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”), with intercompany transactions between consolidated subsidiaries eliminated. 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”), these Condensed Consolidated Financial Statements do not include all of the information and disclosures required by GAAP for complete financial statements. Readers of this quarterly report on Form 10-Q (“Quarterly Report”) should refer to The Howard Hughes Corporation’s (“HHC” or the “Company”) audited Consolidated Financial Statements, which are included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on February 26, 2018 (the "Annual Report"). Approximately $103.2 million in restricted cash was reclassified from Prepaid expenses and other assets, net to Restricted cash on the Condensed Consolidated Balance Sheets at December 31, 2017 to conform to the 2018 presentation. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows and equity for the interim periods have been included. The results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 and future fiscal years.

Management has evaluated for disclosure or recognition all material events occurring subsequent to the date of the Condensed Consolidated Financial Statements up to the date and time this Quarterly Report on Form 10-Q was filed.

Impact of new accounting standard related to Revenue

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenues from Contracts with Customers (Topic 606). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. HHC adopted Topic 606 and all its related amendments (the “New Revenue Standard”) as of January 1, 2018 (the “Adoption Date”) using the modified retrospective transition method. Accordingly, prior period amounts presented have not been adjusted.

HHC recorded a cumulative effect adjustment of $69.7 million, net of taxes of $19.6 million, to increase Accumulated deficit as of the Adoption Date due to the impact of adopting Topic 606. As discussed in the Annual Report, Condominium rights and unit sales revenues were previously required to be recognized under the percentage of completion method. Under the new guidance, revenue and cost of sales for condominium units sold are not recognized until the construction is complete, the sale closes and the title to the property has transferred to the buyer (point in time). Additionally, certain real estate selling costs, such as the costs related to the Company's condominium model units, are either expensed immediately or capitalized as property and equipment and depreciated over their estimated useful life. The cumulative effect adjustments as of the Adoption Date consists of:


•	a decrease in Condominium receivables of $154.2 million,


•	an increase in Buildings and equipment, net, of $3.4 million,


•	an increase to Developments of $150.8 million,


•	an increase to Prepaid expenses and other assets, net of $5.6 million,


•	an increase to Accounts payable and accrued expenses of $95.0 million,


•	a decrease to Deferred tax liabilities of $19.6 million, and


•	an increase in Accumulated deficit of $69.7 million, net of taxes of $19.6 million.

The following Balance Sheet line items were affected as of June 30, 2018, as a result of HHC's adoption of the New Revenue Standard:



	June 30, 2018
Condensed Consolidated Balance Sheet (in thousands)	Recognition Under Previous Guidance			Impact of Adoption of ASC Topic 606			Recognition Under ASC Topic 606
Buildings and equipment, net	$	2,046,542		$	1,956		$	2,048,498
Developments	1,329,468			410,319			1,739,787
Deferred expenses, net	89,931			3,388			93,319
Prepaid expenses and other assets, net	706,930			(444,805		)	262,125
Deferred tax liabilities	179,208			(37,409		)	141,799
Accounts payable and accrued expenses	570,250			133,264			703,514
Accumulated deficit	(55,493		)	(125,474		)	(180,967		)

For the three and six months ended June 30, 2018, the following Condensed Consolidated Statements of Operations line items were affected as a result of HHC's adoption of the New Revenue Standard:



	Three Months Ended June 30, 2018								Six Months Ended June 30, 2018
Condensed Consolidated Statements of Operations (in thousands)	Recognition Under Previous Guidance		Impact of Adoption of ASC Topic 606			Recognition Under ASC Topic 606			Recognition Under Previous Guidance		Impact of Adoption of ASC Topic 606			Recognition Under ASC Topic 606
Condominium rights and unit sales	$	216,490	$	(195,605	)	$	20,885		$	370,192	$	(338,470	)	$	31,722
Condominium rights and unit cost of sales	197,889		(169,073		)	28,816			302,476		(266,931		)	35,545
Depreciation and amortization	28,107		980			29,087			55,306		1,969			57,275
Operating income (loss) before other items	18,949		(27,510		)	(8,561		)	67,485		(73,507		)	(6,022		)
Provision (benefit) for income taxes	4,234		(6,651		)	(2,417		)	15,908		(17,767		)	(1,859		)
Net income (loss)	14,982		(20,861		)	(5,879		)	51,696		(55,741		)	(4,045		)
Net income (loss) attributable to common stockholders	15,773		(20,861		)	(5,088		)	52,127		(55,741		)	(3,614		)

For the three and six months ended June 30, 2018, the following Condensed Consolidated Statements of Comprehensive Income line items were affected as a result of HHC's adoption of the New Revenue Standard:



	Three Months Ended June 30, 2018								Six Months Ended June 30, 2018
Condensed Consolidated Statements of Comprehensive Income (in thousands)	Recognition Under Previous Guidance		Impact of Adoption of ASC Topic 606			Recognition Under ASC Topic 606			Recognition Under Previous Guidance		Impact of Adoption of ASC Topic 606			Recognition Under ASC Topic 606
Net income (loss)	$	14,982	$	(20,861	)	$	(5,879	)	$	51,696	$	(55,741	)	$	(4,045	)
Comprehensive income (loss)	18,294		(20,861		)	(2,567		)	61,176		(55,741		)	5,435
Comprehensive income (loss) attributable to common stockholders	19,085		(20,861		)	(1,776		)	61,607		(55,741		)	5,866

The following Condensed Consolidated Statements of Cash Flows line items were affected as of June 30, 2018, as a result of HHC's adoption of the New Revenue Standard:



	Six Months Ended June 30, 2018
Condensed Consolidated Statements of Cash Flows (in thousands)	Recognition Under Previous Guidance			Impact of Adoption of ASC Topic 606			Recognition Under ASC Topic 606
Net income (loss)	$	51,696		$	(55,741	)	$	(4,045	)
Depreciation and amortization	55,306			1,969			57,275
Deferred income taxes	15,209			(17,767		)	(2,558		)
Condominium rights and unit cost of sales	302,476			(266,931		)	35,545
Percentage of completion revenue recognition from sale of condominium rights and unit sales	(338,470		)	338,470			—

See Note 2 - Accounting Policies and Pronouncements for further discussion of accounting policies impacted by the Company's adoption of the New Revenue Standard and disclosures required by the New Revenue Standard.