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Section 1: 10-Q (10-Q)

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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 March 31, 2020
 
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 every Interactive Data File required to be submitted 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 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
 
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
 
Trading Symbol(s)
 
Name of each exchange on which registered:
Common stock, par value $0.01 per share
 
HHC
 
New York Stock Exchange
 
The number of shares of common stock, $0.01 par value, outstanding as of May 7, 2020 was 54,929,674.
 


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 (UNAUDITED)

THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(In thousands, except par values and share amounts)
 
March 31, 2020
 
December 31, 2019
Assets:
 
 
 
 
Investment in real estate:
 
 
 
 
Master Planned Communities assets
 
$
1,672,534

 
$
1,655,674

Buildings and equipment
 
3,901,549

 
3,813,595

Less: accumulated depreciation
 
(549,452
)
 
(507,933
)
Land
 
359,211

 
353,022

Developments
 
1,488,869

 
1,445,997

Net property and equipment
 
6,872,711

 
6,760,355

Investment in real estate and other affiliates
 
127,293

 
121,757

Net investment in real estate
 
7,000,004

 
6,882,112

Net investment in lease receivable
 
2,933

 
79,166

Cash and cash equivalents
 
971,695

 
422,857

Restricted cash
 
267,018

 
197,278

Accounts receivable, net
 
9,944

 
12,279

Municipal Utility District receivables, net
 
301,897

 
280,742

Notes receivable, net
 
36,000

 
36,379

Deferred expenses, net
 
139,329

 
133,182

Operating lease right-of-use assets, net
 
58,347

 
69,398

Prepaid expenses and other assets, net
 
332,557

 
300,373

Total assets
 
$
9,119,724

 
$
8,413,766

 
 
 
 
 
Liabilities:
 
 
 
 
Mortgages, notes and loans payable, net
 
$
4,304,590

 
$
4,096,470

Operating lease obligations
 
69,980

 
70,413

Deferred tax liabilities
 
140,763

 
180,748

Accounts payable and accrued expenses
 
831,793

 
733,147

Total liabilities
 
5,347,126

 
5,080,778

 
 
 
 
 
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, 55,989,263 issued and 54,939,003 outstanding as of March 31, 2020, and 150,000,000 shares authorized, 43,635,893 shares issued and 42,585,633 outstanding as of December 31, 2019
 
561

 
437

Additional paid-in capital
 
3,939,470

 
3,343,983

Accumulated deficit
 
(171,537
)
 
(46,385
)
Accumulated other comprehensive loss
 
(60,273
)
 
(29,372
)
Treasury stock, at cost, 1,050,260 shares as of March 31, 2020 and December 31, 2019
 
(120,530
)
 
(120,530
)
Total stockholders' equity
 
3,587,691

 
3,148,133

Noncontrolling interests
 
184,907

 
184,855

Total equity
 
3,772,598

 
3,332,988

Total liabilities and equity
 
$
9,119,724

 
$
8,413,766

See Notes to Condensed Consolidated Financial Statements.

3
 

Table of Contents


THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
 
 
Three Months Ended March 31,
(In thousands, except per share amounts)
    
2020
 
2019
Revenues:
 
 
 
 
Condominium rights and unit sales
 
$
43

 
$
198,310

Master Planned Communities land sales
 
39,732

 
41,312

Minimum rents
 
70,987

 
54,086

Other land, rental and property revenues
 
34,897

 
41,479

Tenant recoveries
 
20,875

 
13,508

Builder price participation
 
7,759

 
5,195

Interest income from sales-type leases
 
882

 

Total revenues
 
175,175

 
353,890

 
 
 
 
 
Expenses:
 
 
 
 
Condominium rights and unit cost of sales
 
97,901

 
137,694

Master Planned Communities cost of sales
 
16,786

 
16,818

Operating costs
 
64,606

 
68,759

Rental property real estate taxes
 
13,578

 
9,831

Provision for (recovery of) doubtful accounts
 
1,701

 
(2
)
Demolition costs
 

 
49

Development-related marketing costs
 
2,816

 
5,702

General and administrative
 
39,081

 
25,332

Depreciation and amortization
 
61,637

 
36,131

Total expenses
 
298,106

 
300,314

 
 
 
 
 
Other:
 
 
 
 
Provision for impairment
 
(48,738
)
 

Gain (loss) on sale or disposal of real estate and other assets, net
 
38,124

 
(6
)
Other (loss) income, net
 
(3,684
)
 
173

Total other
 
(14,298
)
 
167

 
 
 
 
 
Operating (loss) income
 
(137,229
)
 
53,743

 
 
 
 
 
Interest income
 
1,146

 
2,573

Interest expense
 
(34,448
)
 
(23,326
)
Equity in earnings from real estate and other affiliates
 
11,349

 
9,951

(Loss) income before taxes
 
(159,182
)
 
42,941

Provision for income taxes
 
(34,100
)
 
11,016

Net (loss) income
 
(125,082
)
 
31,925

Net income attributable to noncontrolling interests
 
(52
)
 
(104
)
Net (loss) income attributable to common stockholders
 
$
(125,134
)
 
$
31,821

 
 
 
 
 
Basic (loss) income per share:
 
$
(2.88
)
 
$
0.74

Diluted (loss) income per share:
 
$
(2.88
)
 
$
0.74

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 March 31,
(In thousands)
 
2020
 
2019
Net (loss) income
 
$
(125,082
)
 
$
31,925

Other comprehensive loss:
 
 
 
 
Interest rate swaps (a)
 
(30,247
)
 
(5,944
)
Capitalized swap interest expense (b)
 

 
(51
)
Terminated swap amortization
 
(654
)
 
(638
)
Other comprehensive loss:
 
(30,901
)
 
(6,633
)
Comprehensive (loss) income
 
(155,983
)
 
25,292

Comprehensive income attributable to noncontrolling interests
 
(52
)
 
(104
)
Comprehensive (loss) income attributable to common stockholders
 
$
(156,035
)
 
$
25,188

 
(a)
Amounts are shown net of deferred tax benefit of $6.9 million and $2.2 million for the three months ended March 31, 2020 and 2019, respectively.
(b)
The deferred tax impact was zero for the three months ended March 31, 2020 and not meaningful for the three months ended March 31, 2019.


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, 2018
 
43,511,473

 
$
436

 
$
3,322,433

 
$
(120,341
)
 
$
(8,126
)
 
(519,849
)
 
$
(62,190
)
 
$
3,132,212

 
$
105,914

 
$
3,238,126

Net income
 

 

 

 
31,821

 

 

 

 
31,821

 
104

 
31,925

Interest rate swaps, net of tax of $2,187
 

 

 

 

 
(5,944
)
 

 

 
(5,944
)
 

 
(5,944
)
Terminated swap amortization
 

 

 

 

 
(638
)
 

 

 
(638
)
 

 
(638
)
Capitalized swap interest, net of tax of $14
 

 

 

 

 
(51
)
 

 

 
(51
)
 

 
(51
)
Contributions to joint ventures
 

 

 

 

 

 

 

 

 
40,988

 
40,988

Stock plan activity
 
148,235

 
1

 
3,066

 

 

 

 

 
3,067

 

 
3,067

Balance, March 31, 2019
 
43,659,708

 
$
437

 
$
3,325,499

 
$
(88,520
)
 
$
(14,759
)
 
(519,849
)
 
$
(62,190
)
 
$
3,160,467

 
$
147,006

 
$
3,307,473

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2019
 
43,635,893

 
$
437

 
$
3,343,983

 
$
(46,385
)
 
$
(29,372
)
 
(1,050,260
)
 
$
(120,530
)
 
$
3,148,133

 
$
184,855

 
$
3,332,988

Net (loss) income
 

 

 

 
(125,134
)
 

 

 

 
(125,134
)
 
52

 
(125,082
)
Interest rate swaps, net of tax of $6,888
 

 

 

 

 
(30,247
)
 

 

 
(30,247
)
 

 
(30,247
)
Terminated swap amortization
 

 

 

 

 
(654
)
 

 

 
(654
)
 

 
(654
)
Adoption of ASU 2016-13
 

 

 

 
(18
)
 

 

 

 
(18
)
 

 
(18
)
Common stock issued
 
12,270,900

 
123

 
593,575

 

 

 

 

 
593,698

 

 
593,698

Stock plan activity
 
82,470

 
1

 
1,912

 

 

 

 

 
1,913

 

 
1,913

Balance, March 31, 2020
 
55,989,263

 
$
561

 
$
3,939,470

 
$
(171,537
)
 
$
(60,273
)
 
(1,050,260
)
 
$
(120,530
)
 
$
3,587,691

 
$
184,907

 
$
3,772,598

 
See Notes to Condensed Consolidated Financial Statements.

6
 

Table of Contents


THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
UNAUDITED
 
 
Three Months Ended March 31,
(In thousands)
 
2020
 
2019
Cash Flows from Operating Activities:
 
 

 
 
Net (loss) income
 
$
(125,082
)
 
$
31,925

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

 
 

Depreciation
 
57,349

 
32,905

Amortization
 
4,075

 
3,086

Amortization of deferred financing costs
 
4,114

 
2,201

Amortization of intangibles other than in-place leases
 
170

 
278

Straight-line rent amortization
 
(2,870
)
 
(1,548
)
Deferred income taxes
 
(34,625
)
 
10,703

Restricted stock and stock option amortization
 
1,152

 
3,069

Net gain on sale of lease receivable
 
(38,124
)
 

Proceeds from the sale of lease receivable
 
64,155

 

Impairment charges
 
48,738

 

Equity in earnings from real estate and other affiliates, net of distributions
 
(5,817
)
 
(4,606
)
Provision for doubtful accounts
 
(3,115
)
 
(2
)
Master Planned Communities land acquisitions
 

 
(752
)
Master Planned Communities development expenditures
 
(64,895
)
 
(56,772
)
Master Planned Communities cost of sales
 
16,783

 
16,744

Condominium development expenditures
 
(60,688
)
 
(40,559
)
Condominium rights and unit cost of sales
 
97,901

 
137,694

Net changes:
 
 

 
 

Accounts and notes receivable
 
9,596

 
(5,679
)
Prepaid expenses and other assets
 
(31,565
)
 
1,881

Condominium deposits received
 
46,186

 
(115,774
)
Deferred expenses
 
(9,176
)
 
(17,191
)
Accounts payable and accrued expenses
 
(47,443
)
 
(57,286
)
Cash used in operating activities
 
(73,181
)
 
(59,683
)
 
 
 
 
 
Cash Flows from Investing Activities:
 
 

 
 

Property and equipment expenditures
 
(270
)
 
(1,178
)
Operating property improvements
 
(10,419
)
 
(25,854
)
Property development and redevelopment
 
(144,422
)
 
(148,894
)
Reimbursements under Tax Increment Financings
 
1,625

 

Distributions from real estate and other affiliates
 
1,232

 
315

Investments in real estate and other affiliates, net
 
(952
)
 
(222
)
Cash used in investing activities
 
(153,206
)
 
(175,833
)
 
 
 
 
 
Cash Flows from Financing Activities:
 
 

 
 

Proceeds from mortgages, notes and loans payable
 
256,770

 
61,614

Proceeds from issuance of common stock
 
593,698

 

Principal payments on mortgages, notes and loans payable
 
(5,115
)
 
(4,587
)
Special Improvement District bond funds released from (held in) escrow
 
1,126

 
936

Deferred financing costs and bond issuance costs, net
 
(2,276
)
 
(343
)
Taxes paid on stock options exercised and restricted stock vested
 
(662
)
 

Stock options exercised
 
1,424

 

Contributions from noncontrolling interest
 

 
40,987

Cash provided by financing activities
 
844,965

 
98,607

 
 
 
 
 
Net change in cash, cash equivalents and restricted cash
 
618,578

 
(136,909
)
Cash, cash equivalents and restricted cash at beginning of period
 
620,135

 
724,215

Cash, cash equivalents and restricted cash at end of period
 
$
1,238,713

 
$
587,306


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THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
 
 
Three Months Ended March 31,
(In thousands)
 
2020
 
2019
Supplemental Disclosure of Cash Flow Information:
 
 

 
 

Interest paid
 
$
62,679

 
$
52,905

Interest capitalized
 
19,041

 
18,370

Income taxes (refunded) paid, net
 

 
(1,839
)
 
 
 
 
 
Non-Cash Transactions:
 
 

 
 

Accrued property improvements, developments, and redevelopments
 
(28,221
)
 
24,774

Special Improvement District bond transfers associated with land sales
 
3

 
74

Accrued interest on construction loan borrowing
 
4,773

 
860

Capitalized stock compensation
 

 
441

Initial recognition of ASC 842 Operating lease ROU asset
 

 
72,106

Initial recognition of ASC 842 Operating lease obligation
 

 
71,888

 
See Notes to Condensed Consolidated Financial Statements.

 

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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, 2019, filed with the SEC on February 27, 2020 (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, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020, and future fiscal years. Certain amounts in the 2019 results of operations have been reclassified to conform to the 2020 presentation. Specifically, the Company reclassified hospitality revenues, other land revenues, and other rental and property revenues to Other land, rental and property revenues; and master planned communities operations, other property operating costs, rental property maintenance costs, and hospitality operating costs to Operating costs for the three months ended March 31, 2019.

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

In December 2019, a novel strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China. COVID-19 has since spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States, have reacted by instituting a wide variety of control measures including states of emergency, mandatory quarantines, required business and school closures, implementing “shelter in place” orders and restricting travel. Many experts predict that the outbreak will trigger a period of material global economic slowdown or a global recession.

The outbreak of COVID-19 has materially negatively impacted, and is expected to continue to materially negatively impact, the Company’s business, financial performance and condition, operating results and cash flows. The significance, extent and duration of such impact remains largely uncertain and dependent on future developments that cannot be accurately predicted. The future developments include, but are not limited to: (1) the continued severity, duration, transmission rate and geographic spread of COVID-19 in the United States and other regions in which the Company operates; (2) the extent and effectiveness of the containment measures taken; and (3) the response of the overall economy, the financial markets and the population, particularly in areas in which the Company operates, once the current containment measures are lifted. Material impacts to the Company are noted below.

Accounts Receivable, net

Due to the impacts of COVID-19 on the collectability of the Company’s accounts receivable, the Company completed an analysis of its collections and determined an additional reserve was required related to its Retail accounts receivable. Upon assessment of its uncollectible Accounts receivable, net balances, the Company determined that a reserve for estimated losses under ASC 450 - Contingencies is required, in addition to the specific reserve required under ASC 842, as the amount is probable and can be reasonably estimated. As a result, during the three months ended March 31, 2020, the Company recorded an additional $1.6 million reserve in the Provision for (recovery of) doubtful accounts on the Condensed Consolidated Statements of Operations. The reserve was estimated based on recent collection experience of retail receivables.

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THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

Impairment of long-lived assets

In conjunction with the Company’s quarterly impairment assessment, the Company recorded a $48.7 million impairment charge for Outlet Collection at Riverwalk, due to decreases in estimated future cash flows resulting from the impact of a shorter than anticipated holding term due to management’s plans to divest the non-core operating asset and decreased demand and reduced interest in brick and mortar retail due to the impact of COVID-19, as well as an increase in the capitalization rate used to evaluate future cash flows due to the impact of COVID-19. See Note 5 - Impairment for additional information.

Business closures

With the indefinite closures of the Company’s Seaport District retail and food and beverage assets as well as the three hotels in The Woodlands, we have temporarily laid off the majority of the Company’s staff there.  The Company has retained key personnel at these locations to facilitate the efficient start-up of operations once restrictions are lifted.
 
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.

Impact of New Accounting Standard Related to Financial Instruments - Credit Losses

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The standard modifies the impairment model for most financial assets, including trade accounts receivables and loans, and requires the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities are 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. Subsequently, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which amended the scope of ASU 2016-13 and clarified that receivables arising from operating leases are not within the scope of the standard and should continue to be accounted for in accordance with the leases standard (Topic 842).

The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized costs. Results for reporting periods beginning after January 1, 2020, are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $18 thousand as of January 1, 2020, for the cumulative effect of adopting ASU 2016-13.

See Note 2 - Accounting Policies and Pronouncements for further discussion of accounting policies impacted by the Company’s adoption of ASU 2016-13 and disclosures required by ASU 2016-13.

Corporate Restructuring
During the fourth quarter ended December 31, 2019, the Company initiated a plan to strategically realign and streamline certain aspects of its business, including selling approximately $2.0 billion of non-core assets, reducing overhead and relocating its corporate headquarters. The Company will consolidate its Dallas corporate headquarters with its largest regional office in The Woodlands. Charges of $2.5 million and $34.3 million associated with retention and severance expenses were recorded in the first quarter of 2020 and fourth quarter of 2019, respectively, and the Company expects to incur an additional $2.3 million to $4.3 million related to relocation, retention and severance expenses in the remainder of 2020. The restructuring costs are included in

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THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

Corporate income, expenses and other items in Note 18 - Segments. The Company expects to conclude its restructuring activity, excluding the disposition of non-core assets, in 2020.

The following table summarizes the changes to the restructuring liability included in Accounts payable and accrued expenses on the Condensed Consolidated Balance Sheets:
(In thousands)
 
Restructuring costs
Balance at December 31, 2019
 
$
9,685

Charges (a)
 
2,478

Charges paid/settled
 
(4,293
)
Balance at March 31, 2020
 
$
7,870

 
(a)
Charges relate to relocation, retention and severance expenses and are included in General and administrative expense in the accompanying Condensed Consolidated Statements of Operations.

NOTE 2 ACCOUNTING POLICIES AND PRONOUNCEMENTS
 
The following is a summary of recently issued and other notable accounting pronouncements which relate to the Company’s business.

In March 2020, the FASB issued 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 transaction that reference 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 ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During Q1 2020, the Company has 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.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this Update simplify the accounting for income taxes by removing certain exceptions from ASC 740. Additionally, the amendments in this Update also simplify the accounting for income taxes by requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax, requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination, and other targeted changes. The effective date of the amendments is for fiscal years, and interim periods within those years, beginning after December 15, 2020. The Company is currently evaluating the impact that the adoption of ASU 2019-12 may have on its consolidated financial statements.

In November 2019, the FASB issued ASU 2019-08, Compensation-Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606). The amendments in this Update require that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. The amount recorded as a reduction of the transaction price is required to be measured on the basis of the grant-date fair value of the share-based payment award in accordance with Topic 718. The grant date is the date at which a grantor (supplier) and a grantee (customer) reach a mutual understanding of the key terms and conditions of the share-based payment award. The classification and subsequent measurement of the award are subject to the guidance in Topic 718 unless the share-based payment award is subsequently modified, and the grantee is no longer a customer. The effective date of the amendments is for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company adopted ASU 2019-08 as of January 1, 2020, and it did not have a material effect on its consolidated financial statements.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in this update provide clarification on certain aspects of the amendments in ASU 2016-13, Financial Instruments—Credit Losses, ASU 2017-12, Derivatives and Hedging, and ASU 2016-01, Financial Instruments—Overall. The effective date of the standard is for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company adopted ASU 2019-04 as of January 1, 2020. See further discussion regarding adoption of ASU 2016-13 for the impact of amendments to Financial Instruments-Credit Losses. The amendments to Derivatives and Hedging, and Financial Instruments-Overall did not have a material effect on the Company’s consolidated financial statements.
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. This standard is intended to improve the accounting when considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. The effective date of the standard is for fiscal years, and interim periods within those years, beginning after December

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THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

15, 2019. The new standard must be adopted retrospectively with early adoption permitted. The Company adopted ASU 2018-17 as of January 1, 2020, and it did not have a material effect on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard is intended to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal use software license). The standard requires an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. This standard also requires the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2019. The new standard may be adopted prospectively or retrospectively with early adoption permitted. The Company adopted ASU 2018-15 prospectively as of January 1, 2020. There was no material impact to the Company’s consolidated financial statements upon adoption.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement that eliminates, adds and modifies certain disclosure requirements for fair value measurements. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted-average of significant unobservable inputs used to develop Level-3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively. Early adoption is permitted. The Company adopted ASU 2018-13 as of January 1, 2020. The amended disclosure requirements did not have a material impact to the Company’s consolidated financial statements upon adoption.
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 adopted ASU 2017-04 as of January 1, 2020, and will eliminate step two from its goodwill impairment tests. There was no material impact to the consolidated financial statements upon adoption.
Financial Instruments - Credit losses and related policy updates
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, tax increment financing (“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 following table summarizes the amortized cost basis of financing receivables by portfolio segment as of March 31, 2020:
($ in thousands)
 
MUD receivables
 
SID receivables
 
TIF receivables
 
Net investments in lease receivable
 
Notes receivable
 
Total
Collection experience
 
$
286,157

 
$
42,103

 
$
3,853

 
$
2,950

 
$
36,247

 
$
371,310



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THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

Accrued interest of $15.7 million and $17.3 million are included within municipal utility district receivables on the Company’s consolidated balance sheet as of March 31, 2020 and 2019, respectively.
The following table presents the activity in the allowance for credit losses for financing receivables by portfolio segment for the three months ended March 31, 2020:
($ in thousands)
 
MUD receivables
 
SID receivables
 
TIF receivables
 
Net investments in lease receivable
 
Notes receivable
 
Trade accounts receivable (a)
Beginning balance as of January 1, 2020
 
$

 
$

 
$

 
$
17

 
$
209

 
$

Current-period provision for expected credit losses
 

 

 

 

 
39

 
60

Write-offs
 

 

 

 

 
(1
)
 

Recoveries
 

 

 

 

 

 

Ending balance as of March 31, 2020
 
$

 
$

 
$

 
$
17

 
$
247

 
$
60

 
(a)
Trade accounts receivable are presented within accounts receivable, net on the consolidated balance sheet. Accounts receivable, net also includes receivables related to operating leases. Collectability and related allowance for amounts due under operating leases is assessed under the guidance of ASC 842. Reserves related to operating lease receivables are not included in the above table.

Financing receivables are considered to be past due once they are 30 days contractually past due under the terms of the agreement. The Company currently does not have significant financing 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.


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

NOTE 3 REAL ESTATE AND OTHER AFFILIATES
 
Equity investments in real estate and other affiliates are reported as follows:
 
 
Economic/Legal Ownership
 
Carrying Value
 
Share of Earnings/Dividends
 
 
March 31,
 
December 31,
 
March 31,
 
December 31,
 
Three Months Ended March 31,
($ in thousands)
 
2020
 
2019
 
2020
 
2019
 
2020
 
2019
Equity Method Investments
 
 
 
 
 
 
 
 
 
 
 
 
Operating Assets:
 
 
 
 
 
 
 
 
 
 
 
 
The Metropolitan Downtown Columbia (a)
 
50
%
 
50
%
 
$

 
$

 
$
227

 
$
183

Stewart Title of Montgomery County, TX
 
50
%
 
50
%
 
3,767

 
4,175

 
343

 
102

Woodlands Sarofim #1
 
20
%
 
20
%
 
3,019

 
2,985

 
35

 
20

m.flats/TEN.M
 
50
%
 
50
%
 
1,784

 
2,431

 
65

 
(1,221
)
Master Planned Communities:
 
 
 
 
 
 
 
 
 
 
 
 
The Summit (b)
 
%
 
%
 
92,216

 
84,455

 
8,934

 
7,837

Seaport District:
 
 
 
 
 
 
 
 
 
 
 
 
Mr. C Seaport
 
35
%
 
35
%
 
7,000

 
7,650

 
(651
)
 
(632
)
Bar Wayō (Momofuku) (b)
 
%
 
%
 
6,745

 
7,469

 
(1,392
)
 

Strategic Developments:
 
 
 
 
 
 
 
 
 
 
 
 
Circle T Ranch and Power Center
 
50
%
 
50
%
 
8,405

 
8,207

 
86

 
35

HHMK Development
 
50
%
 
50
%
 
10

 
10