Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
☒    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2018
 
or
 
☐    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Commission file number 001-34856
 
THE HOWARD HUGHES CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
36-4673192
(State or other jurisdiction of
(I.R.S. employer
incorporation or organization)
identification number)
 
13355 Noel Road, 22nd Floor, Dallas, Texas 75240
(Address of principal executive offices, including zip code)
 
(214) 741-7744
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes    ☐ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒ Yes    ☐ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
 
 
Large accelerated filer ☒
 
Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
 
Smaller reporting company ☐
 
 
Emerging growth company ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes    ☒ No
 
The number of shares of common stock, $0.01 par value, outstanding as of July 26, 2018 was 43,055,006.
 



Table of Contents


THE HOWARD HUGHES CORPORATION
 
TABLE OF CONTENTS
 
 
 
 
PAGE
NUMBER
 
 
 
 
 
 
 
 
 
 
Item 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2:
 
 
 
 
 
Item 3:
 
 
 
 
 
Item 4:
 
 
 
 
 
 
 
 
 
Item 1:
 
 
 
 
 
Item 1A:
 
 
 
 
 
Item 2:
 
 
 
 
 
Item 3:
 
 
 
 
 
Item 4:
 
 
 
 
 
Item 5:
 
 
 
 
 
Item 6:
 
 
 
 
 
 
 
 
 


2
 

Table of Contents


PART I FINANCIAL INFORMATION 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDTIED)

THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS 
UNAUDITED
(In thousands, except shares and par value amounts)
 
June 30, 2018
 
December 31, 2017
Assets:
 
 
 
 
Investment in real estate:
 
 
 
 
Master Planned Communities assets
 
$
1,640,298

 
$
1,642,278

Buildings and equipment
 
2,390,097

 
2,238,617

Less: accumulated depreciation
 
(341,599
)
 
(321,882
)
Land
 
273,444

 
277,932

Developments
 
1,739,787

 
1,196,582

Net property and equipment
 
5,702,027

 
5,033,527

Investment in real estate and other affiliates
 
99,444

 
76,593

Net investment in real estate
 
5,801,471

 
5,110,120

Cash and cash equivalents
 
606,715

 
861,059

Restricted cash
 
129,654

 
103,241

Accounts receivable, net
 
13,471

 
13,041

Municipal Utility District receivables, net
 
222,857

 
184,811

Notes receivable, net
 
4,085

 
5,864

Deferred expenses, net
 
93,319

 
80,901

Prepaid expenses and other assets, net
 
262,125

 
370,027

Total assets
 
$
7,133,697

 
$
6,729,064

 
 
 
 
 
Liabilities:
 
 
 
 
Mortgages, notes and loans payable, net
 
$
3,137,773

 
$
2,857,945

Deferred tax liabilities
 
141,799

 
160,850

Accounts payable and accrued expenses
 
703,514

 
521,718

Total liabilities
 
3,983,086

 
3,540,513

 
 
 
 
 
Commitments and contingencies (see Note 10)
 


 


 
 
 
 
 
Equity:
 
 
 
 
Preferred stock: $.01 par value; 50,000,000 shares authorized, none issued
 

 

Common stock: $.01 par value; 150,000,000 shares authorized, 43,545,778 shares
issued and 43,040,485 outstanding as of June 30, 2018 and 43,300,253 shares
issued and 43,270,880 outstanding as of December 31, 2017
 
436

 
433

Additional paid-in capital
 
3,314,197

 
3,302,502

Accumulated deficit
 
(180,967
)
 
(109,508
)
Accumulated other comprehensive income (loss)
 
2,515

 
(6,965
)
Treasury stock, at cost, 505,293 and 29,373 shares as of June 30, 2018 and December 31, 2017, respectively
 
(60,743
)
 
(3,476
)
Total Stockholders' equity
 
3,075,438

 
3,182,986

Noncontrolling interests
 
75,173

 
5,565

Total equity
 
3,150,611

 
3,188,551

Total liabilities and equity
 
$
7,133,697

 
$
6,729,064

See Notes to Condensed Consolidated Financial Statements.

3
 

Table of Contents


THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 
UNAUDITED
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands, except per share amounts)
 
2018
 
2017
    
2018
 
2017
Revenues:
 
 
 
 
 
 

 
 

Condominium rights and unit sales
 
$
20,885

 
$
148,211

 
$
31,722

 
$
228,356

Master Planned Communities land sales
 
52,432

 
69,144

 
98,997

 
122,625

Minimum rents
 
50,509

 
45,073

 
99,912

 
91,399

Tenant recoveries
 
12,250

 
11,642

 
25,002

 
23,041

Hospitality revenues
 
22,569

 
19,703

 
45,630

 
39,414

Builder price participation
 
5,628

 
4,480

 
10,709

 
9,141

Other land revenues
 
4,712

 
4,463

 
8,843

 
15,045

Other rental and property revenues
 
12,020

 
5,923

 
21,869

 
11,380

Total revenues
 
181,005

 
308,639

 
342,684

 
540,401

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Condominium rights and unit cost of sales
 
28,816

 
106,195

 
35,545

 
166,678

Master Planned Communities cost of sales
 
26,383

 
33,376

 
52,426

 
59,245

Master Planned Communities operations
 
10,587

 
7,307

 
20,912

 
16,701

Other property operating costs
 
25,730

 
20,291

 
48,905

 
38,799

Rental property real estate taxes
 
7,502

 
6,550

 
15,629

 
14,087

Rental property maintenance costs
 
3,951

 
3,608

 
7,148

 
6,636

Hospitality operating costs
 
15,417

 
14,164

 
30,984

 
28,009

Provision for doubtful accounts
 
1,359

 
745

 
2,135

 
1,280

Demolition costs
 
6,660

 
63

 
13,331

 
128

Development-related marketing costs
 
7,188

 
4,716

 
13,266

 
8,921

General and administrative
 
26,886

 
22,944

 
51,150

 
41,061

Depreciation and amortization
 
29,087

 
34,770

 
57,275

 
60,294

Total expenses
 
189,566

 
254,729

 
348,706

 
441,839

 
 
 
 
 
 
 
 
 
Operating (loss) income before other items
 
(8,561
)
 
53,910

 
(6,022
)
 
98,562

 
 
 
 
 
 
 
 
 
Other:
 
 
 
 
 
 
 
 
Gains on sales of properties
 

 

 

 
32,215

Other income, net
 
266

 
223

 
266

 
910

Total other
 
266

 
223

 
266

 
33,125

 
 
 
 
 
 
 
 
 
Operating (loss) income
 
(8,295
)
 
54,133

 
(5,756
)
 
131,687

 
 
 
 
 
 
 
 
 
Interest income
 
2,603

 
785

 
4,679

 
1,407

Interest expense
 
(18,903
)
 
(14,448
)
 
(35,512
)
 
(32,306
)
Loss on redemption of senior notes due 2021
 

 

 

 
(46,410
)
Warrant liability loss
 

 
(30,881
)
 

 
(43,443
)
Gain on acquisition of joint venture partner's interest
 

 

 

 
5,490

Equity in earnings from real estate and other affiliates
 
16,299

 
9,834

 
30,685

 
18,354

(Loss) income before taxes
 
(8,296
)
 
19,423

 
(5,904
)
 
34,779

(Benefit) provision for income taxes
 
(2,417
)
 
16,303

 
(1,859
)
 
26,000

Net (loss) income
 
(5,879
)
 
3,120

 
(4,045
)
 
8,779

Net loss attributable to noncontrolling interests
 
791

 

 
431

 

Net (loss) income attributable to common stockholders
 
$
(5,088
)
 
$
3,120

 
$
(3,614
)
 
$
8,779

 
 
 
 
 
 
 
 
 
Basic (loss) income per share:
 
$
(0.12
)
 
$
0.08

 
$
(0.08
)
 
$
0.22

 
 
 
 
 
 
 
 
 
Diluted (loss) income per share:
 
$
(0.12
)
 
$
0.07

 
$
(0.08
)
 
$
0.20

See Notes to Condensed Consolidated Financial Statements.

4
 

Table of Contents



 THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME 
UNAUDITED
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
 
2018
 
2017
 
2018
 
2017
Net (loss) income
 
$
(5,879
)
 
$
3,120

 
$
(4,045
)
 
$
8,779

Other comprehensive income:
 
 
 
 
 
 
 
 
Interest rate swaps (a)
 
5,353

 
(2,683
)
 
13,398

 
(2,250
)
Capitalized swap interest income (expense) (b)
 
49

 
(46
)
 
59

 
(121
)
Pension adjustment (c)
 
(2,010
)
 

 
(2,010
)
 

Adoption of ASU 2018-02 (d)
 

 

 
(1,148
)
 

Adoption of ASU 2017-12 (e)
 

 

 
(739
)
 

Terminated swap amortization
 
(80
)
 

 
(80
)
 

Other comprehensive income (loss)
 
3,312

 
(2,729
)
 
9,480

 
(2,371
)
Comprehensive (loss) income
 
(2,567
)
 
391

 
5,435

 
6,408

Comprehensive loss attributable to noncontrolling interests
 
791

 

 
431

 

Comprehensive (loss) income attributable to common stockholders
 
$
(1,776
)
 
$
391

 
$
5,866

 
$
6,408

 
(a)
Amounts are shown net of deferred tax expense of $1.8 million and $1.5 million for the three months ended June 30, 2018 and 2017, respectively, and $3.9 million and $1.2 million for the six months ended June 30, 2018 and 2017, respectively.
(b)
The deferred tax impact was not meaningful for the three months ended June 30, 2018 and 2017 and for the six months ended June 30, 2018. Amount is net of deferred tax benefit of $0.1 million for the six months ended June 30, 2017.
(c)
Net of deferred tax benefit of $0.6 million, for the three and six months ended June 30, 2018.
(d)
The Company adopted Accounting Standards Update ("ASU") 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, as of January 1, 2018. See Note 2 - Accounting Policies and Pronouncements for further discussion.
(e)
The Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, as of January 1, 2018. See Note 2 - Accounting Policies and Pronouncements for further discussion.

See Notes to Condensed Consolidated Financial Statements.


5
 

Table of Contents



THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
UNAUDITED
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
 
 
 
 
Total
 
 
 
 
 
 
Common Stock
 
Paid-In
 
Accumulated
 
Comprehensive
 
Treasury Stock
 
Stockholders'
 
Noncontrolling
 
Total
(In thousands, except shares)
 
Shares
 
Amount
 
Capital
 
Deficit
 
(Loss) Income
 
Shares
 
Amount
 
Equity
 
Interests
 
Equity
Balance, December 31, 2016
 
39,802,064

 
$
398

 
$
2,853,269

 
$
(277,912
)
 
$
(6,786
)
 
(12,061
)
 
$
(1,231
)
 
$
2,567,738

 
$
3,772

 
$
2,571,510

Net income
 

 

 

 
8,779

 

 

 

 
8,779

 

 
8,779

Interest rate swaps, net of tax of $1,221
 

 

 

 

 
(2,250
)
 

 

 
(2,250
)
 

 
(2,250
)
Capitalized swap interest, net of tax of $66
 

 

 

 

 
(121
)
 

 

 
(121
)
 

 
(121
)
Grant of management warrants (a)
 

 

 

 

 

 

 

 

 

 

Stock plan activity
 
347,583

 
3

 
14,491

 

 

 
(4,321
)
 
(532
)
 
13,962

 

 
13,962

Exercise of Warrants
 
3,052,453

 
31

 
375,582

 

 

 

 

 
375,613

 

 
375,613

Balance, June 30, 2017
 
43,202,100

 
$
432

 
$
3,243,342

 
$
(269,133
)
 
$
(9,157
)
 
(16,382
)
 
$
(1,763
)
 
$
2,963,721

 
$
3,772

 
$
2,967,493

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 
43,300,253

 
$
433

 
$
3,302,502

 
$
(109,508
)
 
$
(6,965
)
 
(29,373
)
 
$
(3,476
)
 
$
3,182,986

 
$
5,565

 
$
3,188,551

Net loss
 

 

 

 
(3,614
)
 

 

 

 
(3,614
)
 
(431
)
 
(4,045
)
Interest rate swaps, net of tax of $3,933
 

 

 

 

 
13,398

 

 

 
13,398

 

 
13,398

Forward swap amortization
 

 

 

 

 
(80
)
 

 

 
(80
)
 

 
(80
)
Pension adjustment, net of tax of $641
 

 

 

 

 
(2,010
)
 

 

 
(2,010
)
 

 
(2,010
)
Capitalized swap interest, net of tax of $16
 

 

 

 

 
59

 

 

 
59

 

 
59

Adoption of ASU 2014-09
 

 

 

 
(69,732
)
 

 

 

 
(69,732
)
 

 
(69,732
)
Adoption of ASU 2017-12
 

 

 

 
739

 
(739
)
 

 

 

 

 

Adoption of ASU 2018-02
 

 

 

 
1,148

 
(1,148
)
 

 

 

 

 

Repurchase of common shares
 

 

 

 

 

 
(475,920
)
 
(57,267
)
 
(57,267
)
 

 
(57,267
)
Contributions to joint ventures
 

 

 

 

 

 

 

 

 
70,039

 
70,039

Stock plan activity
 
245,525

 
3

 
11,695

 

 

 

 

 
11,698

 

 
11,698

Balance, June 30, 2018
 
43,545,778

 
$
436

 
$
3,314,197

 
$
(180,967
)
 
$
2,515

 
(505,293
)
 
$
(60,743
)
 
$
3,075,438

 
$
75,173

 
$
3,150,611

 
(a)
Represents the warrant granted to our Chief Executive Officer on June 16, 2017 to purchase 1,965,409 shares of the Company's stock upon receipt of the $50.0 million purchase price, which was required to be paid no later than 75 days from June 16, 2017. See Note 13 - Warrants for additional information.

See Notes to Condensed Consolidated Financial Statements.


6
 

Table of Contents


THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
UNAUDITED
 
 
Six Months Ended June 30,
(In thousands)
 
2018
 
2017
Cash Flows from Operating Activities:
 
 
 
 
Net (loss) income
 
$
(4,045
)
 
$
8,779

Adjustments to reconcile net (loss) income to cash used in operating activities:
 
 

 
 

Depreciation
 
50,810

 
51,779

Amortization
 
5,959

 
8,515

Amortization of deferred financing costs
 
3,427

 
2,940

Amortization of intangibles other than in-place leases
 
506

 
(791
)
Straight-line rent amortization
 
(5,914
)
 
(2,553
)
Deferred income taxes
 
(2,558
)
 
24,440

Restricted stock and stock option amortization
 
5,705

 
3,407

Gains on sales of properties
 

 
(32,215
)
Gain on acquisition of joint venture partner's interest
 

 
(5,490
)
Net decrease (increase) in minimum pension liability
 
(2,652
)
 

Warrant liability loss
 

 
43,443

Loss on redemption of senior notes due 2021
 

 
46,410

Equity in earnings from real estate and other affiliates, net of distributions
 
(23,531
)
 
(13,440
)
Provision for doubtful accounts
 
2,135

 
1,280

Master Planned Communities land acquisitions
 
(2,554
)
 
(1,415
)
Master Planned Communities development expenditures
 
(90,403
)
 
(90,973
)
Master Planned Communities cost of sales
 
46,937

 
53,240

Condominium development expenditures
 
(142,673
)
 
(191,499
)
Condominium rights and unit cost of sales
 
35,545

 
166,678

Percentage of completion revenue recognition from sale of condominium rights and unit sales
 

 
(228,356
)
Net changes:
 
 

 
 

Accounts and notes receivable
 
(5,475
)
 
272

Prepaid expenses and other assets
 
(3,302
)
 
(4,872
)
Condominium deposits received
 
47,906

 
31,872

Deferred expenses
 
(6,825
)
 
(9,672
)
Accounts payable and accrued expenses
 
(20,823
)
 
(40,526
)
Condominium deposits receivable
 

 
32,377

Other, net
 

 
(191
)
Cash used in operating activities
 
(111,825
)
 
(146,561
)
 
 
 
 
 
Cash Flows from Investing Activities:
 
 

 
 

Property and equipment expenditures
 
(2,965
)
 
(4,814
)
Operating property improvements
 
(29,774
)
 
(8,967
)
Property developments and redevelopments
 
(198,684
)
 
(195,189
)
Acquisition of assets
 
(179,471
)
 
(15,404
)
Proceeds for reimbursement of development costs
 

 
11,165

Proceeds from sales of properties
 

 
36,000

Proceeds from Tax Increment Financings
 
12,319

 

Distributions from real estate and other affiliates
 
1,503

 

Note issued to real estate and other affiliates
 
(3,795
)
 

Proceeds from repayment of note to Real Estate Affiliate
 

 
(1,391
)
Maturity of long term investment
 

 
3,558

Investments in real estate and other affiliates, net
 
(244
)
 

Cash used in investing activities
 
(401,111
)
 
(175,042
)
 
 
 
 
 
Cash Flows from Financing Activities:
 
 

 
 

Proceeds from mortgages, notes and loans payable
 
299,974

 
1,399,843

Principal payments on mortgages, notes and loans payable
 
(41,573
)
 
(1,085,438
)
Premium paid to redeem 2021 senior notes
 

 
(39,966
)
Purchase of treasury stock
 
(57,267
)
 

Special Improvement District bond funds released from escrow
 
1,468

 
1,602

Deferred financing costs and bond issuance costs, net
 
(1,980
)
 
(11,383
)
Taxes paid on stock options exercised and restricted stock vested
 
(3,234
)
 
(9,029
)
Gain on unwinding of swaps
 
9,390

 

Stock options exercised
 
9,227

 
19,109

Issuance of noncontrolling interests
 
69,000

 

Cash provided by financing activities
 
285,005

 
274,738

 
 
 
 
 
Net change in cash, cash equivalents and restricted cash
 
(227,931
)
 
(46,865
)
Cash, cash equivalents and restricted cash at beginning of period
 
964,300

 
915,139

Cash, cash equivalents and restricted cash at end of period
 
$
736,369

 
$
868,274


7
 

Table of Contents


THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
 
 
Six Months Ended June 30,
(In thousands)
 
2018
 
2017
Supplemental Disclosure of Cash Flow Information:
 
 

 
 

Interest paid
 
$
67,969

 
$
60,566

Interest capitalized
 
37,122

 
35,291

Income taxes paid (refunded), net
 
70

 
1,873

 
 
 
 
 
Non-Cash Transactions:
 
 

 
 

Exercise of Sponsor and Management Warrants
 

 
375,613

Special Improvement District bond transfers associated with land sales
 
5,489

 
6,005

Accrued interest on construction loan borrowing
 
1,794

 
2,522

Capitalized stock compensation
 
921

 
765

Acquisition of Las Vegas 51s
 
 
 
 
Building
 

 
87

Developments
 

 
65

Accounts receivable
 

 
633

Other assets
 

 
32,820

Other liabilities
 

 
(2,294
)
 
See Notes to Condensed Consolidated Financial Statements.

 

8
 

Table of Contents
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

NOTE 1 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.











9
 

Table of Contents
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

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






10
 

Table of Contents
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

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.

NOTE 2 ACCOUNTING POLICIES AND PRONOUNCEMENTS
 
The following is a summary of recently issued and other notable accounting pronouncements which relate to HHC's business.
 
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2018. The amendments must be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. Early adoption is permitted. The Company adopted ASU 2018-02 as of January 1, 2018, and an election was made to reclassify $1.1 million from Accumulated other comprehensive income (loss) to Accumulated deficit.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, to enable entities to better portray the economic results of their risk management activities in their financial statements. The ASU expands an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk and eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. The ASU also eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same Consolidated Statements of Operations line as the hedged item. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2018. The new standard must be adopted using a modified retrospective approach with early adoption permitted. The Company adopted ASU 2017-12 as of January 1, 2018 and, as a result, $0.7 million of ineffectiveness recognized prior to 2018 for its swaps was reclassified to Accumulated deficit from Accumulated other comprehensive income (loss).
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, to provide clarity and reduce the diversity in practice and cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation. Stakeholders observed that the definition of the term “modification” is broad and that its interpretation results in diversity in practice. The ASU states that when an entity concludes that a change is not substantive, then modification accounting does not apply. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2017. The new standard must be adopted prospectively to an award modified on or after the adoption date. Early adoption is permitted. The Company adopted ASU 2017-09 as of January 1, 2018 and, as a result, will apply this guidance to any modifications made to either the stock option or restricted stock award plans. 
In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). The standard defines an “in-substance nonfinancial asset” as a financial asset promised to a counterparty in a contract if substantially all the fair value of the assets is concentrated in nonfinancial assets. The ASU also provides guidance for

11
 

Table of Contents
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

accounting for partial sales of nonfinancial assets such as real estate. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2017. The new standard must be adopted retrospectively with early adoption permitted. The Company adopted ASU 2017-05 as of January 1, 2018, and it did not have an impact on the Company’s financial position or results of operations as the Company did not have partial sales in the period presented.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This standard is intended to simplify the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. In computing the implied fair value of goodwill under step two, an entity determined the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, an entity will perform only step one of its quantitative goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and then recognizing the impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. An entity will still have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative step one impairment test is necessary. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2019. The new standard must be adopted prospectively with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows - Restricted Cash, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statements of cash flows. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2017. As required, the Company adopted ASU 2016-18 retrospectively as of January 1, 2018, resulting in presentation of an additional $39.7 million in Cash used in operating activities and $2.5 million in Cash provided for investing activities for the six months ended June 30, 2017, related to an additional $37.2 million of changes in Restricted cash in the Condensed Consolidated Statements of Cash Flows in the respective period. The nature of these restrictions relates primarily to escrowed condominium deposits and other amounts related to taxes, insurance, legally restricted security deposits and leasing costs held in escrow.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. The standard addresses how certain cash receipts and payments are presented and classified in the statements of cash flows, including debt extinguishment costs, distributions from equity method investees and contingent consideration payments made after a business combination. The effective date of this standard is for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company adopted this standard retrospectively, as of January 1, 2018. ASU 2016-15 had no impact on the Company's presentation of operating, investing and financing activities related to certain cash receipts and payments on its consolidated statements of cash flows.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. The standard modifies the impairment model for most financial assets, including trade accounts receivables and loans, and will require the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. The effective date of the standard is for fiscal years, and for interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-13 may have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 is codified in Accounting Standards Codification (“ASC”) 842. The standard amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The effective date of this standard is for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application. The Company is currently evaluating the impact of adopting ASU 2016-02 on the consolidated financial statements. The Company anticipates a material increase to assets and liabilities as it will be required to capitalize its ground leases, office leases and certain office equipment leases where the Company is the lessee.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which will require entities to recognize changes in equity investments with readily determinable fair values in net income. For equity investments without readily determinable fair values, the ASU permits the application of a measurement alternative using the cost of the investment, less any impairments, plus or minus changes resulting from observable price changes for an identical or similar investment of the same issuer. The effective date of the standard is for fiscal periods, and interim periods within those

12
 

Table of Contents
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

years, beginning after December 15, 2017, and it must be adopted via a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company adopted the guidance as of January 1, 2018. As none of the Company's equity investments have readily determinable fair values, the adoption of this ASU does not have an impact on its consolidated financial statements.
The New Revenue Standard and related policy updates
As discussed in Note 1 - Basis of Presentation and Organization, as of the Adoption Date of the New Revenue Standard, revenues from contracts with customers (excluding lease-related revenues) are recognized when control of the promised goods or services is transferred to HHC's customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

The following table presents HHC's revenues disaggregated by revenue source:
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
 
June 30, 2018
 
June 30, 2018
Revenues
 
 
 
 
From contracts with customers
 
 
 
 
Recognized at a point in time:
 
 
 
 
Condominium rights and unit sales
 
$
20,885

 
$
31,722

Master Planned Communities land sales
 
52,432

 
98,997

Hospitality revenues
 
22,569

 
45,630

Builder price participation
 
5,628

 
10,709

Total revenue from contracts with customers
 
101,514

 
187,058

 
 
 
 
 
Recognized at a point in time and/or over time:
 
 
 
 
Other land revenues
 
4,712

 
8,843

Other rental and property revenues
 
12,020

 
21,869

Total other income
 
16,732

 
30,712

 
 
 
 
 
Rental and other income (lease-related revenues)
 
 
 
 
Minimum rents
 
50,509

 
99,912

Tenant recoveries
 
12,250

 
25,002

Total rental income
 
62,759

 
124,914

 
 
 
 
 
Total revenues
 
$
181,005

 
$
342,684

 
 
 
 
 
Revenues by segment
 
 
 
 
Master Planned Communities revenues
 
$
62,765

 
$
118,530

Operating Assets revenues
 
93,223

 
184,481

Strategic Developments revenues
 
25,017

 
39,673

 
 
 
 
 
Total revenues
 
$
181,005

 
$
342,684


Below is a discussion of the performance obligations, significant judgments and other required disclosures related to revenues from contracts with customers.


13
 

Table of Contents
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

Condominium Rights and Unit Sales

Revenue from the sale of an individual unit in a condominium project is recognized at a point in time (i.e., the closing) when HHC satisfies the single performance obligation to construct a condominium project and transfer control of a completed unit to a buyer. The transaction price, which is the amount of consideration the Company receives upon delivery of the completed condominium unit to the buyer, is allocated to this single obligation and is received at closing less any amounts previously paid on deposit.

The Company receives cash payments in the form of escrowed condominium deposits from customers who have contracted to purchase a condominium unit based on billing schedules established in HHC's condominium purchase agreement contracts. The Company holds these contract assets in Restricted cash, unless released from escrow in accordance with the escrow agreement and on approval of HHC's lender to fund construction costs of a project. A corresponding condominium contract deposit liability is established at the date of receipt, representing a portion of HHC's unsatisfied performance obligation at each reporting date. These deposits, along with the balance of the contract value, are recognized at closing upon satisfaction of HHC's performance obligation and transfer of title to the buyer. Condominium receivables, a conditional right to consideration for satisfaction of HHC's completed obligations, were established under legacy GAAP for condominium units for which revenue was previously recognized under the percentage of completion method. As of the Adoption Date, condominium receivables are recorded only in limited circumstances.

Real estate project costs directly associated with a condominium project, which are HHC's costs to fulfill contracts with condominium buyers, are capitalized while all other costs are expensed as incurred. Total estimated project costs include direct costs such as the carrying value of the land, site planning, architectural, construction and financing costs, as well as indirect cost allocations. The allocations include costs which clearly relate to the specific project, including certain infrastructure and amenity costs which benefit the project as well as others, and are based upon the relative sales value of the units. Costs incurred to sell condominium units are evaluated for capitalization in accordance with ASC 340-40, and incremental costs of obtaining a contract and costs to fulfill a contract are capitalized only if the costs relate directly to a specifically identified contract, enhance resources to satisfy performance obligations in the future and are expected to be recovered.

Master Planned Communities Land Sales

Revenues from land sales are recognized at a point in time when the land sale closing process is complete. The transaction price generally has both fixed and variable components, with the fixed price stipulated in the contract and representative of a single performance obligation. See Builder Price Participation ("BPP") below for a discussion of the variable component. The fixed transaction price, which is the amount of consideration received in full upon transfer of the land title to the buyer, is allocated to this single obligation and is received at closing of the land sale less any amounts previously paid on deposit.

The Company receives cash payments in the form of land purchase deposits from homebuilders or other commercial buyers who have contracted to purchase land, and HHC holds any escrowed deposits in Restricted cash or Cash and cash equivalents based on the terms of the contract.

In situations where the Company has completed the closing of a developed land parcel or superpad and consideration is paid in full, but a portion of HHC's performance obligation relating to the enhancement of the land is still unsatisfied, revenue related to HHC's obligation is recognized over time. The Company recognizes only the portion of the improved land sale where the improvements are fully satisfied based on a cost input method. The aggregate amount of the transaction price allocated to the unsatisfied obligation is recorded as deferred land sales and is presented in Accounts payable and accrued expenses. The Company measures the completion of HHC's unsatisfied obligation based on the costs remaining relative to the total cost at the date of closing.

When developed residential or commercial land is sold, the cost of sales includes actual costs incurred and estimates of future development costs benefiting the property sold. In accordance with ASC 970-360-30-1, when developed land is sold, costs are allocated to each sold superpad or lot based upon the relative sales value. For purposes of allocating development costs, estimates of future revenues and development costs are re-evaluated throughout the year, with adjustments being allocated prospectively to the remaining parcels available for sale. For certain parcels of land, including acquired parcels that the Company does not intend to develop or for which development was complete at the date of acquisition, the specific identification method is used to determine the cost of sales.


14
 

Table of Contents
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

Hospitality revenues

Hospitality revenues are recognized at a point in time in accordance with the pattern of each related service. Lodging is recognized on daily increments, while retail services such as food and beverage are recognized at the point of sale. The transaction price is fixed, clearly stipulated and representative of a single performance obligation in all cases. The duration of all contracts with customers of HHC's hospitality lodging and related services is generally short.

Builder Price Participation

BPP is the variable component of the transaction price for Master Planned Communities Land Sales. BPP is earned when a developer that acquired land from HHC develops and sells a home to an end user at a price higher than a predetermined breakpoint. The excess over the breakpoint is shared between HHC and the developer at the time of closing on the sale of the home based on a percentage previously agreed upon. The Company concluded that as of the Adoption Date and as of June 30, 2018, BPP was constrained, as discussed below, and accordingly, the Company did not recognize an estimate of variable consideration. The Company's conclusion is based on the following factors:

BPP is highly susceptible to factors outside HHC's influence such as unemployment and interest rates;
the time between the sale of land to a developer and closing on a completed home can take up to three years; and
historical experience is of little value when it comes to predicting future home prices.

The Company evaluates contracts with homebuilders with respect to BPP at each reporting period to determine whether a change in facts and circumstances has eliminated the constraint and will record an estimate of BPP revenue, if applicable.

Other land revenues - over time and point in time

Other land revenues recognized over time include ground maintenance revenue, homeowner association fee revenue and revenue from providing exclusive cable and internet services at the Company's Master Planned Communities ("MPC") for the benefit of the tenants and owners of the communities. These revenues are recognized over time, as time elapses. The amount of consideration and the duration are fixed, as stipulated in the related agreements, and represent a single performance obligation.

Other land revenues also include transfer fees on the secondary sales of homes in MPC, forfeitures of earnest money deposits by buyers of HHC's condominium units, and other miscellaneous items. These items are recognized at a point in time when the real estate closing process is complete or HHC has a legal right to the respective fee or deposit.

Other rental and property revenue - over time and point in time

Other rental and property revenues related to contracts with customers is generally comprised of baseball related ticket sales, retail operations, advertising and sponsorships. Season ticket sales are recognized over time as games take place. Baseball-related sponsorships generally cover a season, and the related revenue is recognized over time, as time elapses. Single tickets and retail operations are recognized at a point in time, at the time of sale. In all cases, the transaction prices are fixed, stipulated in the ticket, contract, or product, and representative in each case of a single performance obligation. From time to time, the Company enters into advertising and sponsorship agreements that allow third parties to display their advertising and products at HHC's venues for a certain amount of time. Consideration for these services is fixed as specified in each respective agreement, is related to a single performance obligation in each case and HHC recognizes the related revenue over time, as time elapses.

Contract Assets and Liabilities

Contract assets are the Company's right to consideration in exchange for goods or services that have been transferred to a customer, excluding any amounts presented as a receivable. Contract liabilities are the Company's obligation to transfer goods or services to a customer for which the Company has received consideration.

The Company had no contract assets as of January 1, 2018 and as of June 30, 2018. The beginning and ending balances of contract liabilities and significant activity during the period is as follows:

15
 

Table of Contents
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

 
 
Contract
(In thousands)
 
Liabilities
Balance as of January 1, 2018
 
$
179,179

Consideration earned during the period
 
(33,327
)
Consideration received during the period
 
97,808

Balance as of June 30, 2018
 
$
243,660

Remaining Unsatisfied Performance Obligations

The Company’s remaining unsatisfied performance obligations as of June 30, 2018 represent a measure of the total dollar value of work to be performed on contracts executed and in progress. These performance obligations are associated with contracts that generally are noncancellable by the customer after 30 days; however, purchasers of HHC's condominium units have the right to cancel the contract should the Company elect not to construct the condominium unit within a certain period of time or materially change the design of the condominium unit. The aggregate amount of the transaction price allocated to the Company's remaining unsatisfied performance obligations as of June 30, 2018 is $1.2 billion. The Company expects to recognize this amount as revenue over the following periods:
(In thousands)
 
Less than 1 year
 
1-2 years
 
3 years and thereafter
Total remaining unsatisfied performance obligations
 
$
715,346

 
$
204,058

 
$
256,030


The Company’s remaining performance obligations are adjusted to reflect any known project cancellations, revisions to project scope and cost, and deferrals, as appropriate. These amounts exclude estimated amounts of variable consideration which are constrained, such as BPP, as discussed above.

NOTE 3 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

 

16
 

Table of Contents
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

(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.

17
 

Table of Contents
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED


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.

NOTE 4 RECENT TRANSACTIONS

On July 10, 2018, the Company closed on the sale of 123 acres in Summerlin for a total sales price of $69.0 million. The transaction included a seller financing note in the amount of $35.8 million which will be payable in full on December 7, 2018. 

On June 8, 2018, the Company acquired the property at 250 Water Street, an approximately one-acre parking lot in the Seaport District. The Company purchased the site for $180.0 million plus closing costs, consisting of an initial payment of $53.1 million and a $129.7 million note payable. The loan has an initial interest-free term of six months with an initial maturity date of December 8, 2018, and three, six-month extension options at a rate of 6.00%. The second and third extension options each require a $30.0 million pay down.

On April 30, 2018, the Company and its joint venture partners closed on a $494.5 million construction loan for 110 North Wacker, of which the Company has guaranteed approximately $89.0 million. The loan initially bears interest at LIBOR plus 3.00% and steps up or down based on various leasing thresholds. The loan has an initial maturity date of April 30, 2022, and two, one-year extension options.

On February 23, 2018, the Company repurchased 475,920 shares of HHC common stock, par value $0.01 per share, in a private transaction with an unaffiliated entity at a purchase price of $120.33 per share, or approximately $57.3 million in the aggregate. The repurchase transaction was consummated on February 21, 2018 and was funded with cash on hand. The shares were added to the Company's treasury stock upon repurchase.

NOTE 5 IMPAIRMENT
  
The Company reviews its long-lived assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. With respect to the Investment in real estate and other affiliates, a series of operating losses of an underlying asset or other factors may indicate that a decrease in value has occurred which is other‑than‑temporary. The investment in each Real Estate and Other Affiliate is evaluated periodically and as deemed necessary for recoverability and valuation declines that are other‑than‑temporary. No impairment charges were recorded during the three and six months ended June 30, 2018 or during the year ended December 31, 2017. The Company periodically evaluates its strategic alternatives with respect to each of its properties and may revise its strategy from time to time, including its intent to hold an asset on a long-term basis or the timing of potential asset dispositions. These changes in strategy could result in impairment charges in future periods.


18
 

Table of Contents
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

NOTE 6 OTHER ASSETS AND LIABILITIES
 
Prepaid Expenses and Other Assets
 
The following table summarizes the significant components of Prepaid expenses and other assets:
 
 
June 30,
 
December 31,
(In thousands)
 
2018
 
2017
Condominium inventory
 
$
46,780

 
$

Straight-line rent
 
44,560

 
39,136

Intangibles
 
34,295

 
34,802

Special Improvement District receivable
 
25,206

 
26,430

Below-market ground leases
 
18,478

 
18,647

Security and escrow deposits
 
16,986

 
16,949

Equipment, net of accumulated depreciation of $7.5 million and $6.9 million, respectively
 
16,380

 
16,955

Other
 
13,127

 
4,798

Prepaid expenses
 
10,599

 
11,731

Tenant incentives and other receivables
 
9,135

 
8,482

In-place leases
 
9,091

 
10,821

Interest rate swap derivative assets
 
7,269

 
4,470

TIF receivable
 
6,872

 
14,444

Federal income tax receivable
 
2,000

 
2,198

Above-market tenant leases
 
1,347

 
1,648

Condominium receivables
 

 
158,516

Prepaid expenses and other assets, net