical accounting policies are those that are both significant to the overall presentation of our financial condition and results of operations and require management to make difficult, complex or subjective judgments. There have been no changes to our critical accounting policies.
Recently Issued Accounting Pronouncements
We have implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and we do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations.
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. The new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The Company elects to adopt this guidance as of the date of this filing. There is no impact of the adoption on the Companys consolidated financial statements because the Company does not have any discontinued operations
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to interest rate risk with respect to our variable rate financings in that increases in interest rates will increase our payments under these variable rates. With respect to fixed rate financings, increases in interest rates could make it more difficult to refinance such debt when due. As of March 31, 2014, we had $557.0 million of variable rate debt outstanding of which $172.0 million has been swapped to a fixed-rate. Approximately $176.7 million of the $385.0 million of total variable rate debt that has not been swapped to a fixed rate is represented by the Master Credit Facility at The Woodlands. Due to the revolving nature of this type of debt, it is generally inefficient to use interest rate swaps as a hedging instrument; rather, we have purchased an interest rate cap having a $100.0 million notional amount for this facility to mitigate our exposure to rising interest rates. We also did not swap to a fixed rate $95.7 million of the outstanding balance on the Victoria Ward financing because it is structured to permit partial repayments to release collateral for redevelopment. Due to the uncertain timing of such partial repayments, hedging this portion of the outstanding balance is inefficient. As of March 31, 2014, annual interest costs would increase approximately $3.85 million for every 1.00% increase in floating interest rates. Generally, our interest costs are capitalized due to the level of assets we currently have under development; therefore, the impact of
a change in our interest rate on our Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income (Loss) is expected to be minimal, but we would incur higher payments. For additional information concerning our debt and managements estimation process to arrive at a fair value of our debt as required by GAAP, please refer to the Liquidity and Capital Resources section of Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations, Note 2 Summary of Significant Accounting Policies to our Consolidated Financial Statements, Note 8 Mortgages, Notes and Loans Payable and Note 13 Derivative Instruments and Hedging Activities in our Annual Report. We intend to manage a portion of our variable interest rate exposure by using interest rate swaps and caps.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13(a)-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in our reports to the SEC is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by SEC rules, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal financial and accounting officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2014, the end of the period covered by this report. Based on the foregoing, our principal executive officer and principal financial and accounting officer concluded that our disclosure controls and procedures were effective as of March 31, 2014.
Internal Controls over Financial Reporting
There have been no changes in our internal control over financial reporting during the period covered by this report that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. However, we implemented a new version of our Enterprise Resource Planning (ERP) system on February 24, 2014. This new system changed certain of our business processes and internal controls impacting financial reporting. We believe that the new version of our ERP system and related changes to internal controls will further enhance our internal control over financial reporting. We have taken the necessary steps to monitor and maintain appropriate internal control over financial reporting during this period of system change.
In the ordinary course of our business, we are from time to time involved in legal proceedings related to the ownership and operations of our properties. Neither we nor any of our real estate affiliates are currently involved in any legal or administrative proceedings that we believe is likely to have a materially adverse effect on our business, results of operations or financial condition.
There are no material changes to the risk factors previously disclosed in our Annual Report.
The Exhibit Index following the signature page to this Quarterly Report lists the exhibits furnished as required by Item 601 of Regulation S-K and is incorporated by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
The Howard Hughes Corporation | |
|
|
|
|
By: |
/s/ Andrew C. Richardson |
|
|
Andrew C. Richardson |
|
|
Chief Financial Officer (principal financial officer) |
|
|
May 8, 2014 |
10.1*+ |
|
Form of Restricted Stock Agreement for Executive Officers under The Howard Hughes Corporation Amended and Restated 2010 Incentive Plan |
|
|
|
31.1+ |
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2+ |
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1+ |
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
101.INS+ |
|
XBRL Instance Document |
|
|
|
101.SCH+ |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL+ |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.LAB+ |
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE+ |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
101.DEF+ |
|
XBRL Taxonomy Extension Definition Linkbase Document |
*Management contract, compensatory plan or arrangement
+ Filed herewith
Pursuant to Item 601(b)(4)(v) of Regulation S-K, the registrant has not filed debt instruments relating to long-term debt that is not registered and for which the total amount of securities authorized thereunder does not exceed 10% of total assets of the registrant and its subsidiaries on a consolidated basis as of March 31, 2014. The registrant agrees to furnish a copy of such agreements to the SEC upon request.
Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013, (ii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2014 and 2013, (iii) the Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013, (iv) Condensed Consolidated Statements of Equity for the three months ended March 31, 2014 and 2013, and (v) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013.
Exhibit 10.1
THE HOWARD HUGHES CORPORATION
RESTRICTED STOCK AGREEMENT
WHEREAS, [Insert Name] (the Grantee) is an employee of The Howard Hughes Corporation (and its successors, the Company);
WHEREAS, the grant of Restricted Stock was authorized by the Compensation Committee of the Board (the Compensation Committee) on [Insert Date];
WHEREAS, the date of grant is [Insert Date] (Date of Grant); and
WHEREAS, pursuant to The Howard Hughes Corporation Amended and Restated 2010 Incentive Plan (the Plan), and subject to the terms and conditions thereof and the terms and conditions of this agreement (this Agreement), the Company has granted to Grantee as of the Date of Grant the right to receive [Insert Amount] shares of common stock of the Company (the Restricted Shares).
NOW, THEREFORE, the Company and Grantee hereby agree as follows:
1. Rights of Grantee. The Restricted Shares subject to this grant shall be fully paid and nonassessable and shall be either: (i) represented by certificates held in custody by the Company until all restrictions thereon have lapsed, together with a stock power or powers executed by Grantee in whose name such certificates are registered, endorsed in blank and covering such Restricted Shares; or (ii) held at the Companys transfer agent in book entry form with appropriate restrictions relating to the transfer of such Restricted Shares, and endorsed with an appropriate legend referring to the restrictions hereinafter set forth. Grantee shall have the right to vote the Restricted Shares. Upon vesting of the Restricted Shares hereunder, the Grantee: (x) shall receive cash dividends or cash distributions, if any, paid or made by the Company with respect to common shares after the Date of Grant and prior to the vesting of the Restricted Stock; and (y) shall receive any additional Restricted Shares that Grantee may become entitled to receive by virtue of a Restricted Share dividend, a merger or reorganization in which the Company is the surviving corporation or any other change in the capital structure of the Company.
2. Restrictions on Transfer of Restricted Shares. The Restricted Shares subject to this grant may not be assigned, exchanged, pledged, sold, transferred or otherwise disposed of by Grantee, except to the Company, until the Restricted Shares have become nonforfeitable in accordance with Sections 3 and 4 hereof. Any purported transfer in violation of the provisions of this Section 2 of this Agreement shall be null and void, and the purported transferee shall obtain no rights with respect to such Shares.
3. Vesting of Restricted Shares. Subject to the terms and conditions of Section 4 of this Agreement, the Restricted Shares covered by this Agreement shall become nonforfeitable as follows: (a) 50% of the Restricted Shares covered by this Agreement shall vest on December 31, 2018; and (b) 50% of the Restricted Shares covered by this Agreement shall vest in accordance
with the vesting scheduled based on the total shareholder return as set forth on Exhibit A (the Company-based Vesting Component). Notwithstanding anything to the contrary set forth in this Agreement, in the event that Grantees employment relationship with the Company or a Subsidiary is terminated by the Company or a Subsidiary for any reason, except for cause, and Grantee has been employed by the Company or a Subsidiary continuously for a period of at least forty-eight (48) months from December 31, 2013 then: (a) 50% of the Restricted Shares covered by this Agreement shall vest on December 31, 2018; and (b) a percentage of the Company-based Vesting Component shall vest on December 31, 2018 based on the total shareholder return from the Date of Grant to the date of termination in accordance with the schedule set forth on Exhibit A.
4. Forfeiture of Awards. Except to the extent Grantees rights to receive the Restricted Shares (and any dividends declared thereunder) covered by this Agreement have: (a) become non-forfeitable pursuant to Section 3 of this Agreement; or (b) otherwise vest and become non-forfeitable pursuant to termination in connection with a change in control as provided by the Employment Agreement dated as of [Insert Date] by and between the Grantee and the Company, Grantees rights to receive the Restricted Shares covered by this Agreement shall be forfeited automatically and without further notice on the date that Grantee ceases to be in the employee of the Company or a Subsidiary prior to December 31, 2018.
5. Retention of Shares. During the period in which the restrictions on transfer and risk of forfeiture provided in Sections 3 and 4 of this Agreement are in effect, the Restricted Shares covered by this grant shall be either: (a) represented by certificates retained by the Company, together with the accompanying stock power signed by Grantee and endorsed in blank; or (b) held at the Companys transfer agent in book entry form with appropriate restrictions relating to the transfer of such Restricted Shares, and endorsed with an appropriate legend referring to the restrictions set forth herein.
6. Compliance with Law. The Company shall make reasonable efforts to comply with all applicable federal and state securities laws; provided, however, that notwithstanding any other provision of this Agreement, the Company shall not be obligated to issue any of the Restricted Shares covered by this Agreement if the issuance thereof would result in violation of any such law.
7. Compliance with Section 409A of the Code. To the extent applicable, it is intended that this Agreement and the Plan comply with the provisions of Section 409A of the Code, so that the income inclusion provisions of Section 409A(a)(1) of the Code do not apply to Grantee. This Agreement and the Plan shall be administered in a manner consistent with this intent. Reference to Section 409A of the Code is to Section 409A of the Internal Revenue Code of 1986, as amended, and will also include any proposed, temporary or final regulations, or any other guidance promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service.
8. Amendments. Any amendment to the Plan shall be deemed to be an amendment to this Agreement to the extent that the amendment is applicable hereto; provided, however, that no amendment shall adversely affect the rights of Grantee under this Agreement without Grantees consent; further, provided, that Grantees consent shall not be required to an
amendment that is deemed necessary by the Company to ensure compliance with Section 409A of the Code or the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 or any regulations promulgated thereunder, including as a result of the implementation of any recoupment policy the Company adopts to comply with the requirements set forth in the Dodd-Frank Act.
9. Severability. In the event that one or more of the provisions of this Agreement shall be invalidated for any reason by a court of competent jurisdiction, any provision so invalidated shall be deemed to be separable from the other provisions hereof, and the remaining provisions hereof shall continue to be valid and fully enforceable.
10. Relation to Plan. This Agreement is subject to the terms and conditions of the Plan. In the event of any inconsistency between the provisions of this Agreement and the Plan, the Plan shall govern. Capitalized terms used herein without definition shall have the meanings assigned to them in the Plan. The Compensation Committee acting pursuant to the Plan, as constituted from time to time, shall, except as expressly provided otherwise herein or in the plan, have the right to determine any questions which arise in connection with the grant of Restricted Shares.
11. Successors and Assigns. Without limiting Section 2 hereof, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, administrators, heirs, legal representatives and assigns of Grantee, and the successors and assigns of the Company.
12. Governing Law. This Agreement is made under, and shall be construed in accordance with, the internal substantive laws of the State of Delaware without giving effect to the principles of conflict of laws thereof.
[Remainder of Page Intentionally Left Blank, Signature Page to Follow]
Executed in the name and on behalf of the Company, as of the day of , 2014.
|
THE HOWARD HUGHES CORPORATION | |
|
| |
|
| |
|
By: |
|
|
|
Name: David R. Weinreb |
|
|
Title: Chief Executive Officer |
The undersigned Grantee hereby acknowledges receipt of an executed original of this Agreement and accepts the right to receive the Restricted Shares or other securities covered hereby, subject to the terms and conditions of the Plan and the terms and conditions herein above set forth.
|
| |
|
Grantee | |
|
| |
|
Date: |
|
EXHIBIT A
COMPANY-BASED VESTING SCHEDULE
Total Shareholder Return |
|
Vesting % |
|
|
|
|
|
0.00% to 88.36% |
|
0% |
|
|
|
|
|
88.37% to 105.91% |
|
25% |
|
|
|
|
|
105.92% to 124.63% |
|
50% |
|
|
|
|
|
124.64% to 156.51% |
|
75% |
|
|
|
|
|
156.52% + |
|
100% |
|
The Company-based Vesting Component of each Award shall vest on the fifth anniversary of the grant date of such Award according to the schedule above; provided, that the Company achieves the corresponding total shareholder return (TSR) target. TSR is calculated using the following formula: TSR = (Priceend Pricebegin + Dividends) / Pricebegin. $73.02, the closing price per share of the Company as of December 31, 2012, shall be used as the Pricebegin for the purpose of calculating TSR. A TSR target is deemed satisfied if the highest 30 trading day volume weighted average share price (which shall be based on the daily closing price of the Companys common stock as reported in the consolidated transaction reporting system) represents a TSR that meets or exceeds such target during the period from January 1, 2018 through December 31, 2018.(1)
By way of example, if the highest 30 trading day volume weighted average share price of Company stock equals $167.49 (inclusive of dividends, if any) during the period between January 1, 2018 and December 31, 2018 (which represents a TSR of 129.38% using the following formula: ($167.49-$73.02)/$73.02), then 75% of the Company-based Vesting Component of an Award shall vest on the fifth anniversary of the grant date of such Award; provided, that all other vesting requirements are met.
The Compensation Committee may make adjustments to the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events, including without limitation, stock splits, stock dividends, spinoffs or other similar events, or as a result of changes in applicable laws, regulations or accounting principles, to prevent dilution or enlargement of the benefits or increase in intended benefits or potential intended benefits provided by an Award; provided, that such adjustments shall be consistent with the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code) with regard to Awards subject to Section 162(m) of the Code.
(1) If a Grantee is terminated by the Company for any reason, except for cause after 48 months of employment from December 31, 2013, as provided in Section 3 of the Agreement, prior to the passing of 30 trading days in 2018, the Company shall use the volume weighted average share price for the first 30 trading days of 2018 when calculating TSR.
The term Award shall have the meaning set forth in The Howard Hughes Corporation Amended and Restated 2010 Incentive Plan. All other capitalized terms used herein without definition shall have the meanings assigned to them in the Restricted Stock Agreement to which this Exhibit A is attached.
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a 14(a) ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, David Weinreb, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of The Howard Hughes Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
|
By: |
/s/ David R. Weinreb |
|
|
David R. Weinreb |
|
|
Chief Executive Officer (principal executive officer) |
|
|
May 8, 2014 |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a 14(a) ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Andrew Richardson, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of The Howard Hughes Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
|
By: |
/s/ Andrew C. Richardson |
|
|
Andrew C. Richardson |
|
|
Chief Financial Officer (principal financial officer) |
|
|
May 8, 2014 |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. 1350 ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of The Howard Hughes Corporation (the Company) for the period ended March 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the Report), each of the undersigned officers, in their capacity as officers, of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to such officers knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
By: |
/s/ David R. Weinreb |
|
|
David R. Weinreb |
|
|
Chief Executive Officer (principal executive officer) |
|
|
May 8, 2014 |
|
|
|
|
By: |
/s/ Andrew C. Richardson |
|
|
Andrew C. Richardson |
|
|
Chief Financial Officer (principal financial officer) |
|
|
May 8, 2014 |
IMPAIRMENT (Details) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | |
---|---|---|
Mar. 31, 2014
|
Mar. 31, 2013
|
|
IMPAIRMENT | ||
Impairment charges | $ 0 | $ 0 |
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Details 2) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | |
---|---|---|
Mar. 31, 2014
|
Mar. 31, 2013
|
|
Reclassifications out of accumulated other comprehensive income (loss) | ||
Provision for income taxes | $ (4,773) | $ (2,479) |
Net loss | (86,331) | (23,170) |
Gains and losses on cash flow hedges | Interest rate swap contracts | Amounts reclassified from Accumulated Other Comprehensive Income (Loss)
|
||
Reclassifications out of accumulated other comprehensive income (loss) | ||
Interest expense | (614) | |
Provision for income taxes | 73 | |
Net loss | $ (541) |
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Details 3) (Cash Flow Hedges, USD $)
In Thousands, unless otherwise specified |
3 Months Ended | |
---|---|---|
Mar. 31, 2014
|
Mar. 31, 2013
|
|
Effect of the Company's derivative financial instruments on the income statement | ||
Amount of Loss Recognized in OCI | $ (342) | $ (98) |
Amount of Loss Reclassified from AOCI into Earnings | (541) | (519) |
Interest Rate Swaps | Interest expense
|
||
Effect of the Company's derivative financial instruments on the income statement | ||
Amount of Loss Recognized in OCI | (342) | (98) |
Amount of Loss Reclassified from AOCI into Earnings | $ (541) | $ (519) |
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