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, hospitality and multi-family properties along with other real estate investments. These assets are currently generating revenues, and are comprised of commercial real estate properties recently developed or acquired by us, and properties where we believe there is an opportunity to redevelop, reposition, or sell to improve segment performance or to recycle capital.

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

Effective January 1, 2017, we moved the South Street Seaport assets under construction and related activities to the Strategic Developments segment from the Operating Assets segment. South Street Seaport operating properties and related operating results remain presented within the Operating Assets segment. The respective segment earnings and total segment assets presented in our interim financial statements and elsewhere in this Quarterly Report have been adjusted in all periods reported to reflect this change.

The assets included in each segment as of June 30, 2017, are contained as follows:


Master Planned			Strategic
Communities	Operating Assets		Developments

	Retail	Office	Under Construction
• Bridgeland	▪ Columbia Regional Building	▪ 10-70 Columbia Corporate Center	▪ Ae`o
• Maryland	▪ Cottonwood Square	▪ Columbia Office Properties	▪ Anaha
• Summerlin	▪ Creekside Village Green	▪ One Hughes Landing	▪ Aristocrat
• The Woodlands	▪ Downtown Summerlin	▪ Two Hughes Landing	▪ Creekside Park Apartments
• The Woodlands Hills	▪ Hughes Landing Retail	▪ Three Hughes Landing (b)	▪ Downtown Summerlin Office
	▪ 1701 Lake Robbins	▪ 1725-35 Hughes Landing Boulevard	▪ 100 Fellowship Drive
Other	▪ Lakeland Village Center at Bridgeland (b)	▪ 2201 Lake Woodlands Drive	▪ Ke Kilohana
• The Summit (a)	▪ Outlet Collection at Riverwalk	▪ One Mall North	▪ Two Merriweather
	▪ South Street Seaport - Historic District / Uplands	▪ One Merriweather (d)	▪ m.flats/TEN.M (a)
	▪ Ward Village Retail	▪ 110 North Wacker	▪ 33 Peck Slip (a) (f)
	▪ 20/25 Waterway Avenue	▪ 9303 New Trails	▪ South Street Seaport - Pier 17 (f)
	▪ Waterway Garage Retail	▪ ONE Summerlin	▪ Waiea
		▪ 3831 Technology Forest Drive
	Multi-family	▪ 3 Waterway Square	Other
	▪ Constellation (a) (b)	▪ 4 Waterway Square	▪ AllenTowne
	▪ Millennium Waterway Apartments	▪ 1400 Woodloch Forest	▪ American City Building
	▪ Millennium Six Pines Apartments (c)		▪ Bridges at Mint Hill
	▪ One Lakes Edge	Other	▪ Century Plaza Mall
	▪ 85 South Street	▪ HHC 242 Self-Storage (d)	▪ Circle T Ranch and Power Center (a)
	▪ The Metropolitan Downtown	▪ HHC 2978 Self-Storage (d)	▪ Cottonwood Mall
	Columbia (a)	▪ Las Vegas 51s (e)	▪ 80% Interest in Fashion
		▪ Kewalo Basin Harbor	Show Air Rights
	Hospitality	▪ Stewart Title of Montgomery	▪ Kendall Town Center
	▪ Embassy Suites at Hughes Landing	County, TX (a)	▪ Lakemoor (Volo) Land
	▪ The Westin at The Woodlands (b)	▪ Summerlin Hospital Medical	▪ Landmark Mall (f)
	▪ The Woodlands Resort &	Center (a)	▪ Maui Ranch Land
	Conference Center	▪ The Woodlands Parking Garages	▪ The Elk Grove Collection (g)
		▪ 2000 Woodlands Parkway	▪ West Windsor

(a)

A non-consolidated investment. Refer to Note 8 – Real Estate and Other Affiliates in our Condensed Consolidated Financial Statements.

(b)

Asset was placed in service and moved from the Strategic Developments segment to the Operating Assets segment during 2016.

(c)

Asset was held as a joint venture until our acquisition of our partner’s 18.57% interest on July 20, 2016.

(d)

Asset was placed in service and moved from the Strategic Developments segment to the Operating Assets segment during 2017.

(e)

Asset was held as a joint venture until our acquisition of our partner’s 50% interest on March 1, 2017.

(f)

Asset is in redevelopment and moved from the Operating Assets segment to the Strategic Developments segment during 2017.

(g)

Formerly known as The Outlet Collection at Elk Grove.

Our segments are managed separately, therefore, we use different operating measures 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 Earnings Before Taxes (“EBT”), which represents the operating revenues of the properties less property operating expenses and adjustments for interest, as further described below. We believe that EBT provides useful information about the operating performance of all of our properties.

EBT, as it relates to each business segment, represents the revenues less expenses of each segment, including interest income, interest expense, and equity in earnings of real estate and other affiliates. EBT excludes corporate expenses and other items that are not allocable to the segments. We present 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 company’s historical operating performance and its ability to service and obtain financing. We believe that the inclusion of certain adjustments to net income (loss) to calculate 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,
(In thousands)	2017		2016		2017		2016
Master Planned Communities
Land sales	$	69,144	$	61,098	$	122,625	$	103,040
Builder price participation		4,480		6,501		9,141		11,148
Minimum rents		—		142		(8)		282
Other land revenues		4,452		4,112		15,024		8,150
Other rental and property revenues		—		17		—		20
Total revenues		78,076		71,870		146,782		122,640

Cost of sales – land		33,376		29,008		59,245		44,696
Land sales operations		7,307		9,169		16,701		19,778
Provision for doubtful accounts		—		—		2		—
Depreciation and amortization		79		81		171		164
Interest income		(1)		(5)		(9)		(21)
Interest expense (*)		(5,989)		(5,004)		(11,538)		(10,343)
Equity in earnings in Real Estate and Other Affiliates		(9,792)		(8,874)		(15,072)		(8,874)
Total expenses		24,980		24,375		49,500		45,400
MPC segment EBT		53,096		47,495		97,282		77,240

Operating Assets
Minimum rents		45,023		41,811		90,985		82,929
Tenant recoveries		11,536		10,914		22,766		21,437
Hospitality revenues		19,703		19,129		39,414		32,038
Other rental and property revenues		5,616		4,416		10,800		7,499
Total revenues		81,878		76,270		163,965		143,903

Other property operating costs		18,045		13,795		33,568		27,913
Real estate taxes		6,032		6,709		12,877		12,851
Rental property maintenance costs		3,480		2,645		6,313		5,646
Hospitality operating costs		14,164		14,242		28,009		24,717
Provision for doubtful accounts		745		(353)		1,275		2,626
Demolition costs		63		—		128		—
Development-related marketing costs		832		187		1,250		443
Depreciation and amortization		32,244		22,613		55,033		43,814
Other income, net		(162)		(2,750)		16		(3,113)
Interest income		(3)		(8)		(3)		(16)
Interest expense (*)		15,543		12,744		30,067		24,081
Equity in earnings from Real Estate and Other Affiliates		(37)		(899)		(3,422)		(2,826)
Total expenses		90,946		68,925		165,111		136,136
Operating Assets segment EBT		(9,068)		7,345		(1,146)		7,767

Strategic Developments
Minimum rents		50		83		422		134
Tenant recoveries		106		9		275		14
Condominium rights and unit sales		148,211		125,112		228,356		247,206
Other land revenues		11		10		21		20
Other rental and property revenues		307		160		580		278
Total revenues		148,685		125,374		229,654		247,652

Condominium rights and unit cost of sales		106,195		79,726		166,678		154,541
Other property operating costs		2,246		1,441		5,231		3,065
Real estate taxes		518		620		1,210		1,226
Rental property maintenance costs		128		108		323		239
Provision for doubtful accounts		—		1		3		63
Demolition costs		—		490		—		962
Development-related marketing costs		3,884		6,152		7,671		10,427
Depreciation and amortization		491		660		1,159		1,319
Other income, net		—		—		(15)		(244)
Interest income		(29)		(125)		(94)		(131)
Interest expense (*)		(6,705)		(4,527)		(11,244)		(7,845)
Equity in earnings from Real Estate and Other Affiliates		(5)		(10,502)		140		(10,507)
Gains on sales of properties		—		—		(32,215)		(140,479)
Total expenses		106,723		74,044		138,847		12,636
Strategic Developments segment EBT		41,962		51,330		90,807		235,016
Total consolidated segment EBT	$	85,990	$	106,170	$	186,943	$	320,023

(*) 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 EBT to income before taxes:


Reconciliation of EBT to income before taxes	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2017		2016		2017		2016
MPC segment EBT	$	53,096	$	47,495	$	97,282	$	77,240
Operating Assets segment EBT		(9,068)		7,345		(1,146)		7,767
Strategic Developments segment EBT		41,962		51,330		90,807		235,016
Total consolidated segment EBT		85,990		106,170		186,943		320,023
Corporate and other items:
General and administrative		(22,944)		(20,053)		(41,061)		(40,377)
Corporate interest expense, net		(10,847)		(13,023)		(23,720)		(26,097)
Warrant liability loss		(30,881)		(44,150)		(43,443)		(14,330)
Gain on acquisition of joint venture partner's interest		—		—		5,490		—
Loss on redemption of senior notes due 2021		—		—		(46,410)		—
Corporate other income, net		61		6,317		911		6,069
Corporate depreciation and amortization		(1,956)		(1,598)		(3,931)		(2,627)
Total Corporate and other items		(66,567)		(72,507)		(152,164)		(77,362)
Income before taxes	$	19,423	$	33,663	$	34,779	$	242,661

The following reconciles segment revenues to consolidated revenues:


Reconciliation of Segment Basis Revenues to Revenues	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2017		2016		2017		2016
Master Planned Communities	$	78,076	$	71,870	$	146,782	$	122,640
Operating Assets		81,878		76,270		163,965		143,903
Strategic Developments		148,685		125,374		229,654		247,652
Total revenues	$	308,639	$	273,514	$	540,401	$	514,195

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,
(In thousands)	2017		2016
Master Planned Communities	$	2,041,285	$	1,982,639
Operating Assets		2,482,724		2,344,949
Strategic Developments		1,583,616		1,451,460
Total segment assets		6,107,625		5,779,048
Corporate and other		559,824		588,334
Total assets	$	6,667,449	$	6,367,382

The $137.8 million increase in the Operating Assets segment asset balance as of June 30, 2017 compared to December 31, 2016 is primarily due to placing One Merriweather and HHC 242 and HHC 2978 Self-Storage in service as well as the acquisition of our joint venture partner’s 50% interest in the Las Vegas 51s. These increases were partially offset by the transfer of Landmark Mall and our investment in 33 Peck Slip to Strategic Developments in January 2017.

The $132.2 million increase in the Strategic Developments segment asset balance as of June 30, 2017 compared to December 31, 2016 is primarily due to the transfers of Landmark Mall and 33 Peck Slip into the segment and increased development expenditures primarily at South Street Seaport and our Ward condominium projects under construction.