NOTE 16 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 and other real estate investments. The Club at Carlton Woods was also included in Operating Assets until its sale on September 4, 2015. 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 September 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
• Maryland	▪ Cottonwood Square	▪ Columbia Office Properties	▪ Three Hughes Landing	▪ ONE Ala Moana (e)
• Summerlin (a)	▪ Creekside Village Green (c)	▪ One Hughes Landing	▪ 1725-35 Hughes Landing	▪ Alden Bridge Self-Storage
• The Woodlands	▪ Downtown Summerlin	▪ Two Hughes Landing	Boulevard	▪ AllenTowne
• The Woodlands Hills (b)	▪ Hughes Landing Retail (c)	▪ 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 (d)	Power Center (d)
	▪ Park West	▪ 3 Waterway Square	▪ Waiea Condominiums	▪ Cottonwood Mall
	▪ South Street Seaport	▪ 4 Waterway Square	▪ Waterway Square Hotel	▪ The Outlet Collection at Elk Grove (g)
	(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 (d)
	▪ Golf Courses at TPC Summerlin	▪ Stewart Title of Montgomery		▪ Seaport District Assemblage
	and TPC Las Vegas	County, TX (d)		▪ Ward Block M
	(participation interest)	▪ Summerlin Hospital Medical		▪ Ward Gateway Towers
	▪ Kewalo Basin Harbor	Center (d)		▪ Ward Workforce Tower
	▪ Merriweather Post Pavilion	▪ Summerlin Las Vegas		▪ West Windsor
	▪ Millennium Waterway Apartments	Baseball Club LLC (d)
	▪ Millennium Woodlands	▪ The Metropolitan Downtown
	Phase II LLC (d)	Columbia Project (c) (d)
	▪ One Lake's Edge (c)	▪ The Club at Carlton Woods (f)
	▪ 85 South Street	▪ The Woodlands Resort &
		Conference Center
		▪ The Woodlands Parking Garages
		▪ Woodlands Sarofim #1 (d)

(a)

The Summerlin MPC includes our Discovery Land joint venture.

(b)

Formerly known as the Conroe MPC.

(c)

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

(d)

A non-consolidated investment. Refer to Note 8 – Real Estate and Other Affiliates.

(e)

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.

(f)

Sold on September 4, 2015.

(g)

Formerly known as Elk Grove Promenade.

As our segments are managed separately, different performance 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 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 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 performance of our assets. We also present this measure because we believe certain investors use it as a measure of a company’s historical 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 September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014

	(In thousands)				(In thousands)
Master Planned Communities
Land sales	$	45,423	$	59,351	$	138,937	$	260,186
Builder price participation		6,680		5,311		20,285		13,251
Minimum rents		171		210		601		614
Other land revenues		4,612		4,103		11,038		9,296
Other rental and property revenues		23		198		30		373
Total revenues		56,909		69,173		170,891		283,720

Cost of sales – land		19,674		27,743		67,806		93,540
Land sales operations		7,293		8,068		24,593		24,629
Land sales real estate and business taxes		3,056		2,927		7,702		7,016
Depreciation and amortization		89		101		279		304
Interest income		(14)		(17)		(45)		(96)
Interest expense (*)		(4,210)		(3,332)		(13,656)		(13,210)
Total expenses		25,888		35,490		86,679		112,183
MPC EBT		31,021		33,683		84,212		171,537

Operating Assets
Minimum rents		37,565		24,035		108,574		65,853
Tenant recoveries		10,685		7,581		30,951		20,406
Resort and conference center revenues		11,772		8,150		35,256		27,198
Other rental and property revenues		7,400		6,076		20,645		17,756
Total revenues		67,422		45,842		195,426		131,213

Other property operating costs		15,659		14,116		51,495		42,782
Rental property real estate taxes		6,447		3,716		17,956		10,585
Rental property maintenance costs		2,968		2,154		8,380		5,962
Resort and conference center operations		8,767		8,910		26,738		22,833
Provision for doubtful accounts		975		103		3,050		277
Demolition costs		798		761		2,411		6,689
Development-related marketing costs		2,367		589		7,381		5,379
Depreciation and amortization		22,936		11,261		64,585		29,802
Interest income		(10)		(11)		(29)		(141)
Interest expense		8,002		4,917		22,124		10,889
Equity in Earnings from Real Estate and Other Affiliates		(289)		(202)		(1,333)		(2,774)
Total expenses		68,620		46,314		202,758		132,283
Operating Assets EBT		(1,198)		(472)		(7,332)		(1,070)

Strategic Developments
Minimum rents		78		137		822		473
Tenant recoveries		7		18		109		92
Condominium rights and unit sales		78,992		4,032		200,362		11,516
Other land revenues		5		9		17		26
Other rental and property revenues		29		17		68		472
Total revenues		79,111		4,213		201,378		12,579

Condominium rights and unit cost of sales		47,573		2,026		126,747		5,788
Other property operating costs		1,021		1,083		2,964		2,821
Real estate taxes		461		843		1,720		1,955
Rental property maintenance costs		126		159		358		440
Provision for doubtful accounts		32		16		32		16
Demolition costs		226		(1)		226		22
Development-related marketing costs		5,272		5,798		12,095		10,530
Depreciation and amortization		528		445		2,145		1,483
Other expense/(income)		435		—		101		(2,373)
Interest income		(21)		—		(188)		—
Interest expense (*)		(1,903)		(3,198)		(5,289)		(9,828)
Equity in Earnings from Real Estate and Other Affiliates		(6)		(5,307)		(1,831)		(15,390)
Total expenses		53,744		1,864		139,080		(4,536)
Strategic Developments EBT		25,367		2,349		62,298		17,115
REP EBT	$	55,190	$	35,560	$	139,178	$	187,582

(*) 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 September 30,				Nine Months Ended September 30,
income (loss) before taxes	2015		2014		2015		2014
	(In thousands)				(In thousands)
REP EBT	$	55,190	$	35,560	$	139,178	$	187,582
General and administrative		(18,526)		(14,759)		(57,095)		(49,138)
Corporate interest income (expense), net		(13,262)		(14,938)		(39,709)		(21,089)
Warrant liability gain (loss)		123,640		24,690		57,450		(139,120)
Gain on sale of The Club at Carlton Woods		29,073		-		29,073
Increase (reduction) in tax indemnity receivable		-		5,454		-		(5,473)
Corporate other income (expense), net		(222)		11,409		1,304		25,095
Corporate depreciation and amortization		(1,444)		(1,211)		(4,568)		(3,411)
Income (loss) before taxes	$	174,449	$	46,205	$	125,633	$	(5,554)

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


Reconciliation of Segment Basis Revenues to	Three Months Ended September 30,				Nine Months Ended September 30,
GAAP Revenues	2015		2014		2015		2014
	(In thousands)				(In thousands)
Master Planned Communities	$	56,909	$	69,173	$	170,891	$	283,720
Operating Assets		67,422		45,842		195,426		131,213
Strategic Developments		79,111		4,213		201,378		12,579
Total revenues	$	203,442	$	119,228	$	567,695	$	427,512

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:


	September 30,		December 31,
	2015		2014
	(In thousands)
Master Planned Communities	$	1,986,825	$	1,877,043
Operating Assets		2,141,445		1,934,350
Strategic Developments		1,154,738		879,896
Total segment assets		5,283,008		4,691,289
Corporate and other		261,516		428,642
Total assets	$	5,544,524	$	5,119,931

The $207.1 million increase in the Operating Assets segment asset balance as of September 30, 2015 compared to December 31, 2014, is primarily due to placing One Lake’s Edge, Creekside Village, The Metropolitan Downtown Columbia Project and Hughes Landing Retail in service and additional development and leasing costs at Downtown Summerlin.

The $274.8 million increase in the Strategic Developments segment asset balance as of September 30, 2015 compared to December 31, 2014 is primarily due to the following:

Increases in asset balance

Development expenditures of $92.3 million for the 80 South Street Assemblage, $83.7 million for the 1725-35 Hughes Landing Boulevard office buildings, $42.3 million for Waterway Square Hotel (Westin), $37.5 million for the Three Hughes Landing office building, $28.3 million for Hughes Landing Hotel (Embassy Suites), $94.0 million for our Waiea Condominiums and $52.8 million for our Anaha Condominiums.

$95.5 million in condominium receivables due to percent complete revenue recognition in excess of buyers deposits.

Reductions in asset balance

$112.5 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.

Cost of sales of $75.0 million for our Waiea Condominiums and $51.5 million for our Anaha Condominiums.

$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 September 30, 2015 consist primarily of Cash and cash equivalents. The $167.1 million decrease compared to December 31, 2014 is primarily due to cash utilized in various development activities.