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 management’s operating philosophies and methods. In addition, our segments or assets within such segments 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. 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 multi-family properties, The Woodlands Resort & Conference Center, The Club at Carlton Woods and other real estate investments. These assets are currently generating revenues, and we believe there is an opportunity to redevelop, reposition, or sell certain of these assets to improve segment performance.

Strategic Developments – includes our condominium and commercial property projects currently under development and all other properties held for development which have no substantial operations.

Revenue recognition for contracted individual units in a condominium project are accounted for under the percentage of completion method when the following criteria are met: a) construction is beyond a preliminary stage; b) buyer is unable to require a refund of its deposit, except for non‑delivery of the unit; c) sufficient units are sold to assure that it will not revert to a rental property; d) sales prices are collectible; and e) aggregate sales proceeds and costs can be reasonably estimated. Those units that do not meet the criteria are accounted for using the full accrual or deposit method which defers revenue recognition until the unit is closed.

Revenue recognized on the percentage-of-completion method is calculated based upon the ratio of project costs incurred to date compared to total estimated project cost. Total estimated project costs include direct costs such as the carrying value of our land, site planning, architectural, construction costs, financing costs and indirect cost allocations for certain infrastructure and amenity costs which benefit the project based upon the relative fair value of the land prior to development. Changes in estimated project costs impact the amount of revenue and profit recognized on a percentage of completion basis during the period in which they are determined and future periods.

The assets included in each segment as of June 30, 2015, are contained in the following chart


Master Planned
Communities	Operating Assets		Strategic Developments

	Retail	Office	Under Construction	Other
• Bridgeland	▪ Columbia Regional Building	▪ 10-70 Columbia Corporate Center	▪ Anaha Condominiums	▪ Alameda Plaza
• Conroe	▪ Cottonwood Square	▪ Columbia Office Properties	▪ Three Hughes Landing	▪ ONE Ala Moana (d)
• Maryland	▪ Creekside Village Green (b)	▪ One Hughes Landing	▪ 1725-35 Hughes Landing	▪ Alden Bridge Self-Storage
• Summerlin (a)	▪ Downtown Summerlin	▪ Two Hughes Landing	Boulevard	▪ AllenTowne
• The Woodlands	▪ Hughes Landing Retail (b)	▪ 2201 Lake Woodlands Drive	▪ Hughes Landing Hotel	▪ Bridges at Mint Hill
	▪ 1701 Lake Robbins	▪ 9303 New Trails	(Embassy Suites)	▪ Century Plaza Mall
	▪ Landmark Mall	▪ 110 N. Wacker	▪ Lakeland Village Center	▪ Circle T Ranch and
	▪ Outlet Collection at Riverwalk	▪ 3831 Technology Forest Drive	▪ Summerlin Apartments, LLC (c)	Power Center (c)
	▪ Park West	▪ 3 Waterway Square	▪ Waiea Condominiums	▪ Cottonwood Mall
	▪ South Street Seaport	▪ 4 Waterway Square	▪ Waterway Square Hotel	▪ Elk Grove Promenade
	(under construction)	▪ 1400 Woodloch Forest	(Westin)	▪ 80% Interest in Fashion
	▪ Ward Village			Show Air Rights
	▪ 20/25 Waterway Avenue			▪ Kendall Town Center
	▪ Waterway Garage Retail			▪ Lakemoor (Volo) Land
				▪ Maui Ranch Land
	Other			▪ Parcel C (c)
	▪ Golf Courses at TPC Summerlin	▪ Stewart Title of Montgomery		▪ Seaport District Assemblage
	and TPC Las Vegas	County, TX (c)		▪ Ward Block M
	(participation interest)	▪ Summerlin Hospital Medical		▪ Ward Gateway Towers
	▪ Kewalo Basin Harbor	Center (c)		▪ Ward Workforce Tower
	▪ Merriweather Post Pavilion	▪ Summerlin Las Vegas		▪ West Windsor
	▪ Millennium Waterway Apartments	Baseball Club (c)
	▪ Millennium Woodlands	▪ The Metropolitan Downtown
	Phase II (c)	Columbia Project (b) (c)
	▪ One Lake's Edge (b)	▪ The Club at Carlton Woods
	▪ 85 South Street	▪ The Woodlands Resort &
		Conference Center
		▪ The Woodlands Parking Garages
		▪ Woodlands Sarofim #1 (c)

(a)

The Summerlin MPC includes our Discovery Land joint venture.

(b)

Asset was placed in service and moved from the Strategic Developments segments to the Operating Assets segment during 2015.

(c)

A non-consolidated investment.

(d)

Asset consists of two equity method investments. Construction was substantially completed in the fourth quarter of 2014 and the last available unit was sold in the second quarter of 2015.

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 gain or loss and the change 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 company’s 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.

Segment operating results are as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014

	(In thousands)				(In thousands)
Master Planned Communities
Land sales	$	45,433	$	153,164	$	93,514	$	200,835
Builder price participation		7,907		3,843		13,605		7,940
Minimum rents		215		207		430		404
Other land revenues		3,140		2,689		6,426		5,193
Other rental and property revenues		9		108		7		175
Total revenues		56,704		160,011		113,982		214,547

Cost of sales – land		24,236		42,719		48,132		65,797
Land sales operations		9,721		9,275		17,300		16,579
Land sales real estate and business taxes		2,242		2,135		4,646		4,089
Depreciation and amortization		95		103		190		203
Interest income		(15)		(22)		(31)		(79)
Interest expense (*)		(4,684)		(4,813)		(9,446)		(9,879)
Total expenses		31,595		49,397		60,791		76,710
MPC EBT		25,109		110,614		53,191		137,837

Operating Assets
Minimum rents		36,697		21,918		71,009		41,818
Tenant recoveries		10,693		6,941		20,266		12,825
Resort and conference center revenues		11,481		9,622		23,484		19,048
Other rental and property revenues		6,971		6,570		13,245		11,680
Total revenues		65,842		45,051		128,004		85,371

Other property operating costs		18,350		15,485		35,836		28,666
Rental property real estate taxes		5,990		3,762		11,510		6,869
Rental property maintenance costs		2,785		2,008		5,412		3,808
Resort and conference center operations		8,893		6,412		17,971		13,923
Provision for doubtful accounts		1,266		31		2,075		174
Demolition costs		1,496		3,434		1,613		5,928
Development-related marketing costs		2,748		2,711		5,014		4,790
Depreciation and amortization		22,887		9,531		41,649		18,541
Interest income		(9)		(11)		(19)		(130)
Interest expense		7,629		3,928		14,123		5,972
Equity in Earnings from Real Estate and Other Affiliates		(160)		(767)		(1,044)		(2,572)
Total expenses		71,875		46,524		134,140		85,969
Operating Assets EBT		(6,033)		(1,473)		(6,136)		(598)

Strategic Developments
Minimum rents		77		73		744		336
Tenant recoveries		8		(57)		102		74
Condominium rights and unit sales		86,513		4,358		121,370		7,484
Other land revenues		5		9		12		17
Other rental and property revenues		14		186		39		455
Total revenues		86,617		4,569		122,267		8,366

Condominium rights and unit cost of sales		56,765		2,191		79,174		3,762
Other property operating costs		1,284		1,094		1,943		1,721
Real estate taxes		578		479		1,258		1,112
Rental property maintenance costs		115		166		232		281
Demolition costs		—		1		—		23
Development-related marketing costs		2,846		2,588		6,823		4,732
Depreciation and amortization		601		614		1,617		1,038
Other income		—		—		(334)		(2,373)
Interest income		(166)		—		(166)		—
Interest expense (*)		(1,580)		(3,981)		(3,385)		(6,630)
Equity in Earnings from Real Estate and Other Affiliates		(921)		(5,820)		(1,825)		(10,083)
Total expenses		59,522		(2,668)		85,337		(6,417)
Strategic Developments EBT		27,095		7,237		36,930		14,783
REP EBT	$	46,171	$	116,378	$	83,985	$	152,022

(*)Negative interest expense amounts are due to interest capitalized in our Master Planned Communities and Strategic Developments segments related to Operating Assets segment debt and the Senior Notes.

The following reconciles REP EBT to GAAP‑basis income (loss) before taxes:


Reconciliation of REP EBT to GAAP	Three Months Ended June 30,				Six Months Ended June 30,
income (loss) before taxes	2015		2014		2015		2014
	(In thousands)				(In thousands)
REP EBT	$	46,171	$	116,378	$	83,985	$	152,022
General and administrative		(19,606)		(17,497)		(38,569)		(34,379)
Corporate interest income/(expense), net		(13,235)		4,829		(26,447)		(6,151)
Warrant liability gain (loss)		42,620		(67,370)		(66,190)		(163,810)
Reduction in tax indemnity receivable		—		(10,927)		—		(10,927)
Corporate other income, net		396		5,611		1,529		13,686
Corporate depreciation and amortization		(1,487)		(1,225)		(3,124)		(2,200)
Income (loss) before taxes	$	54,859	$	29,799	$	(48,816)	$	(51,759)

The following reconciles segment revenues to GAAP‑basis consolidated revenues:


Reconciliation of Segment Basis Revenues to	Three Months Ended June 30,				Six Months Ended June 30,
GAAP Revenues	2015		2014		2015		2014
	(In thousands)				(In thousands)
Master Planned Communities	$	56,704	$	160,011	$	113,982	$	214,547
Operating Assets		65,842		45,051		128,004		85,371
Strategic Developments		86,617		4,569		122,267		8,366
Total revenues	$	209,163	$	209,631	$	364,253	$	308,284

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:


	June 30,		December 31,
	2015		2014
	(In thousands)
Master Planned Communities	$	1,919,445	$	1,877,043
Operating Assets		2,132,283		1,934,350
Strategic Developments		1,031,491		879,896
Total segment assets		5,083,219		4,691,289
Corporate and other		322,610		428,642
Total assets	$	5,405,829	$	5,119,931

The $151.6 million increase in the Strategic Developments segment asset balance as of June 30, 2015 compared to December 31, 2014 is primarily due to the following:

Increases in asset balance

Development expenditures of $91.4 million for the 80 South Street Assemblage, $52.9 million for the 1725-35 Hughes Landing Boulevard office buildings, $29.7 million for Waterway Square Hotel (Westin), $28.7 million for the Three Hughes Landing office building, $23.7 million for Ward Village, $17.6 million for Hughes Landing Hotel (Embassy Suites) and $14.2 million for our Waiea Condominiums;

$42.1 million in condominium receivables due to percent complete revenue recognition in excess of buyers deposits;

Reductions in asset balance

$125.3 million resulting from the transfer of Hughes Landing Retail, One Lake’s Edge, The Metropolitan Downtown Columbia Project and Creekside Village to the Operating Assets segment;

$8.5 million in cash distributions from our equity investment in ONE Ala Moana. The cash was moved to the Corporate segment.

Corporate and other assets as of June 30, 2015 consist primarily of Cash and cash equivalents. The $106.0 million decrease compared to December 31, 2014 is primarily due to our development activities.