REAL ESTATE AND OTHER AFFILIATES

The Company's investments in real estate and other affiliates that are reported in accordance with the equity and cost methods are as follows:



	Economic/Legal Ownership				Carrying Value				Share of Earnings/Dividends
	June 30,		December 31,		June 30,		December 31,		Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2018		2017		2018		2017		2018			2017			2018			2017
Equity Method Investments
Master Planned Communities:
The Summit (a)	—	%	—	%	$	68,370	$	45,886	$	14,100		$	9,792		$	25,228		$	15,072
Operating Assets:
Las Vegas 51s, LLC (b)	100	%	100	%	—		—		—			—			—			(152		)
Constellation (b)	100	%	100	%	—		—		—			(385		)	—			(322		)
The Metropolitan Downtown Columbia (c)	50	%	50	%	—		—		204			216			284			274
Stewart Title of Montgomery County, TX	50	%	50	%	3,676		3,673		145			183			227			209
Woodlands Sarofim #1	20	%	20	%	2,702		2,696		16			23			36			30
m.flats/TEN.M (d)	50	%	50	%	4,281		6,521		(1,367		)	—			(2,304		)	—
Strategic Developments:
Circle T Ranch and Power Center	50	%	50	%	7,891		4,455		3,436			—			3,436			—
HHMK Development	50	%	50	%	10		10		—			—			—			—
KR Holdings	50	%	50	%	4		749		4			5			676			16
33 Peck Slip	35	%	35	%	8,654		8,651		(240		)	—			(240		)	(156		)
					95,588		72,641		16,298			9,834			27,343			14,971
Cost method investments					3,856		3,952		1			—			3,342			3,383
Investment in real estate and other affiliates					$	99,444	$	76,593	$	16,299		$	9,834		$	30,685		$	18,354


(a)	Please refer to the schedules below and elsewhere in this Quarterly Report for relevant financial statement information.


(b)	HHC acquired this joint venture partner’s interest in 2017 and has consolidated the assets and liabilities of the entity in its financial results.


(c)	The Metropolitan Downtown Columbia was in a deficit position of $3.1 million and $2.6 million at June 30, 2018 and December 31, 2017, respectively, due to distributions from operating cash flows in excess of basis. This deficit balance is presented in Accounts payable and accrued expenses at June 30, 2018 and December 31, 2017.


(d)	Property was transferred from Strategic Developments to Operating Assets during the three months ended March 31, 2018.

As of June 30, 2018, HHC is not the primary beneficiary of any of the joint ventures listed above because it does not have the power to direct activities that most significantly impact the economic performance of the joint ventures; therefore, the Company reports its interests in accordance with the equity method. As of June 30, 2018, approximately $191.6 million of indebtedness was secured by the properties owned by HHC's real estate and other affiliates of which HHC's share was approximately $88.9 million based upon economic ownership. All of this indebtedness is without recourse to HHC.

As of June 30, 2018, HHC is the primary beneficiary of four variable interest entities ("VIEs") which are consolidated in the financial statements. HHC began consolidating 110 North Wacker and its underlying entities in the second quarter of 2018 as further discussed below. As of December 31, 2017, HHC was the primary beneficiary of three VIEs which are consolidated in the financial statements. The creditors of the other three consolidated VIEs do not have recourse to the Company. As of June 30, 2018, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $115.4 million and $52.5 million, respectively. As of December 31, 2017, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $24.8 million and $2.7 million, respectively. The assets of the VIEs are restricted for use only by the particular VIEs and are not available for the Company's general operations.

During the second quarter of 2018, HHC executed a joint venture agreement with USAA related to 110 North Wacker. At execution, HHC contributed land with a book basis of $33.6 million and an agreed upon fair value of $85.0 million to obtain 90% ownership interest in the joint venture. USAA contributed $64.0 million in cash to obtain 10% ownership interest in the joint venture. The Company has subsequent capital obligations of $42.7 million, and USAA is required to fund up to $105.6 million in addition to its initial contribution. The Company has concluded that it is the primary beneficiary of the VIE because it has the power to direct activities that most significantly impact the joint venture’s economic performance during the development phase of the project.

Given the nature of the venture’s capital structure and the provisions for the liquidation of assets, the Company's share of the venture’s income-producing activities is recognized based on the Hypothetical Liquidation Book Value method, which represents an economic interest of approximately 33% for HHC. Under this method, HHC recognizes income or loss in Equity in earnings from real estate and other affiliates based on the change in its underlying share of the venture's net assets on a hypothetical liquidation basis as of the reporting date. After USAA receives a 9.0% preferred return on its capital contribution, HHC is entitled to cash distributions from the venture until it receives a 9.0% return. Subsequently, USAA is entitled to cash distributions equal to 11.11% of the amount distributed to HHC that resulted in a 9.0% return. Thereafter, the members are entitled to distributions pari passu to their ownership interest.

On April 30, 2018, the joint venture closed on a $494.5 million construction loan, which will be drawn upon over the period of development. In connection with closing, HHC received a $52.2 million distribution. The Company has provided financial guarantees up to $89.0 million and certain construction guarantees. The financial guarantees are released as certain project milestones are achieved.

During the first quarter of 2015, HHC formed DLV/HHPI Summerlin, LLC (“The Summit”), a joint venture with Discovery Land Company (“Discovery”), contributed land with a book basis of $13.4 million and transferred Special Improvement District ("SID") bonds related to such land with a carrying value of $1.3 million to the joint venture at the agreed upon capital contribution value of $125.4 million, or $226,000 per acre. Discovery is required to fund up to a maximum of $30.0 million of cash as its capital contribution, and the Company has no further capital obligations. The gains on the contributed land are recognized in Equity in earnings from real estate and other affiliates as the joint venture sells lots.

After the Company receives its capital contribution of $125.4 million and a 5.0% preferred return on such capital contribution, Discovery is entitled to cash distributions by the joint venture until it has received two times its equity contribution. Any further cash distributions are shared equally. Given the nature of the venture’s capital structure and the provisions for the liquidation of assets, the Company's share of the venture’s income-producing activities is recognized based on the Hypothetical Liquidation Book Value method. Under this method, HHC recognizes income or loss based on the change in its underlying share of the venture's net assets on a hypothetical liquidation basis as of the reporting date.

Relevant financial statement information for The Summit is summarized as follows:



	June 30,		December 31,
(In millions)	2018		2017
Total Assets	$	213.9	$	166.9
Total Liabilities	143.4		118.9
Total Equity	70.5		48.0



	Three Months Ended June 30,				Six Months Ended June 30,
(In millions)	2018		2017		2018		2017
Revenues (a)	$	37.5	$	20.7	$	60.9	$	32.2
Net income	14.1		9.8		25.2		15.1
Gross Margin	14.2		12.1		27.5		18.6


(a)	Revenues related to land sales at the joint venture are recognized on a percentage of completion basis as The Summit follows the private company timeline for implementation of the New Revenue Standard of January 1, 2019. The Company has evaluated this impact and concluded that at this time it is not material to HHC's Condensed Consolidated Financial Statements.