Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2021

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

1. Summary of Significant Accounting Policies

General 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 (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, 2020, filed with the SEC on February 25, 2021 (the Annual Report). 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 months ended March 31, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021, and future fiscal years.

Certain amounts in the 2020 results of operations have been reclassified to conform to the current presentation. Specifically, the Company reclassified minimum rents, tenant recoveries, and interest income from sales-type leases to Rental revenue. Certain amounts in the 2020 condensed consolidated balance sheets have been reclassified to conform to the current presentation. Specifically, the Company reclassified straight-line rent from Prepaid expenses and other assets, net to Accounts Receivable, net.

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 was filed.

COVID-19 Pandemic The outbreak of COVID-19 in 2020 resulted in a global slowdown of economic activity including worldwide travel restrictions, prohibitions of non-essential work activities, disruption and shutdown of businesses and greater uncertainty in global financial markets, all of which resulted in COVID-19 having an impact on the Company’s financial performance in fiscal 2020, particularly the Operating Asset and Seaport segments. Many states began easing quarantine protocols near the end of the second quarter of 2020 which allowed most of the Company’s retail and hospitality properties to resume operations. While the impact of COVID-19 affected all business segments throughout 2020 and continues to impact the Company in 2021, the Company saw notable performance improvement during the second half of the 2020 that has continued throughout the first quarter of 2021.

Restricted Cash Restricted cash reflects amounts segregated in escrow accounts in the name of the Company, primarily related to escrowed condominium deposits by buyers and other amounts related to taxes, insurance and legally restricted security deposits and leasing costs.

Accounts Receivable, net On a quarterly basis, management reviews tenant rents, tenant recoveries and straight-line rent assets for collectability. As required under Accounting Standards Codification (ASC) 842 - Leases, this analysis includes a review of past due accounts and considers factors such as the credit quality of tenants, current economic conditions and changes in customer payment trends. When full collection of a lease receivable or future lease payment is not probable, a reserve for the receivable balance is charged against rental revenue and future rental revenue is recognized on a cash basis. Due to the continued impacts of COVID-19 on the collectability of tenant receivables, the Company determined full collection of outstanding tenant rents and recoveries was not probable for a number of retail tenants. In addition, the Company determined that a reserve for estimated losses under ASC 450 - Contingencies is required as the amount is probable and can be reasonably estimated.

The following table represents the components of Accounts Receivable, net of amounts considered uncollectible, in the accompanying Condensed Consolidated Balance Sheets:

thousands	March 31, 2021		December 31, 2020
Tenant Receivables	$	3,802	$	4,339
Straight-line rent receivables	64,605		59,288
Other receivables	2,583		3,099
Accounts receivable, net (a)	$	70,990	$	66,726

(a)As of March 31, 2021, the total reserve balance for amounts considered uncollectible was $32.3 million, comprised of $27.1 million related to ASC 842 and $5.2 million related to ASC 450. As of December 31, 2020, the total reserve balance was $33.0 million, comprised of $27.3 million related to ASC 842 and $5.7 million related to ASC 450.

For the three months ended March 31, 2021, the Company recognized total expense of $0.4 million in the Consolidated Statement of Operations, comprised of a $1.0 million charge against Rental revenue related to ASC 842 and a $0.6 million reversal to the Provision for (recovery of) doubtful accounts related to ASC 450. For the three months ended March 31, 2020, the Company recognized a total impact of $3.1 million in the Consolidated Statement of Operations, comprised of a $1.4 million charge against Rental revenue related to ASC 842 and a $1.7 million charge to the Provision for (recovery of) doubtful accounts related to ASC 450.

Business Closures In the first quarter of 2020, the Company experienced closures of its Seaport retail and food and beverage assets as well as the three hotels in The Woodlands.

The Company reopened The Woodlands Resort & Conference Center in May 2020, the Embassy Suites at Hughes Landing in June 2020 and The Westin at The Woodlands in July 2020. Despite these reopenings, the Company continues to see lower occupancy, compared to levels achieved prior to the pandemic. However, with an increase in business and leisure travel during the first quarter of 2021, the performance of the Company’s hospitality assets has improved. Occupancy at the Embassy Suites at Hughes Landing increased to 63% for the three months ended March 31, 2021, compared to 55% for the three months ended December 31, 2020. Similarly, occupancy at The Westin at The Woodlands increased to 38% for the three months ended March 31, 2021, compared to 28% for the three months ended December 31, 2020. The Woodlands Resort and Conference Center continues to only operate at 55% capacity and occupancy decreased to 22% for the three months ended March 31, 2021, compared to 27% for the three months ended December 31, 2020. This reduced operating capacity and decrease in occupancy is partially due to damage from Winter Storm Uri during the first quarter of 2021.

Many of the Seaport retail and food and beverage assets resumed operations in the third quarter of 2020, on a limited basis. The 2020 Seaport summer concert series was cancelled and in its place a new concept at the Pier 17 rooftop was launched called The Greens, which continued through the end of first quarter of 2021 and is expected to return in May 2021 to compliment the summer concert series. This concept continues to generate high customer demand for the outdoor venue and will help to fulfill obligations under HHC’s sponsorship agreements.

Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The estimates and assumptions include, but are not limited to, capitalization of development costs, provision for income taxes, recoverable amounts of receivables, and deferred tax assets, initial valuations of tangible and intangible assets acquired and the related useful lives of assets upon which depreciation and amortization is based. Estimates and assumptions have also been made with respect to future revenues and costs, debt and options granted. In particular, Master Planned Communities (MPC) cost of sales estimates are highly judgmental as they are sensitive to cost escalation, sales price escalation and lot absorption, which are subject to judgment and affected by expectations about future market or economic conditions. Actual results could differ from these and other estimates. It is reasonably possible these estimates will change in the near term due to the rapid development and fluidity of the events and circumstances resulting from the COVID-19 pandemic.

Noncontrolling Interests As of March 31, 2021 and December 31, 2020, Noncontrolling interests are related to the Ward Village Homeowners’ Associations (HOAs). All revenues and expenses related to the HOAs are attributable to noncontrolling interests and do not impact net income attributable to common stockholders.

Financial Instruments - Credit Losses The Company is exposed to credit losses through the sale of goods and services to the Company’s customers. Receivables held by the Company primarily relate to short-term trade receivables and financing receivables, which include Municipal Utility District (MUD) receivables, Special Improvement District (SID) bonds, TIF receivables, net investments in lease receivables, and notes receivable. The Company assesses its exposure to credit loss based on historical collection experience and future expectations by portfolio segment. Historical collection experience is evaluated on a quarterly basis by the Company.

The amortized cost basis of financing receivables, consisting primarily of MUD receivables, totaled $389.3 million as of March 31, 2021, including accrued interest of $18.7 million. There has been no material activity in the allowance for credit losses for financing receivables for the three months ended March 31, 2021.

Financing receivables are considered to be past due once they are 30 days contractually past due under the terms of the agreement. The Company does not have significant receivables that are past due or on nonaccrual status. There have been no significant write-offs or recoveries of amounts previously written off during the current period for financing receivables.

Executive Transition In December 2020, the Company announced the appointment of David R. O’Reilly as the Company’s Chief Executive Officer and the appointment of L. Jay Cross as the Company’s President. On April 8, 2021, the Company announced that Correne Loeffler has been appointed to serve as the Company's Chief Financial Officer (CFO), effective April 19, 2021. Ms. Loeffler succeeds David O'Reilly as the Company's CFO, a position that he has held since joining HHC in 2016 and has continued to hold on an interim basis since being appointed Chief Executive Officer in December 2020. Ms. Loeffler joined HHC following her role as Chief Financial Officer of Whiting Petroleum, where she managed the company’s Finance, Accounting, and Corporate Planning organizations. She also previously served as Vice President of Finance and Treasurer for the Callon Petroleum Company. In addition, she served as Callon's Interim Chief Financial Officer. Prior to that she spent over a decade at JPMorgan Securities before leaving as an Executive Director in the Corporate Client Banking group.

Recently Issued Accounting Standards The following is a summary of recently issued and other notable accounting pronouncements which relate to the Company’s business.

ASU 2020-04, Reference Rate Reform The amendments in this Update provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform when certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has applied certain optional expedients, that are retained through the end of the hedging relationship. The amendments in this Update are effective as of March 12, 2020, through December 31, 2022. The guidance in Accounting Standards Update (ASU) 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedge transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur. An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued.