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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(MARK ONE)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

2018

or

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to

Commission File Number 001-34856

THE HOWARD HUGHES CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

36-4673192

Delaware36-4673192
(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)

13355 Noel Road, 22nd Floor, Dallas, Texas

75240

(Address of principal executive offices)

(Zip Code)

(214) 741‑7744
(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class:

Name of Each Exchange on Which Registered:

Common Stock, $.01 par value

New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   YES [X]  NO [   ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   YES [   ]  NO [X]

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 [X]  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 [X]  NO [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   [X]

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   [X]

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 Act).   YES [   ]  NO [X]

As of June 30, 2017,2018, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $4.2$4.5 billion based on the closing sale price as reported on the New York Stock Exchange.

As of February 19, 2018,2019, there were 43,351,81242,990,898 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for its 20172019 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K. The registrant intends to file its Proxy Statement with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2017.

2018.


TABLE OF CONTENTS

Item No.    
Page
Number
Part I 
   
1.
Business
2
1A. 
Risk Factors
8
1B. 
Unresolved Staff Comments
20
2.
Properties
20
3.
Legal Proceedings
26
4.
Mine Safety Disclosure
26
   
Part II 
5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
26
6.
Selected Financial Data
27
7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
7A. 
Quantitative and Qualitative Disclosures About Market Risk
65
8.
Financial Statements and Supplementary Data
65
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
65
9A. 
Controls and Procedures
65
9B. 
Other Information
66
   
Part III 
10.
Directors, Executive Officers and Corporate Governance
68
11.
Executive Compensation
68
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
68
13.
Certain Relationships and Related Transactions, and Director Independence
68
14.
Principal Accountant Fees and Services
68
   
Part IV 
15.
Exhibits, Financial Statement Schedule
68
16.
Form 10-K Summary
72
   
Signatures 
 
72


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TABLE OF CONTENTS

Item No.

    

    

    

Page
Number

 

Part I 

 

 

 

 

 

 

 

1. 

 

Business

 

2

 

1A. 

 

Risk Factors

 

8

 

1B. 

 

Unresolved Staff Comments

 

19

 

2. 

 

Properties

 

19

 

3. 

 

Legal Proceedings

 

24

 

4. 

 

Mine Safety Disclosure

 

25

 

 

 

 

 

 

 

Part II 

 

5. 

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

25

 

6. 

 

Selected Financial Data

 

27

 

7. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

28

 

7A. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

63

 

8. 

 

Financial Statements and Supplementary Data

 

64

 

9. 

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

64

 

9A. 

 

Controls and Procedures

 

64

 

9B. 

 

Other Information

 

65

 

 

 

 

 

 

 

Part III 

 

10. 

 

Directors, Executive Officers and Corporate Governance

 

67

 

11. 

 

Executive Compensation

 

67

 

12. 

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

67

 

13. 

 

Certain Relationships and Related Transactions, and Director Independence

 

67

 

14. 

 

Principal Accountant Fees and Services

 

67

 

 

 

 

 

 

 

Part IV 

 

15. 

 

Exhibits and Financial Statement Schedule

 

67

 

 

 

 

 

 

 

Signatures 

 

 

 

70

 


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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (“Annual Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Annual Report are forward-looking statements. Forward-looking statements give our current expectations relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to current or historical facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “forecast,” “plan,” “intend,” “believe,” “may,” “should,” “would,” “likely,”“likely” and other words of similar expression. Forward-looking statements give our expectations about the future and are not guarantees. We caution you not to rely on these forward-looking statements.


In this Annual Report, we make forward-looking statements discussing our expectations about:

·

budgeted costs, future lot sales and estimates of NOI and EBT;

·

capital required for our operations and development opportunities for the properties in our Master Planned Communities (“MPC”), Operating Assets and Strategic Developments segments;


·

expected commencement and completion for property developments and timing of sales or rentals of certain properties;

budgeted costs, future lot sales and estimates of net operating income ("NOI") and earnings before taxes ("EBT");

·

expected performance of our MPC and Operating Assets segments, as well as other current income producing properties such as our condominiums;

capital required for our operations and development opportunities for the properties in our Master Planned Communities (“MPC”), Operating Assets and Strategic Developments segments;

·

forecasts of our future economic performance; and

expected commencement and completion for property developments and timing of sales or rentals of certain properties;

·

future liquidity, development opportunities, development spending and management plans.

expected performance of our MPC and Operating Assets segments, as well as other current income producing properties such as our condominiums;

forecasts of our future economic performance; and
future liquidity, development opportunities, development spending and management plans.

These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements to materially differ from any future results, performance and achievements expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include:

·

our inability to obtain operating and development capital, including our inability to obtain or refinance debt capital from lenders and the capital markets;

·

a prolonged recession in the national economy and adverse economic conditions in the homebuilding, condominium development, retail, office and hospitality sectors;


·

our inability to compete effectively;

our inability to obtain operating and development capital, including our inability to obtain or refinance debt capital from lenders and the capital markets;

·

potential natural disasters (including any potential negative impact from Hurricane Harvey on the Houston, Texas region), terrorist activity, acts of violence, breaches of our data security, contamination of our properties by hazardous or toxic substances, or other similar disruptions, as well as losses that are not insured or exceed the applicable insurance limits;

a prolonged recession in the national economy and adverse economic conditions in the homebuilding, condominium development, retail, office and hospitality sectors;

·

our ability to lease new or redeveloped space;

our inability to compete effectively;

·

our ability to obtain the necessary governmental permits for the development of our properties and necessary regulatory approvals pursuant to an extensive entitlement process involving multiple and overlapping regulatory jurisdictions, which often require discretionary action by local governments;

natural disasters (including the results of litigation or any other potential negative impact from Hurricane Harvey on the Houston, Texas region), terrorist activity, acts of violence, breaches of our data security, contamination of our properties by hazardous or toxic substances, or other similar disruptions, as well as losses that are not insured or exceed the applicable insurance limits;

·

increased construction costs exceeding our original estimates, delays or overruns, claims for construction defects, or other factors affecting our ability to develop, redevelop or construct our properties;

our ability to lease new or redeveloped space;

·

regulation of the portion of our business that is dedicated to the formation and sale of condominiums, including regulatory filings to state agencies, additional entitlement processes and requirements to transfer control to a condominium association’s board of directors in certain situations, as well as defaults by purchasers on their obligations to purchase condominiums;

our ability to obtain the necessary governmental permits for the development of our properties and necessary regulatory approvals pursuant to an extensive entitlement process involving multiple and overlapping regulatory jurisdictions, which often require discretionary action by local governments;

1

increased construction costs exceeding our original estimates, delays or overruns, claims for construction defects, or other factors affecting our ability to develop, redevelop or construct our properties;

regulation of the portion of our business that is dedicated to the formation and sale of condominiums, including regulatory filings to state agencies, additional entitlement processes and requirements to transfer control to a condominium association’s board of directors in certain situations, as well as defaults by purchasers on their obligations to purchase condominiums;

Tablerisks associated with our relationships with homebuilders and with our ownership and management of Contents

hotels;

·

risks associated with our relationships with homebuilders and with our ownership and management of hotels;

fluctuations in regional and local economies, the residential housing and condominium markets, local real estate conditions, tenant rental rates and competition from competing retail properties and the internet;

·

fluctuations in regional and local economies, the residential housing and condominium markets, local real estate conditions, tenant rental rates and competition from competing retail properties and the internet;

our ability to retain key executive personnel;

·

our ability to retain key executive personnel;

our ability to collect rent, attract tenants and customers to our hotels;

·

our ability to collect rent, attract tenants and customers to our hotels;

our indebtedness, including our $1,000,000,000 5.375% senior notes due 2025, our $615,000,000 Term Loan (as defined below) and $85,000,000 Revolver Loan (as defined below) (which currently remains undrawn) and that are secured by first priority security interest in certain of the Company’s properties which are owned subsidiaries of the Company and contain restrictions, each of which contain restrictions which may limit our ability to operate our business;    

·

our substantial indebtedness, including our $1,000,000,000 5.375% senior notes due 2025, that contain restrictions which may limit our ability to operate our business;

our directors involvement or interests in other businesses, including real estate activities and investments;

·

our directors involvement or interests in other businesses, including real estate activities and investments;

our inability to control certain of our properties due to the joint ownership of such property and our inability to successfully attract desirable strategic partners;

·

our inability to control certain of our properties due to the joint ownership of such propertythe potential impact of the recently enacted U.S. tax reform legislation; and our inability to successfully attract desirable strategic partners;

·

substantial stockholders having influence over us, whose interests may be adverse to ours or yours;


·

the potential impact of the recently enacted U.S. tax reform legislation; and

the other risks described in “Item 1A. Risk Factors.”

·

the other risks described in “Item 1A. Risk Factors.”


Any factor could, by itself, or together with one or more other factors, adversely affect our business, results of operations, plans, objectives, future performance or financial condition. There may also be other factors that we have not described in this Annual Report that could cause results to differ from our expectations. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements present our estimates and assumptions only as of the date of this Annual Report. Except as may be required by law, we undertake no obligation to modify or revise any forward-looking statements to reflect events or circumstances occurring after the date of this Annual Report.


PART I


Throughout this Annual Report, references to the “Company”, “HHC”, “we” and “our” refer to The Howard Hughes Corporation and its consolidated subsidiaries, unless the context requires otherwise.


ITEM 1.  BUSINESS 

OVERVIEW

We create timeless places and extraordinary experiences that inspire people while driving sustainable, long-term growth and value for our shareholders. We specialize in the development of MPCs, in the ownership, management and redevelopment of revenue-generating real estate assets (“Operating Assets”) and in the development of other real estate assets in the form of entitled and unentitled land and residential condominium developments (“Strategic Developments”). We expect to continue to generate income from the growth of our Operating Assets portfolio, through the continued development of strategic project opportunities, and from ongoing MPC land development and homesite sales. We generate cash flow from the sale of land in our MPC business and the operations of our operating properties which funds the development of strategic development opportunities which is expected to generate meaningful growth in recurring income in our Operating Assets segment. We are focused on maximizing value from all of our assets, and we continue to develop, acquire and manage our assets to achieve this goal. We are headquartered in Dallas, Texas, and in New York, New York, and our assets are located across the United States.

We were incorporated in Delaware in 2010. Through our predecessors, we have been in business for several decades. We operate our business in three segments: MPCs, Operating Assets and Strategic Developments. Financial information about each of our segments is presented in Note 17 – Segments of our audited consolidated financial statements.

Our Competitive Strengths

We believe that we distinguish ourselves from other real estate companies through the following competitive strengths:

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·

Management Team with Track Record of Value Creation.  We have completed the development of over 4.2 million square feet of office and retail operating properties, 1,645 multi-family units and 913 hospitality keys since 2011. Excluding land which we own, we have invested approximately $1.6 billion in these developments, which is projected to generate a 9.9% yield on cost or $155.1 million per year of net operating income (“NOI”) upon stabilization. At today’s market cap rates, this implies value creation to our shareholders of roughly $1.0 billion. These investments and returns exclude condominium development as well as projects under construction such as the Seaport District NYC. Our investment of approximately $283.2 million of cash equity in these projects since inception, is projected to generate a 29.7% return on cash equity assuming a 5.5% cost of debt, which approximates our historical cost. In addition, we have either opened or have under construction 1,381 condominium units in Ward Village, which have approximately 93% units sold at a targeted profit margin, excluding land costs, of approximately 30%.

·

Unique, Diverse Portfolio.  We own a portfolio with many diverse market leading assets located across 12 states with a combination of steady cash flow and longer term value creation opportunities.

·

Unparalleled Value Creation Opportunity.  We own one of the preeminent development pipelines in the world with over 50.0 million square feet of vertical entitlements remaining across our portfolio. This represents approximately 12 times the 4.2 million square feet we have delivered in the last seven years without having to acquire another development site or external asset, which we believe is a significant competitive advantage over other real estate development corporations.

·

Low Leverage, Flexible Balance Sheet.  As of December 31, 2017, our total debt equaled approximately 42.5% of the book value of our total assets, which we believe is significantly less than the market value. Our net debt, which includes our share of debt of Real Estate and other Affiliates less cash and Special Improvement District (“SID”) and Municipal Utility Districts (“MUD”) receivables, equaled approximately 23.3% of our total enterprise value. We finished the year with approximately $861.1 million of cash on hand. We have focused our efforts on obtaining non-recourse debt for both our construction financing and long-term fixed rate mortgage financing and have limited cross-collateralization across the portfolio. Our low leverage, with a focus on project specific financing, provides substantial insulation against potential downturns and provides us with the flexibility to evaluate new real estate project opportunities.   

·

Self-Funded Business Plan.  One of our key differentiators is our ability to self-fund significant portions of our new development without having to dispose of our recently completed developments or raise additional equity. In normal years, our residential land sales, recurring NOI and profits on the sales of condominium units generate substantial amounts of free cash flow which is used to fund the equity required to execute our many development opportunities.Furthermore, we are not required to pay dividends and are not restricted from investing in any asset type, amenity or service, providing further flexibility as compared to many other real estate companies which are limited in their activities because they have elected to be taxed as real estate investment trusts (“REIT”). We believe our structure currently provides significant financial and operating flexibility to maximize the value of our real estate portfolio.

Overview of Business Segments

We operate in three complementary business segments: Operating Assets, MPCs and Strategic Developments. The combination of these three segments provides both operational and financial synergies. The vast majority of the assets in our Operating Assets segment are located within our MPCs. This helps us achieve scale and, in most cases, critical mass, which leads to pricing power in lease and vendor negotiations; increased ability to attract, hire and retain the best local leadership and leasing teams; flexibility to meet changing customer demands; and enhanced ability to identify and capitalize on emerging opportunities. In our MPC segment, we plan, develop and manage small cities in markets with strong long-term growth fundamentals. This business involves the horizontal development of residential land and selling the improved acreage to homebuilders for the eventual sale of homes to new residents. Combined, our MPCs span over 80,000 gross acres, with over 7,600approximately 7,200 residential acres of land remaining to be developed and sold across our portfolio.in high demand geographic areas. In addition to the residential land, our MPC segment contains more than 3,300nearly 3,400 acres designated for commercial development or sale to non-competing users such as hospitals. This land is held in our MPC segment until we identify demand for a new commercial development, at which point the land is transitioned into our Strategic Developments segment.


The operational synergies of combining our three business segments createscreate a unique and continuous value-creation cycle. We sell land to residential homebuilders in our MPC segmentMPCs, and the new homes attract residents to our cities looking for places to work and shop. New homeowners create demand for commercial developments, such as retail, office, self-storage and hospitality offerings. We build these commercial properties through our Strategic Developments segment when the timing is

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right which helps mitigate development risk, using the cash flow harvested from the sale of land to homebuilders.homebuilders, which helps mitigate development risk. Once these strategic developments are completed and stabilized, they transition to our Operating Assets segment and increase our recurring NOI, further funding the equity requirements in our Strategic Developments segment.Developments. New office, retail and other commercial amenities make our MPC residential land more appealing to buyershomebuyers and increase the velocity of land sales at premiums that exceed the broader market. Increased demand for residential land generates more cash flow from our MPC segment,MPCs, thus continuing the cycle.

We are headquartered in Dallas, Texas, and our assets are located across the United States. We were incorporated in Delaware in 2010. Through our predecessors, we have been in business for several decades. Financial information about each of our segments is presented in Note 17 - Segments of our audited Notes to Consolidated Financial Statements, and highlights of our segments are included below.


Operating Assets

65 assets, including our investments in joint ventures and other assets, consisting of 15 retail, 28 office, eight multi-family, four hospitality properties and 10 other operating assets and investments.
We own approximately 7.3 million square feet of retail and office, 2,351 multi-family units and 975 rooms in our hospitality assets.

MPCs

We own the MPCs of Summerlin in Las Vegas; The Woodlands, The Woodlands Hills and Bridgeland in Houston; and Columbia in Maryland.
Our MPCs encompass over 80,000 gross acres of land and include approximately 10,543 remaining saleable acres of land.



Strategic Developments

Consists of 29 development or redevelopment projects.
As of December 31, 2018, total project costs are estimated to be $3.5 billion, of which $1.7 billion has already been spent.

Our Competitive Strengths

We believe that we distinguish ourselves from other real estate companies through the following competitive strengths:

Management Team with Track Record of Value Creation.  We have completed the development of over 4.6 million square feet of office and retail operating properties, 1,937 multi-family units and 909 hospitality keys since 2011. Excluding land which we own, we have invested approximately $1.8 billion in these developments, which is projected to generate a 9.6% yield on cost, or $170.0 million per year of NOI upon stabilization. At today’s market cap rates, this implies value creation to our shareholders of roughly $1.0 billion. Our investment of approximately $369.6 million of cash equity in our development projects since inception, which is computed as total costs excluding land less the related construction debt, is projected to generate a 25.2% return on cash equity assuming a 5.5% cost of debt, which approximates our historical cost. These investments and returns exclude condominium development as well as projects under construction such as the Seaport District. We exclude condominium developments since they do not result in recurring NOI, and we exclude projects under development due to the wider range of NOI they are expected to generate upon stabilization. In Ward Village, we have either opened or have under construction 2,129 condominium units, which have approximately 91.8% units sold as of December 31, 2018 at a targeted profit margin, excluding land costs, of approximately 29% or $726 million.

Unique, Diverse Portfolio.  We own a portfolio with many diverse market leading assets located across 12 states with a combination of steady cash flow and longer term value creation opportunities.

Significant Value Creation Opportunity.  We own one of the preeminent development pipelines in the world with over 50.0 million square feet of vertical entitlements remaining across our portfolio. This represents approximately 11 times the 4.6 million square feet we have delivered in the last eight years without having to acquire another development site or external asset, which we believe is a significant competitive advantage over other real estate development corporations.

Low Leverage, Flexible Balance Sheet.  As of December 31, 2018, our total debt equaled approximately 43.2% of the book value of our total assets, which we believe is significantly less than the market value. Our net debt, which includes our share of debt of Real Estate and Other Affiliates less cash and Special Improvement District (“SID”) and Municipal Utility Districts (“MUD”) receivables, equaled approximately 35% of our total enterprise value. “Real Estate and Other Affiliates” refers to partnerships or joint ventures primarily for the development and operation of real estate assets. We finished the year with approximately $499.7 million of cash on hand. We have focused our efforts on obtaining non-recourse debt for both our construction financing and long-term fixed rate mortgage financing and have limited cross-collateralization for construction financing. Our low leverage, with a focus on project specific financing, provides substantial insulation against potential downturns and provides us with the flexibility to evaluate new real estate project opportunities.

Self-Funded Business Plan.  One of our key differentiators is our ability to self-fund significant portions of our new development without having to dispose of our recently completed developments or raise additional equity. Our residential land sales, recurring NOI and profits on the sales of condominium units generate substantial amounts of free cash flow which is used to fund the equity required to execute our many development opportunities.Furthermore, we are not required to pay dividends and are not restricted from investing in any asset type, amenity or service, providing further flexibility as compared to many other real estate companies which are limited in their activities because they have elected to be taxed as real estate investment trusts (“REIT”). We believe our structure currently provides significant financial and operating flexibility to maximize the value of our real estate portfolio.

Overview of Business Segments

The following further describes our three business segments and provides a general description of the assets comprising these segments. This section should be referred to when reading “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations” which contains information about our financial results and operating performance for our business segments.

Master Planned Communities. Our MPC segment includes the development and sale of residential and commercial land, primarily in large-scale, long-term projects. Our five MPCs include The Woodlands, Bridgeland, and The Woodlands Hills in Houston; Summerlin in Las Vegas; and Columbia, Maryland. These developments often require decades of investment and continued focus on the changing market dynamics surrounding these communities. We believe that the long-term value of our MPCs remains strong because of their competitive positioning in their respective markets, our in-depth experience in diverse land use planning and the fact that we have substantially completed the entitlement processes within the majority of our communities.

Our MPCs have won numerous awards for design excellence and for community contribution. Among its many honors, Summerlin was recently ranked fourth on the list of best-selling MPCs by RCLCO. Bridgeland was recently recognized by the National Association of Home Builders with four Silver awards, including “Best Landscape Design – Master Plan.” Hughes Landing in The Woodlands recently received Gold and Commendation awards from the International Council of Shopping Centers at the 2017 U.S. Design and Development Awards competition.

We expect the competitive position, desirable locations and land development expertise to drive the long-term growth of our MPCs. As of December 31, 2017, our MPCs include approximately 11,031 remaining saleable acres of land. Residential sales, which are generated primarily from the sale of finished lots and undeveloped superpads to residential homebuilders and developers, include standard and custom parcels designated for detached and attached single family homes, and range from entry-level to luxury homes. Superpad sites are generally 20 to 25-acre parcels of unimproved land where we develop and construct the major utilities (water, sewer and storm drainage) and roads to the borders of the parcel and the homebuilder completes the on-site utilities, roads and finished lots. Revenue is also generated through price participation with homebuilders.

We also occasionally sell or lease land for commercial development when we deem its use will not compete with our existing properties or our development strategy. Commercial sales include land parcels designated for retail, office, hospitality, high density residential projects (e.g., condominiums and apartments), services and other for-profit activities, as well as those parcels designated for use by government, schools and other not-for-profit entities.

Operating Assets. Our



Operating Assets segment contains 57 assets, including our investments in joint ventures and other assets, consisting of 13 retail, 25 office, six multi-family, three hospitality properties and 10 other operating assets and investments.

We have developed many of thesethe assets in our Operating Assets segment since the Company’s inception in 2010. Revenue is primarily generated through rental and hospitality services and is directly impacted by trends in rental and occupancy rates and operating costs. We will also occasionally sell an operating asset when it does not complement our existing properties or no longer fits within our current strategy. We believe that the long-term value of our Operating Assets liesis driven by their concentration in our premier portfolio located in geographically diverse locations.MPCs where we have a unique level of control and competitive advantage. We believe these assets have the potential for future growth by increasing rental rates, absorbing remaining vacancy and changing the tenant mix in retail centers to improve gross sales revenue of our tenants, thereby increasing rents.


For certain assets, we believe there are opportunities to improve operating performance through redevelopment or repositioning. Redevelopment plans for these assets may include office, retail or residential space, shopping centers, movie theaters, parking complexes or open space. The redevelopment plans may require that we obtain permits, licenses, consents and/or waivers from various parties. These opportunities will require new capital investment and vary in complexity and scale. The redevelopment opportunities range from those that would have minimal disruption to the property to those requiring partial or full demolition of existing structures for new construction. Factors we evaluate in determining whether to redevelop or reposition an asset include the following: (1) existing and forecasted demographics surrounding the property; (2) competition related to existing and/or alternative uses; (3) existing entitlements of the property and our ability to change them; (4)

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compatibility of the physical site with proposed uses; and (5) environmental considerations, traffic patterns and access to the properties.


We generally transfer an operating asset that is being repositioned or redeveloped into our Strategic Developments segment when we close operations at a property and/or begin construction on the redevelopment project. Upon completion of construction or renovation of a development or redevelopment, the asset is fully or partially placed in service and transferred back into our Operating Assets segment.


Master Planned Communities

Our MPC segment includes the development and sale of residential and commercial land, primarily in large-scale, long-term projects. These developments often require decades of investment and continued focus on the changing market dynamics surrounding these communities. We believe that the long-term value of our MPCs remains strong because of their competitive positioning in their respective markets, our in-depth experience in diverse land use planning and the fact that we have substantially completed the entitlement processes within the majority of our communities.

Our MPCs have won numerous awards for design excellence and for community contribution. Summerlin was recently ranked by RCLCO as the third highest selling master planned community, with Bridgeland also ranking 18th and The Woodlands ranking 42nd in the country for 2018. Downtown Summerlin was also recognized with a Placemaking Award from the Urban Land Institute and several neighborhoods in Summerlin earned Silver Nugget Awards from the Southern Nevada Home Builders Association. Bridgeland was recognized by the Texas Association of Builders as Developer of the Year for 2018, and The Woodlands was named Trailblazer of the Year by the Greater Houston Builders Association.

We expect the competitive position, desirable locations and land development expertise to drive the long-term growth of our MPCs. As of December 31, 2018, our MPCs include 10,543 remaining saleable acres of land. Residential sales, which are generated primarily from the sale of finished lots and undeveloped superpads to residential homebuilders and developers, include standard and custom parcels designated for detached and attached single family homes, and range from entry-level to luxury homes. Superpad sites are generally 20 to 25-acre parcels of unimproved land where we develop and construct the major utilities (water, sewer and storm drainage) and roads to the borders of the parcel and the homebuilder completes the on-site utilities, roads and finished lots. Revenue is also generated through price participation with homebuilders.

We also occasionally sell or lease land for commercial development when we deem its use will not compete with our existing properties or our development strategy. Commercial sales include land parcels designated for retail, office, hospitality, high density residential projects (e.g., condominiums and apartments), services and other for-profit activities, as well as those parcels designated for use by government, schools and other not-for-profit entities.

Strategic Developments.Developments

Our Strategic Developments segment consists of 2829 development or redevelopment projects, most of which require extensive planning and expertise in large-scale and long-range development to maximize their highest and best uses. The strategic process is complex and unique to each asset and requires on-going assessment of the changing market dynamics prior to the commencement of construction. We must study each local market, determine the highest and best use of the land and necessary improvements to

the area, obtain entitlements and permits, complete architectural design and construction drawings, secure tenant commitments and obtain and commit sources of capital.


We are in various stages of predevelopment or execution of our strategic plans for many of these assets based on market conditions. As of December 31, 2017,2018, we had 13 properties under construction and not yet placed into service. Excluding our two projects in joint ventures, totalTotal estimated aggregate project costs remaining to be spent on our 11 consolidated properties under construction as of December 31, 2017,2018, are $934.3 million,$1.7 billion, of which $468.0 million$0.7 billion remains to be funded by us and the remaining amounts towill be funded with existing debt. We generally obtain construction financing to fund a majority of the costs associated with developing these assets. Furthermore, we are always undergoing processes to obtain the required permits for our large scale real estate developments.

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The chart below presents our assets classified by reportable segment, predominant use and geographic location at December 31, 2017:

2018: 

Geographic

Master Planned

Strategic 

Region

Geographic

Communities

Master Planned

Operating Assets

Developments

Strategic

Region

Communities

Operating Assets

Developments

Houston

Retail

Office

Under Construction

Houston

RetailOfficeUnder Construction
• Bridgeland

▪• Creekside Village Green

▪• One Hughes Landing

▪• Creekside Park West

• The Woodlands• Hughes Landing Retail• Two Hughes Landing• 100 Fellowship Drive

• The Woodlands

▪ Hughes Landing Retail

▪ Two Hughes Landing

▪ Creekside Park Apartments

• The Woodlands Hills

▪• 1701 Lake Robbins

▪• Three Hughes Landing (b)

▪ Lake Woodlands Crossing Retail

• Hughes Landing Daycare

▪ 20/25 Waterway Avenue

▪ 1725-35 Hughes Landing Boulevard

▪ Waterway Garage Retail

▪ 2201 Lake Woodlands Drive

Other

▪ 2000 Woodlands Parkway

▪ 9303 New Trails

▪ Bridgeland Apartments

▪• Lakeland Village Center at Bridgeland

• 1725-1735 Hughes Landing Boulevard• Lakeside Row (c)
• Lake Woodlands Crossing Retail (a)• 2201 Lake Woodlands Drive• Two Lakes Edge
• 20/25 Waterway Avenue• Lakefront North (b)

▪

• Waterway Garage Retail• 9303 New Trails
• 2000 Woodlands Parkway• 3831 Technology Forest Drive

▪• 3 Waterway Square

Multi-family

▪• 4 Waterway Square

▪ Millennium Waterway• Creekside Park Apartments

(a)

▪• 1400 Woodloch Forest

▪• Millennium Six Pines Apartments (a)

(d)

▪• Millennium Waterway Apartments

Other
• One Lakes Edge

Other

▪• HHC 242 Self-Storage (c)

(e)

Hospitality

▪• HHC 2978 Self-Storage (c)

(e)

▪Hospitality

• Stewart Title of Montgomery
• Embassy Suites at Hughes Landing

▪ Stewart Title of Montgomery

County, TX (f)

▪• The Westin at The Woodlands (b)

  County, TX (d)

• The Woodlands Parking Garages

▪• The Woodlands Resort &

▪ The Woodlands Parking Garages

  Conference Center

▪• Woodlands Sarofim #1 (d)

(f)

Conference Center

▪• Woodlands Ground Lease

Las Vegas

• Summerlin

Retail

Office

Under Construction

▪• Downtown Summerlin

▪• Aristocrat (a)

• Summerlin Ballpark (g)
Other• ONE Summerlin

▪ Two Summerlin

• Tanager Apartments (h)

▪ Aristocrat

Other

Other

Multi-family

▪ Las Vegas 51s (a)

Other

• The Summit (d)

(f)

▪ ConstellationMulti-family

• TWO Summerlin (a)

▪ Summerlin Hospital Medical

▪ Las Vegas Ballpark

• Constellation (d)

 Center (d)

▪ Downtown Summerlin Apartments

Other

▪ Hockey Ground Lease

Other

▪• 80% Interest in Fashion

• Hockey Ground Lease

Show Air Rights

• Las Vegas Aviators (f) (i)

Columbia

• Summerlin Hospital Medical

• Maryland Communities

Retail

Office

Center (f)

Under Construction

▪

Columbia
• Columbia (j)RetailOfficeUnder Construction
• Columbia Regional Building

▪• 10-70 Columbia Corporate Center

▪ m.flats/TEN.M (d)

• Columbia Multi-family

▪• Columbia Office Properties

• 6100 Merriweather (k)

Multi-family

▪• One Mall North

Other

▪• The Metropolitan Downtown

Columbia (e)

▪• One Merriweather (c)

(e)

▪Other

• m.flats/TEN.M (a)(f)• Two Merriweather (e)• American City Building

  Columbia (d)

▪ Two Merriweather (c)

▪ Three Merriweather

• Sterrett Place

• Ridgely Building

New York

Retail

Under Construction

New York

▪Retail

Under Construction
• Seaport District NYC - Historic Area/Uplands

▪ 33 Peck Slip (d) (f)

• Seaport District NYC - Tin Building (m) (n)

▪• Seaport District NYC - Pier 17 (g)

(a)

Multi-family

▪ Seaport District NYC - Tin Building (g)

Other

▪Multi-family

• 250 Water Street
• 85 South Street

Honolulu

Hospitality

Retail

• Mr. C Seaport (a)(f)(l)

Other

Under Construction

▪

Honolulu
RetailOtherUnder Construction
• Ward Village Retail (e)

(o)

▪• Kewalo Basin Harbor

▪ Ae`o

• Ke Kilohana

▪ Anaha (h)

• ‘A‘ali‘i

▪ Ke Kilohana

▪ Waiea (h)

Unsold Condominium Inventory

• Ae‘o (p)

Other

• Anaha (p)

▪ Maui Ranch Land

• Waiea (p)

Other

Retail

Office

Other

Under Construction

▪• Outlet Collection at Riverwalk

▪

• 110 North Wacker

▪ AllenTowne

(q)

▪

Other
• Monarch City (r)
• Bridges at Mint Hill

▪• Circle T Ranch and Power Center (d)

(f)

▪• Cottonwood Mall

▪• The Elk Grove Collection (i)

▪• Landmark Mall (f)

(s)

▪ Ridgely Building (j)

• Maui Ranch Land

▪• West Windsor



(a)

Asset was placed in service and moved from Strategic Developments to Operating Assets during 2018.

(b)Lakefront North is comprised of two office buildings.
(c)Formerly known as Bridgeland Apartments.
(d)Asset was held as a joint venture until our acquisition of our partner’s interest.

(b)

(e)

Asset was placed in service and moved from the Strategic Developments segment to the Operating Assets segment during 2016.

2017.

(c)

(f)

Asset was placed in service and moved from the Strategic Developments segment to the Operating Assets segment during 2017.

(d)

A non-consolidated investment. Refer to Note 5 –2 - Real Estate and Other Affiliates in our Notes to Consolidated Financial Statements.

(e)

(g)

Includes retail within the recently opened Waiea and Anaha condominium towers.

Formerly known as Las Vegas Ballpark.

(f)

(h)

Asset is in redevelopment and moved from the Operating Assets segment to the Strategic Developments segment during 2017.

Formerly known as Downtown Summerlin Apartments.

(g)

(i)

Formerly known as Las Vegas 51s.

(j)Formerly known as Maryland Communities.
(k)Formerly known as Three Merriweather.
(l)Formerly known as 33 Peck Slip.
(m)Formerly known as South Street Seaport - Tin Building
(n)Effective January 1, 2017, we moved the Seaport District NYC assets under construction and related activities to the Strategic Developments segment from the Operating Assets segment. The Seaport District NYC operating properties currently in service and related operating results remain presented within the Operating Assets segment.

(h)

(o)

Includes retail within the recently opened Waiea, Anaha and Ae‘o condominium towers.

Waiea

(p)Ae‘o, Anaha and AnahaWaiea are open and occupied by tenants with sales of remaining units ongoing.

(i)

(q)

Asset is in redevelopment and moved from Operating Assets to Strategic Developments during 2018.

(r)Formerly known as The Outlet Collection at Elk Grove.

AllenTowne.

(j)

(s)

Asset was previously includedis in Columbia Office Properties.

redevelopment and moved from Operating Assets to Strategic Developments during 2017.


6

Competition


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Competition

The nature and extent of our competition depends on the type of property involved. With respect to our MPC segment, we compete with other landholders and residential and commercial property developers primarily in the development of properties within Las Vegas, Nevada; the greater Houston, Texas area; and the Baltimore, Maryland/Washington, D.C. markets. Significant factors which we believe allow us to compete effectively in this business include:

·

the size and scope of our MPCs;

·

years of experience serving and strong reputation within the industry;

·

the recreational and cultural amenities available within our communities;

·

the commercial centers in the communities, including the properties that we own and/or operate or may develop;

·

our relationships with homebuilders;

·

our level of debt relative to total assets; and

·

the proximity of our developments to major metropolitan areas.

With respect to our Operating Assets segment, we primarily compete for retail and office tenants, residential tenants and hospitality guests. We believe the principal factors that retailers consider in making their leasing decisions include: (1) consumer demographics; (2) age, quality, design and location of properties; (3) neighboring real estate projects that have been developed or that we, or others, may develop in the future; (4) diversity of retailers and anchor tenants at shopping center locations; (5) management and operational expertise; and (6) rental rates. The principal factors influencing tenant leasing decisions for our office space include: (1) rental rates; (2) attractive views; (3) walkable retail; (4) commute time; (5) efficiency of space; and (6) demographics of available workforce. For residential tenants, we believe the factors that impact their decision of where to live are: (1) walkability/proximity to work; (2) amenities; and (3) the best value for their money. Our hospitality guests generally make decisions on which hotel they prefer based on: (1) the nature and intention of their trip; (2) brand loyalty; or (3) location and convenience to either an urban or open resort experience.


With respect to our MPC segment, we compete with other landholders and residential and commercial property developers primarily in the development of properties within Las Vegas, Nevada; the greater Houston, Texas area; and the Baltimore, Maryland/Washington, D.C. markets. Significant factors which we believe allow us to compete effectively in this business include:

the size and scope of our MPCs;
years of experience serving and strong reputation within the industry;
the recreational and cultural amenities available within our communities;
the commercial centers in the communities, including the properties that we own and/or operate or may develop;
our relationships with homebuilders;
our level of debt relative to total assets; and
the proximity of our developments to major metropolitan areas.

With respect to our Strategic Developments segment, our direct competitors include other commercial property developers, residential condominium developers and other owners of commercial real estate that engage in similar businesses. With significant existing entitlements, we hold an advantage over many of our competitors in our markets in that we already own and control, or have significant influence over, substantial acreage for development. We also own the majority of square feet of each product type in many of our markets.


Environmental Matters


Under various federal, state and local laws and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on such real estate. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to promptly remediate such substances, may adversely affect the owner’s ability to sell such real estate or to obtain financing using such real estate as collateral.


Substantially all of our properties have been subject to third-party Phase I environmental assessments, which are intended to evaluate the environmental condition of the surveyed and surrounding properties. As of December 31, 2017,2018, the assessments have not revealed any known environmental liability that we believe would have a material adverse effect on our overall business, financial position or results of operations. Nevertheless, it is possible that these assessments do not reveal all environmental liabilities or that the conditions have changed since the assessments were prepared (typically at the time the property was purchased

or encumbered with debt). Moreover, no assurances can be given that future laws, ordinances or regulations will not impose any material environmental liability on us, or the current environmental condition of our properties will not be adversely affected by tenants and occupants of the properties, by the condition of properties in the vicinity of our properties (such as the presence on such properties of underground storage tanks) or by third parties unrelated to us.


Future development opportunities may require additional capital and other expenditures to comply with federal, state and local statutes and regulations relating to the protection of the environment. In addition, there is a risk when redeveloping sites that we might encounter previously unknown issues that require remediation or residual contamination warranting special handling or disposal, which could affect the speed of redevelopment. Where redevelopment involves renovating or demolishing existing facilities, we may be required to undertake abatement and/or the removal and disposal of building materials or other remediation or cleanup activities that contain hazardous materials. We cannot predict with any certainty the magnitude of any such

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expenditures or the long-range effect, if any, on our operations. Compliance with such laws has not had a material adverse effect on our current or past operating results or competitive position, but could have such an effect on our operating results or competitive position in the future.


Employees


As of December 31, 2017,2018, we had approximately 1,1001,400 employees, approximately 500550 of whom were employed at our hospitality properties.


Available Information


Our website address is www.howardhughes.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other publicly filed documents, including all exhibits filed therewith, are available and may be accessed free of charge through the “Investors” section of our website under the SEC Filings subsection, as soon as reasonably practicable after those documents are filed with, or furnished to, the SEC.SEC at www.sec.gov. Also available through our Investors section of our website are reports filed by our directors and executive officers on Forms 3, 4 and 5, and amendments to those reports. Our website and included or linked information on the website are not incorporated into this Annual Report on Form 10-K.

From time to time, we use our website as an additional means of disclosing public information to investors, the media and others interested in us.


ITEM 1A. RISK FACTORS 


The risks and uncertainties described below are those that we deem currently to be material, and do not represent all of the risks that we face. Additional risks and uncertainties not presently known to us or that we currently do not consider material may in the future become material and impair our business operations. If any of the following risks actually occur, our business could be materially harmed, and our financial condition and results of operations could be materially and adversely affected. Our business, prospects, financial condition or results of operations could be materially and adversely affected by the following:


Risks Related to our Business


Our performance and the market value of our securities are subject to risks associated with our investments in real estate assets and with trends in the real estate industry.

Our economic performance and the value of our real estate assets and, consequently the market value of the Company’s securities, are subject to the risk that our properties may not generate revenues sufficient to meet our operating expenses or other obligations. A deficiency of this nature would adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations.

A downturn in the housing market or decline in general economic conditions could adversely affect our business, financial condition and operations.

We believe that new home sales are an important indicator of future demand for our superpad sites, lots and condominium units. Demand for new homes is sensitive to changes in economic conditions such as the level of employment, consumer confidence, consumer income, the availability of financing and interest rate levels. The prior economic downturn severely affected both the numbers of homes that could be sold in our MPCs and the prices for which homebuilders could sell them. We cannot predict when another economic downturn in the housing market will occur. If there were another economic downturn in the housing market or in general economic conditions, the resulting decline in demand for new homes and condominium units would likely have a material adverse effect on our business, financial condition and results of operations.



Our MPC segment is highly dependent on homebuilders.


We are highly dependent on our relationships with homebuilders to purchase superpad sites and lots at our master planned communities.MPCs. Our business will be adversely affected if homebuilders do not view our master planned communitiesMPCs as desirable locations for homebuilding operations or due to a change in demand, our inability to achieve certain pricing arrangements or upon an overall decline in general market conditions. Also, some homebuilders may be unwilling or unable to close on previously committed lot purchases due to our failure to meet certain conditions in our agreements or otherwise. As a result, we may sell fewer lots and, in certain instances suspend any of our MPC developments and may havedevelopments. This would result in lower sales revenues, which could have an adverse effect on our financial position and results of operations.


Our development, construction and sale of condominiums are subject to state regulations and may be subject to claims from the condominium owners association at each project.


A portion of our business is dedicated to the development and sale of condominiums. Condominiums are generally regulated by an agency of the state in which they are located or where the condominiums are marketed to be sold. In connection with our development and offering of condominium units for sale, we must submit regulatory filings to various state agencies and engage in an entitlement process by which real property owned under one title is converted into individual units. Responses or comments on our condominium filings may delay our ability to sell condominiums in certain states and other jurisdictions in a

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timely manner, or at all. Further, we will be required to transfer control of a condominium association’s board of directors once we trigger one of several statutory thresholds, with the most likely triggers being tied to the sale of not less than a majority of units to third-party owners. Transfer of control can result in claims with respect to deficiencies in operating funds and reserves, construction defects and other condominium-related matters by the condominium association and/or third-party condominium unit owners. Any material claims in these areas could negatively affect our reputation in condominium development and ultimately have a material adverse effect on our business, financial condition and results of operations.


Our condominium sales are sensitive to interest rates and the ability of consumers to obtain mortgage financing.


The ability of the ultimate buyers of condominiums to finance their purchases is generally dependent on their personal savings and availability of third-party financing. Consequently, the demand for condominiums will be adversely affected by increases in interest rates (which generally rose during 2018), unavailability of mortgage financing, increasing housing costs and unemployment levels. Levels of income and savings, including retirement savings, available to condominium purchasers can be affected by declines in the capital markets. Any significant increase in the prevailing low mortgage interest rate environmentrates or decrease in available credit could reduce consumer demand for housing, and result in fewer condominium sales, which may have an adverse effect on our business, financial condition and results of operations.


Purchasers may default on their obligations to purchase condominiums.


We enter into contracts for the sale of condominium units that generally provide for the payment of a substantial portion of the sales price at closing when a condominium unit is ready to be delivered and occupied. A significant amount of time may pass between the execution of a contract for the purchase of a condominium unit and the closing thereof. Defaults by purchasers to pay any remaining portions of the sales prices for condominium units under contract may have an adverse effect on our business, financial condition and results of operations.


Downturn in tenants’ businesses may reduce our revenues and cash flows.

An office or retail tenant may experience a downturn in its business, which may weaken its financial condition and result in its failure to make timely rental payments or result in defaults under our leases. In the event of default by a tenant, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment.

We maybenegatively impacted by the consolidation or closing of anchor stores.


Many of our mixed-used properties are anchored by “big box” tenants. We could be adversely affected if these or other anchor stores were to consolidate, close or enter into bankruptcy. Given the current economic environment for certain retailers, there is a heightened risk an anchor store could close or enter into bankruptcy. Any losses resulting from the bankruptcy of any of our existing tenants could adversely impact our financial condition. Even if we own the anchor space, we may be unable to re-lease this area or to re-lease it on comparable terms. The loss of these revenues could adversely affect our results of operations and cash flows. Further, the temporary or permanent loss of any anchor would likely reduce customer traffic in the retail center, which could lead to decreased sales at other retail stores. Rents obtained from other tenants may be adversely impacted as a result of co-tenancy

clauses in their leases. One or more of these factors could cause the retail center to fail to meet its debt service requirements. The consolidation of anchor stores may also negatively affect lease negotiations and current and future development projects.

Seaport District Operational Risk

The Seaport District’s operational results are volatile. The increased volatility is largely the result of: (i) seasonality; (ii) potential sponsorship revenue; (iii) potential event revenue; and (iv) business operating risks from various startup businesses.  We will own and operate several of the startup businesses in the Seaport District. As a result, the revenues and expenses of these businesses will directly impact the net operating income of The Seaport District, which could have an adverse effect on our financial position and results of operations. This is in contrast to our other retail properties where we generally receive lease payments from unaffiliated tenants and are not necessarily impacted by the operating performance of their underlying businesses. 

We may be unable to renew leases or re-lease available space

.


We cannot provide any assurance that existing leases will be renewed, available space will be re-leased or that our rental rates will be equal to or above the current rental rates. If the average rental rates for our properties decrease, existing tenants do not renew their leases, or available space is not re-leased, our financial condition, results of operations, cash flows, the quoted trading price of our securities and our ability to satisfy our debt service obligations at the affected properties could be adversely affected.

We may have to make significant capital expenditures to maintain our hotel properties, and any hotel redevelopment or development activities we undertake may be more costly than we anticipate.


From time to time, our hotels will have a need for renovations and other capital improvements, including replacements of furniture, fixtures and equipment. Managers or franchisors of our hotels also require periodic capital improvements pursuant to management agreements we enter into with them or as a condition of maintaining franchise licenses. Generally, we are responsible for the cost of these capital improvements. As part of our long-term growth strategy, we may also develop hotel properties, timeshare units or other alternate uses of portions of our existing properties, including the development of retail, office or apartments, including through joint ventures. Such renovation and development involves substantial risks, including, but not limited to:

·

construction cost overruns and delays;

·

the disruption of operations and displacement of revenue at operating hotels, including revenue lost while rooms, restaurants or meeting space under renovation are out of service;


·

the cost of funding renovations or developments and inability to obtain financing on attractive terms;

construction cost overruns and delays;

·

the return on our investment in these capital improvements or developments failing to meet expectations;

the disruption of operations and displacement of revenue at operating hotels, including revenue lost while rooms, restaurants or meeting space under renovation are out of service;

·

governmental restrictions on the nature or size of a project or the inability to obtain all necessary zoning, land use, building, occupancy, and construction permits; and

the cost of funding renovations or developments and inability to obtain financing on attractive terms;

9

the return on our investment in these capital improvements or developments failing to meet expectations;

governmental restrictions on the nature or size of a project or the inability to obtain all necessary zoning, land use, building, occupancy and construction permits; and

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disputes with franchisors or property managers regarding compliance with relevant franchise agreements or management agreements.


·

disputes with franchisors or property managers regarding compliance with relevant franchise agreements or management agreements.

The occurrence of any of the aforementioned risks or any others not currently known to us could negatively impact certain hotel properties and result in a material adverse effect on our financial condition and results of operations.



The concentration of our properties in certain states may make our revenues and the value of our assets vulnerable to adverse changes in local economic conditions.


Many of the properties we own are located in the same or a limited number of geographic regions, including Texas, Hawaii,Hawai‘i, Las Vegas, New York and Maryland. Our operations at the properties in these states are generally subject to significant fluctuations by various factors that are beyond our control such as the regional and local economy, which may be negatively impacted by material relocation by residents, industry slowdowns, plant closings, increased unemployment, lack of availability of consumer credit, levels of consumer debt, housing market conditions, adverse weather conditions, natural disasters and other factors, as well as the local real estate conditions, such as an oversupply of, or a reduction in demand for, retail space or retail goods, hotel rooms and the availability and creditworthiness of current and prospective tenants.


In addition, some of our properties are subject to various other factors specific to those geographic areas. For example, tourism is a major component of both the local economies in HawaiiHawai‘i and Nevada. Ward Village, which is located in Honolulu, Hawaii,Hawai‘i, and Summerlin, which is located in Las Vegas, Nevada, may be impacted by the local and global tourism industry. These properties are susceptible to any factors that affect travel and tourism related to HawaiiHawai‘i and Las Vegas, including cost and availability of air services and the impact of any events that disrupt air travel to and from these regions. Moreover, these properties may be affected by risks such as acts of terrorism and natural disasters, including major fires, floods and earthquakes, as well as severe or inclement weather, which could also decrease tourism activity in Las Vegas or Hawaii.

Hawai‘i.


Further, Summerlin is to some degree dependent on the gaming industry, which could be adversely affected by changes in consumer trends and preferences and other factors over which we have no control. TheThe gaming industry is characterized by an increasingly high degree of competition among a large number of participants, including riverboat casinos, dockside casinos, land-based casinos, video lottery, sweepstakes and poker machines, many of which are located outside of Las Vegas. Furthermore, competition from internet lotteries, sweepstakes, and other internet wagering gaming services, which allow their customers to wager on a wide variety of sporting events and play Las Vegas-style casino games from home or in non-casino settings, could negatively impact the population in the Las Vegas area. Expansion of internet gaming in other jurisdictions (both legal and illegal) could further compete with the gaming industry in Las Vegas, which could have a negative impact on the local Las Vegas economy and result in an adverse effect on Summerlin and Downtown Summerlin.


Markets and the local economy surrounding our properties in Columbia, Maryland are heavily influenced by government spending and activity. A reduction of government spending in this market generally could decrease the demand for housing and retail space in this geographic region.


The Woodlands, The Woodlands Hills and Bridgeland in the Houston, Texas region depend significantly on the energy sector. Our success depends to a large extent upon the business activity, population, income levels, employment trends and real estate activity in and around Houston, Texas. In the event that oil prices fall and remain depressed for a sustained period, as they recently have, demand may decrease for housing and commercial space in The Woodlands, Bridgeland and The Woodlands Hills and hotel rooms at our hospitality properties in The Woodlands. 


If any or all of the factors discussed above were to occur and result in our inability to sell or lease our residential and commercial property, or book an adequate amount of hotel room stays at our hospitality properties, in any of these geographic regions, it would likely have a material adverse effect on our business, financial condition and results of operations.


We are exposed to risks associated with the development, redevelopment or construction of our properties.


Our development, redevelopment and construction activities expose us to risks such as:

·

inability to obtain construction financing for the development or redevelopment of properties;

·

increased construction costs for a project that exceeded our original estimates due to increases in materials, labor or other costs, which could make completion of the project less profitable because market rents or condominium prices may not increase sufficiently to compensate for the increased construction costs;


10

inability to obtain construction financing for the development or redevelopment of properties;

increased construction costs for a project that exceeded our original estimates due to increases in materials, labor or other costs, which could make completion of the project less profitable because market rents or condominium prices may not increase sufficiently to compensate for the increased construction costs;
construction delays, which may increase project development costs;

Tableclaims for construction defects after a property has been developed;

poor performance or nonperformance by any of Contents

our joint venture partners or other third parties on whom we rely;

·

construction delays, which may increase project development costs;

health and safety incidents and site accidents;

·

claims for construction defects after a property has been developed;

easement restrictions which may impact our development costs and timing;

·

poor performance or nonperformance by any of our joint venture partners or other third parties on whom we rely;

compliance with building codes and other local regulations; and

·

health and safety incidents and site accidents;

the inability to secure tenants necessary to support commercial projects.

·

easement restrictions which may impact our development costs and timing;

·

compliance with building codes and other local regulations; and


·

the inability to secure tenants necessary to support commercial projects.

If any of the aforementioned risks were to occur during the development, redevelopment or construction of our properties, it could have a substantial negative impact on the project’s success and result in a material adverse effect on our financial condition or results of operations.


Development of properties entails a lengthy, uncertain and costly entitlement process.


Approval to develop real property sometimes requires political support and generally entails an extensive entitlement process involving multiple and overlapping regulatory jurisdictions and often requires discretionary action by local governments. Real estate projects must generally comply with local land development regulations and may need to comply with state and federal regulations. We incur substantial costs to comply with legal and regulatory requirements. An increase in legal and regulatory requirements may cause us to incur substantial additional costs, or in some cases cause us to determine that the property is not feasible for development. In addition, our competitors and local residents may challenge our efforts to obtain entitlements and permits for the development of properties. The process to comply with these regulations is usually lengthy and costly, may not result in the approvals we seek, and can be expected to materially affect our development activities.


Specifically, our redevelopment plans for the Seaport District are subject to a Uniform Land Use Review Procedure (“ULURP”) that requires approval by the New York City Council, the New York City Landmarks Preservation Commission and various other government agencies. Our inability to obtain or modify the ULURP could negatively affect our future redevelopment plans for the Seaport District.


Government regulations and legal challenges may delay the start or completion of the development of our communities, increase our expenses or limit our homebuilding or other activities.


Various local, state and federal statutes, ordinances, rules and regulations concerning building, health and safety, site and building design, environment, zoning, sales and similar matters apply to and/or affect the real estate development industry. In addition, our ability to obtain or renew permits or approvals and the continued effectiveness of permits already granted or approvals already obtained depends on factors beyond our control, such as changes in federal, state and local policies, rules and regulations and their interpretations and application.


Municipalities may restrict or place moratoriums on the availability of utilities, such as water and sewer taps. If municipalities in which we operate take such actions, it could have an adverse effect on our business by causing delays, increasing our costs or limiting our ability to operate in those municipalities. These measures may reduce our ability to open new MPCs and to build and sell other real estate development projects in the affected markets, including with respect to land we may already own, and create additional costs and administration requirements, which in turn may harm our future sales, margins and earnings.


In addition, there is a variety of legislation being enacted, or considered for enactment, at the federal, state and local level relating to energy and climate change. This legislation relates to items such as carbon dioxide emissions control and building codes that impose energy efficiency standards. New building code requirements that impose stricter energy efficiency standards could significantly increase our cost to construct buildings. Such environmental laws may affect, for example, how we manage storm water runoff, wastewater discharges and dust; how we develop or operate on properties on or affecting resources such as wetlands, endangered species, cultural resources, or areas subject to preservation laws; and how we address contamination. As climate change concerns continue to grow, legislation and regulations of this nature are expected to continue and become more costly to comply with. In addition, it is possible that some form of expanded energy efficiency legislation may be passed by the U.S. Congress or federal agencies and certain state legislatures, which may, despite being phased in over time, significantly increase our costs of building MPCs and the sale price to our buyers and adversely affect our sales volumes. We may be required to apply for additional approvals or modify our existing approvals because of changes in local circumstances or applicable law.

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Energy-related initiatives affect a wide variety of companies throughout the United States and the world and, because our operations are heavily dependent on significant amounts of raw materials, such as lumber, steel and concrete, they could have an indirect adverse impact on our operations and profitability to the extent the manufacturers and suppliers of our materials are burdened with expensive cap and trade and similar energy related taxes and regulations. Our noncompliance with environmental laws could result in fines and penalties, obligations to remediate, permit revocations and other sanctions.

Governmental regulation affects not only construction activities but also sales activities, mortgage lending activities and other dealings with consumers. Further, government agencies routinely initiate audits, reviews or investigations of our business practices to ensure compliance with applicable laws and regulations, which can cause us to incur costs or create other disruptions in our business that can be significant. Further, we may experience delays and increased expenses as a result of legal challenges to our proposed communities, whether brought by governmental authorities or private parties.



Our development projects may subject us to certain liabilities.

We may hire and supervise third-party contractors to provide construction, engineering and various other services for wholly-owned development projects or development projects undertaken by real estate ventures in which we hold an equity interest. Certain of these contracts are structured such that we are the principal rather than the agent. As a result, we may assume liabilities in the course of the project and be subjected to, or become liable for, claims for construction defects, negligent performance of work or other similar actions by third parties we have engaged.

Adverse outcomes of disputes or litigation could negatively impact our business, results of operations and financial condition, particularly if we have not limited the extent of the damages to which we may be liable, or if our liabilities exceed the amounts of the insurance that we carry. Moreover, our tenants and condominium owners may seek to hold us accountable for the actions of contractors because of our role even if we have technically disclaimed liability as a legal matter, in which case we may determine it necessary to participate in a financial settlement for purposes of preserving the tenant or customer relationship or to protect our corporate brand. Acting as a principal may also mean that we pay a contractor before we have been reimbursed by our tenants or have received the entire purchase price of a condominium unit from the purchaser. This exposes us to additional risks of collection in the event of a bankruptcy, insolvency or a condominium purchaser default. The reverse can occur as well, where a contractor we have paid files for bankruptcy protection or commits fraud with the funds before completing a project which we have funded in part or in full.

For example, in 2018 we recognized a $13.4 million charge for window repair at the Waiea condominium tower in Ward Village.

Our indebtedness could adversely affect our business, prospects, financial condition or results of operations and prevent us from fulfilling our obligations under our Senior Notes.

Notes and the Loans.


We have a significant amount of indebtedness. As of December 31, 2017,2018, our total consolidated debt was approximately $2.9$3.2 billion (excluding an undrawn balance of $30.0$115.0 million under our revolving facilities) of which $1.2 billion was recourse to the Company. In addition, we have $42.9$160.5 million of recourse guarantees associated with undrawn construction financing commitments as of December 31, 2017.2018. As of December 31, 2017,2018, our proportionate share of the debt of our unconsolidatednon-consolidated joint ventures (“Real Estate and Other Affiliates”) was $85.0$96.2 million based upon our economic ownership. All of the debt of our Real Estate and Other Affiliates is non-recourse to us.


Subject to the limits contained in the indenture governing the $1,000,000,000 5.375% senior notes due 2025 (the “Senior Notes”), the limits contained in the Loan Agreements which mature on September 18, 2023 and any limits under our other debt agreements, we may need to incur substantial additional indebtedness from time to time, including project indebtedness for developments by our subsidiaries. If we incur additional indebtedness, the risks related to our level of indebtedness could intensify. Specifically, an increased level of indebtedness could have important consequences, including:

·

making it more difficult for us to satisfy our obligations with respect to our indebtedness, including the Senior Notes;

·

limiting our ability to obtain additional financing to fund future working capital, capital expenditures, debt service requirements, execution of our business strategy or finance other general corporate requirements;


·

requiring us to make non-strategic divestitures, particularly when the availability of financing in the capital markets is limited, which may adversely impact sales prices;

making it more difficult for us to satisfy our obligations with respect to our indebtedness, including the Senior Notes and Loan Agreements;

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limiting our ability to obtain additional financing to fund future working capital, capital expenditures, debt service requirements, execution of our business strategy or finance other general corporate requirements;

requiring us to make non-strategic divestitures, particularly when the availability of financing in the capital markets is limited, which may adversely impact sales prices;

Tablerequiring a substantial portion of Contents

our cash flow to be allocated to debt service payments instead of other business purposes, thereby reducing the amount of cash flow available for working capital, capital expenditures, acquisitions, dividends and other general corporate purposes;

·

requiring a substantial portion of our cash flow to be allocated to debt service payments instead of other business purposes, thereby reducing the amount of cash flow available for working capital, capital expenditures, acquisitions, dividends and other general corporate purposes;

increasing our vulnerability to general adverse economic and industry conditions, including increases in interest rates, particularly given that certain indebtedness bears interest at variable rates;

·

increasing our vulnerability to general adverse economic and industry conditions, including increases in interest rates, particularly given that certain indebtedness bears interest at variable rates;

limiting our ability to capitalize on business opportunities, reinvest in and develop properties, and to react to competitive pressures and adverse changes in government regulations;

·

limiting our ability to capitalize on business opportunities, reinvest in and develop properties, and to react to competitive pressures and adverse changes in government regulations;

placing us at a disadvantage compared to other, less leveraged competitors;

·

placing us at a disadvantage compared to other, less leveraged competitors;

limiting our ability, or increasing the costs, to refinance indebtedness; and

·

limiting our ability, or increasing the costs, to refinance indebtedness; and

resulting in an event of default if we fail to satisfy our obligations under our indebtedness, which default could result in all or part of our indebtedness becoming immediately due and payable and, in the case of our secured debt, could permit the lenders to foreclose on our assets securing such debt.

·

resulting in an event of default if we fail to satisfy our obligations under our indebtedness, which default could result in all or part of our indebtedness becoming immediately due and payable and, in the case of our secured debt, could permit the lenders to foreclose on our assets securing such debt.


The indenture governing our Senior Notes contains, and our other debt agreements contain, restrictions which may limit our ability to operate our business.



The indenture governing our Senior Notes contains, and some of our other debt agreements contain, certain restrictions. These restrictions limit our ability or the ability of certain of our subsidiaries to, among other things:

·

incur indebtedness or issue certain equity;

·

create certain liens;

·

pay dividends on, redeem or repurchase capital stock or make other restricted payments;

incur indebtedness or issue certain equity;

·

make investments;

create certain liens;

·

incur obligations that restrict the ability of our subsidiaries to make dividend or other payments to us;

pay dividends on, redeem or repurchase capital stock or make other restricted payments;

·

consolidate, merge or transfer all or substantially all of our assets;

make investments;

·

enter into transactions with our affiliates; and

incur obligations that restrict the ability of our subsidiaries to make dividend or other payments to us;

·

create or designate unrestricted subsidiaries.

consolidate, merge or transfer all or substantially all of our assets;

enter into transactions with our affiliates; and
create or designate unrestricted subsidiaries.

Additionally, certain of our debt agreements also contain various restrictive covenants, including minimum net worth requirements, maximum payout ratios on distributions, minimum debt yield ratios, minimum fixed charge coverage ratios, minimum interest coverage ratios and maximum leverage ratios.


The restrictions under the indenture and/or other debt agreements could limit our ability to finance our future operations or capital needs, make acquisitions or pursue available business opportunities.


We may be required to take action to reduce our debt or act in a manner inconsistent with our business objectives and strategies to meet such ratios and satisfy the covenants in our debt agreements. Events beyond our control, including changes in economic and business conditions in the markets in which we operate, may affect our ability to do so. We may not be able to meet the ratios or satisfy the covenants in our debt agreements, and we cannot assure you that our lenders will waive any failure to do so. A breach of any of the covenants in, or our inability to maintain the required financial ratios, under our debt agreements would likely result in a default under such debt agreements, which may accelerate the principal and interest payments of the debt and, if such debt is secured, result in the foreclosure on certain of our assets that secure such debt. A breach of any of the covenants in, or our inability to maintain the required financial ratios, under our debt agreements also would prevent us from borrowing additional money under such agreements that include revolving credit facilities. A default under any of our debt agreements could, in turn, result in defaults under other obligations and result in other creditors accelerating the payment of other obligations and foreclosing on assets securing such obligations, if any.

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Any such defaults could materially impair our financial condition and liquidity. In addition, if the lenders under any of our debt agreements or other obligations accelerate the maturity of those obligations, we cannot assure you that we will have sufficient assets to satisfy our obligations under the notes or our other debt. 


The Loan Agreements governing our $615,000,000 Term Loan and $85,000,000 Revolver Loan contain restrictions which may limit our ability to operate our business.

The Loan Agreements governing our Term Loan and Revolver loan contain representations and covenants which are customary for a loan agreement of this type, including financial covenants related to maintenance of interest coverage ratios and loan-to-value ratios with respect to the certain mortgaged properties, taken as a whole. The Loan Agreements also contain customary events of default, certain of which are subject to cure periods. These restrictions limit the ability of certain of our subsidiaries to, among other things:

incur further indebtedness
distribute cash generated from borrowers if financial coverage ratios or other covenants are not met
enter into or amend lease or other agreements or transactions without lender consent
substitute collateral due to product and geographic concentrations

The restrictions under the Loan Agreements could limit our ability to finance our future operations or capital needs, make acquisitions or pursue available business opportunities.

We may be required to take action to reduce our debt or act in a manner inconsistent with our business objectives and strategies to meet such ratios and satisfy the covenants in our Loan Agreements. Events beyond our control, including changes in economic and business conditions in the markets in which we operate, may affect our ability to do so. We may not be able to meet the ratios or satisfy the covenants in our Loan Agreements, and we cannot assure you that our lenders will waive any failure to do so. A breach of any of the covenants in, or our inability to maintain the required financial ratios, under our Loan Agreements would likely result in a default under such debt agreements, which may accelerate the principal and interest payments of the debt and, if such debt is secured, result in the foreclosure on certain of our assets that secure such debt. A breach of any of the covenants in,

or our inability to maintain the required financial ratios, under our Loan Agreements also would prevent us from borrowing additional money under such agreements that include revolving credit facilities. A default under any of our Loan Agreements could, in turn, result in defaults under other obligations and result in other creditors accelerating the payment of other obligations and foreclosing on assets securing such obligations, if any.

Any such defaults could materially impair our financial condition and liquidity. In addition, if the lenders under any of our debt agreements or other obligations accelerate the maturity of those obligations, we cannot assure you that we will have sufficient assets to satisfy our obligations under the notes or our other debt.

We may be unable to develop and expand our properties without sufficient capital or financing.


Our business objective includes the development and redevelopment of our properties, particularly those in our Strategic Developments segment, which we may be unable to do if we do not have, cannot obtain or cannot obtaingenerate sufficient capital to finance any developmentfrom MPC sales or redevelopment projects, including our inability to obtainoperations, debt capital from lenders or the capital markets, or government incentives, such as tax increment financing, to proceed with planned development, redevelopment or expansion activities. We may be unable to obtain an anchor store, mortgage lender and property partner approvals that are required for any such development, redevelopment or expansion. We may abandon redevelopment or expansion activities already underway that we are unable to complete due to the inability to secure additional capital to finance such activities. This may result in charge-offs of costs previously capitalized. In addition, if redevelopment, expansion or reinvestment projects are unsuccessful, the investment in such projects may not be recoverable, in full or in part, from future operations or sale resulting in impairment charges.


Our business model includes entering into joint venture arrangements with strategic partners and our strategic partners may have different interests than us.


We currently have and intend to enter into joint venture partnerships. These joint venture partners may bring local market knowledge and relationships, development experience, industry expertise, financial resources, financing capabilities, brand recognition and credibility or other competitive advantages. In the future, we may not have sufficient resources, experience and/or skills to locate desirable partners. We also may not be able to attract partners who want to conduct business in the locations where our properties are located, and who have the assets, reputation or other characteristics that would optimize our development opportunities.


While we generally participate in making decisions for our jointly owned properties and assets, we might not always have the same objectives as the partner in relation to a particular asset, and we might not be able to formally resolve any issues that arise. In addition, actions by a partner may subject property owned by the joint venture to liabilities greater than those contemplated by the joint venture agreements, be contrary to our instructions or requests or result in adverse consequences. We cannot control the ultimate outcome of any decision made, which may be detrimental to our interests.


The bankruptcy or, to a lesser extent, financial distress of any of our joint venture partners could materially and adversely affect the relevant property or properties. If this occurred, we would be precluded from taking some actions affecting the estate of the other investor without prior court approval which would, in most cases, entail prior notice to other parties and a hearing. At a minimum, the requirement to obtain court approval may delay the actions we would or might want to take. If the relevant joint venture through which we have invested in a property has incurred recourse obligations, the discharge in bankruptcy of one of the other partners might result in our ultimate liability for a greater portion of those obligations than would otherwise be required.


Significant competition could have an adverse effect on our business.


The nature and extent of the competition we face depends on the type of property. With respect to our master planned communities,MPCs, we compete with other landholders and residential and commercial property developers in the development of properties within the Las Vegas, Nevada; Houston, Texas; and Baltimore, Maryland/Washington, D.C. markets. A number of residential and commercial developers, some with greater financial and other resources, compete with us in seeking resources for development and prospective purchasers and tenants. Competition from other real estate developers may adversely affect our ability to attract purchasers and sell residential and commercial real estate, sell undeveloped rural land, attract and retain experienced real estate development personnel, or obtain construction materials and labor. These competitive conditions can make it difficult to sell land at desirable prices and can adversely affect our results of operations and financial condition.


There are numerous shopping facilities that compete with our operating retail properties in attracting retailers to lease space. In addition, retailers at these properties face continued competition from other retailers, including internet retailers, retailers at other regional shopping centers, outlet malls and other discount shopping centers, discount shopping clubs, and catalog companies. Competition of this type could adversely affect our results of operations and financial condition.

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In addition, we compete with other major real estate investors with significant capital for attractive investment and development opportunities. These competitors include REITs and private institutional investors.


We are subject to risks associated with hedging arrangements.


We enter into interest rate swap agreements and other interest rate hedging contracts, including caps and cash settled forward starting swaps, to mitigate or reduce our exposure to interest rate volatility or to satisfy lender requirements. These agreements expose us to additional risks, including a risk that counterparties of these hedging and swap agreements will not perform. There also could be significant costs and cash requirements involved to fulfill our obligations under a hedging agreement. In addition, our hedging activities may not have the desired beneficial impact on interest rate exposure and have a negative impact on our business, financial condition and results of operations.


We may not realize the value of our tax assets.


Certain provisions of the Internal Revenue Code could limit our ability to fully utilize certain tax assets if we were to experience a “change of control.” If such an event were to occur, the cash flow benefits we might otherwise have received would be eliminated. For example, we currently have approximately $147.1$170.7 million of federal net operating loss carryforwards, $25.0 million of which are subject to the separate return year limitation rules.


The effect of comprehensive United States tax reform legislation on the Company and its affiliates, whether adverse or favorable, is uncertain.


Changes to United States federal income tax rules and regulations could have material United States federal income tax consequences for the Company or an investment in the Company. On December 22, 2017, President Trump signed into law H.R. 1, known as the “Tax Cuts and Jobs Act” (the “Tax Act”) that significantly changes the United States federal income tax system. Among a number of significant changes to the current United States federal income tax rules, the Tax Act reduces the marginal United States corporate income tax rate from 35% to 21%, eliminates the corporate alternative minimum tax, limits the deduction for net business interest expense and compensation expense above $1.0 million, shifts the United States toward a more territorial tax system, and imposes new taxes to combat erosion of the United States federal income tax base. The effect of the Tax Act on us, whether adverse or favorable, is uncertain, and may not become evident for some period of time. You are urgedWe will continue to consult yourwork with our tax advisor regardingadvisors to determine the implications ofimpact that the Tax Act for an investment in the Company.as a whole will have on us.


Because real estate is illiquid, we may not be able to sell properties when in our best interest.

Real estate investments generally, and in particular large office and mixed-use properties like those that we develop and construct, often cannot be sold quickly. The capitalization rates at which properties may be sold could be higher than historic rates, thereby reducing our potential proceeds from sale. Consequently, we may not be able to alter our portfolio promptly in response to changes in economic or other conditions. All of these factors reduce our ability to respond to changes in the performance of our investments and could adversely affect our business, financial condition and results of operations.

Inflation may adversely affect us by increasing costs beyond what we can recover through price increases.


Inflation can adversely affect us by increasing costs of land, materials and labor. In addition, significant inflation is often accompanied by higher interest rates, which have a negative impact on demand for homes in our MPCs and demand for our condominium projects, and our ability to refinance existing indebtedness on favorable terms, or at all. In an inflationary environment, depending on the homebuilding industry and other economic conditions, we may be precluded from raising land prices enough to keep up with the rate of inflation, which could significantly reduce our profit margins. In recent years we have been experiencing increases in the prices of labor and materials above the general inflation rate. Our inability to recover increasing costs due to inflation through price increases could have a material adverse effect on our results of operations, financial conditions and cash flows.


Some of our properties are subject to potential natural or other disasters.


A number of our properties are located in areas which are subject to natural or other disasters, including hurricanes, floods, earthquakes and oil spills. We cannot predict the extent of damage that may result from such adverse weather events, which depend on a variety of factors beyond our control. Some of our properties, including Houston-area MPCs, Ward Village, the Seaport District NYC and the Outlet Collection at Riverwalk are located in coastal regions, and could be affected by increases in sea levels, the frequency

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or severity of hurricanes and tropical storms, or environmental disasters, whether such events are caused by global


climate changes or other factors. Additionally, adverse weather events can cause widespread property damage and significantly depress the local economies in which the Company operates and have an adverse impact on the Company’s business, financial condition and operations.

In late August 2017, Hurricane Harvey,


Climate change may adversely affect our business.

As a Category 4 hurricane, caused extensiveresult of climate change, we may experience extreme weather and costlychanges in precipitation and temperature, all of which may result in physical damage across Southeast Texas. The Houston area saw catastrophic flooding and unprecedented damage to residences and businesses. The Woodlands, Bridgeland and The Woodlands Hills areor a decrease in demand for our properties located outsidein the areas affected by these conditions. Should the impact of Houston, Texas. Although we do not believe that Hurricane Harvey will have significant long-term effects onclimate change be material in nature or occur for lengthy periods of time, our business, financial condition or results of operations we are unable to predict with certainty the full impact of the storm on the markets in which we operate. The Company will continue to monitor the residual effects of Hurricane Harvey on its business and customers. Similar future adverse weather events in Texas could potentially result in extensive and costly property damage to businesses and residences, force the relocation of residents, significantly disrupt economic activity in the region and potentially impact the overall desirability for businesses and employees to locate there.

would be adversely affected.


Some potential losses are not insured.


We carry comprehensive liability, fire, flood, earthquake, terrorism, extended coverage and rental loss insurance on all of our properties. We believe the policy specifications and insured limits of these policies are adequate and appropriate. There are some types of losses, including lease and other contract claims, which generally are not insured. If an uninsured loss or a loss in excess of insured limits occurs, we could lose all or a portion of the capital invested in a property, as well as the anticipated future revenue from the property. If this happens, we might remain obligated for any mortgage debt or other financial obligations related to the property.


Loss of key personnel could adversely affect our business and operations.


We depend on the efforts of key executive personnel. The loss of the services of any key executive personnel could adversely affect our business and operations. While we believe we have proper succession planning and are confident we could attract and train new personnel if necessary, this could impose additional costs and hinder our business strategy. Competition for qualified personnel in our industry is intense.

Security breaches and


A breach of the Company’s privacy or information security systems, or those of our vendors or other disruptionsthird parties, could compromise our information and expose us to liability, which would cause our business and reputation to suffer.


The protection of tenant, business partner, employee and company data is critically important to us. In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our tenants and business partners and personally identifiable information of our employees on our networks. The secure processing, maintenancecollection and transmissionuse of thispersonally identifiable information is criticalgoverned by federal and state laws and regulations. Privacy and information security laws continue to our operations. Despite ourevolve and may be inconsistent from one jurisdiction to another. Compliance with all such laws and regulations may increase the Company’s operating costs and adversely impact the Company’s ability to market the Company’s properties and services.

The security measures that we and our vendors put in place cannot provide absolute security, and the information technology infrastructure we and infrastructureour vendors use may be vulnerable to attacks by hackerscriminal cyber-attacks or breachesdata security incidents, including, ransom of data, such as, without limitation, tenant, business partner and/or employee information, due to employee error, malfeasance or other disruptions.vulnerabilities. Any such breachincident could compromise our networks or our vendors’ networks (or the networks or systems of third parties that facilitate our business activities or our vendors’ business activities), and the information stored therewe or our vendors store could be accessed, misused, publicly disclosed, corrupted, lost or stolen. Any such access, disclosurestolen, resulting in fraud, including wire fraud related to our assets, or other harm. Moreover, if a data security incident or breach affects our systems or our vendors’ systems, whether through a breach of our systems or a breach of the systems of third parties, or results in the unauthorized release of personally identifiable information, our reputation and brand could be materially damaged and we may be exposed to a risk of loss of informationor litigation and possible liability, including, without limitation, loss related to the fact that agreements with our vendors, or our vendors’ financial condition, may not allow us to recover all costs related to a cyber-breach for which they alone are responsible for or which we are jointly responsible for, which could result in legal claims or proceedings and liability under laws that protect the privacy of personal information, which could adversely affecta material adverse effect on our business, results of operations and financial conditionscondition.

Privacy and information security risks have generally increased in recent years because of the proliferation of new technologies, such as ransomware, and the increased sophistication and activities of perpetrators of cyber-attacks. In light of the increased risks, we have dedicated substantial additional resources of expense, labor and time to strengthening the security of our computer systems. In the future, we may expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities. Despite these steps, there can be no assurance that we will not suffer a significant data security incident in the future, that unauthorized parties will not gain access to sensitive data stored on our systems or that any such incident will be discovered in a timely manner. Any failure in or breach of our information security systems, those of third party service providers or a breach of other third party systems that ultimately impacts our operational or information

security systems as a result of cyber-attacks or information security breaches could result in a wide range of potentially serious harm to our business and results of operations.

Further, the techniques used by criminals to obtain unauthorized access to sensitive data, such as phishing and other forms of human engineering, are increasing in sophistication and are often novel or change frequently; accordingly, we may be unable to anticipate these techniques or implement adequate preventative measures.


Possible terrorist activity or other acts of violence could adversely affect our financial condition and results of operations.


Future terrorist attacks in the United States or other acts of violence may result in declining economic activity, which could harm the demand for goods and services offered by tenants and the value of our properties and might adversely affect the value of an investment in our securities. Such a resulting decrease in retail demand could make it difficult to renew or re-lease properties at lease rates equal to or above historical rates. Terrorist activities or violence also could directly affect the value of our properties through damage, destruction or loss, and the availability of insurance for such acts, or of insurance generally, might be lower or cost more, which could increase our operating expenses and adversely affect our financial condition and results of operations. To the extent that tenants are affected by future attacks, their businesses similarly could be adversely affected, including their ability to continue to meet obligations under their existing leases. These acts might erode business and consumer confidence and spending and might result in increased volatility in national and international financial markets and economies. Any one of these events might decrease demand for real estate, decrease or delay the occupancy of new or redeveloped properties, and limit access to capital or increase the cost of capital.

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We may be subject to potential costs to comply with environmental laws.


Future development opportunities may require additional capital and other expenditures to comply with laws and regulations relating to the protection of the environment. Under various federal, state or local laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances released at a property and may be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred by the parties in connection with the contamination. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of the hazardous or toxic substances. The presence of contamination or the failure to remediate contamination may adversely affect the owner's ability to sell or lease real estate or to borrow using the real estate as collateral. Other federal, state and local laws, ordinances and regulations require abatement or removal of asbestos-containing materials in the event of demolition or certain renovations or remodeling, the cost of which may be substantial for certain redevelopments, and also govern emissions of and exposure to asbestos fibers in the air. Federal and state laws also regulate the operation and removal of underground storage tanks. In connection with our ownership, operation and management of certain properties, we could be held liable for the costs of remedial action with respect to these regulated substances or tanks or related claims.


We cannot predict with any certainty the magnitude of any expenditures relating to the environmental compliance or the long-range effect, if any, on our operations. Compliance with such laws has not had a material adverse effect on our operating results or competitive position in the past, but could have such an effect on our operating results and competitive position in the future.


Compliance with the Americans with Disabilities Act may be a significant cost for us.


The Americans with Disabilities Act of 1990, as amended (“ADA”), requires that all public accommodations and commercial facilities, including office buildings, meet certain federal requirements related to access and use by disabled persons. Compliance with ADA requirements could involve the removal of structural barriers from certain disabled persons' entrances which could adversely affect our financial condition and results of operations. Other federal, state and local laws may require modifications to or restrict further renovations of our properties with respect to such accesses. Noncompliance with the ADA or similar or related laws or regulations could result in the United States government imposing fines or private litigants being awarded damages against us. In addition, changes to existing requirements or enactments of new requirements could require significant expenditures. Such costs may adversely affect our business, financial and results of operations.


Some of our directors are involved in other businesses including real estate activities and public and/or private investments and, therefore, may have competing or conflicting interests with us.


Certain of our directors have and may in the future have interests in other real estate business activities, and may have control or influence over these activities or may serve as investment advisors, directors or officers. These interests and activities, and any duties to third parties arising from such interests and activities, could divert the attention of such directors from our operations. Additionally, certain of our directors are engaged in investment and other activities in which they may learn of real estate and other related opportunities in their non-director capacities. Our Code of Business Conduct and Ethics applicable to our directors expressly provides, as permitted by Section 122(17) of the Delaware General Corporation Law (the “DGCL”), that our non-employeenon-

employee directors are not obligated to limit their interests or activities in their non-director capacities or to notify us of any opportunities that may arise in connection therewith, even if the opportunities are complementary to, or in competition with, our businesses. Accordingly, we have no expectation that we will be able to learn of or participate in such opportunities. If any potential business opportunity is expressly presented to a director exclusively in his or her director capacity, the director will not be permitted to pursue the opportunity, directly or indirectly through a controlled affiliate in which the director has an ownership interest, without the approval of the independent members of our board of directors.

There is a risk of investor influence over our company that may be adverse to our best interests and those of our other stockholders.

Pershing Square Capital Management, L.P. and its affiliates (collectively, “Pershing Square”) own approximately 5.1% of our outstanding common stock and have economic exposure under cash-settled total return swaps to an additional 5,399,839 notional shares of our common stock, equaling a fully diluted economic interest of approximately 17.7% of our outstanding shares. Mr. William Ackman, our Chairman, is the CEO and founder of Pershing Square. Pershing Square has the ability to influence our policies and operations, including the appointment of management, future issuances of our common stock or other securities, the payment of dividends, if any, on our common stock, the incurrence or modification of debt by us, amendments to our amended and restated certificate of incorporation and amended and restated bylaws and the entering into

17


Table of Contents

of extraordinary transactions, and its interests may not in all cases be aligned with the interests of other stockholders.

In addition, under the stockholder agreement between us and Pershing Square, if we make a public or non-public offering of our common stock (or securities convertible or exchangeable into common stock), Pershing Square has a right to acquire the securities for the same price and on the same terms up to the amount needed for it to maintain its then aggregate proportionate common stock-equivalent interest in the Company on a fully diluted basis. This right will terminate for Pershing Square when it beneficially owns less than 5% of our outstanding shares on a fully diluted basis.

The concentration of ownership of our outstanding common stock held by Pershing Square and other substantial stockholders, combined with Pershing Square’s additional economic exposure under cash-settled total return swaps, may make some transactions more difficult or impossible without the support of these stockholders, or more likely with the support of these stockholders. The interests of our substantial stockholders could conflict with or differ from the interests of our other stockholders. For example, the concentration of ownership held by Pershing Square and other substantial stockholders, even if these stockholders are not acting in a coordinated manner, could allow Pershing Square and other substantial stockholders to influence our policies and strategy and could delay, defer or prevent a change of control or impede a merger, takeover or other business combination that management and our board of directors believe may otherwise be favorable to us and our other stockholders.

Risks Related to Our Common Stock


Our stock price may continue to be volatile.


The trading price of our common stock is likely to continue to be volatile due to the stock market’s routine periods of large or extreme volatility. This volatility often has been unrelated or disproportionate to the operating performance of particular companies, including ours. Factors that affect our trading price include the following:

·

results of operations that vary from the expectations of securities analysts and investors, including our ability to finance and achieve operational success at the Seaport District NYC project;

·

results of operations that vary from those of our competitors;


·

change in expectations as to our future financial performance, including financial estimates and investment recommendations by securities analysts and investors;

results of operations that vary from the expectations of securities analysts and investors, including our ability to finance and achieve operational success at the Seaport District project;

·

declines in the market prices of stocks generally, particularly those in the real estate industry;

results of operations that vary from those of our competitors;

·

strategic actions by us or our competitors;

changes in expectations as to our future financial performance, including financial estimates and investment recommendations by securities analysts and investors;

·

announcements by us or our competitors of new significant real-estate developments, acquisitions, joint ventures, other strategic relationships, or capital commitments;

declines in the market prices of stocks generally, particularly those in the real estate industry;

·

changes in general economic or market conditions, including increases in interest rates, or trends in our industry or markets;

strategic actions by us or our competitors;

·

changes in business or regulatory conditions;

announcements by us or our competitors of new significant real-estate developments, acquisitions, joint ventures, other strategic relationships, or capital commitments;

·

future sales of our common stock or other securities;

changes in general economic or market conditions, including increases in interest rates, or trends in our industry or markets;

·

investor perceptions or the investment opportunity associated with our common stock relative to other investment alternatives;

changes in business or regulatory conditions;

·

the public’s response to press releases or other public announcements by us or third parties, including our filings with the Securities and Exchange Commission;

future sales of our common stock or other securities;

·

announcements relating to litigation;

investor perceptions or the investment opportunity associated with our common stock relative to other investment alternatives;

·

guidance, if any, that we provide to the public, any changes in this guidance, or our failure to meet this guidance;

the public’s response to press releases or other public announcements by us or third parties, including our filings with the Securities and Exchange Commission;

·

the development and sustainability of an active trading market for our stock;

announcements relating to litigation;

·

changes in accounting principles;

guidance, if any, that we provide to the public, any changes in this guidance, or our failure to meet this guidance;

18

the development and sustainability of an active trading market for our stock;

changes in accounting principles, particularly those related to the revenue recognition standard which we adopted on January 1, 2018;

Tableevents or factors resulting from natural disasters, such as the impact of Contents

Hurricane Harvey in the Houston, Texas area; and

·

events or factors resulting from natural disasters, such as the impact of Hurricane Harvey in the Houston, Texas area; and

other events or factors, including those resulting from war, acts of terrorism, or responses to these events.

·

other events or factors, including those resulting from war, acts of terrorism, or responses to these events.


These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock is low.


In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and the attention of executive management from our business regardless of the outcome of such litigation.


Provisions in our certificate of incorporation, our by-laws, Delaware law, stockholders rights agreement and certain other agreements may prevent or delay an acquisition of us, which could decrease the trading price of our common stock.


Our certificate of incorporation and bylaws contain the following limitations:

·

the inability of our stockholders to act by written consent;

·

restrictions on the ability of stockholders to call a special meeting without 15% or more of the voting power of the issued and outstanding shares entitled to vote generally in the election of our directors;


·

rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;

the inability of our stockholders to act by written consent;

·

the right of our board of directors to issue preferred stock without stockholder approval;

restrictions on the ability of stockholders to call a special meeting without 15% or more of the voting power of the issued and outstanding shares entitled to vote generally in the election of our directors;

·

a requirement that, to the fullest extent permitted by law, certain proceedings against or involving us or our directors or officers be brought exclusively in the Court of Chancery in the State of Delaware; and

rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;

·

that certain provisions may be amended only by the affirmative vote of at least 66 2/3% of the shares of common stock entitled to vote generally in the election of directors.

the right of our board of directors to issue preferred stock without stockholder approval;

a requirement that, to the fullest extent permitted by law, certain proceedings against or involving us or our directors or officers be brought exclusively in the Court of Chancery in the State of Delaware; and

that certain provisions may be amended only by the affirmative vote of at least 66 2/3% of the shares of common stock entitled to vote generally in the election of directors.

In addition, we are a Delaware corporation, and Section 203 of the Delaware General Corporation Law (the “DGCL”)DGCL applies to us. In general, Section 203 prevents an "interested stockholder" from engaging in certain "business combinations" with us for three years following the date that person becomes an interested stockholder subject to certain exceptions. The statute generally defines "interested stockholder" as any person that is the owner of 15% or more of the outstanding voting stock or is our affiliate or associate and was the owner of 15% or more of outstanding voting stock at any time within the three-year period immediately before the date of determination.


These anti-takeover provisions could make it more difficult for a third party to acquire us, even if the third-party’s offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. There also may be dilution of our common stock from the exercise of outstanding warrants, which may materially adversely affect the market price and negatively impact a holder’s investment. 


ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

ITEM 2.   PROPERTIES 


Our headquarters are located in Dallas, Texas and New York, New York.Texas. We also maintain offices at certain of our properties nationwide, including The Woodlands, Texas; Honolulu, Hawaii;Hawai‘i; New York, New York; Columbia, Maryland; and Las Vegas, Nevada, which serve operations across all segments. We believe our present facilities are sufficient to support our operations.


19

Operating Assets

In our Operating Assets segment, we own a variety of asset types including retail, office, multi-family, hospitality and other assets and investments. Our portfolio includes approximately 7.3 million square feet of retail and office, 2,351 wholly and partially-owned multi-family units, 975 combined keys at wholly and partially-owned hospitality properties, and other properties and investments. In addition to several other locations, our assets are primarily located in and around The Woodlands, Texas; Columbia, Maryland; New York, New York; Las Vegas, Nevada; and Honolulu, Hawai‘i.

The following table summarizes certain metrics of the retail properties (does not include any retail square feet within our multi-family or office assets) within our Operating Assets segment as of December 31, 2018: 

Retail Properties Location Rentable Sq.Ft./Units   % Leased Annualized Base Rent
(In thousands) (a)		 Annualized Base Rent Per Square Foot (a) Year Built / Acquired / Last Renovated
The Woodlands              
Creekside Village Green The Woodlands, TX 74,670
   90.0%$1,975
 $30.17
 2015
Hughes Landing Retail The Woodlands, TX 126,131
   100.0 3,942
 31.25
 2015
1701 Lake Robbins The Woodlands, TX 12,376
   100.0 506
 40.85
 2014
Lake Woodlands Crossing The Woodlands, TX 60,262
   85.0 1,100
 25.44
 2018
20/25 Waterway Avenue The Woodlands, TX 50,062
   100.0 1,482
 29.60
 2007 / 2009
Waterway Garage Retail The Woodlands, TX 21,513
   99.8 623
 29.02
 2011
2000 Woodlands Parkway The Woodlands, TX 7,900
   100.0 225
 28.50
 1996
    352,914
          
Bridgeland              
Lakeland Village Center at Bridgeland Cypress, TX 83,497
   83.3 1,431
 26.50
 2016
               
Columbia              
Columbia Regional Building Columbia, MD 89,199
   100.0 2,496
 27.99
 2014
               
Seaport District              
Seaport District NYC - Historic Area/Uplands New York, NY 183,583
 (b) 75.9 9,985
 76.66
 2016
Seaport District NYC - Pier 17 New York, NY 212,548
 (b) 44.5 2,977
 70.86
 2018
    396,131
          
Summerlin              
Downtown Summerlin Las Vegas, NV 838,271
 (c) 91.3 22,508
 30.17
 2014
               
Ward Village              
Ward Village Retail - Pending Redevelopment Honolulu, HI 583,409
   91.8 12,851
 26.77
 2002
Ward Village - New or Renovated Honolulu, HI 422,107
   98.0 15,641
 39.03
 2012 - 2018
    1,005,516
          
Other              
Outlet Collection at Riverwalk New Orleans, LA 267,934
 (d) 99.3 7,789
 29.99
 2014
               
Total   3,033,462
          

Table

(a)Annualized Base Rent is calculated as the monthly Base Minimum Rent for the property for December 31, 2018 multiplied by 12. Annualized Base Rent Per Square Foot is the Annualized Base Rent for the property at December 31, 2018 divided by the average occupied square feet. 
(b)A significant portion of the project is on a ground lease where we are the ground lessee. The existing square feet in service as of December 31, 2018 are referenced above. Upon completion of the Seaport District NYC - Tin Building reconstruction and redevelopment, the Seaport District (inclusive of Historic Area/Uplands, Pier 17 and Tin Building) will be approximately 449,527 square feet, as further discussed in Strategic Developments.
(c)Excludes 381,767 square feet of anchors, 206,279 square feet for ONE Summerlin, 144,615 square feet for TWO Summerlin and 36,914 square feet of additional office space above our retail space.
(d)The entire property is subject to a ground lease where we are the ground lessee.


The following table summarizes certain metrics of Contents

our office assets within our Operating Assets segment as of December 31, 2018:

Office Assets Location Rentable Sq.Ft./Units % Leased  Annualized
Base Rent
(In thousands) (a)		 Annualized Base Rent Per Square Foot (a) Effective 
Annual Rent
(In thousands) (b)		 Effective Annual Rent per Square Foot (b) Year Built /
Acquired / Last Renovated
The Woodlands                 
One Hughes Landing The Woodlands, TX 197,719
 97.6% $5,683
 $29.45
 $8,467
 $43.87
 2013
Two Hughes Landing The Woodlands, TX 197,714
 95.5  5,585
 29.58
 8,306
 44.00
 2014
Three Hughes Landing The Woodlands, TX 320,815
 76.3  5,828
 26.96
 8,136
 37.64
 2016
1725 Hughes Landing Boulevard The Woodlands, TX 331,754
 78.4  5,802
 22.30
 8,186
 31.47
 2015
1735 Hughes Landing Boulevard The Woodlands, TX 318,170
 100.0  7,429
 23.35
 10,795
 33.93
 2015
2201 Lake Woodlands Drive (c) The Woodlands, TX 24,119
 100.0  410
 17.00
 NM
 NM
 1994
Lakefront North The Woodlands, TX 262,812
 73.6  1,053
 9.92
 1,133
 10.66
 2018
9303 New Trails The Woodlands, TX 97,967
 70.1  1,387
 20.19
 2,155
 31.38
 2008
3831 Technology Forest Drive The Woodlands, TX 95,078
 100.0  2,206
 23.20
 3,150
 33.13
 2014
3 Waterway Square The Woodlands, TX 234,659
 100.0  6,401
 27.28
 8,613
 36.71
 2013
4 Waterway Square The Woodlands, TX 218,551
 100.0  6,407
 29.32
 8,735
 39.97
 2010
1400 Woodloch Forest The Woodlands, TX 95,667
 91.1  2,478
 28.43
 2,514
 28.85
 1981
    2,395,025
             
Columbia                 
10-70 Columbia Corporate Center Columbia, MD 889,470
 95.0  22,028
 26.28
 22,242
 26.54
 2012 / 2014
Columbia Office Properties (d) Columbia, MD 62,038
 100.0  1,845
 29.74
 1,954
 31.49
 1969 / 1972
One Mall North Columbia, MD 98,607
 92.0  2,737
 30.16
 2,766
 30.48
 2016
One Merriweather Columbia, MD 206,588
 91.0  5,814
 33.04
 5,839
 33.18
 2017
Two Merriweather Columbia, MD 124,635
 73.9  2,571
 35.45
 2,571
 35.45
 2017
    1,381,338
             
Summerlin                 
Aristocrat (e) Las Vegas, NV 181,534
 100.0  —
 —
 —
 —
 2018
ONE Summerlin Las Vegas, NV 206,279
 100.0  7,512
 36.56
 7,512
 36.56
 2015
TWO Summerlin Las Vegas, NV 144,615
 89.3  1,835
 37.02
 1,835
 37.02
 2018
    532,428
             
Total   4,308,791
             

(a)Annualized Base Rent is calculated as the monthly Base Minimum Rent for the property for December 31, 2018 multiplied by 12. Annualized Base Rent Per Square Foot is the Annualized Base Rent for the property at December 31, 2018 divided by the average occupied square feet. 
(b)Effective Annual Rent includes base minimum rent and common area maintenance recovery revenue. Effective Annual Rent Per Square Foot is the Effective Annual Rent divided by the average occupied square feet.
(c)2201 Lake Woodlands Drive previously served as temporary space for tenants relocating to permanent space and was 100.0% leased in April 2018 with abated rent through September 2018. Therefore, the Effective Annual Rent per Square Foot data is not meaningful.
(d)Excludes the Ridgely Building which was moved to Strategic Developments in the fourth quarter of 2017.
(e)Aristocrat is a build-to-suit project entirely leased by a single tenant. Therefore, the Annualized Base Rent and Effective Annual Rent details have been excluded for competitive reasons.

The following tables summarize certain metrics of our multi-family, hospitality and other Operating Assets as of December 31, 2018:
Multi-family Assets Location Economic
Ownership %		 # Units Retail Square Feet % Leased Average Monthly Rate Average Monthly Rate Per Square Foot Year Built / Acquired / Last Renovated
The Woodlands                
Creekside Park Apartments The Woodlands, TX 100.0
%292
 —
 51.0
%$1,214
 $1.24
 2018
Millennium Six Pines Apartments The Woodlands, TX 100.0
 314
 —
 95.2
 1,646
 1.71
 2014
Millennium Waterway Apartments The Woodlands, TX 100.0
 393
 —
 95.4
 1,328
 1.48
 2010
One Lakes Edge The Woodlands, TX 100.0
 390
 23,280
 95.4
 1,893
 1.92
 2015
                 
Columbia                
The Metropolitan Downtown Columbia Columbia, MD 50.0
 380
 13,591
 95.0
 1,863
 1.97
 2015
m.flats/TEN.M Columbia, MD 50.0
 437
 28,026
 77.8
 1,416
 1.60
 2018
                 
Summerlin                
Constellation Las Vegas, NV 100.0
 124
 —
 96.8
 2,344
 2.10
 2016
                 
Seaport District                
85 South Street New York, NY 100.0
 21
 13,000
 100.0
 3,833
 2.00
 2014
      2,351
 77,897
        


Hospitality Assets Location Economic
Ownership %		 # Keys 2018 Average Daily Rate 2018 Revenue Per Available Room Year Built / Acquired / Last Renovated
The Woodlands             
Embassy Suites at Hughes Landing The Woodlands, TX 100.0
%205
 $202.67
 $164.99
 2015 
The Westin at The Woodlands The Woodlands, TX 100.0
 302
 216.58
 158.28
 2016 
The Woodlands Resort & Conference Center The Woodlands, TX 100.0
 402
 215.22
 112.94
 2014(a)
Seaport District             
Mr. C Seaport New York, NY 35.0
 66
 368.90
 147.65
 2018 
(a)The Woodlands Resort & Conference Center was built in 1974, expanded in 2002, and renovated in 2014.
Other Assets Location Economic
Ownership %		 Asset Type Square Feet / Acres / Units % Leased Year Built / Acquired / Last Renovated
The Woodlands             
The Woodlands Parking Garages The Woodlands, TX 100
%Garage 2,982
 N/A 2008/2009(a)
Woodlands Sarofim #1 The Woodlands, TX 20
 Industrial 129,760
 73.3%late 1980s 
Stewart Title of Montgomery County, TX The Woodlands, TX 50
 Title Company —
 N/A — 
HHC 242 Self-Storage The Woodlands, TX 100
 Storage 654
 66.2 2017 
HHC 2978 Self-Storage The Woodlands, TX 100
 Storage 754
 60.2 2017 
Woodlands Ground Leases The Woodlands, TX 100
 Ground lease N/A
 N/A 2011 
              
Summerlin             
Summerlin Hospital Medical Center Las Vegas, NV 5
 Hospital —
 N/A 1997 
Las Vegas Aviators Las Vegas, NV 100
 Minor League Baseball Team —
 N/A 2017 
Hockey Ground Lease Las Vegas, NV 100
 Ground lease N/A
 N/A 2017 
              
Ward Village             
Kewalo Basin Harbor Honolulu, HI Ground Lease
 Marina 55 acres
 N/A — 
(a)The Woodlands Parking Garages consists of two garages: Woodloch Forest Garage, built in 2008, and Waterway Square Garage, built in 2009.

The following table summarizes our Operating Assets segment lease expirations:
Year Number of Expiring Leases   Total Square Feet Expiring Total 
Annualized Base 
Rent Expiring		 % of Total 
Annual Gross Rent Expiring		 
2019 225
 (a) 556,539
 $13,829,633
 6.9%
2020 162
   475,120
 12,533,105
 6.3 
2021 104
   511,137
 13,350,760
 6.7 
2022 114
   588,101
 19,129,318
 9.6 
2023 113
   668,177
 22,785,558
 11.4 
2024 94
   654,289
 18,839,162
 9.4 
2025 152
   854,096
 29,772,753
 14.9 
2026 37
   221,099
 6,513,203
 3.3 
2027 47
   622,184
 17,776,541
 8.9 
2028 50
   474,736
 16,643,301
 8.3 
2029+ 79
   1,096,390
 29,102,834
 14.5 
Total 1,177
   6,721,868
 $200,276,168
 100.0%
(a)Includes 101 specialty leases totaling 73,790 square feet which expire in less than 365 days.

Master Planned Communities


Our MPCs are located in and around Houston, Texas; Las Vegas, Nevada; and Columbia, Maryland. The following table summarizes our MPCs, all of which are wholly-owned, as of December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining 

 

Projected 

 

 

 

Undiscounted/

 

 

 

 

Total

 

Approx. No.

 

 

 

Average Price Per Acre

 

Saleable 

 

Community 

 

Average Cash

 

Uninflated Value

 

 

 

 

Gross

 

People Living

 

Remaining Saleable Acres

 

($ in thousands)

 

Residential 

 

Sell-Out

 

Margin (e)

 

($ in millions)

Community

  

Location

  

Acres (a)

  

in Community

  

Residential (b)

  

Commercial (c)

  

Residential

  

Commercial

  

Lots (d)

  

 Date

  

Residential

  

Residential

  

Commercial

Bridgeland

 

Houston, TX

 

11,470

 

8,800

 

2,440

 

1,535

 

$

377

 

$

470

 

14,500

 

 

2045

 

81%

 

$

745

 

$

721

Maryland

 

Columbia, MD

 

16,450

 

112,000

 

 —

 

97

 

 

N/A

 

 

576

 

 —

 

 

2021

 

N/A

 

 

N/A

 

 

56

Summerlin

 

Las Vegas, NV

 

22,500

 

108,000

 

3,568

 

821

 

 

584

 

 

759

 

39,000

(f)  

 

2039

 

75%

 

 

1,562

 

 

623

The Woodlands

 

Houston, TX

 

28,475

 

116,000

 

231

 

743

 

 

628

 

 

945

 

736

 

 

2026

 

98%

 

 

144

 

 

702

The Woodlands Hills

 

Conroe, TX

 

2,055

 

 —

 

1,425

 

171

 

 

313

 

 

552

 

5,000

 

 

2029

 

85%

 

 

379

 

 

94

Total

 

 

 

80,950

 

344,800

 

7,664

 

3,367

 

 

 

 

 

 

 

59,236

 

 

 

 

 

 

$

2,830

 

$

2,196

2018:

        RemainingProjectedAverageUndiscounted/
  Total
 Average Price Per AcreSaleableCommunityCashUninflated Value
  GrossApprox. No.Remaining Saleable Acres($ in thousands) (b)ResidentialSell-Out DateMargin (d)($ in millions) (e)
CommunityLocationAcres (a)ResidentsResidentialCommercialResidentialCommercialLots (c)ResidentialCommercialResidentialResidentialCommercial
BridgelandCypress, TX11,470
10,100
2,299
1,533
$410
$539
13,874
 2034204582%$773
$826
ColumbiaColumbia, MD16,450
112,000
—
96
 N/A
580
—
 N/A2023N/A—
56
SummerlinLas Vegas, NV22,500
110,000
3,311
831
565
1,091
37,876
(f)20392039741,384
907
The WoodlandsHouston, TX28,505
117,100
157
753
652
1,027
515
 2023202799101
773
The Woodlands HillsConroe, TX2,055
36
1,392
171
318
515
4,800
 2029202788390
88
Total 80,980
349,236
7,159
3,384
  57,065
    $2,648
$2,650

(a)

Encompasses all of the land located within the borders of the master planned community, including parcels already sold, saleable parcels and non-saleable areas such as roads, parks and recreation areas, conservation areas and parcels acquired during the year.

(b)

Includes standard and custom residentialAverage Price Per Acre is the weighted average land parcels. Standard residential lots are designed for detached and attached single family homes, ranging from entry-level to luxury homes. Certain residential parcels are designated as custom lots as their premium price reflects a larger size and other distinguishing features such as location within a gated community, having golf course access or higher elevations.

value per acre estimated in the Company's 2019 land models.

(c)

Designated for retail, office, resort, high density residential projects (condominiums and apartments), services and other for-profit activities, as well as those parcels allocated for use by government, schools, houses of worship and other not-for-profit entities.

(d)

Remaining Saleable Residential Lots are estimates and include only lots that are intended for sale or joint venture. The mix of intended use on our remaining saleable and developable acres is primarily based on assumptions regarding entitlements and zoning of the remaining project and are likely to change over time as the master plan is refined.

(e)

(d)

Average Cash Margin represents the total projected cash profit (total projected cash sales minus remaining projected cash development expenditures excluding land costs), divided by total projected cash sales.

It is calculated based on future revenues and future projected non-reimbursable development costs, capitalized overhead, capitalized taxes and capitalized interest.

(f)

(e)

Undiscounted / Uninflated Value represents Remaining Saleable Acres, multiplied by Average Price Per Acre, multiplied by Average Cash Margin.

(f)Amount represents remaining entitlements and not necessarily the number of lots that may ultimately be developed and sold.


The Summit


Within our Summerlin MPC, we are currently developing an exclusive luxury community named The Summit which is being developed and managed through a joint venture with Discovery Land Company (“Discovery”), a leading developer of luxury communities and private clubs. The 555-acre community is expected to consist of approximately 262 homes, an 18-hole Tom Fazio designed golf course and other amenities for residents.

In 2015, we contributed undeveloped land to the venture at an agreed upon value of $125.4 million, or $226,000 per acre. Discovery is required to fund up to a maximum of $30.0 million cash for development costs as their capital contribution, and we have no further capital obligations. After the return of our capital invested in the project and a 5.0% preferred return, 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 50/50. Discovery is the manager on the project, and land development began in the second quarter of 2015. Through December 31, 2017, 146 custom homesites and 74 built product homesites, including bungalows and villas, were mapped and available for sale, of which the joint venture has sold and closed on 77 of the homesites for $240.8 million, with 17 of these closing for $55.9 million in the year ended December 31, 2017. The golf course was completed and opened to the members of the golf club in October 2017. The clubhouse and related amenities are in the final planning stages with construction expected to commence in 2018. See further discussion in “Item 7. -– Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Operating Assets

In our Operating Assets segment, we own a variety of asset types including retail, office, multi-family, hospitality and other assets and investments. Our portfolio includes approximately 7.0 million square feet of retail and office, 1,623 wholly and partially-owned multi-family units, 913 combined keys at hospitality properties, and other properties and investments. In addition to several other locations, our assets are primarily located in and around Columbia, Maryland; Honolulu, Hawaii; Las Vegas, Nevada; New York, New York; and The Woodlands, Texas. The following table summarizes certain metrics of the retail

20


Table of Contents

properties (does not include any retail square feet within our multi-family or office assets) within our Operating Assets segment as of December 31, 2017: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Properties

    

Location

    

Rentable Sq.Ft./Units

 

 

% Leased

 

Annualized Base Rent
(In thousands) (a)

 

Annualized Base Rent Per Square Foot (a)

 

Year Built/ Acquired/Last Renovated

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hughes Landing Retail

 

The Woodlands, TX

 

126,131

 

 

98.8

%

 

$

3,902

 

$

31.31

 

2015

Creekside Village Green

 

The Woodlands, TX

 

74,669

 

 

90.7

 

 

 

1,982

 

 

29.27

 

2015

20/25 Waterway Avenue

 

The Woodlands, TX

 

50,062

 

 

100.0

 

 

 

1,734

 

 

34.64

 

2007 / 2009

Waterway Garage Retail

 

The Woodlands, TX

 

21,513

 

 

99.8

 

 

 

759

 

 

35.35

 

2011

1701 Lake Robbins

 

The Woodlands, TX

 

12,376

 

 

100.0

 

 

 

503

 

 

40.67

 

2014

2000 Woodlands Parkway

 

The Woodlands, TX

 

7,900

 

 

100.0

 

 

 

217

 

 

27.50

 

1996

 

 

 

 

292,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Columbia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Columbia Regional Building

 

Columbia, MD

 

89,199

 

 

100.0

 

 

 

2,463

 

 

27.61

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seaport District

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seaport District NYC - Historic Area/Uplands

 

New York, NY

 

122,921

(b)

 

92.0

 

 

 

N/A

 

 

N/A

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summerlin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Downtown Summerlin

 

Las Vegas, NV

 

824,421

(c)

 

96.6

 

 

 

21,800

 

 

29.04

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ward Village

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ward Village Retail - Pending Redevelopment

 

Honolulu, HI

 

633,283

(d)

 

83.1

 

 

 

11,854

 

 

22.53

 

2002

Ward Village - New or Renovated

 

Honolulu, HI

 

286,129

 

 

99.5

 

 

 

12,937

 

 

45.43

 

2015

 

 

 

 

919,412

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outlet Collection at Riverwalk

 

New Orleans, LA

 

264,462

(e)

 

99.8

 

 

 

8,184

 

 

31.20

 

2014

Lakeland Village Center at Bridgeland

 

Houston, TX

 

83,466

 

 

74.8

 

 

 

1,309

 

 

22.35

 

2016

 

 

 

 

347,928

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

2,596,532

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Annualized Base Rent is calculated as the monthly Base Minimum Rent for the property for December 31, 2017 multiplied by 12. Annualized Base Rent Per Square Foot is the Annualized Base Rent for the property at December 31, 2017 divided by the average occupied square feet. 

(b)

A significant portion of the project is on a ground lease where we are the ground lessee. The existing square feet in service as of December 31, 2017 are referenced above. Upon completion of the Pier 17 and Tin Building reconstruction and redevelopment, Seaport District NYC (inclusive of Historic Area/Uplands, Pier 17 and Tin Building) will be approximately 449,527 square feet, as further discussed in Strategic Developments.

(c)

Excludes 381,767 square feet of anchors, 206,279 square feet for ONE Summerlin and 36,914 square feet of additional office space above our retail space.

(d)

As of December 31, 2017, approximately 226,466 square feet of this total has closed and transferred to our Strategic Developments segment.

(e)

The entire project is subject to a ground lease where we are the ground lessee.

21

Table of Contents

The following table summarizes certain metrics of our office assets within our Operating Assets Segment as of December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Office Assets

 

Location

   

Rentable Sq.Ft./Units

 

% Leased

 

Annualized

Base Rent

(In thousands) (a)

 

Annualized Base Rent Per Square Foot (a)

 

Effective 

Annual Rent

(In thousands) (b)

 

Effective Annual Rent per Square Foot (b)

   

 

Year Built/
Acquired/ Last Renovated

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1725 Hughes Landing Boulevard

 

The Woodlands, TX

 

331,754

 

69.8

%

 

$

5,366

 

$

23.16

 

$

7,110

 

$

30.69

 

 

2015

Three Hughes Landing

 

The Woodlands, TX

 

320,815

 

57.3

 

 

 

3,087

 

 

27.28

 

 

4,209

 

 

35.61

 

 

2016

1735 Hughes Landing Boulevard

 

The Woodlands, TX

 

318,170

 

100.0

 

 

 

7,283

 

 

22.89

 

 

10,295

 

 

32.36

 

 

2015

3 Waterway Square

 

The Woodlands, TX

 

232,021

 

100.0

 

 

 

6,484

 

 

27.95

 

 

9,487

 

 

40.89

 

 

2013

4 Waterway Square

 

The Woodlands, TX

 

218,551

 

100.0

 

 

 

6,392

 

 

29.25

 

 

8,338

 

 

38.15

 

 

2010

One Hughes Landing

 

The Woodlands, TX

 

197,719

 

100.0

 

 

 

5,646

 

 

28.56

 

 

8,355

 

 

42.26

 

 

2013

Two Hughes Landing

 

The Woodlands, TX

 

197,714

 

97.8

 

 

 

5,478

 

 

28.77

 

 

8,034

 

 

42.20

 

 

2014

9303 New Trails

 

The Woodlands, TX

 

97,967

 

58.2

 

 

 

1,261

 

 

22.13

 

 

1,882

 

 

33.04

 

 

2008

1400 Woodloch Forest

 

The Woodlands, TX

 

95,667

 

96.6

 

 

 

2,745

 

 

29.70

 

 

2,882

 

 

30.53

 

 

1981

3831 Technology Forest Drive

 

The Woodlands, TX

 

95,078

 

100.0

 

 

 

2,159

 

 

22.70

 

 

3,025

 

 

31.82

 

 

2014

2201 Lake Woodlands Drive (c)

 

The Woodlands, TX

 

24,119

 

100.0

 

 

 

333

 

 

13.80

 

 

NM

 

 

NM

 

 

1994

 

 

 

 

2,129,575

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Columbia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10-70 Columbia Corporate Center

 

Columbia, MD

 

888,474

 

92.6

 

 

 

21,832

 

 

26.65

 

 

22,011

 

 

26.87

 

 

2012 / 2014

One Merriweather

 

Columbia, MD

 

202,603

 

81.3

 

 

 

3,333

 

 

29.35

 

 

3,342

 

 

29.43

 

 

2017

Two Merriweather

 

Columbia, MD

 

124,635

 

58.2

 

 

 

2,571

 

 

35.45

 

 

2,571

 

 

35.45

 

 

2017

One Mall North

 

Columbia, MD

 

98,607

 

98.7

 

 

 

2,874

 

 

29.52

 

 

2,918

 

 

29.97

 

 

2016

Columbia Office Properties (d)

 

Columbia, MD

 

61,598

 

100.0

 

 

 

1,681

 

 

27.29

 

 

1,790

 

 

29.06

 

 

1969/1972

 

 

 

 

1,375,917

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summerlin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ONE Summerlin

 

Las Vegas, NV

 

206,279

 

95.2

 

 

 

6,804

 

 

35.44

 

 

6,804

 

 

35.44

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

110 North Wacker (e)

 

Chicago, IL

 

226,000

 

100.0

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1957

Total

 

 

 

3,937,771

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Annualized Base Rent is calculated as the monthly Base Minimum Rent for the property for December 31, 2017 multiplied by 12. Annualized Base Rent Per Square Foot is the Annualized Base Rent for the property at December 31, 2017 divided by the average occupied square feet. 

(b)

Effective Annual Rent includes base minimum rent and common area maintenance recovery revenue. Effective Annual Rent Per Square Foot is the Effective Annual Rent divided by the average occupied square feet.

(c)

2201 Lake Woodlands Drive serves as temporary space for tenants relocating to permanent space; therefore, the Effective Annual Rent per Square Foot data is not meaningful.

(d)

Excludes the Ridgely Building which was moved to Strategic Developments in the fourth quarter of 2017.

(e)

Per the early termination agreement, tenant stopped paying rent in 2017 and vacated the premises effective January 2018. We began demolition of the building in the first quarter of 2018, and construction is expected to begin in the second quarter of 2018.

The following tables summarize certain metrics of our multi-family, hospitality, and other Operating Assets as of December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family Assets

 

Location

    

Economic
Ownership %

 

# Units

 

 

Retail Square Feet

 

 

% Leased

 

 

Average Monthly Rate

 

 

Average Monthly Rate Per Square Foot

 

 

Year Built / Acquired / Last Renovated

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Millennium Six Pines Apartments

 

The Woodlands, TX

 

100

%  

 

314

 

 

 —

 

 

 

98.4

%  

 

$

1,971

 

 

$

2.06

 

 

2014

 

Millennium Waterway Apartments

 

The Woodlands, TX

 

100

 

 

393

 

 

 —

 

 

 

95.9

 

 

 

1,817

 

 

 

2.02

 

 

2010

 

One Lakes Edge

 

The Woodlands, TX

 

100

 

 

390

 

 

23,280

 

 

 

98.2

 

 

 

2,308

 

 

 

2.34

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Columbia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Metropolitan Downtown Columbia

 

Columbia, MD

 

50

 

 

380

 

 

13,591

 

 

 

95.0

 

 

 

1,966

 

 

 

2.08

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summerlin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Constellation

 

Las Vegas, NV

 

100

 

 

124

 

 

 —

 

 

 

97.6

 

 

 

2,114

 

 

 

1.66

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seaport District

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

85 South Street

 

New York, NY

 

100

 

 

22

 

 

13,000

 

 

 

95.5

 

 

 

3,628

 

 

 

1.89

 

 

2014

 

 

 

 

 

 

 

 

1,623

 

 

49,871

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hospitality Assets

 

Location

    

Economic
Ownership %

 

# Keys

 

2017 Average Daily Rate

 

 

2017 Revenue Per Available Room

 

Year Built / Acquired / Last Renovated

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Embassy Suites at Hughes Landing

 

The Woodlands, TX

 

100

%  

 

205

 

$

191.48

 

 

$

154.58

 

 

 

2015

 

The Westin at The Woodlands

 

The Woodlands, TX

 

100

 

 

302

 

 

205.95

 

 

 

144.77

 

 

 

2016

 

The Woodlands Resort & Conference Center

 

The Woodlands, TX

 

100

 

 

406

 

 

204.80

 

 

 

108.92

 

 

 

2014

(a)

(a)

The Woodlands Resort & Conference Center was built in 1974, expanded in 2002, and renovated in 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Assets

 

Location

 

Economic
Ownership %

 

Asset Type

 

Square Feet / Acres / Units

 

 

% Leased

 

Year Built / Acquired / Last Renovated

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands Parking Garages

 

The Woodlands, TX

 

100

%  

 

Garage

 

 

2,988

 

 

 

N/A

 

 

 

2008/2009

(a)

Woodlands Sarofim #1

 

The Woodlands, TX

 

20

 

 

Industrial

 

 

129,790

 

 

 

71.4

%  

 

 

late 1980s

 

Stewart Title of Montgomery County, TX

 

The Woodlands, TX

 

50

 

 

Title Company

 

 

 —

 

 

 

N/A

 

 

 

—

 

HHC 242 Self-Storage

 

The Woodlands, TX

 

100

 

 

Storage

 

 

654

 

 

 

37.0%

 

 

 

2017

 

HHC 2978 Self-Storage

 

The Woodlands, TX

 

100

 

 

Storage

 

 

784

 

 

 

33.9%

 

 

 

2017

 

Woodlands Ground Lease

 

The Woodlands, TX

 

100

 

 

Ground lease

 

 

N/A

 

 

 

N/A

 

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summerlin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summerlin Hospital Medical Center

 

Las Vegas, NV

 

5

 

 

Hospital

 

 

 —

 

 

 

N/A

 

 

 

1997

 

Las Vegas 51s

 

Las Vegas, NV

 

100

 

 

Minor League Baseball Team

 

 

 —

 

 

 

N/A

 

 

 

2017

 

Hockey Ground Lease

 

Las Vegas, NV

 

100

 

 

Ground lease

 

 

N/A

 

 

 

N/A

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ward Village

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Kewalo Basin Harbor

 

Honolulu, HI

 

Lease

 

 

Marina

 

 

55 acres

 

 

 

N/A

 

 

 

—

 

(a)

The Woodlands Parking Garages consist of two garages: Woodloch Forest Garage, built in 2008, and Waterway Square Garage, built in 2009.

The following table summarizes our Operating Segment lease expirations:

 

 

 

 

 

 

 

 

 

 

 

Year

    

Number of Expiring Leases

    

Total Square Feet Expiring

    

Total 
Annualized Base 
Rent Expiring 
(in thousands)

    

% of Total 
Annual Gross Rent Expiring

2018

 

187

(a)

291,545

 

$

8,506,561

 

4.8

%

2019

 

123

 

639,017

 

 

12,669,664

 

7.1

 

2020

 

131

 

435,588

 

 

11,644,558

 

6.6

 

2021

 

74

 

435,456

 

 

11,524,889

 

6.5

 

2022

 

117

 

848,444

 

 

12,282,270

 

6.9

 

2023

 

80

 

588,995

 

 

20,056,641

 

11.3

 

2024

 

68

 

596,966

 

 

15,037,891

 

8.5

 

2025

 

141

 

767,541

 

 

29,081,412

 

16.4

 

2026

 

36

 

205,246

 

 

6,377,186

 

3.6

 

2027

 

47

 

621,887

 

 

18,227,733

 

10.3

 

 2028+

 

72

 

1,141,695

 

 

32,106,417

 

18.0

 

Total

 

1,076

 

6,572,380

 

$

177,515,222

 

100.0

%

(a)

Includes 95 specialty leases totaling 76,580 square feet which expire in less than 365 days.

Strategic Developments


We continue to plan, develop plan to develop,and hold or seek development rights for unique properties primarily in New York, New York; Honolulu, Hawaii;Hawai‘i; The Woodlands, Texas; Allen, Texas; Alexandria, Virginia; Columbia, Maryland; West Windsor, New Jersey; and Las Vegas, Nevada. We continue to execute our strategic plans for developing several of these assets with construction either actively underway or pending. Once stabilized, Strategic Developments are transferred into our Operating Assets segment and increase recurring cash flow.


The majority of our Total Estimated Costs of projects currently Under Constructionunder construction relate to our projects in Honolulu andat Ward Village, in New York at the Seaport District.District and in Chicago at 110 North Wacker. Ward Village our key development in Honolulu, Hawaii, is a globally recognized urban master planned condominium community offering integration with local culture, access to parks and public amenities, unique retail experiences, exceptional residences and desirable workforce housing. The Seaport District, located on the East River in Lower Manhattan, encompasses seven buildings on several city blocks (inclusive of Historic Area/Uplands, Pier 17 and Tin Building) and will total 396,527449,527 square feet  excluding 53,000 square feet related to the Tin Building, of innovative culinary, fashion, entertainment and cultural experiences. Highlights include the renovated Seaport District NYC - Pier 17, with a 1.5-acre rooftop that will havehas a restaurant, outdoor bars and a venue for special events, scheduledwhich opened throughout 2018. Additionally, 53,396 square feet related to open throughout 2018.

the Seaport District NYC - Tin Building is being redeveloped. 110 North Wacker is a 1.5 million square foot Class-A office building located between Wacker Drive and the Chicago River. The tower will feature an abundance of first-class modern amenities, including retail and dining options, a conference center, a fitness facility and state-of-the-art building systems.

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Table of Contents

The following table summarizes our Strategic Developments projects as of December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Location

    

Size / GLA

    

Size 
(Acres)

    

Total Estimated Cost
(in thousands)

 

Construction Start

 

Estimated Completion

 

Estimated Stabilization Date

Strategic Developments Under Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Creekside Park Apartments

 

The Woodlands, TX

 

292 units

 

14

 

$

42,111

 

Q1 2017

 

Q3 2018

 

2019

100 Fellowship Drive

 

The Woodlands, TX

 

203,000

 

14

 

 

63,278

 

Q1 2017

 

2019

 

2019

Lake Woodlands Crossing Retail

 

The Woodlands, TX

 

60,300 retail

 

 8

 

 

15,381

 

Q4 2017

 

Q4 2018

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Columbia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

m.flats/TEN.M (a)

 

Columbia, MD

 

437 units

 

 5

 

 

109,000

 

Q1 2016

 

Q1 2018

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ward Village

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ae`o

 

Honolulu, HI

 

466 units / 68,300 retail

 

 3

 

 

428,508

 

Q1 2016

 

2019

 

N/A

Anaha

 

Honolulu, HI

 

317 units / 16,100 retail

 

 2

 

 

401,314

 

Q4 2014

 

Opened

(b)

N/A

Ke Kilohana

 

Honolulu, HI

 

424 units / 21,900 retail

 

 1

 

 

218,898

 

Q3 2016

 

2019

 

N/A

Waiea

 

Honolulu, HI

 

174 units / 8,200 retail

 

 2

 

 

424,604

 

Q2 2014

 

Opened

(b)

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seaport District

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seaport District NYC - Pier 17 and Historic Area / Uplands

 

New York, NY

 

396,131

(c)

 6

 

 

622,883

 

Q4 2013

 

Q4 2018

 

2021

Seaport District NYC - Tin Building

 

New York, NY

 

53,396 retail

 

 1

 

 

161,812

 

Q4 2017

 

Q1 2020

 

2021

33 Peck Slip (a)

 

New York, NY

 

66 rooms

 

N/A

 

 

67,000

 

Q1 2017

 

Q2 2018

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summerlin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aristocrat

 

Las Vegas, NV

 

2 buildings / 90,000 each

 

12

 

 

46,661

 

Q2 2017

 

Q2 2018

 

2019

Las Vegas Ballpark

 

Las Vegas, NV

 

—

 

 9

 

 

—

(d)

—

(d)

—

(d)

N/A

Two Summerlin

 

Las Vegas, NV

 

145,000

 

 4

 

 

49,538

 

Q2 2017

 

Q3 2018

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Future Strategic Developments Rights or Pending Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Columbia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

American City Building

 

Columbia, MD

 

—

 

 1

 

 

 

 

 

 

 

 

 

Three Merriweather

 

Columbia, MD

 

—

 

 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summerlin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

80% Interest in Fashion Show Air Rights

 

Las Vegas, NV

 

—

 

—

 

 

 

 

 

 

 

 

 

Downtown Summerlin Apartments

 

Las Vegas, NV

 

—

 

 9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AllenTowne

 

Allen, TX

 

—

 

238

 

 

 

 

 

 

 

 

 

Bridgeland Apartments

 

Cypress, TX

 

—

 

15

 

 

 

 

 

 

 

 

 

Bridges at Mint Hill

 

Charlotte, NC

 

—

 

210

 

 

 

 

 

 

 

 

 

Circle T Ranch and Power Center (a)

 

Dallas / Ft. Worth, TX

 

—

 

198

 

 

 

 

 

 

 

 

 

Cottonwood Mall

 

Holladay, UT

 

—

 

54

 

 

 

 

 

 

 

 

 

The Elk Grove Collection

 

Elk Grove, CA

 

—

 

64

 

 

 

 

 

 

 

 

 

West Windsor

 

West Windsor, NJ

 

—

 

658

 

 

 

 

 

 

 

 

 

Landmark Mall

 

Alexandria, VA

 

—

 

33

 

 

 

 

 

 

 

 

 

Maui Ranch Land

 

Maui, HI

 

—

 

20

 

 

 

 

 

 

 

 

 

Ridgely Building

 

Columbia, MD

 

—

 

 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands Commercial Land

 

The Woodlands, TX

 

—

 

 4

(e)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Columbia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merriweather District Land

 

Columbia, MD

 

—

 

27

(f)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ward

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ward Commercial Land

 

Honolulu, HI

 

—

 

17

(g)

 

 

 

 

 

 

 

 

2018:
($ in thousands) Location Size / GLA Size 
(Acres)		 Total Estimated Cost Construction Start Estimated Completion Estimated Stabilization Date
Strategic Developments Under Construction            
Bridgeland              
Lakeside Row Cypress, TX  312 units
 15
 $48,412
  Q2 2018 Q4 2019 2021
               
The Woodlands              
Creekside Park West The Woodlands, TX 72,624
 12
 22,625
  Q4 2018 Q4 2019 2022
100 Fellowship Drive The Woodlands, TX 203,000
 14
 63,278
 Q2 2017 Q2 2019 Q3 2019
Hughes Landing Daycare The Woodlands, TX 10,000
 1
 3,206
  Q3 2018 Q1 2019 Q4 2019
Two Lakes Edge The Woodlands, TX  386 units
 3
 107,706
  Q2 2018 Q2 2020 2024
               
Chicago              
110 North Wacker Chicago, IL 1,500,000
 1
 712,962
  Q1 2018 Q3 2020 2023
               
Columbia              
6100 Merriweather and Garage Columbia, MD 320,811
 4
 138,221
  Q2 2018 Q3 2019 2023
Columbia Multi-family Columbia, MD  382 units / 56,755 retail
 3
 116,386
  Q2 2018 Q4 2019 2023
               
Ward Village              
‘A‘ali‘i Honolulu, HI  751 units / 11,336 retail
 2
 411,777
 Q4 2018 2021 N/A
Ae‘o Honolulu, HI  465 units / 68,300 retail
 3
 428,508
 Q1 2016 Opened(c)N/A
Anaha Honolulu, HI  317 units / 16,100 retail
 2
 401,314
 Q4 2014 Opened(b)N/A
Ke Kilohana Honolulu, HI  423 units / 21,900 retail
 1
 218,898
 Q3 2016 Q2 2019 N/A
Waiea Honolulu, HI  174 units / 8,200 retail
 2
 452,041
 Q2 2014 Opened(b)N/A
               
Seaport District              
Seaport District NYC - Tin Building New York, NY  53,396 retail
 1
 159,982
 Q4 2017 Q4 2020 2022
               
Summerlin              
Summerlin Ballpark Las Vegas, NV —
 7
 122,452
 Q1 2018 Q2 2019 Q3 2019
Tanager Apartments Las Vegas, NV  267 units
 9
 59,276
 Q1 2018 Q3 2019 2020
               
Future Strategic Developments Rights or Pending Construction          
               
Columbia              
American City Building Columbia, MD —
 1
        
Ridgely Building Columbia, MD —
 1
        
Sterrett Place Columbia, MD —
 1
        
               
Seaport District              
250 Water Street New York, NY —
 1
        
               
Summerlin              
80% Interest in Fashion Show Air Rights Las Vegas, NV —
 —
        
               
Other              
Bridges at Mint Hill Charlotte, NC —
 210
        
Circle T Ranch and Power Center (a) Dallas / Ft. Worth, TX —
 198
        
Cottonwood Mall Holladay, UT —
 54
        
The Elk Grove Collection Elk Grove, CA —
 64
        
Landmark Mall Alexandria, VA —
 33
        
Monarch City Allen, TX —
 238
        
Maui Ranch Land Maui, HI —
 20
        
West Windsor West Windsor, NJ —
 658
        
               
Commercial Land              
               
The Woodlands              
The Woodlands Commercial Land The Woodlands, TX —
 4
(d)       
               
Columbia              
Merriweather District Land Columbia, MD —
 23
(e)       
               
Ward              
Ward Commercial Land Honolulu, HI —
 15
(f)       

(a)

These are unconsolidatednon-consolidated joint venture partnerships.

(b)

Waiea and Anaha opened and residents began occupying units in November 2016 and October 2017, respectively. All retail has been placed in service.

(c)

This represents total square footage for Pier 17Ae‘o opened and Uplands, including Fulton Market Building, a portion of which hasresidents began occupying units in December 2018. All retail have not been leased but building placed in service.

(d)

See further discussion in Management’s Discussion and Analysis on the current status of the Las Vegas Ballpark.

(e)

Represents land transferred to the Strategic Developments segment in 2015 for future development at The Woodlands.

(f)

(e)

Represents land transferred to the Strategic Developments segment in 2015 for future development in the Merriweather District in Columbia, Maryland, excluding acreage relating to One and Two Merriweather now in service in our Operating Assets Segment and Three6100 Merriweather pending constructionand Columbia Multi-family (see above).

(g)

(f)

Represents land transferred to the Strategic Developments segment for future development at Ward Village, excluding acreage related toAe` ‘A‘ali‘i, Ae‘o, Anaha, Ke Kilohana and Waiea.


ITEM 3.   LEGAL PROCEEDINGS


We, as part of our normal business activities, are a party to a number of legal proceedings. Management periodically assesses our liabilities and contingencies in connection with these matters based upon the latest information available. We disclose material pending legal proceedings pursuant to Securities and Exchange Commission rules and other pending matters as we may determine to be appropriate. As of December 31, 2017,2018, management believes that any monetary liability or financial impact of claims or potential claims to which we might be subject after final adjudication of any legal procedures would not be material to our financial

24

Table of Contents

position, results of operations or cash flows.

See Note 10 - Commitments and Contingencies for further discussion.


ITEM 4.   MINE SAFETY DISCLOSURE

Not applicable.


PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES


Market Information

The Company’s


Our common stock is traded on the New York Stock Exchange (the “NYSE”) under the symbol “HHC”. The following table shows the high and low sales prices of our common stock on the NYSE, as reported in the consolidated transaction reporting system for each quarter of fiscal 2017 and 2016.

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Price Range

 

    

High

    

Low

Year Ended December 31, 2017

 

 

 

 

 

 

Fourth Quarter

 

$

131.79

 

$

116.92

Third Quarter

 

 

126.77

 

 

114.47

Second Quarter

 

 

130.00

 

 

115.24

First Quarter

 

 

119.00

 

 

105.33

Year Ended December 31, 2016

 

 

 

 

 

 

Fourth Quarter

 

$

118.84

 

$

103.30

Third Quarter

 

 

121.71

 

 

110.85

Second Quarter

 

 

115.61

 

 

98.43

First Quarter

 

 

109.14

 

 

81.34

No dividends have been declared or paid in 20172018 or 2016.2017. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, restrictions under debt agreements, financial condition and future prospects and other factors the board of directors may deem relevant.


Number of Holders of Record


As of February 20, 2018,19, 2019, there were 1,8811,698 stockholders of record of our common stock.

25



Table of Contents

Performance Graph


The following performance graph compares the yearly dollar change in the cumulative total shareholder return on our common stock with the cumulative total returns of the NYSE Composite Index, and the group of companies in the Morningstar Real Estate – General Index and the MSCI US REIT Index. The graph was prepared based on the following assumption:

·

Dividendsassumption that dividends have been reinvested subsequent to the initial investment.

26

capture.jpg


ITEM 6.  SELECTED FINANCIAL DATA 


The selected historical financial data for the years ended December 31, 2018, 2017 2016 and 2015,2016, and as of December 31, 20172018 and 2016,2017, has been derived from our audited Consolidated Financial Statements, which are included in this Annual Report as referenced in the index on page F-1.


The selected historical financial data for the years ended December 31, 20142015 and 20132014, and as of December 31, 2016, 2015 2014, and 20132014, has been derived from our audited Consolidated Financial Statements for those years which are not included in this Annual Report.


The selected financial data set forth below are qualified in their entirety by, and should be read in conjunction with, “Item 7. -– Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and related notes thereto included in this Annual Report.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

(In thousands, except per share amounts)

    

2017

    

2016

    

2015

    

2014

    

2013

Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

1,100,120

 

$

1,035,005

 

$

797,088

 

$

634,565

 

$

469,418

Depreciation and amortization

 

 

(132,252)

 

 

(95,864)

 

 

(98,997)

 

 

(55,958)

 

 

(33,845)

Operating expenses

 

 

(803,981)

 

 

(728,647)

 

 

(581,156)

 

 

(441,356)

 

 

(353,837)

Other operating income, net (a)

 

 

54,615

 

 

116,268

 

 

1,829

 

 

29,471

 

 

29,478

Interest income (expense), net

 

 

(60,525)

 

 

(64,365)

 

 

(59,158)

 

 

(16,093)

 

 

(6,574)

Loss on redemption of senior notes due 2021

 

 

(46,410)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Warrant liability (loss) gain

 

 

(43,443)

 

 

(24,410)

 

 

58,320

 

 

(60,520)

 

 

(181,987)

Gain on acquisition of joint venture partner's interest

 

 

23,332

 

 

27,088

 

 

 —

 

 

 —

 

 

 —

Increase (reduction) in tax indemnity receivable

 

 

 —

 

 

 —

 

 

 —

 

 

90

 

 

(1,206)

Loss on settlement of tax indemnity receivable

 

 

 —

 

 

 —

 

 

 —

 

 

(74,095)

 

 

 —

Gain (loss) on disposal of operating assets

 

 

3,868

 

 

(1,117)

 

 

29,073

 

 

 —

 

 

 —

Equity in earnings from Real Estate and Other Affiliates

 

 

25,498

 

 

56,818

 

 

3,721

 

 

23,336

 

 

14,428

Benefit (provision) for income taxes

 

 

45,801

 

 

(118,450)

 

 

(24,001)

 

 

(62,960)

 

 

(9,570)

Net income (loss)

 

 

166,623

 

 

202,326

 

 

126,719

 

 

(23,520)

 

 

(73,695)

Net loss (income) attributable to noncontrolling interests

 

 

1,781

 

 

(23)

 

 

 —

 

 

(11)

 

 

(95)

Net income (loss) attributable to common stockholders

 

$

168,404

 

$

202,303

 

$

126,719

 

$

(23,531)

 

$

(73,790)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share:

 

$

4.07

 

$

5.12

 

$

3.21

 

$

(0.60)

 

$

(1.87)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share:

 

$

3.91

 

$

4.73

 

$

1.60

 

$

(0.60)

 

$

(1.87)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

(In thousands)

    

2017

    

2016

    

2015

    

2014

    

2013

Cash Flow Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

319,032

 

$

58,915

 

$

23,930

 

$

(58,315)

 

$

129,332

Investing activities

 

 

(322,681)

 

 

(38,563)

 

 

(575,568)

 

 

(746,456)

 

 

(294,325)

Financing activities

 

 

199,198

 

 

199,857

 

 

436,488

 

 

470,274

 

 

830,744

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

(In thousands)

    

2017

    

2016

    

2015

    

2014

    

2013

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in real estate - cost (b)

 

$

5,432,002

 

$

5,056,216

 

$

4,832,443

 

$

4,170,242

 

$

3,085,854

Total assets

 

 

6,729,064

 

 

6,367,382

 

 

5,721,582

 

 

5,105,268

 

 

4,559,013

Total debt

 

 

2,857,945

 

 

2,690,747

 

 

2,443,962

 

 

1,978,807

 

 

1,505,768

Total equity

 

 

3,188,551

 

 

2,571,510

 

 

2,363,889

 

 

2,227,506

 

 

2,245,146


We adopted ASU 2014-09, Revenues from Contracts with Customers (Topic 606), on January 1, 2018. As discussed in the notes to our Consolidated Financial Statements, we adopted the new standard using the modified retrospective transition method, and prior period amounts presented have not been adjusted. The adoption of the new standard primarily impacted the recognition of condominium rights and unit sales revenues and cost of sales. 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.

 Year Ended December 31,
(In thousands, except per share amounts)2018 2017 2016 2015 2014
Operating Data:         
Total revenues$1,064,537
 $1,100,120
 $1,035,005
 $797,088
 $634,565
Operating expenses(830,226) (803,981) (728,647) (581,156) (441,356)
Depreciation and amortization(126,565) (132,252) (95,864) (98,997) (55,958)
Other operating (loss) income, net (a)(936) 54,615
 116,268
 1,829
 29,471
Interest expense, net(73,542) (60,525) (64,365) (59,158) (16,093)
Loss on redemption of senior notes due 2021—
 (46,410) —
 —
 —
Warrant liability (loss) gain—
 (43,443) (24,410) 58,320
 (60,520)
Gain on acquisition of joint venture partner's interest—
 23,332
 27,088
 —
 —
Increase in tax indemnity receivable—
 —
 —
 —
 90
Loss on settlement of tax indemnity receivable—
 —
 —
 —
 (74,095)
(Loss) gain on disposal of operating assets(4) 3,868
 (1,117) 29,073
 —
Equity in earnings from Real Estate and Other Affiliates39,954
 25,498
 56,818
 3,721
 23,336
(Provision) benefit for income taxes(15,492) 45,801
 (118,450) (24,001) (62,960)
Net income (loss)57,726
 166,623
 202,326
 126,719
 (23,520)
Net (income) loss attributable to noncontrolling interests(714) 1,781
 (23) —
 (11)
Net income (loss) attributable to common stockholders$57,012
 $168,404
 $202,303
 $126,719
 $(23,531)
          
Basic earnings (loss) per share:$1.32
 $4.07
 $5.12
 $3.21
 $(0.60)
          
Diluted earnings (loss) per share:$1.32
 $3.91
 $4.73
 $1.60
 $(0.60)
 Year Ended December 31,
(In thousands)2018 2017 2016 2015 2014
Cash Flow Data:         
Operating activities$210,520
 $165,567
 $239,103
 $(79,431) $83,080
Investing activities(841,771) (315,604) (33,958) (568,988) (767,386)
Financing activities391,166
 199,198
 199,857
 436,488
 470,274
 As of December 31,
(In thousands)2018 2017 2016 2015 2014
Balance Sheet Data:         
Investments in real estate - cost (b)$6,265,574
 $5,432,002
 $5,056,216
 $4,832,443
 $4,170,242
Total assets7,355,799
 6,729,064
 6,367,382
 5,721,582
 5,105,268
Total debt3,181,213
 2,857,945
 2,690,747
 2,443,962
 1,978,807
Total equity3,238,126
 3,188,551
 2,571,510
 2,363,889
 2,227,506

(a)

2017 includes the $32.2 million gain on the sale of 36 acres of land at The Elk Grove Collection and $20.2 million gain on sale of Kendall Town Center. 2016 includes the $140.5 million gain on the sale of 80 South Street and a $35.7 million impairment charge on Park West.

(b)

Amount represents Net investment in real estate excluding accumulated depreciation.


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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The following discussion should be read in conjunction with our consolidated financial statementsConsolidated Financial Statements and the related notes filed as a part of this Annual Report. This discussion contains forward-looking statements that involve risks, uncertainties, assumptions and other factors, including those described in Part I, “Item 1A. Risk Factors” and elsewhere in this Annual Report. These factors and others not currently known to us could cause our financial results in 20172018 and subsequent fiscal years to differ materially from those expressed in, or implied by, those forward-looking statements. You are cautioned not to place undue reliance on this information which speaks only as of the date of this report. We are not obligated to update this information, whether as a result of new information, future events or otherwise, except as may be required by law.


All references to numbered Notes are to specific Notes to our Consolidated Financial Statements included in this Annual Report and which descriptions are incorporated into the applicable response by reference. Capitalized terms used, but not defined, in this Management’s Discussion and Analysis of Financial Condition and Results of OperationOperations (“MD&A”) have the same meanings as in such Notes.


Overview


Please refer to “Item 1. Business” for a general description of each of the assets contained in our three business segments and “Item 2. Properties” for details regarding the size, location and key metrics about our various properties.


The following highlights significant milestones achieved during 20172018 for the Company and each of our business segments. Each of these items is more fully described hereinafter (all items are pre-tax unless otherwise noted).


Throughout 2017,2018, we demonstrated strong operating results realizing $1.1 billion in total revenues, an increase of $65.1 million as compared to 2016 driven by increases in earnings before tax in our Operating Assets and MPC segments of $24.0 million compared to 2017, offset by a modest decline in our Strategic Developments segment. The increase in the Operating Assets segment was primarily attributable to increased occupancy and continued stabilization at our office properties, as well as increased room rates and conference and food and beverage earnings at our hospitality assets. The increase in the MPC segment was primarily attributable to superpad sales at Summerlin and increased single-family lot sales at Bridgeland and The Woodlands Hills. MPC residential land sales for the year ended December 31, 2018 were the highest in the Company's history. The decrease in revenuesearnings before tax in our Strategic Developments segment was primarily due to a decreaserequired change in accounting method as to how we recognize revenue on our condominium rights and unit sales recognized on a percentage of completion basis,projects, as two of our residential towers are substantially sold. Despite higher revenues, the decline in operating income was largely the result of a  one-time gainwell as non-recurring gains on sales of properties realized$51.2 million recognized in 2016 relating to the opportunistic sale of 80 South Street Assemblage and is not indicative of the underlying business results within our operating segments.

2017. These changes are explained in further detail below.


Capital and Financing Activities


In 2017,2018, we were also able to maintain our strong balance sheet, financial flexibility and liquidity to fund future growth. As of December 31, 2017,2018, we have $861.1$499.7 million of cash and cash equivalents, and, based on extended maturity dates, we have only $78.2approximately $93.4 million of debt maturing during 2018. In Marchpayments due in 2019. On September 18, 2018, certain wholly-owned subsidiaries (the “Borrowers”) of 2017, we issued $800the Company entered into a $700.0 million loan agreement (the “Loan Agreement”), which provides for a $615.0 million term loan (the “Term Loan”) and an $85.0 million revolver loan (the “Revolver Loan” and together with the Term Loan, the "Senior Secured Credit Facility" or the “Loans”), with Wells Fargo Bank, National Association, as administrative agent and a lender, as well as other lenders. The Term Loan proceeds were used to refinance approximately $608.7 million of 5.375% senior notes due March 15, 2025 (the “2025 Notes”), usingexisting debt, and the sales proceeds to redeem all $750 million of the 6.875% senior notes, to pay related transaction fees and expenses, and to repay construction financings and fund ongoing development projects and general corporate needs.Revolver Loan remains undrawn. This refinancing transaction added meaningful duration to our debt maturity profile, reduced our current coupon by 150 basis points and maintained our current liquidity profile all at a positive net present value basis. In June of 2017, we opportunistically issued an additional $200.0 millionprofile. Concurrent with the funding of the 2025 Notes atTerm Loan, we entered into a premiumswap agreement to parfix 100% of 102.25%the outstanding principal to a rate of 4.61%, further increasingsignificantly reducing our liquidity profile.

In addition, ourfloating rate exposure.


Our liquidity was further enhanced during the year by obtaining approximately $127.6$907.1 million inof new construction financings, obtaining $49.2$875.1 million in non-recourseother financings a $30.0 million increase in The Woodlands Master Credit Facility, the receiptand receiving reimbursements of our first reimbursement of $1.6$22.7 million from the first tranche of $38.5 million in Tax Increment Financedtax increment financing ("TIF") bonds issued by Howard County, Maryland (with another $14.4 million submitted for reimbursement as of December 31, 2017, to offset our development costs), and the receipt of $52.0 million from our CEO and President as consideration for the issuance of warrants to these executives. Finally, we closed on the sales of six non-core assets for total proceeds of $88.6 million, resulting in a net gain of $51.4 million included in Gains on sales of properties from our Strategic Developments segment and $3.9 million in Gains on sales of operating properties from our Operating Assets segment. These sales have generated $88.5 million in taxable losses.

costs.

On February 23, 2018, we repurchased 475,920 shares of our 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 $57,267,453 in the aggregate. The repurchase transaction was consummated on February 21, 2018 and was funded with cash on hand.

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Master Planned Communities

In 2017, we increased our MPC segment earnings before tax to $190.4 million, an increase of 6.1% as compared to prior year, bolstered by strong performance in Bridgeland and Summerlin as well as the opening and initial land sales at our newest MPC, The Woodlands Hills. In total during 2017, we sold 349.6 acres of residential land at a price per acre increase of 1.3%, 26.1% and 12.1% at Bridgeland, Summerlin and The Woodlands, respectively.These increases, along with the sale of 35.7 acres of commercial land, helped drive an increase in total revenue in our MPC segment by $46.2 million. In addition, we recognized our $23.2 million share of earnings from The Summit, our luxury golf course joint venture development within Summerlin, and received a $10.0 million cash distribution generated by $55.9 million in land sales at the joint venture.

Operating Assets


In our Operating Assets segment, we increased net operating income (“NOI”), including our share of NOI from equity investments and excluding properties sold or in redevelopment, by $18.0$16.3 million, or 13.0%10.4%, to $173.3 million in 2018, compared to $157.0 million in 2017 compared to $139.0 million in 2016.2017. This increase was driven by strong performanceincreases of $6.4 million, $4.4 million and the$2.4 million in NOI at our office, multi-family and retail properties, respectively, all mainly as a result of continued stabilization at several assets in these categories, compounded by an increase in hospitality NOI of assets across all property types,$5.5 million, mainly as a result of increased hotel room rates and conference and food and beverage revenue. These increases were partially offset by NOI reductions related tolosses at our Seaport District properties associated with opening new businesses such as our concert series, winter attractions and restaurants. Excluding the wind down of operating activities at both 110 North Wacker and certain areas of Ward Village, where we will execute on development in the coming months as we pursue future value creation opportunities. We experienced particularly strongSeaport District, NOI growth in our office and hospitality assets for the yearsyear ended December 31, 20172018 would have increased $20.8 million, or approximately 13.1%, over the prior year period. Additionally, we purchased Lakefront North, a campus comprised of two buildings formerly occupied by CB&I and 2016 witha 12.9 acre piece of land.

Master Planned Communities

In 2018, we increased our MPC segment earnings before tax to $203.0 million, an increase of 6.6% compared to prior year, mainly as a result of superpad sales at Summerlin and increased single-family lot sales at Bridgeland and The Woodlands Hills. In total during 2018, we sold 456.2 acres of residential land, an increase of 106.6 acres, or 30.5%, over 2017. This increase in residential land sales helped drive an increase in NOItotal revenue in our MPC segment of $7.3$9.9 million. In addition, we recognized our $36.3 million and $6.9share of earnings from The Summit, which increased $13.1 million respectively.

Also during 2017, we acquired our joint venture partner’s 50.0% interest in Constellation for $8.0 million in cash and 50% ofover the joint venture’s liabilities, for a total of $16.0 million, resulting in a gain of $17.8 million on step-upprior year due to fair value of net assets acquired.  We also acquired our joint venture partner’s 50.0% interestincreased sales in the Las Vegas 51s minor league baseball team, which upon completion of a new stadium will serve as an amenity for our Summerlin MPC, for $16.4 million, resulting in a gain of $5.4 million on step-up to fair value of the net assets acquired.

community.


Strategic Developments


Our Strategic Developments segment experienced another strong year of execution with respect to both the sale of condominium units in Ward Village as well as development activities throughout the portfolio, with two new condominium towers under construction, twothree that have welcomed residents and three projects completed at The Woodlands and Columbia.the Seaport District. We reported revenues of $464.3$357.7 million from condominium rights and unit sales at our four residential condominium towers available for sale in Ward Village, as compared to $464.3 million in 2017 and $485.6 million in 20162016. A change in accounting methods discussed previously contributed to the 2018 decrease and $305.3 million in 2015.makes the periods not comparable. As of December 31, 20172018, we have closed on the sales of a total of 464777 units to new residents. With the opening of both Waiea and AnahaAe'o to new residents in December 2018 and the associated proceeds generated from the closings of those units, we repaid the $195.3$174.0 million outstanding balance on the Waiea and Anahaproject's construction loan.


Also within our Strategic DevelopmentDevelopments segment during 2017,2018, we completed construction on: (i) two self-storage facilitiesSeaport District NYC - Pier 17, which includes approximately 213,000 square feet of experiential retail, studio and creative office space; (ii) Mr. C Seaport, our joint venture project for redevelopment of the 66-room Mr. C Seaport hotel which serves as an amenity in The Woodlands totaling 1,438 units; (ii) One Merriweather, a 202,603 square foot, Class A office building in Downtown Columbia;the Seaport District; and (iii) Two Merriweather, a 124,635 square foot, Class A office building in Downtown Columbia. We commenced construction on six projects including: (i) Aristocrat, a 12-acre build-to-suit project including two 90,000 square foot  office buildings, 100% pre-leased to Aristocrat Technologies; (ii) Two Summerlin, a 145,000 square foot Class A office building; (iii) 100 Fellowship Drive, a three-story, 203,000 rentable square foot medical building in The Woodlands which is 100% pre-leased; (iv) Creekside Park Apartments, a 292-unit apartment complex in The Woodlands;Woodlands. We commenced construction on nine projects including: (i) 110 North Wacker, a joint venture project for a 1.5 million square foot office building in Chicago, Illinois; (ii) Summerlin Ballpark, which will serve as the home of the Las Vegas Aviators, our Triple-A baseball team; (iii) Tanager Apartments, a 267-unit apartment complex in Downtown Summerlin; (iv) 6100 Merriweather and Garage, a 320,811 square foot office building in Columbia; (v) Lake Woodlands Crossing Retail center, containingColumbia Multi-family, a 382-unit apartment building with approximately 60,300 rentable retail57,000 square feet of retail, in Columbia; (vi) Hughes Landing Daycare, a build-to-suit project in The Woodlands; (vii) Lakeside Row, a 312-unit multi-family development in Bridgeland; and (viii) Two Lakes Edge, a 386-unit multi-family development with ground floor retail in The Woodlands; and (vi) 33 Peck Slip, our joint venture project for redevelopment of(ix) Creekside Park West, a 66-room hotel serving as an amenityretail space in The Woodlands.
Earnings Before Taxes

In addition to the required presentations using accounting principles generally accepted in the Seaport District. Finally,United States ("GAAP"), we announceduse certain non-GAAP performance measures, as we believe these measures improve the understanding of our intentions to develop a new ballpark in downtown Summerlin for the Las Vegas 51s minor league baseball team as well as a naming rights agreement with the Las Vegas Conventionoperational results and Visitor’s Authority which will pay us $4 million annually for a 20-year term. We broke ground on the ballpark in February 2018.

Earnings Before Taxes

We use a numbermake comparisons of operating measures for assessing operating performance of properties within our segments, some of which may not be commonresults among all threepeer companies more meaningful. Management continually evaluates the usefulness, relevance, limitations and calculation of our segments. We believe that investors may find somereported non-GAAP performance measures to determine how best to provide relevant information to the public, and thus such reported measures could change.


Because our three segments, Operating Assets, MPC and Strategic Developments, are managed separately, we use different operating measures more useful than others when separately evaluating each segment. Oneto assess operating results and allocate resources among these three segments. The one common operating measure used to assess operating results for our business segments is EBT. We believe EBT provides useful information about the operating performance of each segment and

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its properties as further discussed below. EBT may be calculated differently by other companies in our industry, limiting its usefulness as a comparative measure.

EBT, as it relates to each business segment, represents the revenues less expenses of each segment, including interest income, interest expense, depreciation and amortization and equity in earnings of real estateReal Estate and other affiliates.Other Affiliates. EBT excludes corporate expenses and other items that are not allocable to the segments. See discussion herein at Corporate and other items for further details. We present EBT for each segment because we


use these measures,this measure, among others, internally to assess the core operating performance of our assets. We also present these measures because we believe certain investors use them as a measure of our Company’s historical operating performance and our ability to service existing debt and incur new debt. We believe that the inclusion of certain adjustments to net income to calculate EBT is appropriate to provide additional information to investors. A reconciliation of EBT to consolidated net income as computed in accordance with GAAP has beenis presented in Note 17 –- Segments.


EBT should not be considered as an alternative to GAAP net income attributable to common stockholders or GAAP net income, as it has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of the limitations of EBT are that it does not include the following in our calculations:

·

cash expenditures, or future requirements for capital expenditures or contractual commitments;


·

corporate general and administrative expenses;

cash expenditures, or future requirements for capital expenditures or contractual commitments;

·

interest expense on our corporate debt;

corporate general and administrative expenses;

·

income taxes that we may be required to pay;

interest expense on our corporate debt;

·

any cash requirements for replacement of fully depreciated or amortized assets; and

income taxes that we may be required to pay;

·

limitations on, or costs related to, the transfer of earnings from our Real Estateany cash requirements for replacement of fully depreciated or amortized assets; and Other Affiliates to us.

limitations on, or costs related to, the transfer of earnings from our Real Estate and Other Affiliates to us.

Results of Operations


Our revenues are primarily derived from the sale of superpads and individual lots at our master planned communities to homebuilders, from tenants and customers at our commercial, residential and residentialhospitality operating properties, overage rent and recoveries of operating expenses, from the sale of superpads and individual lots in our MPCs, and from the sale of condominium units.


The following table reflects our results of operations for the years ended December 31, 2018, 2017 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 

 

2017-2016

 

2016-2015

(In thousands, except per share amounts)

   

2017

   

2016

   

2015

   

Change

   

Change

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MPC segment revenues

 

$

299,543

 

$

253,304

 

$

229,865

 

$

46,239

 

$

23,439

Operating Assets segment revenues

 

 

327,555

 

 

295,165

 

 

259,306

 

 

32,390

 

 

35,859

Strategic Developments segment revenues

 

 

473,022

 

 

486,536

 

 

307,917

 

 

(13,514)

 

 

178,619

Total revenues

 

$

1,100,120

 

$

1,035,005

 

$

797,088

 

$

65,115

 

$

237,917

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MPC segment EBT

 

$

190,351

 

$

179,481

 

$

114,366

 

$

10,870

 

$

65,115

Operating Assets segment EBT

 

 

(28,664)

 

 

(22,985)

 

 

(9,646)

 

 

(5,679)

 

 

(13,339)

Strategic Developments segment EBT

 

 

169,041

 

 

302,022

 

 

97,580

 

 

(132,981)

 

 

204,442

Corporate and other items

 

 

(209,906)

 

 

(137,742)

 

 

(51,580)

 

 

(72,164)

 

 

(86,162)

Income before taxes

 

 

120,822

 

 

320,776

 

 

150,720

 

 

(199,954)

 

 

170,056

Benefit (provision) for income taxes

 

 

45,801

 

 

(118,450)

 

 

(24,001)

 

 

164,251

 

 

(94,449)

Net income (loss)

 

 

166,623

 

 

202,326

 

 

126,719

 

 

(35,703)

 

 

75,607

Net loss (income) attributable to noncontrolling interests

 

 

1,781

 

 

(23)

 

 

 —

 

 

1,804

 

 

(23)

Net income attributable to common stockholders

 

$

168,404

 

$

202,303

 

$

126,719

 

$

(33,899)

 

$

75,584

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted income per share

 

$

3.91

 

$

4.73

 

$

1.60

 

$

(0.82)

 

$

3.13

2016:

30

 Year Ended December 31, 2018-2017 2017-2016
(In thousands, except per share amounts)2018 2017 2016 Change Change
Revenues         
Operating Assets segment revenues$379,124
 $327,555
 $295,165
 $51,569
 $32,390
MPC segment revenues309,451
 299,543
 253,304
 9,908
 46,239
Strategic Developments segment revenues375,962
 473,022
 486,536
 (97,060) (13,514)
Total revenues$1,064,537
 $1,100,120
 $1,035,005
 $(35,583) $65,115
Operating Assets segment EBT$(12,351) $(23,713) $(21,844) $11,362
 $(1,869)
MPC segment EBT202,955
 190,351
 179,481
 12,604
 10,870
Strategic Developments segment EBT91,786
 186,517
 325,277
 (94,731) (138,760)
Corporate and other items(209,172) (232,333) (162,138) 23,161
 (70,195)
Income before taxes73,218
 120,822
 320,776
 (47,604) (199,954)
(Provision) benefit for income taxes(15,492) 45,801
 (118,450) (61,293) 164,251
Net income57,726
 166,623
 202,326
 (108,897) (35,703)
Net (income) loss attributable to noncontrolling interests(714) 1,781
 (23) (2,495) 1,804
Net income attributable to common stockholders$57,012
 $168,404
 $202,303
 $(111,392) $(33,899)
Diluted income per share$1.32
 $3.91
 $4.73
 $(2.59) $(0.82)

TableTotal revenues for the year ended December 31, 2018 decreased compared to the same period in 2017 primarily due to a decrease in Strategic Developments segment revenues, which were meaningfully impacted by the adoption of Contents

ASU 2014-09, Revenues from Contracts with Customers (Topic 606) and all its related amendments (the “New Revenue Standard”) as of January 1, 2018 (the "Adoption Date"); see Note 1 - Summary of Significant Accounting Policies for additional information. Operating Assets segment revenue increased due to increases in Minimum rents and Tenant recoveries at our office, multi-family and retail properties, accompanied by increased room rates and conference and food and beverage revenue at our hospitality properties as well as increased Other rental and property revenues and sponsorship revenue associated with inaugural business openings and events at our Seaport District properties. MPC segment revenue for the year ended December 31, 2018 increased compared to the same period in 2017 primarily due to superpad sales at Summerlin and increased single-family lot sales at Bridgeland and The Woodlands Hills.


Total revenues for the year ended December 31, 2017 increased compared to the same period inyear ended December 31, 2016 primarily due to higher revenues in our MPC and Operating Assets segments. MPC segment revenue increased due to higher land sales at Bridgeland, Summerlin, Maryland, and The Woodlands Hills as well as a two utility easement sales at Bridgeland totaling $10.4 million. Operating Assets segment revenue increased due to increases at our office, multi-family and hospitality properties, as well as the recent acquisition and consolidation of our joint venture partners’ interests in the Las Vegas 51sAviators baseball team and Millennium Six Pines apartments. These increases arewere partially offset by a decline in revenues at 110 North Wacker and Landmark Mall, both nowof which were closed in preparation for redevelopment. The Strategic Developments segment revenue decrease iswas due to less revenue

recognized on a percentage of completion basis at Waiea, which was open to residents at the end of 2016, partially offset by increased revenue at the Anaha, Ae`o and Ke Kilohana condominium projects.

Total revenues for the year ended December 31, 2016 increased compared to the year ended December 31, 2015 primarily due to higher revenues in our Strategic Developments segment. Strategic Developments segment revenue increased due to recognition of revenue related to sales at our Waiea and Anaha condominium projects. Operating Assets segment revenue increased due to the elimination of co-tenancy allowances for the majority of tenants at Downtown Summerlin, recognition of a full year of revenue for various office, multi-family and hospitality properties which opened in 2015 and 2016, and the purchase of our partner’s interest in Millennium Six Pines Apartments (formerly known as Millennium Woodlands Phase II, LLC). The MPC segment revenue increase is due to increased residential land sales, partially offset by decreased commercial land sales in MPCs in 2016 as compared to 2015.


Net expenses related to Corporate and other items increaseddecreased for the year ended December 31, 2017 as2018 compared to the same period in 20162017 primarily due to a $19.0the absence of $43.4 million increase in the Warrantwarrant liability loss priorexpenses and $46.4 million of expenses related to the settlementredemption of these liabilities and a Loss on redemption ofour $750.0 million senior notes due in 2021 that were incurred in 2017 but did not recur in 2018. These decreases were partially offset by an increase of $46.4 million.$61.3 million in the Provision for income taxes for the year ended December 31, 2018. Please refer to the Corporate and other items section elsewhere in this MD&A for additional discussion regarding the accounts comprising thisthe Corporate and other items line item.


The decrease in the Benefit (provision)(Provision) benefit for income taxes for the year ended December 31, 20172018 compared to 20162017 is due to a decrease of $200.0$47.6 million in income before tax and a 2017 tax benefit of $101.7 million related to a reduction in deferred tax liabilities resulting from legislation that was enacted on December 22, 2017. The increase in the provision(Provision) benefit for income taxes for the year ended December 31, 20162017 compared to 2015 is2016 was attributable to an increase of $208.0$200.0 million in operating income decrease in valuation allowance,before tax and other permanent items.

the tax benefit related to the 2017 legislation.

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We have significant permanent differences, primarily from warrant liability gainsstock compensation deductions and losses, and changes in valuation allowances thatnon-deductible executive compensation, which cause our effective tax rate to deviate greatly from statutory rates. The effective tax rate based upon actual operating results wasis 21.4% for the year ended December 31, 2018 compared to (37.4%) for the year ended December 31, 2017 compared toand 36.9% for the year ended December 31, 20162016. The change in the tax rate from 2018 to 2017 was primarily attributable to changes in the federal income tax rate due to the passage of the Tax Cuts and 15.9% for the year ended December 31, 2015.Jobs Act and non-deductible executive compensation. The change in the effective tax rate from 2017 to 2016 was primarily attributable to the Tax Act reducing the corporate tax rate from 35.0% to 21.0%, resulting in a one-time transitional tax benefit of $101.7 million. Other changes in both periods were changes in the warrant liability, valuation allowance related to our deferred tax assets, as well as other items which are permanent differences for tax purposes. IfFor comparison purposes, if changes in the federal tax rate in new tax legislation, warrant liability, valuation allowance, unrecognized tax benefits and other material discrete adjustments to deferred tax liabilities were excluded from the effective tax rate computation and a federal statutory tax rate of 21% was applied, the effective tax rates would have been 36.4%19.6%, 36.3%21.5% and 31.2%22.5% for the years ended December 31, 2018, 2017 and 2016, and 2015, respectively.


The decrease in Net income (loss)attributable to common stockholders for the year ended December 31, 2018 compared to the year ended December 31, 2017 is primarily due to decreased earnings in our Strategic Developments segment, which was impacted by the adoption of the New Revenue Standard as of the Adoption Date, as previously discussed. Additionally, we recognized Gains on sales of properties of $51.4 million and Gain on acquisition of joint venture partner's interest of $23.3 million in 2017, which did not recur in 2018 and further contributed to the decrease in Net income attributable to common stockholders. These decreases were partially offset by the absence in 2018 of Warrant liability loss of $43.4 million and Loss on redemption of senior notes due in 2021 of $46.4 million, which were both recognized in 2017.

The decrease in Net income attributable to common stockholders for the year ended December 31, 2017 compared to the year ended December 31, 2016 iswas primarily due to a decline in gains on sales of properties resulting from the opportunistic $140.5 million gain on sale of 80 South Street Assemblage in 2016, increased warrant liabilities loss and decreased equity in earnings from real estateReal Estate and other affiliatesOther Affiliates in 2017, offset by a $164.3 million decrease in our tax provision, primarily due to a $101.7 million benefit provided by the Tax Act.

The increase in Net income (loss) attributable to common stockholders for the year ended December 31, 2016 compared to the year ended December 31, 2015 is primarily due to significant growth in Strategic Developments EBT from higher condominium unit sales due to construction progress triggering the recognition of revenue under the percentage of completion method and a gain of $140.5 million on the sale of the 80 South Street Assemblage. The increase is also due to higher MPC segment EBT. These increases are partially offset by a provision for impairment and loss on disposal of our Park West property in our Operating Assets segment EBT, a warrant liability loss and an increased provision for income taxes.


Please refer to the individual segment operations sections that follow for explanations of the results of each of our segments for the years ended December 31, 2018, 2017 2016 and 2015.

2016.


32


Operating Assets

EBT for Operating Assets are presented below:

 Year Ended December 31, 2018 - 2017 2017 - 2016
(In thousands)2018 2017 2016 Change Change
Minimum rents$206,132
 $182,468
 $172,437
 $23,664
 $10,031
Tenant recoveries49,585
 45,366
 44,306
 4,219
 1,060
Hospitality revenue82,037
 76,020
 62,252
 6,017
 13,768
Other rental and property revenues41,370
 23,701
 16,170
 17,669
 7,531
Total revenues379,124
 327,555
 295,165
 51,569
 32,390
          
Other property operating costs92,404
 71,748
 60,506
 (20,656) (11,242)
Rental property real estate taxes29,390
 26,523
 24,439
 (2,867) (2,084)
Rental property maintenance costs13,863
 12,872
 12,033
 (991) (839)
Hospitality operating costs59,195
 56,362
 49,359
 (2,833) (7,003)
Provision for doubtful accounts6,020
 2,710
 5,601
 (3,310) 2,891
Total operating expenses200,872
 170,215
 151,938
 (30,657) (18,277)
Segment operating income178,252
 157,340
 143,227
 20,912
 14,113
Depreciation and amortization113,576
 122,421
 86,313
 8,845
 (36,108)
Provision for impairment—
 —
 35,734
 —
 35,734
Interest expense (income), net71,551
 61,584
 50,427
 (9,967) (11,157)
Other loss (income), net7,005
 315
 (4,601) (6,690) (4,916)
Equity in (earnings) loss from Real Estate and Other Affiliates(1,529) (3,267) (2,802) (1,738) 465
EBT$(12,351) $(23,713) $(21,844) $11,362
 $(1,869)

Table of Contents


Master Planned Communities

Master Planned Communities RevenuesMinimum rents and Expenses

Fortenant recoveries increased for the Year Endedyear ended December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridgeland

 

Maryland Communities

 

Summerlin

 

The Woodlands

 

The Woodlands Hills

 

Total MPC

($ in thousands, except %)

 

2017

 

2016

 

2015

 

2017

 

2016

 

2015

 

2017

 

2016

 

2015

 

2017

 

2016

 

2015

 

2017

 

2016

 

2015

 

2017

 

2016

 

2015

Land sales (a)

 

$

39,529

 

$

24,254

 

$

20,385

 

$

10,800

 

 

$

 —

 

 

$

 —

 

 

$

156,617

 

$

148,699

 

$

123,171

 

$

40,367

 

$

42,365

 

$

43,843

 

$

1,282

 

$

 —

 

$

 —

 

$

248,595

 

$

215,318

 

$

187,399

Builder price participation (b)

 

 

398

 

 

754

 

 

1,193

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

21,731

 

 

19,083

 

 

21,465

 

 

706

 

 

1,549

 

 

4,188

 

 

 —

 

 

 —

 

 

 —

 

 

22,835

 

 

21,386

 

 

26,846

Minimum rents

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

(8)

 

 

384

 

 

797

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(8)

 

 

384

 

 

797

Other land revenues (c)

 

 

10,952

 

 

314

 

 

345

 

 

445

 

 

 

418

 

 

 

468

 

 

 

10,124

 

 

9,669

 

 

7,907

 

 

6,572

 

 

5,778

 

 

6,058

 

 

31

 

 

13

 

 

 —

 

 

28,124

 

 

16,192

 

 

14,778

Other rental and property revenue

 

 

 —

 

 

 —

 

 

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

(3)

 

 

24

 

 

45

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3)

 

 

24

 

 

45

Total revenues

 

 

50,879

 

 

25,322

 

 

21,923

 

 

11,245

 

 

 

418

 

 

 

468

 

 

 

188,461

 

 

177,859

 

 

153,385

 

 

47,645

 

 

49,692

 

 

54,089

 

 

1,313

 

 

13

 

 

 —

 

 

299,543

 

 

253,304

 

 

229,865

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales - land

 

 

12,792

 

 

7,672

 

 

6,763

 

 

5,839

 

 

 

 —

 

 

 

 —

 

 

 

83,343

 

 

68,436

 

 

65,414

 

 

18,470

 

 

19,619

 

 

15,888

 

 

672

 

 

 —

 

 

 —

 

 

121,116

 

 

95,727

 

 

88,065

Land sales operations

 

 

7,463

 

 

6,507

 

 

5,945

 

 

1,692

 

 

 

1,317

 

 

 

1,423

 

 

 

9,715

 

 

11,226

 

 

14,943

 

 

19,080

 

 

22,989

 

 

22,521

 

 

827

 

 

332

 

 

75

 

 

38,777

 

 

42,371

 

 

44,907

Provision for (recovery of) doubtful accounts

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 2

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 2

 

 

 —

 

 

 —

Depreciation and amortization

 

 

102

 

 

94

 

 

387

 

 

 8

 

 

 

16

 

 

 

21

 

 

 

93

 

 

81

 

 

112

 

 

120

 

 

120

 

 

120

 

 

 —

 

 

 —

 

 

 —

 

 

323

 

 

311

 

 

640

Other income

 

 

 —

 

 

 —

 

 

 

 

 

 —

 

 

 

 —

 

 

 

 

 

 

 

 —

 

 

 —

 

 

 

 

 

(3,500)

 

 

 —

 

 

 

 

 

 —

 

 

 —

 

 

 

 

 

(3,500)

 

 

 —

 

 

 —

Total expenses

 

 

20,357

 

 

14,273

 

 

13,095

 

 

7,539

 

 

 

1,333

 

 

 

1,444

 

 

 

93,153

 

 

79,743

 

 

80,469

 

 

34,170

 

 

42,728

 

 

38,529

 

 

1,499

 

 

332

 

 

75

 

 

156,718

 

 

138,409

 

 

133,612

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

30,522

 

 

11,049

 

 

8,828

 

 

3,706

 

 

 

(915)

 

 

 

(976)

 

 

 

95,308

 

 

98,116

 

 

72,916

 

 

13,475

 

 

6,964

 

 

15,560

 

 

(186)

 

 

(319)

 

 

(75)

 

 

142,825

 

 

114,895

 

 

96,253

Interest (income) expense, net (d)

 

 

(10,566)

 

 

(9,461)

 

 

(8,780)

 

 

 3

 

 

 

(2)

 

 

 

(33)

 

 

 

(17,386)

 

 

(16,459)

 

 

(14,241)

 

 

4,221

 

 

5,414

 

 

5,524

 

 

(564)

 

 

(577)

 

 

(583)

 

 

(24,292)

 

 

(21,085)

 

 

(18,113)

Equity in (earnings) loss in Real Estate and Other Affiliates (e)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

(23,234)

 

 

(43,501)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(23,234)

 

 

(43,501)

 

 

 —

MPC segment EBT*

 

$

41,088

 

$

20,510

 

$

17,608

 

$

3,703

 

 

$

(913)

(f)

 

$

(943)

(f)

 

$

135,928

 

$

158,076

 

$

87,157

 

$

9,254

 

$

1,550

 

$

10,036

 

$

378

 

$

258

 

$

508

 

$

190,351

 

$

179,481

 

$

114,366

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(GAAP Basis) Residential Gross Margin %

 

 

66.4%

 

 

67.9%

 

 

63.1%

 

 

NM

 

 

 

NM

 

 

 

NM

 

 

 

40.8%

 

 

54.0%

 

 

46.7%

 

 

52.0%

 

 

51.5%

 

 

61.4%

 

 

47.6%

 

 

NM

 

 

NM

 

 

46.5%

 

 

55.0%

 

 

50.7%

(GAAP Basis) Commercial Gross Margin %

 

 

71.8%

 

 

71.1%

 

 

71.1%

 

 

45.9%

 

 

 

NM

 

 

 

NM

 

 

 

87.3%

 

 

50.7%

 

 

51.8%

 

 

76.3%

 

 

60.2%

 

 

70.4%

 

 

NM

 

 

NM

 

 

NM

 

 

62.4%

 

 

62.8%

 

 

67.0%

(*) For a reconciliation of MPC segment EBT 2018 compared to consolidated income before taxes, refer2017 primarily due to Note 17 – Segmentsincreases at our office, retail and multi-family properties. The increase in our Consolidated Financial Statements.

(a) Land sales includes deferred revenue from land sales closedoffice properties was primarily due to increased occupancy and continued stabilization at Three Hughes Landing, 1725 Hughes Landing, One Merriweather, 30 Columbia Corporate Center and ONE Summerlin, as well as placing Two Merriweather in a previous period which met criteriaservice. The increase for recognitionour retail properties was primarily due to on-going stabilization at Downtown Summerlin and increased occupancy at Ward Village Retail. The increase in the current period.

(b) Builder price participation revenue is based on an agreed-upon percentage of the sales price of homes closed relativeour multi-family properties was primarily due to the base lot price which was paid by the homebuilders to us. This revenue fluctuates based upon the numberconsolidation of homes closed that qualifyConstellation Apartments as well as increased occupancy and continued stabilization at One Lakes Edge. Minimum rents and tenant recoveries increased for builder price participation payments.

(c) For the year ended December 31, 2017 Other land revenues includes two salescompared to 2016 primarily due to increases of utility easements$10.1 million for our office properties, $5.3 million at our Bridgeland community recordedmulti-family properties, $0.7 million at our retail properties, and $1.0 million related to our National Hockey League (“NHL”) ground lease, partially offset by decreases of $6.0 million related to the sale of Park West and transfer of Landmark Mall to Strategic Developments. The increase in our office properties was primarily due to One Merriweather being placed in service, the acquisition of One Mall North in Columbia and the continued stabilization of ONE Summerlin, 1725 Hughes Landing and Three Hughes Landing, offset primarily by a decrease for 110 North Wacker related to the future redevelopment of the property. The increase in our multi-family properties was primarily due to the purchase and consolidation of our joint venture partner’s 18.57% interest in Millennium Six Pines Apartments in July 2016 and ongoing leasing activities of One Lakes Edge. The increase in our retail properties was due to the ongoing stabilization of Lakeland Village Center and Creekside Village Green, offset by decreases at Ward Village Retail as certain properties moved into redevelopment.

Hospitality revenues, operating costs and profit margin increased for the year ended December 31, 2018 compared to 2017 primarily due to increased hotel room rates and food and beverage revenue at The Woodlands Resort & Conference Center, The Westin at The Woodlands and the Embassy Suites at Hughes Landing. The increase in hospitality revenues for the year ended December 31, 2017 compared to 2016 was primarily due to a $2.6 million increase at Embassy Suites at Hughes Landing and a $9.7 million increase at The Westin at The Woodlands compared to 2016, with increases in hospitality operating costs due to the on-going stabilization of the two properties placed in service in December 2015 and March 2016. The increase in profit margin for our hospitality properties for the year ended December 31, 2017 compared to 2016 is primarily to due focused efforts to reduce operating expenses at all hospitality properties.

Other rental and property revenue increased for the year ended December 31, 2018 compared to 2017 primarily due to revenue associated with food and beverage, various inaugural events and sponsorships at our Seaport District properties, which increased $19.4 million during the period. Other rental and property revenue increased for the year ended December 31, 2017 compared to

2016 primarily due to revenue related to the Las Vegas Aviators baseball team which was consolidated effective March 1, 2017 with the purchase of our joint venture partner’s 50.0% interest in the team.

Other property operating costs increased for the year ended December 31, 2018 compared to the same period in 2017 totaling $14.1primarily due to the start-up costs associated with opening new businesses at our Seaport District properties such as our concert series, summer activations and restaurants, which increased $28.0 million lessduring the period. These expenses are included in our total estimated costs as shown in the Projects Under Construction table in the Strategic Developments section. Other property operating costs and rental property maintenance costs increased for the year ended December 31, 2017 compared to 2016 due to the purchase of our joint venture partner’s 50.0% interest in the Las Vegas Aviators baseball team, an increase in operating expenses for 110 North Wacker which were previously paid by the tenant, an increase at the Seaport District for the Fulton Market Building which was partially placed in service in the fourth quarter of 2016 and expenses related coststo the seasonal marketing events at the Seaport District, offset by the impact of $3.7 million.

(d) the December 2016 sale of Park West and the first quarter of 2017 transfer of Landmark Mall to our Strategic Developments segment.


Rental property real estate taxes increased for the year ended December 31, 2018 compared to 2017 primarily due to One Merriweather, Two Merriweather, Constellation, Lakefront North and Lakeland Village Center being placed in service. Rental property real estate taxes increased for the year ended December 31, 2017 compared to 2016 primarily due to the purchase and consolidation of Millennium Six Pines Apartments, placing Three Hughes Landing in service, and the late 2015 and early 2016 openings of the Embassy Suites at Hughes Landing and The Westin at The Woodlands, respectively, offset by the sale of Park West.

The provision for doubtful accounts increased for the year ended December 31, 2018 compared to the same period in 2017 primarily due to a bad debt reserve of $2.4 million for a tenant at Ward Village. The provision for doubtful accounts decreased for the year ended December 31, 2017 compared to the same period in 2016 due to improved tenant credit at our retail properties. The 2016 reserves related to two tenants at our retail properties and to the remaining receivables from our Park West property, sold in December 2016.

Depreciation and amortization decreased for the year ended December 31, 2018 compared to 2017 primarily due to the transfers of 110 North Wacker, Ridgely and three buildings at Ward Village Retail from Operating Assets to Strategic Developments. Depreciation and amortization increased for the year ended December 31, 2017 compared to 2016 due to the acceleration of depreciation reflecting shorter remaining useful lives for two office and two retail buildings pending redevelopment and depreciation on assets acquired or newly placed in service during the year ended December 31, 2017.

There was no provision for impairment for the years ended December 31, 2018 and 2017. In the third quarter of 2016 we recognized a $35.7 million impairment charge on Park West as a result of our shorter than previously anticipated holding period of the property. The property was sold in December 2016.

Interest expense, net increased for the year ended December 31, 2018 compared to the same period in 2017 primarily due to higher expenses associated with the new $700.0 million credit facility and swap agreement entered into in September 2018 as well as increases in the one month London Interbank Offered Rate ("LIBOR") rate. Interest expense, net increased for the year ended December 31, 2017 compared to 2016 primarily due to higher loan balances on additional properties acquired or placed in service in 2017 and late 2016, as well as increases in the one month LIBOR rate throughout the second and third quarters of 2017. See further discussion in Note 7 - Mortgages, Notes and Loans Payable, Net in our Notes to Consolidated Financial Statements.

Other loss (income), net increased for the year ended December 31, 2018 compared to 2017 primarily due to legal fees at Merriweather Post Pavilion. Other loss (income), net increased for the year ended December 31, 2017 compared to 2016 due to the settlement received for TPC at Summerlin in 2016 and the write-off of a liability at Riverwalk in 2016.

Equity in earnings from Real Estate and Other Affiliates decreased for the year ended December 31, 2018 compared to the same period in 2017 primarily due to m.flats/TEN.M, which is operating at a loss and was placed in service in the first quarter of 2018. Equity in earnings from Real Estate and Other Affiliates increased for the year ended December 31, 2017 compared to the same period in 2016 primarily due to a $3.4 million distribution from our Summerlin Hospital investment compared to $2.6 million for the same period in 2016 and due to increased earnings at The Metropolitan Downtown Columbia, offset by a decrease in earnings from Mr. C Seaport due to an adjustment for depreciation, a decrease in earnings from Stewart Title due to increased competition in the area and decreases in both the Constellation and Las Vegas Aviators investments as a result of their consolidation with the purchase of our joint venture partners' interests.


Operating Assets Net Operating Income

We believe that NOI is a useful supplemental measure of the performance of our Operating Assets because it provides a performance measure that, when compared year over year, reflects the amountrevenues and expenses directly associated with owning and operating real estate properties and the impact on operations from trends in rental and occupancy rates and operating costs as variances between years in NOI typically result from changes in rental rates, occupancy, tenant mix and operating expenses. We define NOI as operating revenues (rental income, tenant recoveries and other revenue) less operating expenses (real estate taxes, repairs and maintenance, marketing and other property expenses). NOI excludes straight-line rents and amortization of tenant incentives, net interest expense, ground rent amortization, demolition costs, amortization, depreciation, development-related marketing costs and Equity in earnings from Real Estate and Other Affiliates. We use NOI to evaluate our operating performance on a property-by-property basis because NOI allows us to evaluate the impact that property-specific factors such as lease structure, lease rates and tenant base have on our operating results, gross margins and investment returns.

Although we believe that NOI provides useful information to investors about the performance of our Operating Assets, due to the exclusions noted above, NOI should only be used as an additional measure of the financial performance of such assets and not as an alternative to GAAP net income. A reconciliation of Operating Assets EBT to Operating Assets NOI is capitalizedpresented in the table below.

Operating Assets NOI and EBT
  Year Ended December 31, 2018-2017 2017-2016
(In thousands) 2018 2017 2016 Change Change
Retail          
The Woodlands          
Creekside Village Green $2,025
 $1,893
 $1,616
 $132
 $277
Hughes Landing Retail 4,301
 3,733
 3,564
 568
 169
1701 Lake Robbins 515
 284
 381
 231
 (97)
Lake Woodlands Crossing (a) 104
 —
 —
 104
 —
20/25 Waterway Avenue 1,942
 1,837
 1,844
 105
 (7)
Waterway Garage Retail 703
 719
 671
 (16) 48
2000 Woodlands Parkway 81
 (94) (51) 175
 (43)
Bridgeland          
Lakeland Village Center at Bridgeland 1,190
 782
 190
 408
 592
Columbia          
Columbia Regional 2,101
 1,536
 1,467
 565
 69
Seaport District          
Seaport District NYC -  Historic Area / Uplands (a) (5,985) (1,452) 92
 (4,533) (1,544)
Summerlin          
Downtown Summerlin 20,842
 17,950
 16,632
 2,892
 1,318
Ward Village          
Ward Village Retail (a) 21,905
 20,576
 22,048
 1,329
 (1,472)
Other          
Outlet Collection at Riverwalk 6,285
 5,879
 5,125
 406
 754
Total Retail NOI 56,009
 53,643
 53,579
 2,366
 64
           
Office          
The Woodlands          
One Hughes Landing 6,263
 6,168
 6,276
 95
 (108)
Two Hughes Landing 5,862
 5,790
 5,271
 72
 519
Three Hughes Landing (b) 1,804
 (623) (514) 2,427
 (109)
1725 Hughes Landing Boulevard 5,002
 3,531
 200
 1,471
 3,331
1735 Hughes Landing Boulevard (b) 7,512
 7,509
 3,041
 3
 4,468
2201 Lake Woodlands Drive (87) (32) (121) (55) 89
Lakefront North (a) (993) —
 —
 (993) —
9303 New Trails 1,043
 1,171
 1,721
 (128) (550)
3831 Technology Forest Drive 2,316
 2,268
 2,051
 48
 217
3 Waterway Square 6,824
 6,709
 7,033
 115
 (324)
4 Waterway Square 6,730
 6,473
 6,749
 257
 (276)
1400 Woodloch Forest 1,878
 1,781
 1,794
 97
 (13)
Columbia          
10-70 Columbia Corporate Center 13,288
 11,568
 11,862
 1,720
 (294)
Columbia Office Properties 1,366
 1,002
 (6) 364
 1,008
One Mall North 1,844
 1,900
 78
 (56) 1,822
One Merriweather 2,418
 1,499
 —
 919
 1,499
Two Merriweather (a) (889) (141) —
 (748) (141)
Summerlin          
Aristocrat (a) (c) —
 —
 —
 —
 —
ONE Summerlin 5,510
 3,898
 2,365
 1,612
 1,533
TWO Summerlin (a) (120) —
 —
 (120) —
Other          
110 North Wacker (b) —
 723
 6,105
 (723) (5,382)
Total Office NOI 67,571
 61,194
 53,905
 6,377
 7,289
           
           
           
           

  Year Ended December 31, 2018-2017 2017-2016
(In thousands) 2018 2017 2016 Change Change
Multi-family          
The Woodlands          
Creekside Park Apartments (a) —
 —
 —
 —
 —
Millennium Six Pines Apartments (b) 3,869
 3,579
 1,498
 290
 2,081
Millennium Waterway Apartments 3,423
 3,208
 3,183
 215
 25
One Lakes Edge 6,585
 5,324
 3,651
 1,261
 1,673
Summerlin          
Constellation Apartments (b) 2,291
 15
 —
 2,276
 15
Seaport District          
85 South Street 553
 194
 523
 359
 (329)
Total Multi-family NOI 16,721
 12,320
 8,855
 4,401
 3,465
           
Hospitality          
The Woodlands          
Embassy Suites at Hughes Landing 5,157
 4,816
 3,563
 341
 1,253
The Westin at The Woodlands 7,736
 6,189
 1,739
 1,547
 4,450
The Woodlands Resort & Conference Center 12,373
 8,740
 7,591
 3,633
 1,149
Total Hospitality NOI 25,266
 19,745
 12,893
 5,521
 6,852
Total Retail, Office, Multi-family, and Hospitality NOI 165,567
 146,902
 129,232
 18,665
 17,670
           
Other          
The Woodlands          
The Woodlands Ground Leases 1,589
 1,608
 1,461
 (19) 147
The Woodlands Parking Garages (108) (178) (417) 70
 239
Other          
Other Properties (a) (1,158) 894
 1,012
 (2,052) (118)
Total Other NOI 323
 2,324
 2,056
 (2,001) 268
Operating Assets NOI excluding properties sold or in redevelopment $165,890
 $149,226
 $131,288
 $16,664
 $17,938
           
Redevelopments          
Seaport District          
Seaport District NYC -  Historic Area / Uplands (a) $—
 $—
 $(589) $—
 $589
Other          
Landmark Mall (b) —
 —
 (676) —
 676
110 North Wacker (b) (513) —
 —
 (513) —
Total Operating Assets Redevelopments NOI (513) —
 (1,265) (513) 1,265
           
Dispositions          
Other          
Park West —
 (60) 1,835
 60
 (1,895)
Cottonwood Square (11) 750
 705
 (761) 45
Total Operating Assets Dispositions NOI (11) 690
 2,540
 (701) (1,850)
Total Operating Assets NOI - Consolidated $165,366
 $149,916
 $132,563
 $15,450
 $17,353
           
Reconciliation of Operating Assets EBT to NOI          
Total Operating Assets NOI - Consolidated $165,366
 $149,916
 $132,563
 $15,450
 $17,353
Straight-line rent amortization 12,756
 7,999
 10,689
 4,757
 (2,690)
Depreciation and amortization (113,576) (122,421) (86,313) 8,845
 (36,108)
Provision for impairment —
 —
 (35,734) —
 35,734
Write-off of lease intangibles and other 130
 (575) (25) 705
 (550)
Other (expense) income, net (7,005) (315) 4,601
 (6,690) (4,916)
Equity in earnings (loss) from Real Estate Affiliates 1,529
 3,267
 2,802
 (1,738) 465
Interest expense (income), net (71,551) (61,584) (50,427) (9,967) (11,157)
Total Operating Assets segment EBT $(12,351) $(23,713) $(21,844) $11,362
 $(1,869)
           
           

  Year Ended December 31, 2018-2017 2017-2016
(In thousands) 2018 2017 2016 Change Change
Operating Assets NOI - Equity and Cost Method Investments        
The Woodlands          
Millennium Six Pines Apartments (b) $—
 $—
 $1,537
 $—
 $(1,537)
Stewart Title of Montgomery County, TX 1,762
 1,329
 1977
 433
 (648)
Woodlands Sarofim # 1 1,034
 901
 1,541
 133
 (640)
Columbia          
The Metropolitan Downtown Columbia 5,500
 5,858
 4,137
 (358) 1,721
m.flats/TEN.M (a) 1,493
 —
 —
 1,493
 —
Summerlin          
Constellation (b) 152
 1,549
 (108) (1,397) 1,657
Las Vegas Aviators (b) —
 (295) 68
 295
 (363)
Seaport District          
Mr. C Seaport (a) (2,037) —
 1,347
 (2,037) (1,347)
Total NOI - equity investees 7,904
 9,342
 10,499
 (1,438) (1,157)
           
Depreciation, interest and other adjustments to NOI (11,834) (9,813) (9,527) (2,021) (286)
Equity Method Investments EBT (3,930) (471) 972
 (3,459) (1,443)
Less: Joint Venture Partner's Share of EBT (2,024) (355) 786
 (1,669) (1,141)
Equity in earnings (loss) from Real Estate Affiliates (1,906) (116) 186
 (1,790) (302)
Distributions from Summerlin Hospital Investment 3,435
 3,383
 2,616
 52
 767
Segment equity in earnings from Real Estate and Other Affiliates $1,529
 $3,267
 $2,802
 $(1,738) $465
           
Company's Share of Equity Method Investments NOI          
The Woodlands          
Millennium Six Pines Apartments (b) $—
 $—
 $1,252
 $—
 $(1,252)
Stewart Title of Montgomery County, TX 881
 665
 989
 216
 (324)
Woodlands Sarofim # 1 207
 180
 308
 27
 (128)
Columbia          
The Metropolitan Downtown Columbia 2,750
 2,929
 2,069
 (179) 860
m.flats/TEN.M (a) 747
 —
 —
 747
 —
Summerlin       —
 —
Constellation (b) 76
 775
 (54) (699) 829
Las Vegas Aviators (b) —
 (148) 34
 148
 (182)
Seaport District          
Mr. C Seaport (a) (713) —
 471
 (713) (471)
Company's share NOI - equity investees $3,948
 $4,401
 $5,069
 $(453) $(668)
  Economic December 31, 2018
(In thousands) Ownership Total Debt Total Cash
The Woodlands      
Stewart Title of Montgomery County, TX 50.00% $—
 $162
Woodlands Sarofim # 1 20.00
 4,897
 564
Columbia      
The Metropolitan Downtown Columbia 50.00
 70,000
 312
m.flats/TEN.M 50.00
 85,659
 1,337
Seaport District      
Mr. C Seaport 35.00
 36,000
 377
(a)Please refer to discussion in the following Retail, Office, Multi-family, Hospitality and Other sections regarding this property.
(b)
Please refer to discussion in the following Other Transferred or Consolidated Properties section regarding this property.
(c)The building was placed in service and tenant took occupancy in late December 2018, and therefore 2018 NOI on the property is not meaningful.

Retail Properties
Some of the leases related to our retail properties are triple net leases, which generally require tenants to pay their pro-rata share of property operating costs, such as real estate taxes, utilities and insurance, and the direct costs of their leased space. We also enter into certain leases which require tenants to pay a fixed-rate per square foot reimbursement for common area costs which is increased annually according to the terms of the lease. Given the unique nature of many of our retail properties, the mix of tenant

lease agreements and related lease terms executed during the year ended December 31, 2018 may differ significantly from those entered into in prior periods.

The following table summarizes the leases we executed at our retail properties during the year ended December 31, 2018:
      Square Feet Per Square Foot per Annum
Retail Properties (a) Total Executed Avg. Lease Term (Months) Total Leased Associated with Tenant Improvements Associated with Leasing Commissions Avg. Starting Rents (f) Total Tenant Improvements Total Leasing Commissions
Pre-leased (b) 8
 111
 86,028
 76,028
 45,988
 $23.24
 $8.61
 $0.35
Comparable - Renewal (c) 13
 49
 26,372
 1,200
 —
 34.58
 9.72
 —
Comparable - New (d) 10
 71
 23,923
 16,946
 16,663
 39.15
 8.73
 1.31
Non-comparable (e) 25
 97
 147,020
 68,721
 102,633
 52.10
 8.59
 0.79
Total     283,343
 162,895
 165,284
      
(a)Excludes executed leases with a term of 12 months or less.
(b)Pre-leased information is associated with our projects under development at December 31, 2018.
(c)Comparable - Renewal information is associated with stabilized assets for which the space was occupied by the same tenant within 12 months prior to the executed agreement. These leases represent an increase in cash rents from $33.51 per square foot to $34.58 per square foot, or 3.2% over previous rents.
(d)Comparable - New information is associated with stabilized assets for which the space was occupied by a different tenant within 12 months prior to the executed agreement. These leases represent an increase in cash rents from $34.16 per square foot to $39.15 per square foot, or 14.6% over previous rents.
(e)Non-comparable information is associated with space that was previously vacant for more than 12 months or has never been occupied.
(f)Avg. Starting Rent is based on Base Minimum Rent only.

The following discussions summarize our retail properties which were completed and transferred to Operating Assets in 2018:

The Woodlands

Lake Woodlands Crossing

We placed this 60,262 square foot retail center in The Woodlands Town Center in service in the fourth quarter of 2018. The total development costs are approximately $15 million, and we expect to reach annual stabilized NOI of approximately $1.7 million million in 2020. As of December 31, 2018, the building is 85.0% leased with Total Wine and Ulta as anchor tenants.

Seaport District

We celebrated several milestones at the Seaport District in 2018, including:

Signed a lease agreement with Nike to lease approximately 23,000 square feet of office space at Pier 17;
ESPN began broadcasting from their 19,000 square foot studio at Pier 17;
Sold out 18 of 23 concerts held at The Rooftop at Pier 17's inaugural concert season, selling over 61,000 tickets. The full artist lineup included a diverse roster of A-list talent from various genres;
Hosted approximately 2,100 diners during the Seaport Food Lab summer pop-up series and celebrated the grand opening of the Heineken Riverdeck in June;
Celebrated the openings of several new businesses, including 10 Corso Como in conjunction with New York Fashion Week. The store is the only U.S. location for the iconic Milan-based fashion destination. We also celebrated the opening of the first permanent New York location of SJP by Sarah Jessica Parker;
Booked more than 30 private events and celebrated the openings of Cobble & Co, 10CC Café, Garden Bar, R17 and Winterland, New York City's only outdoor rooftop ice rink; and
Successfully executed founding sponsorship agreements for Pier 17 with global brands such as Heineken, Pepsi, Lincoln, and Chase. In addition, we have partnered with AmTrust Title Insurance, Bacardi, Jim Beam, Moet, NY Presbyterian and Redbull.

As noted above, both Other rental and property revenues and Other property operating costs increased for the year ended December 31, 2018 compared to the same period in 2017 due to the start-up activities associated with opening new businesses at our Seaport District properties such as our concert series, summer activations and restaurants. While the Seaport District operated at a loss for the year ended December 31, 2018, these losses are included in our total estimated costs as shown in the Projects Under Construction table in the Strategic Developments section.

For the Seaport District, we expect to deliver a stabilized yield of 6% to 8% on our total development costs, net of our insurance proceeds from Superstorm Sandy, of $731 million. We now expect the stabilization date for the Seaport District to be achieved in 2022, largely as a result of the timing for construction, interior finish work and time to stabilize the Jean-Georges food hall in the Tin Building, which is expected to open by the end of 2021 assuming we receive the necessary approvals in a timely manner. The

expected range of stabilized yields is wider than our other projects as the Seaport District has more volatility than our other projects, and the ultimate results may in fact fall outside of the expected range. The increased volatility is largely the result of (i) business operating risks, (ii) seasonality, (iii) potential sponsorship revenue and (iv) event revenue. Many of the tenants in the Seaport District such as 10 Corso Como, SJP by Sarah Jessica Parker and restaurants such as The Fulton by Jean George, Momofuku, Malibu Farm, Andrew Carmellini’s restaurant, R-17 and the Jean-Georges Food Hall will be owned, either directly or in a joint venture, and operated by The Howard Hughes Corporation. As a result, the revenues and expenses of these businesses will directly impact the NOI of the Seaport District. This is in contrast to our other retail properties where we primarily receive lease payments and are not directly impacted by the operating performance of the underlying businesses. Additionally, in the near term, we are opening and stabilizing a range of new businesses and due to this fact as well as the factors above, the quarterly results of the Seaport District will be less predictable than our other operating real estate assets with traditional lease structures. Further, as we open new operating businesses, either owned entirely or in joint venture, we expect to incur pre-opening expenses and operating losses until those businesses stabilize, which likely will not happen until the Seaport District reaches its critical mass of offerings. The Seaport District is part non-stabilized operating asset, part development project level. Negative interest expense amounts relate to interest capitalized relating to debt assigned toand part operating business. As such, we believe that the progress and results of the Seaport should be viewed independently. Starting in the first quarter of 2019, the Seaport District will be moved out of our Operating Assets segment and corporate debt.

(e) Equityinto a stand-alone segment for disclosure purposes. We believe that by providing this additional detail, our investors and analysts will be able to better track our progress towards stabilization.


Ward Village

In the second quarter of 2018, we celebrated the opening of Whole Foods Market's Honolulu flagship store at Ward Village. The store is the largest Whole Foods Market in earningsthe state. June 2018 also marked the opening of pioneering chef Peter Merriman's newest Oahu restaurant, Merriman's, on the ground floor of our Anaha tower. In December 2018, we opened Victoria Ward Park with the launch of Light Garden, a 1,000-Year Bloom, a one-of-a-kind immersive art installation designed by acclaimed design studio Symmetry Labs.

Office Properties

Our office properties are located in Real EstateSummerlin in Las Vegas, Nevada; Columbia, Maryland; and Other Affiliates reflectsThe Woodlands, Texas. Leases related to our share of earningsoffice properties in The Summit joint ventureWoodlands are generally triple net leases. Leases at properties located in Summerlin and Columbia are generally gross leases.
The following table summarizes our executed office property leases during the year ended December 31, 2018:
      Square Feet Per Square Foot per Annum
Office Properties (a) Total Executed Avg. Lease Term (Months) Total Leased Associated with Tenant Improvements Associated with Leasing Commissions Avg. Starting Rents (f) Total Tenant Improvements Total Leasing Commissions
Pre-leased (b) —
 —
 —
 —
 —
 $—
 $—
 $—
Comparable - Renewal (c) 19
 51
 76,302
 38,516
 31,800
 32.63
 2.52
 1.35
Comparable - New (d) 9
 63
 35,134
 24,750
 30,702
 36.93
 4.80
 1.73
Non-comparable (e) 41
 83
 433,448
 427,278
 394,051
 36.49
 7.53
 1.85
Total     544,884
 490,544
 456,553
      
(a)Excludes executed leases with a term of 12 months or less.
(b)Pre-leased information is associated with projects under development at December 31, 2018. Certain information associated with pre-leasing activity at 110 North Wacker has been excluded for competitive reasons.
(c)Comparable - Renewal information is associated with stabilized assets for which the space was occupied by the same tenant within 12 months prior to the executed agreement. These leases represent a decrease in cash rents from $33.20 per square foot to $32.63 per square foot, or (1.7%) under previous rents.
(d)Comparable - New information is associated with stabilized assets for which the space was occupied by a different tenant within 12 months prior to the executed agreement. These leases represent a decrease in cash rents from $36.99 per square foot to $36.93 per square foot, or (0.2%) under previous rents.
(e)Non-comparable information is associated with space that was previously vacant for more than 12 months or has never been occupied.
(f)Avg. Starting Rents is based on the gross rents, including recoveries.

The following discussions summarize our recently completed or acquired office properties, which commenced lot saleswere placed in service in 2018:

The Woodlands

Lakefront North

We purchased this 12.9-acre campus comprised of a four-story, 110,186 square foot building and a six-story 152,626 square foot building in September 2018. The campus, formerly occupied by CB&I, also includes a 1,035-space parking garage. At acquisition, the buildings were 19.1% leased and occupied. The total development costs are approximately $78 million, and remaining costs

relate to tenant build-out. We expect to reach annual stabilized NOI of approximately $6.5 million in 2021. As of December 31, 2018, the buildings are 73.6% leased and 40.4% occupied.

Columbia

Two Merriweather

Located in the Merriweather District, this 124,635 square foot, Class-A office building was placed in service in 2018. Adjacent to the building on 1.6 acres is a nine-story, 1,149-space parking garage which was also placed in service in 2018. The garage provides parking for One and Two Merriweather. The total development costs are approximately $41 million, and remaining costs relate to tenant build-out. We expect to reach annual stabilized NOI of approximately $3.5 million in 2021. As of December 31, 2018, the building is 73.9% leased and 58.2% occupied.

Summerlin

Aristocrat

This 12-acre build-to-suit project, which includes two 90,000 square foot office buildings, was placed in service in the third quarter of 2018. The buildings are 100% leased to Aristocrat Technologies, a global leader in gaming solutions. We expect to reach projected annual stabilized NOI of $4.1 million in the second quarter of 2016.

(f)2019. Total development costs are approximately $47 million, with remaining costs relating to trailing costs. The negative MPC segmenttenant took occupancy of the building in late December 2018, and therefore, 2018 NOI on the property is not meaningful.


Two Summerlin

Located just east of Downtown Summerlin adjacent to land which we ground lease to the NHL practice facility, this 144,615 square foot Class-A office building was completed in the third quarter of 2018. The property has an adjacent 424-space parking structure and is situated on approximately four acres. Total development costs are approximately $49 million, and we expect to reach projected annual stabilized NOI of approximately $3.5 million in 2020. As of December 31, 2018, the building is 89.3% leased and 34.3% occupied, of which 10.0% is intended for use by our local operations.

Multi-family Properties

The following are wholly and jointly owned multi-family properties which were acquired or transferred from Strategic Developments to Operating Assets during the year ended December 31, 2018:

The Woodlands

Creekside Park Apartments

The grand opening and completion of the clubhouse and certain buildings for this 292-unit apartment complex took place in the third quarter of 2018. As of December 31, 2018, all buildings were in service. This complex represents the first rental product in Creekside Park Village Center. Total development costs are approximately $42 million. We expect to reach projected annual stabilized NOI of $3.5 million in 2020.

Columbia

m.flats/TEN.M

We have a 50% ownership interest in this 437-unit property, the m.flats portion of which was completed in the first quarter of 2018. TEN.M was completed in September 2017. The Class-A multi-family project includes 28,026 square feet of ground floor retail and is adjacent to The Metropolitan Downtown Columbia. Kettler, our joint venture partner, provides construction and property management services for the project. We expect the property to reach projected annual stabilized NOI of approximately $7.6 million in 2020, of which our share would be $3.8 million. Our share of total development costs is approximately $54.7 million, and costs incurred through December 31, 2018 were approximately $53.4 million. Remaining costs relate to final lease-up and tenant build-out. The project is financed with an $88.0 million construction loan, which is non-recourse to us.

Hospitality Properties


Seaport District

Mr. C Seaport

In January 2016, we entered into a joint venture with Grandview SHG, LLC to purchase an operating hotel totaling 43,889 square feet at 33 Peck Slip in the Seaport District of New York. Refinancing of the property with a $36.0 million redevelopment loan was completed in June 2016. Our total investment in the joint venture is $13.5 million as of December 31, 2018, which represents our 35% ownership share of the total equity in the project and includes $4.0 million of 7.0% of first priority preferred equity. Under the terms of the joint venture agreement, cash will be distributed to the members as follows: (1) We will be repaid our 7.0% first priority preferred equity along with any accrued return thereon; (2) other preferred equity holders will be paid a 7.0% return on their preferred equity and their preferred equity will be repaid; (3) each member will be paid a 6.5% return on their initial invested capital and will be repaid their initial invested capital; and (4) all remaining cash will be distributed pro-rata to the members based on their profit participation interests. The Mr. C Seaport hotel was closed at the end of December 2016 for redevelopment and transferred to the Strategic Developments segment. In July 2018, the 66-room, renovated hotel was reopened and transferred back to the Operating Assets segment. We expect stabilized NOI to be $3.8 million, of which $1.3 million is our share.

Other

The properties that are included in Other Properties in our Operating Assets NOI and EBT table for the years ended December 31, 2018, 2017 and 2016 include the Kewalo Basin Harbor, Merriweather Post Pavilion (until its transfer to the Downtown Columbia Arts and Culture Commission in MarylandNovember 2016), HHC 242 Self-Storage and HHC 2978 Self-Storage, ground lease for our NHL hockey practice facility in Downtown Summerlin and Las Vegas Aviators since the consolidation of the venture on March 1, 2017. The decrease in NOI for the year ended December 31, 2018 compared to the same period in 2017 is primarily due to the full year of operations for the Las Vegas Aviators baseball team. NOI decrease for the year ended December 31, 2017 compared to the same period in 2016 in Other Properties is due to the transfer of the Merriweather Post Pavilion in 2016, offset by the ground lease with a hockey team and consolidation of Las Vegas Aviators in 2017.

Other Transferred or Consolidated Properties

The following discussions summarize our other properties which were transferred to Operating Assets, transferred to Strategic Developments or fully consolidated over the past 36 months:

The Woodlands

Three Hughes Landing

We placed this 320,815 square foot office property in service in the first quarter of 2017.

1735 Hughes Landing Boulevard

We placed this 318,170 square foot office property in service in the fourth quarter of 2017.

Millennium Six Pines

We acquired this joint venture partner’s interest in 2016 and 2015 is duehave consolidated the assets and liabilities of the entity in our financial results. See Note 3 - Acquisitions and Dispositions for additional information regarding the transaction.

Summerlin

Constellation

We acquired this joint venture partner’s interest in 2017 and have consolidated the assets and liabilities of the entity in our financial results. See Note 3 - Acquisitions and Dispositions for additional information regarding the transaction.

Las Vegas Aviators

We acquired this joint venture partner’s interest in 2017 and have consolidated the assets and liabilities of the entity in our financial results. See Note 3 - Acquisitions and Dispositions for additional information regarding the transaction.

Other

Landmark Mall

Landmark Mall was closed for redevelopment and moved to real estate taxesour Strategic Developments segment as of January 2017.

110 North Wacker

110 North Wacker was demolished in the first quarter of 2018 and administrative expenses.

construction began at that time. To facilitate redevelopment, we terminated the existing tenant's lease and abated rent through the January 2018 lease termination date. See the Strategic Developments section of Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.


Master Planned Communities
EBT for Master Planned Communities are presented below:

For the Year Ended December 31,
  Bridgeland Columbia Summerlin The Woodlands The Woodlands Hills Total MPC
($ in thousands) 2018 2017 2016 2018 2017 2016 2018 2017 2016 2018 2017 2016 2018 2017 2016 2018 2017 2016
Land sales (a) $50,150
 $39,529
 $24,254
 $—
 $10,800
 $—
 $168,311
 $156,617
 $148,699
 $34,551
 $40,367
 $42,365
 $8,893
 $1,282
 $—
 $261,905
 $248,595
 $215,318
Builder price participation (b) 569
 398
 754
 —
 —
 —
 26,245
 21,731
 19,083
 250
 706
 1,549
 21
 —
 —
 27,085
 22,835
 21,386
Minimum rents 

 —
 —
 

 —
 —
 —
 (8) 384
 —
 —
 —
 

 —
 —
 —
 (8) 384
Other land revenues (c) 1,207
 10,952
 314
 325
 445
 418
 11,996
 10,124
 9,669
 6,444
 6,572
 5,778
 487
 31
 13
 20,459
 28,124
 16,192
Other rental and property revenue —
 —
 —
 2
 —
 —
 —
 (3) 24
 —
 —
 —
 —
 —
 —
 2
 (3) 24
Total revenues 51,926
 50,879
 25,322
 327
 11,245
 418
 206,552
 188,461
 177,859
 41,245
 47,645
 49,692
 9,401
 1,313
 13
 309,451
 299,543
 253,304
                                     
Cost of sales - land 16,097
 12,792
 7,672
 —
 5,839
 —
 87,229
 83,343
 68,436
 16,563
 18,470
 19,619 4,325
 672
 —
 124,214
 121,116
 95,727
Land sales operations 7,877
 7,463
 6,507
 1,541
 1,692
 1,317
 12,449
 9,715
 11,226
 20,253
 19,080
 22,989
 3,097
 827
 332
 45,217
 38,777
 42,371
Provision for (recovery of) doubtful accounts 33
 —
 —
 —
 —
 —
 10
 2
 —
 —
 —
 —
 —
 —
 —
 43
 2
 —
Total operating expenses 24,007
 20,255
 14,179
 1,541
 7,531
 1,317
 99,688
 93,060
 79,662
 36,816
 37,550
 42,608
 7,422
 1,499
 332
 169,474
 159,895
 138,098
                                     
Operating income 27,919
 30,624
 11,143
 (1,214) 3,714
 (899) 106,864
 95,401
 98,197
 4,429
 10,095
 7,084
 1,979
 (186) (319) 139,977
 139,648
 115,206
Depreciation and amortization 127
 102
 94
 (51) 8
 16
 31
 93
 81
 136
 120
 120
 —
 —
 —
 243
 323
 311
Other income —
 —
 —
 —
 —
 —
 —
 —
 —
 (18) (3,500) —
 —
 —
   (18) (3,500) —
Interest (income) expense, net (d) (13,035) (10,566) (9,461) (151) 3
 (2) (17,514) (17,386) (16,459) 4,656
 4,221
 5,414
 (875) (564) (577) (26,919) (24,292) (21,085)
Equity in (earnings) loss in Real Estate and Other Affiliates (e) —
 —
 —
 —
 —
 —
 (36,284) (23,234) (43,501) —
 —
 —
 —
 —
 —
 (36,284) (23,234) (43,501)
 EBT $40,827
 $41,088
 $20,510
 $(1,012)(f)$3,703
 $(913)(f)$160,631
 $135,928
 $158,076
 $(345) $9,254
 $1,550
 $2,854
 $378
 $258
 $202,955
 $190,351
 $179,481
(GAAP Basis) Residential Gross Margin % 67.6% 66.4% 67.9% NM
 NM
 NM
 48.4% 40.8% 54.0% 54.4 % 52.0% 51.5% 51.4% 47.6% NM
 52.9% 46.5% 55.0%
(GAAP Basis) Commercial Gross Margin % 75.9% 71.8% 71.1% NM
 45.9% NM
 32.8% 87.3% 50.7% (4.7)% 76.3% 60.2% NM
 NM
 NM
 38.3% 62.4% 62.8%
(a)Land sales include deferred revenue from land sales closed in a previous period which met criteria for recognition in the current period.
(b)Builder price participation revenue is based on an agreed-upon percentage of the sales price of homes closed relative to the base lot price which was paid by the homebuilders to us. This revenue fluctuates based upon the number and the prices of homes closed that qualify for builder price participation payments.
(c)For the year ended December 31, 2017, Other land revenues includes two sales of utility easements at our Bridgeland community totaling $14.1 million less related costs of $3.7 million.
(d)Interest expense, net reflects the amount of interest that is capitalized at the project level. Negative interest expense amounts relate to interest capitalized relating to debt assigned to our Operating Assets segment and corporate debt.
(e)Equity in earnings in Real Estate and Other Affiliates reflects our share of earnings in The Summit joint venture which commenced lot sales in the second quarter of 2016.
(f)The negative MPC segment EBT in Maryland in 2018 and 2016 is due to real estate taxes and administrative expenses.
(g)Commercial land sales in The Woodlands in 2018 consisted of a 1.6-acre site that was acquired in 2014 at market value, as the original purchaser did not proceed with construction, our holding costs exceeded the 2018 sale price.
NM –- Not Meaningful





MPC revenues vary between periods based on economic conditions and several factors including location, availability of land for sale, development density and residential or commercial use. Gross margin for each MPC will vary from period to period based on the locations of the land sold and the related costs associated with developing the land sold. Reported results differ significantly from actual cash flows generated principally because cost of sales for GAAP purposes is derived from margins calculated using carrying values, projected future improvements and other capitalized project costs in relation to projected future land sale revenues. Carrying values generally represent acquisition and development costs reduced by any previous impairment charges. Development expenditures are capitalized and generally not reflected in the Statements of Operations in the current period. Accordingly, Cost of sales – land includes both actual and estimated future costs allocated based upon relative sales value to the lots or land parcels in each of the villages and neighborhoods in our MPCs.

33


Table of Contents

The following schedules detail our residential and commercial land sales for the years ended December 31, 2018, 2017 2016 and 2015:

2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary of Residential MPC Land Sales Closed for the Year Ended December 31, 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land Sales

 

Acres Sold

 

Number of Lots/Units

 

Price per acre

 

Price per lot

($ in thousands)

 

2017

  

2016

  

2015

 

2017

  

2016

  

2015

 

2017

  

2016

  

2015

 

2017

  

2016

  

2015

 

2017

 

2016

 

2015

Bridgeland

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single family - detached

 

$

30,429

 

$

20,474

 

$

10,856

 

80.7

 

55.0

 

28.4

 

 

391

 

 

296

 

 

130

 

$

377

 

$

372

 

$

382

 

$

78

 

$

69

 

$

84

$ Change

 

 

9,955

 

 

9,618

 

 

 

 

25.7

 

26.6

 

 

 

 

95

 

 

166

 

 

 

 

 

 5

 

 

(10)

 

 

 

 

 

 9

 

 

(15)

 

 

 

% Change

 

 

48.6%

 

 

88.6%

 

 

 

 

46.7%

 

93.7%

 

 

 

 

32.1%

 

 

127.7%

 

 

 

 

 

1.3%

 

 

(2.6%)

 

 

 

 

 

13.0%

 

 

(17.9%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maryland Communities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No residential land sales

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summerlin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Superpad sites

 

 

110,223

 

 

96,843

 

 

92,219

 

201.5

 

231.7

 

177.7

 

 

1,164

 

 

1,071

 

 

555

 

 

547

 

 

418

 

 

519

 

 

95

 

 

90

 

 

166

Single family - detached

 

 

 —

 

 

 —

 

 

13,650

 

 —

 

 —

 

14.9

 

 

 —

 

 

 —

 

 

75

 

 

 —

 

 

 —

 

 

916

 

 

 —

 

 

 —

 

 

182

Custom lots

 

 

10,515

 

 

13,865

 

 

8,640

 

5.1

 

7.4

 

5.8

 

 

11

 

 

15

 

 

14

 

 

2,062

 

 

1,874

 

 

1,490

 

 

956

 

 

924

 

 

617

Total

 

 

120,738

 

 

110,708

 

 

114,509

 

206.6

 

239.1

 

198.4

 

 

1,175

 

 

1,086

 

 

644

 

 

584

 

 

463

 

 

577

 

 

103

 

 

102

 

 

178

$ Change

 

 

10,030

 

 

(3,801)

 

 

 

 

(32.5)

 

40.7

 

 

 

 

89

 

 

442

 

 

 

 

 

121

 

 

(114)

 

 

 

 

 

 1

 

 

(76)

 

 

 

% Change

 

 

9.1%

 

 

(3.3%)

 

 

 

 

(13.6%)

 

20.5%

 

 

 

 

8.2%

 

 

68.6%

 

 

 

 

 

26.1%

 

 

19.9%

 

 

 

 

 

1.0%

 

 

(42.7%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single family - detached

 

 

28,393

 

 

24,950

 

 

27,161

 

57.0

 

51.2

 

42.9

 

 

227

 

 

204

 

 

160

 

 

498

 

 

487

 

 

633

 

 

125

 

 

122

 

 

170

Single family - attached

 

 

8,175

 

 

7,010

 

 

5,280

 

1.2

 

5.9

 

5.8

 

 

28

 

 

67

 

 

65

 

 

6,813

 

 

1,188

 

 

910

 

 

292

 

 

105

 

 

81

Total

 

 

36,568

 

 

31,960

 

 

32,441

 

58.2

 

57.1

 

48.7

 

 

255

 

 

271

 

 

225

 

 

628

 

 

560

 

 

666

 

 

143

 

 

118

 

 

144

$ Change

 

 

4,608

 

 

(481)

 

 

 

 

1.1

 

8.4

 

 

 

 

(16)

 

 

46

 

 

 

 

 

68

 

 

(106)

 

 

 

 

 

25

 

 

(26)

 

 

 

% Change

 

 

14.4%

 

 

(1.5%)

 

 

 

 

1.9%

 

17.2%

 

 

 

 

(5.9%)

 

 

20.4%

 

 

 

 

 

12.1%

 

 

(16.0%)

 

 

 

 

 

21.2%

 

 

(18.2%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands Hills

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single family - detached

 

 

1,282

 

 

 —

 

 

 —

 

4.1

 

 —

 

 —

 

 

18

 

 

 —

 

 

 —

 

 

313

 

 

 —

 

 

 —

 

 

71

 

 

 —

 

 

 —

Total

 

 

1,282

 

 

 —

(a)

 

 —

(a)

4.1

 

 —

 

 —

 

 

18

 

 

 —

 

 

 —

 

 

313

 

 

 —

 

 

 —

 

 

71

 

 

 —

 

 

 —

$ Change

 

 

1,282

 

 

 —

 

 

 

 

4.1

 

 —

 

 

 

 

18

 

 

 —

 

 

 

 

 

313

 

 

 —

 

 

 

 

 

71

 

 

 —

 

 

 

% Change

 

 

NM

 

 

 —

 

 

 

 

NM

 

 —

 

 

 

 

NM

 

 

 —

 

 

 

 

 

NM

 

 

 —

 

 

 

 

 

NM

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total residential land sales closed in period (b)

 

$

189,017

 

$

163,142

 

$

157,806

 

349.6

 

351.2

 

275.5

 

 

1,839

 

 

1,653

 

 

999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary of Residential MPC Land Sales Closed for the Year Ended December 31,
 Land SalesAcres SoldNumber of Lots/UnitsPrice per acrePrice per lot
($ in thousands)201820172016201820172016201820172016201820172016201820172016
Bridgeland               
Single family$48,200$30,429$20,474125.3
80.7
55.0
620
391
296
$385$377$372$78$78$69
Change17,771
9,955
 44.6
25.7
 229
95
 85 —
9 
% Change58.4 %48.6% 55.3 %46.7 % 58.6 %32.1 % 2.1 %1.3% — %13.0% 
Columbia               
No residential land sales—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Summerlin               
Superpad sites136,246
110,223
96,843
240.8
201.5
231.7
786
1,164
1,071
5665474181739590
Custom lots8,485
10,515
13,865
4.0
5.1
7.4
6
11
15
2,1212,0621,8741,414956924
Total144,731
120,738
110,708
244.8
206.6
239.1
792
1,175
1,086
591584463183103102
Change23,993
10,030
 38.2
(32.5)
 (383)
89
 7121 801 
% Change19.9 %9.1% 18.5 %(13.6)% (32.6)%8.2 % 1.2 %26.1% 77.7 %1.0% 
The Woodlands               
Single family33,189
36,568
31,960
53.7
58.2
57.1
215
255
271
618628560154143118
Change(3,379)
4,608
 (4.5)
1.1
 (40)
(16)
 (10)68 1125 
% Change(9.2)%14.4% (7.7)%1.9 % (15.7)%(5.9)% (1.6)%12.1% 7.7 %21.2% 
The Woodlands Hills (a)               
Single family8,893
1,282
—
32.4
4.1
—
146
18
—
274313—
6171—
Change7,611
1,282
 28.3
4.1
 128
18
 (39)313 (10)71 
% Change593.7 %NM
 690.2 %NM
 711.1 %NM
 (12.5)%NM
 (14.1)%NM
 
Total residential land sales closed in period (b)$235,013$189,017$163,142456.2
349.6
351.2
1,773
1,839
1,653
      

(a)

The Woodlands Hills began closing land sales in the fourth quarter of 2017.

(b)

Excludes revenues closed and deferred for recognition in a previous period that met criteria for recognition in the current period. Please see the Reconciliation of MPC Land Sales Closed to GAAP Land Sales Revenue table below which reconciles Total residential and commercial land sales closed to Land sales revenue for the years ended December 31, 2018, 2017 2016 and 2015.

2016.

34

Summary of Commercial MPC Land Sales Closed for the Year Ended December 31,
  Land Sales Acres Sold Price per acre
($ in thousands) 2018 2017 2016 2018 2017 2016 2018 2017 2016
Bridgeland                  
Not-for-profit $—
 $2,379
 $—
 —
 9.0
 —
 $—
 $264
 $—
   Other 1,398
 —
 —
 2.4
 —
 —
 583
 —
 —
Total 1,398
 2,379
 —
 2.4
 9.0
 —
 583
 264
 —
Change (981) 2,379
   (6.6) 9.0
   319
 264
  
% Change (41.2)% NM
   (73.3)% NM
   120.8% NM
  
Columbia                  
Medical —
 10,800
 —
 —
 11.3
 —
 —
 956
 —
Change (10,800) 10,800
   (11.3) 11.3
   (956) 956
  
% Change NM
 NM
   NM
 NM
   NM
 NM
  
Summerlin                  
Not-for-profit 2,356
 —
 348
 5.9
 —
 10.0
 399
 —
 35
Other —
 1,276
 —
 —
 5.0
 —
 —
 255
 —
Total 2,356
 1,276
 348
 5.9
 5.0
 10.0
 399
 255
 35
Change 1,080
 928
   0.9
 (5.0)   144
 220
  
% Change 84.6 % 266.7 %   18.0 % (50.0)%   56.5% 628.6 %  
The Woodlands                  
Medical —
 —
 10,405
 —
 —
 4.3
 —
 —
 2,420
Retail 1,362
 —
 —
 1.6
 —
 —
 851
 —
 —
Other —
 3,799
 —
 —
 10.4
 —
 —
 365
 —
Total 1,362
 3,799
 10,405
 1.6
 10.4
 4.3
 851
 365
 2,420
Change (2,437) (6,606)   (8.8) 6.1
   486
 (2,055)  
% Change (64.1)% (63.5)%   (84.6)% 141.9 %   133.2% (84.9)%  
Total commercial land sales closed in period (a) $5,116
 $18,254
 $10,753
 9.9
 35.7
 14.3
      

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary of Commercial MPC Land Sales Closed for the Year Ended December 31, 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land Sales

 

Acres Sold

 

Price per acre

($ in thousands)

 

2017

  

2016

  

2015

 

2017

  

2016

  

2015

 

 

2017

 

 

2016

 

 

2015

Bridgeland

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not-for-Profit

 

$

2,379

 

$

 —

 

$

20,664

 

9.0

 

 —

 

162.4

 

$

264

 

$

 —

 

$

127

$ Change

 

 

2,379

 

 

(20,664)

 

 

 

 

9.0

 

(162.4)

 

 

 

 

264

 

 

(127)

 

 

 

% Change

 

 

NM

 

 

(100.0%)

 

 

 

 

NM

 

(100.0%)

 

 

 

 

NM

 

 

(100.0%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maryland Communities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medical

 

 

10,800

 

 

 —

 

 

 —

 

11.3

 

 —

 

 —

 

 

956

 

 

 —

 

 

 —

$ Change

 

 

10,800

 

 

 —

 

 

 

 

11.3

 

 —

 

 

 

 

956

 

 

 —

 

 

 

% Change

 

 

NM

 

 

 —

 

 

 

 

NM

 

 —

 

 

 

 

NM

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summerlin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not-for-profit

 

 

 —

 

 

348

 

 

 

 

 —

 

10.0

 

 —

 

 

 —

 

 

35

 

 

 —

Other

 

 

1,276

 

 

 —

 

 

3,936

 

5.0

 

 —

 

20.3

 

 

255

 

 

 —

 

 

194

Total

 

 

1,276

 

 

348

 

 

3,936

 

5.0

 

10.0

 

20.3

 

 

255

 

 

35

 

 

194

$ Change

 

 

928

 

 

(3,588)

 

 

 

 

(5.0)

 

(10.3)

 

 

 

 

220

 

 

(159)

 

 

 

% Change

 

 

266.7%

 

 

(91.2%)

 

 

 

 

(50.0%)

 

(50.7%)

 

 

 

 

628.6%

 

 

(82.0%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medical

 

 

 —

 

 

10,405

 

 

8,422

 

 —

 

4.3

 

5.0

 

 

 —

 

 

2,420

 

 

1,684

Not-for-profit

 

 

 —

 

 

 —

 

 

733

 

 —

 

 —

 

5.0

 

 

 —

 

 

 —

 

 

147

Other

 

 

3,799

 

 

 —

 

 

2,247

 

10.4

 

 —

 

2.4

 

 

365

 

 

 —

 

 

936

Total

 

 

3,799

 

 

10,405

 

 

11,402

 

10.4

 

4.3

 

12.4

 

 

365

 

 

2,420

 

 

920

$ Change

 

 

(6,606)

 

 

(997)

 

 

 

 

6.1

 

(8.1)

 

 

 

 

(2,055)

 

 

1,500

 

 

 

% Change

 

 

(63.5%)

 

 

(8.7%)

 

 

 

 

141.9%

 

(65.3%)

 

 

 

 

(84.9%)

 

 

163.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total commercial land sales closed in period (a)

 

$

18,254

 

$

10,753

 

$

36,002

 

35.7

 

14.3

 

195.1

 

 

 

 

 

 

 

 

 

(a)

Excludes revenues closed and deferred for recognition in a previous period that met criteria for recognition in the current period. Please see the Reconciliation of MPC Land Sales Closed to GAAP Land Sales Revenue table below which reconciles Total residential and commercial land sales closed to Land sales for the years ended December 31, 2018, 2017 2016, and 2015.

2016.


35

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Although our business does not involve the sale or resale of homes, we believe that net new home sales are an important indicator of future demand for our superpad sites and finished lots. Therefore, we use this statistic where relevant in our discussion of our MPC operating results herein. Net new home sales reflect home sales made by homebuilders, less cancellations. Cancellations generally occur when a home buyerhome-buyer signs a contract to purchase a home but later fails to qualify for a home mortgage or is unable to provide an adequate down payment to complete the home sale.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplementary Information for the Year Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net New Home Sales

 

Median Home Sales Price

($ in thousands)

 

2017

  

2016

  

2015

 

2017

  

2016

  

2015

Bridgeland

 

423

 

333

 

199

 

$

347

 

$

328

 

$

409

$ Change

 

90

 

134

 

 

 

 

19

 

 

(81)

 

 

 

% Change

 

27.0%

 

67.3%

 

 

 

 

5.8%

 

 

(19.8%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maryland Communities - No New Home Sales

 

N/A

 

N/A

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summerlin

 

1,022

 

682

 

602

 

 

564

 

 

540

 

 

533

$ Change

 

340

 

80

 

 

 

 

24

 

 

 7

 

 

 

% Change

 

49.9%

 

13.3%

 

 

 

 

4.4%

 

 

1.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

340

 

248

 

256

 

 

533

 

 

557

 

 

562

$ Change

 

92

 

(8)

 

 

 

 

(24)

 

 

(5)

 

 

 

% Change

 

37.1%

 

(3.1%)

 

 

 

 

(4.3%)

 

 

(0.9%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands Hills - No New Home Sales

 

N/A

 

N/A

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A


Supplementary Information for the Year Ended December 31,
  Net New Home Sales Median Home Sales Price
($ in thousands) 2018 2017 2016 2018 2017 2016
Bridgeland 495
 423
 333
 $383
 $347
 $328
Change 72
 90
   36
 19
  
% Change 17.0% 27.0%   10.4 % 5.8 %  
             
Columbia - No New Home Sales N/A
 N/A
 N/A
 N/A
 N/A
 N/A
             
Summerlin 1,276
 1,022
 682
 575
 564
 540
Change 254
 340
   11
 24
  
% Change 24.9% 49.9%   2.0 % 4.4 %  
             
The Woodlands 343
 340
 248
 465
 533
 557
Change 3
 92
   (68) (24)  
% Change 0.9% 37.1%   (12.8)% (4.3)%  
             
The Woodlands Hills 35
 N/A
 N/A
 325
 N/A
 N/A
Change N/A
 N/A
   N/A
 N/A
  
% Change N/A
 N/A
   N/A
 N/A
  

Reconciliation of MPC Land Sales Closed to GAAP Land Sales Revenue


The following table reconciles Total residential and commercial land sales closed in the yearyears ended December 31, 2018, 2017 2016 and 2015, respectively,2016 to Land sales revenue for the respective periods. Total net recognized (deferred) revenue includes revenues recognized in the current period which are related to sales closed in prior periods, offset by revenues deferred on sales closed in the current period.

 

 

 

 

 

 

 

 

 

 

 

 

For the Year Ended December 31,

(In thousands)

 

2017

  

2016

  

2015

Total residential land sales closed in period

 

$

189,017

 

$

163,142

 

$

157,806

Total commercial land sales closed in period

 

 

18,254

 

 

10,753

 

 

36,002

Net recognized (deferred) revenue:

 

 

 

 

 

 

 

 

 

  Bridgeland

 

 

6,722

 

 

3,780

 

 

(11,136)

  Summerlin

 

 

20,063

 

 

29,596

 

 

(16,043)

Total net recognized (deferred) revenue

 

 

26,785

 

 

33,376

 

 

(27,179)

Special Improvement District revenue

 

 

14,539

 

 

8,047

 

 

20,770

Land sales

 

$

248,595

 

$

215,318

 

$

187,399

36

  For the Year Ended December 31,
(In thousands) 2018 2017 2016
Total residential land sales closed in period $235,013
 $189,017
 $163,142
Total commercial land sales closed in period 5,116
 18,254
 10,753
Net recognized (deferred) revenue:      
Bridgeland 553
 6,722
 3,780
Summerlin 7,049
 20,063
 29,596
Total net recognized (deferred) revenue 7,602
 26,785
 33,376
Special Improvement District revenue 14,174
 14,539
 8,047
Land sales $261,905
 $248,595
 $215,318

Table of Contents


Houston

TheBoth the Houston area market continuesand Summerlin markets continue to experience population and job growth, which has resulted in increasedstrong demand in our MPCs. We experienced minimal impact from Hurricane Harvey, evidencedfor housing. Summerlin was recently ranked by an increase in new home sales inRCLCO as the third highest selling master planned community, with Bridgeland also ranking 18th and The Woodlands of 27% and 37%, respectively,ranking 42nd in the country for 2018. For the year ended December 31, 2017 compared to the same period in 2016. The 423 new home sales in Bridgeland in 2017 is2018, our MPCs recorded the highest annual number ofresidential land sales in the community’s ten-yearCompany's history. We expect demand to continue as manufacturing, construction and service sector job growth in Houston has improved recently. Exxon Mobil recently announced plans to relocate approximately 1,600 jobs to Spring, Texas, just south of The Woodlands, beginning in 2018. We believe that ourOur strategy of expanding the offering of lots priced for homes under $500,000 within our communities has, and we believe will continue to result in continued homebuilder demand for land at our Bridgeland, The Woodlands and The Woodlands MPCs.

Hills.


Houston

Bridgeland


Land sales revenues increased $10.6 million, or 26.9%, to $50.2 million, for the year ended December 31, 2018, compared to the same period in 2017 primarily as a result of higher residential land sales. Land sales revenues totaled $39.5 million for the year ended December 31, 2017, which was $15.3 million or 63.0% higher than the same period in 2016 primarily as a result of higher residential land sales and also due to the recognition of revenues deferred in previous periods. Land sales revenues totaled $24.3 million for the year ended December 31, 2016, which was $3.9 million, or 19.0% higher than the same period in 2015 as a result of higher residential land sales and the recognition of revenues deferred in previous periods.



Residential land sales for the year ended December 31, 2018 were higher compared to 2017 due to increased demand for products in the mid-range of the residential market. For the year ended December 31, 2018, Bridgeland sold125.3 residential acres compared to 80.7 acres in 2017. We achieved an accelerated number of acres sold while realizing a modest increase in the average price per residential acre sold. The average price per residential acre increased $8,000, or 2.1%, to $385,000 for the year ended December 31, 2018 compared to $377,000 in 2017 as a result of contractual escalations in lot prices. Residential land sales for the year ended December 31, 2017 were higher compared to 2016 partially as a result of our development of additional lot sizes to accommodate homebuilders’ demand and the opening of Parkland Village, a new phase in the community. For the year ended December 31, 2017, Bridgeland sold 80.7 residential acres compared to 55.0 acres in 2016. The average price per residential acre for single family – detached product increased $5,000, or 1.3%, to $377,000 for the year ended December 31, 2017 compared to $372,000 in 2016 as a result of the mix of lots sold.Residential land sales

One commercial site totaling 2.4 acres was sold to a daycare operator for 583,000 per acre for the year ended December 31, 2016 were substantially higher2018 compared to 2015 due to increased demand for products in the mid-range of the residential market. For the year ended December 31, 2016, Bridgeland sold 55.0 residential acres compared to 28.4 acres in 2015. The average price per residential acre for single family – detached product decreased $10,000, or 2.6% to $372,000 for the year ended December 31, 2016 compared to $382,000 in 2015 due to a combination of lot price adjustments to meet current market conditions and the mix of lots sold in the respective periods. For the year ended December 31, 2016, there was a larger percentage of smaller, lower priced lots sold than in the same periods in 2015.

Twotwo church sites totaling 9.0 acres were sold at an average price of $264,000 per acre for the year ended December 31, 2017. There were no commercial land sales in 2016.


As of December 31, 2018, Bridgeland had 301 residential lots under contract, of which 299 are scheduled to close in 2019 for $20.1 million.

For the year ended December 31, 2018, builder price participation increased 43.0% compared to the same period in 2017 due to an increase in the number of homes closed. Builder price participation revenue decreased 47.2% for the year ended December 31, 2017 compared to no commercial land sales in the same period in 2016. There were three land sales in the last half of 2015 for a school site, a church site and a fire station totaling $20.7 million, of which $11.1 million was recorded as deferred income due to performance obligations related to these commercial land sales. The work has been completed and $6.7 million of previously deferred income was recognized in the year ended December 31, 2017 compared to $3.8 million in the same period in 2016. 

As of December 31, 2017, Bridgeland had 440 residential lots under contract, of which 433 are scheduled to close in 2018 for $31.1 million.

Builder price participation revenue decreased 47.2% and 36.8% for the years ended December 31, 2017 and 2016 respectively, compared to the prior years at Bridgeland due to a combination of lower priced homes being closed and adjustments to participation terms in our homebuilder contracts to meet current market conditions. 


Other land revenues decreased for the year ended December 31, 2018 compared to 2017 and increased for the year ended December 31, 2017 compared to 2016 primarily due to the sale of utility easements generating $10.4 million in revenue, net of $3.7 million in related costs.

costs in 2017, which did not recur in 2018.


The Woodlands


Land sales revenues decreased $5.8 million, or 14.4%, to $34.6 million, for the year ended December 31, 2018, compared to the same period in 2017. Residential land sales revenues were down $3.4 million, or 9.2%, to $33.2 million primarily due to the volume and mix of lots sold, and commercial land sales were down $2.4 million, or 64.1%, to $1.4 million as the Company sold 8.8 fewer acres in 2018 compared to 2017, which is due to the Company’s shift to developing the majority of our commercial land internally instead of selling to third parties. Land sales revenues totaled $40.4 million for the year ended December 31, 2017, which was $2.0 million, or 4.7%, lower than the same period in 2016 as a result of a $4.6 million increase in residential land sales, offset by a $6.6 million decrease in commercial land sales. Land sales revenues totaled $42.4 million for

For the year ended December 31, 2016, which was $1.5 million,2018, The Woodlands sold 53.7 residential acres compared to 58.2 acres in 2017 and the average price per residential acre decreased $10,000, or 3.4% lower than the same period1.6%, to $618,000 in 2015 as a result of $0.5 million2018 compared to $628,000 in 2017. The decrease in price per residential land sales and a $1.0 million decrease in commercial land sales.

acre is primarily due to the mix of lots sold. For the year ended December 31, 2017, The Woodlands sold 58.2 residential acres compared to 57.1 acres in 2016, and the average price per residential acre increased $68,000, or 12.1% to $628,000 in 2017 compared to $560,000 in 2016. The increase

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in price per residential acre is due primarily to the sale of single family-attached lots in theour premium East Shore neighborhood.


For the year ended December 31, 2016,2018, The Woodlands sold 57.1 residential acres compared to 48.7 acres in 2015, and the averagea 1.6-acre commercial retail site for $851,000 per acre. The higher price per residential acre decreased $106,000, or 16.0%is due to $560,000 in 2016 compared to $666,000 in 2015. The increase in acres sold in 2016 was the result of providing more mid-market priced lots to homebuilders to meet current market conditions.

location being on a major thoroughfare.


For the year ended December 31, 2017, TheThe Woodlands sold 10.4 acres of commercial land at $365,000 per acre which included a 9.1-acre site with a less desirable location with no freeway frontage and limited access, resulting in a lower price per acre.For the year ended December 31, 2016, there were two medical-use commercial land sales totaling 4.3 acres. Revenues in 2016 totaled $10.4 million, or an average of $2.4 million per acre, as one of the sites was 3.1 acres with freeway frontage that generated $2.7 million in revenue per acre. For the year ended December 31, 2015, there were 12.4 commercial acres sold at an average price of $920,000 per acre, including a 5.0-acre church site that sold for $147,000 per acre.


At December 31, 2017,2018, there were 234325 residential lots under contract in The Woodlands, of which 142251 are scheduled to close in 20182019 for $25.1$39.7 million.


Builder price participation revenue decreased 54.4%64.6% and 63.0%54.4% for the years ended December 31, 2018 and 2017, and 2016, respectively, as compared to the respective prior year as contractual terms with our homebuilders were adjusted to align with the current Houston market.


The Woodlands Hills

Land sales revenues and Other land revenues increased $7.6 million and $0.5 million for the year ended December 31, 20172018 compared to 2016, and decreased for2017, respectively, which was significantly higher than 2017 as the year ended December 31, 2016 compared to 2015. These fluctuations are due to variable revenues from a common-area maintenance arrangement with the Township.

The Woodlands Hills

The first phase of lots were delivered in December 2017, and 18 lots consisting of2017. For the year ended December 31, 2018, The Woodlands Hills sold 32.4 residential acres compared to 4.1 acres were soldin 2017. The average price per residential acre decreased $39,000, or 12.5%, to $274,000 for $1.3 million, or $313,000 per acre. Atthe year ended December 31, 2018 compared to $313,000 in 2017 as a result of the mix of lots sold.


As of December 31, 2018, there were 85 additional89 residential lots under contract with homebuilders, allin The Woodlands Hills, of which 73 are scheduled to close in 20182019 for $5.2 million. Construction and

Land sales operations expense increased by $2.3 million, or 274.5%, for the year ended December 31, 2018 compared to 2017. This increase is attributable to 2018 being the first full year of homes will commenceoperations at the MPC. We do not expect a significant increase in early 2018, and we anticipate thatland sales operations expense in future years as the median new home price will be approximately $350,000, which we expectnumber of land sales continues to be competitive in the Houston market.

accelerate.


Maryland Communities


Our Columbia, Gateway, Emerson and Fairwood MPCs contain approximately 9796 commercial acres remaining to be developed. Commercial land sales for the year ended December 31, 2017 relate to 11.3 acres sold for $10.8 million for proposed medical office buildings. There were no commercial land sales for the yearyears ended December 31, 2016 and 2015. However, 45 acres were transferred to our Strategic Developments segment relating to pending2018 or active development projects.2016. All of the residential inventory was sold out in prior years.


Summerlin

The Las Vegas home market remains strong as there were 1,022 new home


Land sales in Summerlinrevenues increased $11.7 million, or 7.5%, for the year ended December 31, 2018, compared to the same period in 2017, an increase of 49.9% over 2016.due to increased superpad sales. Our land sales revenues totaled $156.6 million for the year ended December 31, 2017, which was $7.9 million, or 5.3%, higher than the same period in 2016 primarily as a result of a higher average price per acre on residential land sold. LandThere were 1,276 new home sales revenues totaled $148.7 millionin Summerlin for the year ended December 31, 2016, which was $25.5 million, or 20.7% higher than the same period in 2015 due to the recognition2018, an increase of revenues deferred in previous periods.

24.9% over 2017.


Summerlin’s residential land sales for the year ended December 31, 20172018 totaled 206.6244.8 acres compared to 239.1206.6 for the same period in 2016.2017. In July and September 2018, we closed on the sales of 123 and 38 acres of residential land in Summerlin for a total sales price of $69.0 million and $22.1 million, respectively. The average price per acre for the year ended December 31, 2018 was $591,000, or 1.2% higher than the same period in 2017. The average price per acre for the year ended December 31, 2017 of $584,000 iswas $121,000, or 26.1%, higher than the average price per acre of $463,000 for the same period in 2016. The increase in the price per acre is due to the $40 million bulk sale of a 116.8-acre parcel at $342,000 per acre in 2016. This parcel required the buyer to install power and drainage facilities to the site and, as a result, warranted a lower price per acre compared to our typical superpad sales. However, the gross margin on this parcel sale was higher than normal due to lower development costs. Residential land sales for the year ended December 31, 2016 totaled 239.1 acres compared to 198.4 for the same period in 2015. The average price per acre for the year ended December 31, 2016 of $463,000 is not comparable to the average price per acre of $577,000 for the same period in 2015 due to the 116.8-acre parcel sale in 2016 explained above, and theOur residential gross margin for the year ended December 31, 20162017 was higher than in 2015 as we incurred lower development costs on the undeveloped parcel. Our residential gross

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margin for the year ended December 31, 2017 is lower than the same period in 2016 as our 2017 land sales consist of more steeply graded parcels which are more costly to develop.

For


During the year ended December 31, 2018, we sold a 5.9-acre church site for $399,000 per acre. During the year ended December 31, 2017, we sold a 5.0-acre parking site in Summerlin for $255,000 per acre. ForDuring the year ended December 31, 2016, we sold a 10.0-acre school site to the County in Summerlin for $35,000 per acre. During the year ended

At December 31, 2015, we sold2018 a 16.7-acre school20.0-acre superpad site was under contract and expected to a charter schoolclose in 2019 for $0.8 million or $48,000 per acre, and a 3.6-acre school site for $3.1 million, or $873,000 per acre to a university to construct a post-graduate healthcare education facility.

$13.1 million.


Builder price participation increased 20.8% and 13.9% for the yearyears ended December 31, 2018 and 2017, compared to 2016respectively, primarily due to the increased number of actively selling neighborhoods and increased availability of product to choose from resulting in an increase in the number of home closings in 2017. Builder price participation decreased 11.1% for the year ended December 31, 2016 compared to 2015 primarily due to the near sell-out of a neighborhood in 2015 that produced the highest price participation per home in Summerlin. 

As of December 31, 2017, there was one superpad site totaling 42.5 acres and two custom lots under contract which are scheduled to close in 2018 for a total of $27.0 million.

both years.


The Summit


Land development began at The Summit, our joint venture with Discovery Land, in the second quarter of 2015, and the development continues to progress. The golf course was completed and opened to the members of the golf club in October 2017. The clubhouse and related amenities broke ground in November 2018 with construction expected to be completed in 2020. Custom lot closings began in the second quarter of 2016, and a total of 77109 lots out of an anticipated 210 total lots have closed for $240.8$345.0 million through December 31, 2017.2018. For the year ended December 31, 2017, 172018, 32 residential lots closed for $55.9$104.8 million, compared to 60

17 lots for $184.9$55.9 million for the same period in 2016.2017. We recognized $23.2$36.3 million and $43.5$23.2 million in equity in earnings, and cash distributions of $10.0 million and $22.9 million were received in the years ended December 31, 2018 and 2017, and 2016, respectively. The significant number of lot closings in 2016 resulted from a backlog of sales contracts executed between the second quarter of 2015 and the second quarter of 2016 when lots were not yet available for sale. Please refer to Note 5 –2 - Real Estate and Other Affiliates in our Notes to Consolidated Financial Statements for a description of the joint venture and further discussion.


MPC Net Contribution


In addition to segment EBT for the MPC, we believe that certain investors measure the value of the assets in this segment based on their contribution to liquidity and capital available for investment. MPC Net Contribution is a non-GAAP financial measure derived from EBT, adjusted for certain items as discussed below. Management uses this measure because it captures current period performance through the velocity of sales, as well as current period development expenditures based upon demand at our MPCs, which varies depending upon the stage of the MPCs development lifecycle, and the overall economic environment.

As reconciled below for each of the respective periods, we calculate MPC Net Contributiondefined as MPC segment EBT, adjusted to exclude timing differences related toplus MPC cost of sales, and non-cash depreciationDepreciation and amortization, and net collections from SID bonds and Municipal Utility District (“MUD”) receivables, reduced by the current periodMPC development expenditures, land acquisitions and land acquisition expenditures (net of municipality reimbursements) which relate to the ordinary course of our long-term master planned community development business, further adjusted for distributedEquity in earnings from unconsolidated development ventures.

AlthoughReal Estate and Other Affiliates, net of distributions. MPC Net Contribution can be computed from GAAP elements of income, it is not a GAAP-based operational metric and should not be evaluated in additionused to and not consideredmeasure operating performance of the MPC assets as a substitute for or superior to, any GAAP measures of operating performance. Furthermore,such performance nor should it be used as a comparison metric with other companies may calculate Net Contribution in a different manner, which may hinder comparability.comparable businesses. A reconciliation of segment EBT to consolidated net income (loss) as computed in accordance with GAAPMPC Net Contribution is presented in Note 17 –  Segments.

below.

39


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The following table sets forth the MPC Net Contribution for the years ended December 31, 2018, 2017 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

2017-2016

 

2016-2015

(In thousands)

 

2017

  

2016

  

2015

 

Change

 

Change

MPC segment EBT (a)

 

$

190,351

 

$

179,481

 

$

114,366

 

$

10,870

 

$

65,115

Plus:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales - land

 

 

121,116

 

 

95,727

 

 

88,065

 

 

25,389

 

 

7,662

Depreciation and amortization

 

 

323

 

 

311

 

 

640

 

 

12

 

 

(329)

MUD and SID bonds collections, net (b)

 

 

56,509

 

 

37,672

 

 

20,345

 

 

18,837

 

 

17,327

Distributions from Real Estate and Other Affiliates

 

 

10,000

 

 

22,900

 

 

 —

 

 

(12,900)

 

 

22,900

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MPC development expenditures

 

 

(193,087)

 

 

(149,592)

 

 

(197,020)

 

 

(43,495)

 

 

47,428

MPC land acquisitions

 

 

(4,391)

 

 

(94)

 

 

(7,293)

 

 

(4,297)

 

 

7,199

Equity in (earnings) loss in Real Estate and Other Affiliates

 

 

(23,234)

 

 

(43,501)

 

 

 —

 

 

20,267

 

 

(43,501)

MPC Net Contribution

 

$

157,587

 

$

142,904

 

$

19,103

 

$

14,683

 

$

123,801

2016:
  Year Ended December 31, 2018-2017 2017-2016
(In thousands) 2018 2017 2016 Change Change
MPC segment EBT (a) $202,955
 $190,351
 $179,481
 $12,604
 $10,870
Plus:          
Cost of sales - land 124,214
 121,116
 95,727
 3,098
 25,389
Depreciation and amortization 243
 323
 311
 (80) 12
MUD and SID bonds collections, net (b) 37,401
 56,509
 37,672
 (19,108) 18,837
Distributions from Real Estate and Other Affiliates 10,000
 10,000
 22,900
 —
 (12,900)
Less:          
MPC development expenditures (195,504) (193,087) (149,592) (2,417) (43,495)
MPC land acquisitions (8,826) (4,391) (94) (4,435) (4,297)
Equity in (earnings) loss in Real Estate and Other Affiliates (36,284) (23,234) (43,501) (13,050) 20,267
MPC Net Contribution $134,199
 $157,587
 $142,904
 $(23,388) $14,683

(a)

For a detailed breakdown of our MPC segment EBT, refer to Note 17 –- Segmentsin our Notes to Consolidated Financial Statements.

(b)

SID collections are shown net of SID transfers to buyers in the respective periods.


MPC Net Contribution decreased for the year ended December 31, 2018 compared to 2017 primarily due to lower MUD and SID bonds collections, net and higher Equity in earnings in Real Estate and Other Affiliates, partially offset by higher Land sales revenues. MPC Net Contribution increased for the year ended December 31, 2017 compared to 2016 primarily due to increasesan increase in MPC segment EBT, Cost of sales – land, and MUD and SID bonds collections, net offset by increased MPC development expenditures, MPC land acquisitions, and decreased income from Equity in earnings in Real Estate and other affiliates in 2017. MPC Net Contribution increased for the year ended December 31, 2016 compared to 2015 primarily due to an increase in MPC segment EBT at Summerlin, an increase in MUD and SID bond collections and a reduction in MPC development expenditures in 2016. While the land sales closed for the year ended December 31, 2016 decreased as compared to the same period in 2015, $33.4 million of revenue previously deferred due to future performance obligations met criteria for recognition in 2016. The Summit at our Summerlin MPC contributed earnings of $43.5 million for the year ended December 31, 2016, which was its first year of land sales.


The following table sets forth MPC land inventory activity for the years ended December 31, 20172018 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

    

Bridgeland

    

Maryland Communities

    

Summerlin

 

The Woodlands

    

The Woodlands Hills

    

Total MPC

Balance December 31, 2015

 

$

435,220

 

$

22,143

 

$

864,276

 

 

$

220,099

 

$

101,104

 

$

1,642,842

Acquisitions

 

 

 —

 

 

 —

 

 

 —

 

 

 

94

 

 

 —

 

 

94

Development expenditures (a)

 

 

46,135

 

 

282

 

 

73,069

 

 

 

28,117

 

 

1,989

 

 

149,592

Cost of sales

 

 

(7,672)

 

 

 —

 

 

(68,436)

 

 

 

(19,619)

 

 

 —

 

 

(95,727)

MUD reimbursable costs (b)

 

 

(33,421)

 

 

 —

 

 

 —

 

 

 

(6,198)

 

 

(166)

 

 

(39,785)

Transfer to Strategic Development

 

 

 —

 

 

 —

 

 

 —

 

 

 

(539)

 

 

 —

 

 

(539)

Other

 

 

1,336

 

 

 3

 

 

13,634

(c)

 

 

(1,984)

 

 

95

 

 

13,084

Balance December 31, 2016

 

$

441,598

 

$

22,428

 

$

882,543

 

 

$

219,970

 

$

103,022

 

$

1,669,561

Acquisitions

 

 

3,001

 

 

 —

 

 

 —

 

 

 

1,415

 

 

(25)

 

 

4,391

Development expenditures (a)

 

 

74,798

 

 

21

 

 

88,964

 

 

 

17,798

 

 

11,506

 

 

193,087

MPC Cost of sales

 

 

(12,792)

 

 

(5,839)

 

 

(83,343)

 

 

 

(18,470)

 

 

(672)

 

 

(121,116)

MUD reimbursable costs (b)

 

 

(53,491)

 

 

 —

 

 

 —

 

 

 

(3,785)

 

 

(5,793)

 

 

(63,069)

Transfer to Strategic Developments

 

 

 —

 

 

 —

 

 

(22,991)

 

 

 

(8,151)

 

 

 —

 

 

(31,142)

Other

 

 

5,794

 

 

18

 

 

(12,940)

(d)

 

 

(2,728)

 

 

422

 

 

(9,434)

Balance December 31, 2017

 

$

458,908

 

$

16,628

 

$

852,233

 

 

$

206,049

 

$

108,460

 

$

1,642,278

2017:

(a)Development expenditures are inclusive of capitalized interest and property taxes.

(b)MUD reimbursable costs represent land development expenditures transferred to MUD Receivables.

(c)    Primarily consists of a $9.8 million increase in accrued development expenditures and $3.9 million of utility deposits reclassified into land inventory at Summerlin.

(d) Includes $8.5 million of refundable utility deposits reclassified from land inventory and $4.4 million decrease in accrued development expenditures.

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Operating Assets

Operating assets typically generate rental revenues sufficient to cover their operating costs, except when a substantial portion, or all, of the property is being redeveloped, vacated for development or in its initial lease-up phase.

Total revenues and expenses for the Operating Assets segment are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

2017-2016

 

2016-2015

(In thousands)

 

2017

  

2016

  

2015

 

Change

 

Change

Minimum rents

 

$

182,468

 

$

172,437

 

$

149,064

 

$

10,031

 

$

23,373

Tenant recoveries

 

 

45,366

 

 

44,306

 

 

39,415

 

 

1,060

 

 

4,891

Hospitality revenues

 

 

76,020

 

 

62,252

 

 

45,374

 

 

13,768

 

 

16,878

Other rental and property revenues

 

 

23,701

 

 

16,170

 

 

25,453

 

 

7,531

 

 

(9,283)

Total revenues

 

 

327,555

 

 

295,165

 

 

259,306

 

 

32,390

 

 

35,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other property operating costs

 

 

71,748

 

 

60,506

 

 

68,078

 

 

11,242

 

 

(7,572)

Rental property real estate taxes

 

 

26,523

 

 

24,439

 

 

21,856

 

 

2,084

 

 

2,583

Rental property maintenance costs

 

 

12,872

 

 

12,033

 

 

10,236

 

 

839

 

 

1,797

Hospitality operating costs

 

 

56,362

 

 

49,359

 

 

34,839

 

 

7,003

 

 

14,520

Provision for doubtful accounts

 

 

2,710

 

 

5,601

 

 

3,998

 

 

(2,891)

 

 

1,603

Other income, net

 

 

315

 

 

(4,601)

 

 

(524)

 

 

4,916

 

 

(4,077)

Depreciation and amortization

 

 

122,421

 

 

86,313

 

 

89,075

 

 

36,108

 

 

(2,762)

Provision for impairment

 

 

 —

 

 

35,734

 

 

 —

 

 

(35,734)

 

 

35,734

Interest income

 

 

(22)

 

 

(19)

 

 

(37)

 

 

(3)

 

 

18

Interest expense

 

 

61,606

 

 

50,446

 

 

32,968

 

 

11,160

 

 

17,478

Equity in (earnings) loss from Real Estate and Other Affiliates

 

 

(3,267)

 

 

(2,802)

 

 

(1,883)

 

 

(465)

 

 

(919)

Total operating expenses

 

 

351,268

 

 

317,009

 

 

258,606

 

 

34,259

 

 

58,403

Income (loss) before development expenses

 

 

(23,713)

 

 

(21,844)

 

 

700

 

 

(1,869)

 

 

(22,544)

Demolition costs

 

 

1,605

 

 

194

 

 

2,412

 

 

1,411

 

 

(2,218)

Development-related marketing costs

 

 

3,346

 

 

947

 

 

7,934

 

 

2,399

 

 

(6,987)

Total development expenses

 

 

4,951

 

 

1,141

 

 

10,346

 

 

3,810

 

 

(9,205)

Operating Assets segment EBT*

 

$

(28,664)

 

$

(22,985)

 

$

(9,646)

 

$

(5,679)

 

$

(13,339)

(*)      For a reconciliation of Operating Assets segment EBT to consolidated income (loss) before taxes, refer to Note 17 – Segments in our Consolidated Financial Statements.

Minimum rents and tenant recoveries revenue increased for the year ended December 31, 2017 compared to 2016 primarily due to increases of $10.1 million for our office properties, $5.3 million at our multi-family properties, $0.7 million at our retail properties, and $1.0 million related to our new National Hockey League (“NHL”) ground lease, partially offset by decreases of $6.0 million related to the sale of Park West and transfer of Landmark Mall to Strategic Developments. The increase in our office properties was primarily due to One Merriweather being placed in service, the acquisition of One Mall North in Columbia and the continued stabilization of ONE Summerlin, 1725 Hughes Landing and Three Hughes Landing, offset primarily by a decrease for 110 North Wacker in Chicago related to the future redevelopment of the property. The increase in our multi-family properties was primarily due to the purchase and consolidation of our joint venture partner’s 18.57% interest in Millennium Six Pines Apartments in July 2016 and ongoing leasing activities of One Lakes Edge. The increase in our retail properties was due to the ongoing stabilization of Lakeland Village Center and Creekside Village Green, offset by decreases at Ward Village Retail as certain properties are moved into redevelopment. Minimum rents and tenant recoveries increased for the year ended December 31, 2016 compared to 2015 primarily due to increases of $16.0million for our office properties, $6.0million for our multi-family properties and $5.9 million for our retail properties. The increase in our office properties was primarily due to the openings and on-going stabilization of 1725-1735 Hughes Landing Boulevard in 2016. The increase for our retail properties was primarily due to the elimination of co-tenancy allowances for the majority of tenants at Downtown Summerlin. The increase in our multi-family properties was primarily due to the opening of One Lakes Edge in 2015 and the purchase of our joint venture partner’s interest in Millennium Six Pines Apartments in July 2016.

The increase in hospitality revenues was primarily due to a $2.6 million increase at Embassy Suites at Hughes Landing and a $9.7 million increase at The Westin at The Woodlands as compared to 2016, with increases in hospitality operating costs due to the on-going stabilizationof the two properties placed in service in December 2015 and March 2016, respectively. The increase in profit margin for our hospitality properties for the year ended December 31, 2017 compared to 2016 is due primarily to focused efforts to reduce operating expenses at all hospitality properties. Hospitality revenues and hospitality operating costs increased for the year ended December 31, 2016 compared to 2015 due primarily to the openings of The Westin at The

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Woodlands in March 2016 and the Embassy Suites at Hughes Landing in December 2015. The decrease in profit margin for hospitality for the year ended December 31, 2016 compared to 2015 is due primarily to a decrease in occupancy and conference services at The Woodlands Resort and Conference Center which maintains relatively high fixed costs associated primarily with labor.

Other rental and property revenue increased for the year ended December 31, 2017 compared to 2016 primarily due to revenue related to the Las Vegas 51s baseball team which was consolidated effective March 1, 2017 with the purchase of our joint venture partner’s 50.0% interest in the team. Other rental and property revenue decreased for the year ended December 31, 2016 compared to 2015 primarily due to the sale of The Club at Carlton Woods in September 2015.

Other property operating costs increased for the year ended December 31, 2017 compared to the same period in 2016 due primarily to the purchase of our joint venture partner’s 50.0% interest in the Las Vegas 51s baseball team, an increase in operating expenses for 110 North Wacker which were previously paid by the tenant, an increase at the Seaport District for the Fulton Market Building which was partially placed in service in the fourth quarter of 2016 and expenses related to the seasonal marketing events at Seaport, offset by the impact of the December 2016 sale of Park West and the first quarter of 2017 transfer of Landmark Mall to our Strategic Developments segment. Other property operating costs and rental property maintenance costs decreased for the year ended December 31, 2016 compared to 2015 due to the sale of The Club at Carlton Woods, partially offset by an increase for our office properties primarily due to the openings of 1725-1735 Hughes Landing Boulevard.

Rental property real estate taxes increased for the year ended December 31, 2017 compared to 2016, primarily due to the purchase and consolidation of Millennium Six Pines Apartments, placing Three Hughes Landing in service, and the late 2015 and early 2016 openings of the Embassy Suites at Hughes Landing and The Westin at The Woodlands, respectively, offset by the sale of Park West. Rental property real estate taxes increased for the year ended December 31, 2016 compared to 2015 primarily due to the openings of 1725-1735 Hughes Landing Boulevard, Downtown Summerlin and One Lakes Edge, partially offset by the 2015 sale of The Club at Carlton Woods.

The provision for doubtful accounts decreased for the year ended December 31, 2017 compared to the same period in 2016 due to improved tenant credit at our retail properties. The 2016 reserves related to two tenants at our retail properties and for remaining receivables from our Park West property, sold in December 2016. The provision for doubtful accounts increased for the year ended December 31, 2016 compared to the same period in 2015 due primarily to reserves for a bankrupt tenant at Ward Village and due to collectability concerns with tenants at Park West and Downtown Summerlin.

Other income, net decreased for the year ended December 31, 2017 compared to 2016 and increased for the year ended December 31, 2016 compared to 2015 due to the settlement received for TPC at Summerlin in 2016 and the write-off of a liability at Riverwalk in 2016.

Depreciation and amortization increased for the year ended December 31, 2017 compared to 2016 due to the acceleration of depreciation reflecting shorter remaining useful lives for two office and two retail buildings pending redevelopment and depreciation on assets acquired or newly placed in service during the year ended December 31, 2017. Depreciation and amortization decreased for the year ended December 31, 2016 compared to 2015 due to accelerated depreciation in 2015 in anticipation of development at Ward Village, offset primarily by assets placed in service in 2016.

There was no provision for impairment for the year ended December 31, 2017. The provision for impairment increased for the year ended December 31, 2016 compared to the same period in 2015 due to a $35.7 million impairment charge recognized on Park West during the third quarter of 2016 as a result of our shorter than previously anticipated holding period of the property. The property was sold in December 2016.

The increase in interest expense for the year ended December 31, 2017 as compared to the same period in 2016 is primarily due to higher loan balances on additional properties acquired or placed in service in 2017 and late 2016 as well as increases in the one month LIBOR rate throughout the second and third quarters of 2017. Interest expense increased for the year ended December 31, 2016 due to new debt on assets placed in service in 2016 and a full year of interest on assets placed in service during 2015. See further discussion in Note 8 –Mortgages, Notes and Loans Payable in our consolidated financial statements.

Equity in earnings from Real Estate and Other Affiliates increased for the year ended December 31, 2017 compared to the same period in 2016 primarily due to a $3.4 million distribution from our Summerlin Hospital investment as compared to $2.6 million for the same period in 2016 and due to increased earnings at The Metropolitan Downtown Columbia, offset by a decrease in

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33 Peck Slip due to an adjustment for depreciation, a decrease in Stewart Title due to increased competition in the area, a decrease in Constellation as a result of its consolidation with the purchase of our joint venture partner’s interest and a decrease the Las Vegas 51s baseball team investment subsequent to its consolidation with the purchase of our joint venture partner’s interest. Equity in earnings from Real Estate and Other Affiliates increased for the year ended December 31, 2016 compared to the same period in 2015 due primarily to the income earned from the purchase of our joint venture partner’s interest in Millennium Woodlands Six Pines and a $2.6 million distribution from our Summerlin Hospital investment as compared to $1.7 million in 2015.

Demolition costs for the year ended December 31, 2017 and 2016 relate to the demolition of Ward Warehouse, a portion of Ward Village Retail. Demolition costs decreased for the year ended December 31, 2016 versus 2015 due to the completion of the interior demolition of the Fulton Market Building part of the Seaport District NYC - Historic Area/Uplands.

Development-related marketing costs increased for the year ended December 31, 2017 as compared to the same period in 2016 due to an increase in marketing costs in the Seaport District. The costs in 2017 and 2016 relate to ongoing marketing initiatives as we continue leasing efforts in advance of the completion of our Pier 17 redevelopment. Development-related marketing costs decreased for the year ended December 31, 2016 compared to 2015 due to a decrease in marketing costs at the Seaport District NYC - Historic Area/Uplands. We incurred higher costs in 2015 due to greater marketing initiatives at Seaport District as we accelerated leasing efforts in advance of the 2016 completion of the Fulton Market Building.

Operating Assets Net Operating Income

We believe that NOI is a useful supplemental measure of the performance of our Operating Assets because it provides a performance measure that, when compared year over year, reflects the revenues and expenses directly associated with owning and operating real estate properties and the impact on operations from trends in rental and occupancy rates and operating costs. We define NOI as operating revenues (rental income, tenant recoveries and other revenue) less operating expenses (real estate taxes, repairs and maintenance, marketing and other property expenses). NOI excludes straight-line rents and amortization of tenant incentives, net interest expense, ground rent amortization, demolition costs, amortization, depreciation, development-related marketing costs and Equity in earnings from Real Estate and Other Affiliates. We use NOI to evaluate our operating performance on a property-by-property basis because NOI allows us to evaluate the impact of these factors which vary by property such as lease structure, lease rates and tenant base have on our operating results, gross margins and investment returns.

Although we believe that NOI provides useful information to investors about the performance of our Operating Assets, due to the exclusions noted above, NOI should only be used as an additional measure of the financial performance of such assets and not as an alternative to GAAP net income. A reconciliation of Operating Assets NOI to Operating Assets EBT has been presented in the table below to provide the most comparable GAAP measure. Variances between years in NOI typically result from changes in rental rates, occupancy, tenant mix and operating expenses. Please refer to our Operating Assets NOI by property and Operating Assets EBT in the tables below for the years ended December 31, 2017, 2016 and 2015.

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Operating Assets NOI and EBT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

2017-2016

 

2016-2015

(In thousands)

 

2017

  

2016

  

2015

 

Change

 

Change

Retail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Creekside Village Green (a)

 

$

1,893

 

$

1,616

 

$

877

 

$

277

 

$

739

Hughes Landing Retail (a)

 

 

3,733

 

 

3,564

 

 

1,548

 

 

169

 

 

2,016

1701 Lake Robbins (b)

 

 

284

 

 

381

 

 

418

 

 

(97)

 

 

(37)

20/25 Waterway Avenue

 

 

1,837

 

 

1,844

 

 

1,978

 

 

(7)

 

 

(134)

Waterway Garage Retail

 

 

719

 

 

671

 

 

722

 

 

48

 

 

(51)

2000 Woodlands Parkway

 

 

(94)

 

 

(51)

 

 

 —

 

 

(43)

 

 

(51)

Columbia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Columbia Regional

 

 

1,536

 

 

1,467

 

 

1,415

 

 

69

 

 

52

Seaport District

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seaport District NYC -  Historic Area / Uplands (c)

 

 

(1,452)

 

 

92

 

 

 —

 

 

(1,544)

 

 

92

Summerlin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Downtown Summerlin (a)

 

 

17,950

 

 

16,632

 

 

10,117

 

 

1,318

 

 

6,515

Ward Village

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ward Village Retail (d)

 

 

20,576

 

 

22,048

 

 

25,566

 

 

(1,472)

 

 

(3,518)

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lakeland Village Center at Bridgeland (a)

 

 

782

 

 

190

 

 

 —

 

 

592

 

 

190

Outlet Collection at Riverwalk

 

 

5,879

 

 

5,125

 

 

6,450

 

 

754

 

 

(1,325)

Total Retail NOI

 

 

53,643

 

 

53,579

 

 

49,091

 

 

64

 

 

4,488

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Office

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One Hughes Landing

 

 

6,168

 

 

6,276

 

 

5,547

 

 

(108)

 

 

729

Two Hughes Landing (e)

 

 

5,790

 

 

5,271

 

 

4,650

 

 

519

 

 

621

Three Hughes Landing

 

 

(623)

 

 

(514)

 

 

 —

 

 

(109)

 

 

(514)

1725 Hughes Landing Boulevard (a)

 

 

3,531

 

 

200

 

 

(198)

 

 

3,331

 

 

398

1735 Hughes Landing Boulevard (a)

 

 

7,509

 

 

3,041

 

 

(18)

 

 

4,468

 

 

3,059

2201 Lake Woodlands Drive (a)

 

 

(32)

 

 

(121)

 

 

(138)

 

 

89

 

 

17

9303 New Trails (f)

 

 

1,171

 

 

1,721

 

 

1,993

 

 

(550)

 

 

(272)

3831 Technology Forest Drive

 

 

2,268

 

 

2,051

 

 

2,044

 

 

217

 

 

 7

3 Waterway Square

 

 

6,709

 

 

7,033

 

 

6,588

 

 

(324)

 

 

445

4 Waterway Square

 

 

6,473

 

 

6,749

 

 

6,048

 

 

(276)

 

 

701

1400 Woodloch Forest

 

 

1,781

 

 

1,794

 

 

1,703

 

 

(13)

 

 

91

Columbia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10-70 Columbia Corporate Center (g)

 

 

11,568

 

 

11,862

 

 

12,947

 

 

(294)

 

 

(1,085)

Columbia Office Properties (h)

 

 

1,002

 

 

(6)

 

 

550

 

 

1,008

 

 

(556)

One Mall North

 

 

1,900

 

 

78

 

 

 —

 

 

1,822

 

 

78

One Merriweather (c)

 

 

1,499

 

 

 —

 

 

 —

 

 

1,499

 

 

 —

Two Merriweather (c)

 

 

(141)

 

 

 —

 

 

 —

 

 

(141)

 

 

 —

Summerlin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ONE Summerlin (a)

 

 

3,898

 

 

2,365

 

 

(206)

 

 

1,533

 

 

2,571

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

110 North Wacker (i)

 

 

723

 

 

6,105

 

 

6,100

 

 

(5,382)

 

 

 5

Total Office NOI

 

 

61,194

 

 

53,905

 

 

47,610

 

 

7,289

 

 

6,295

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Millennium Six Pines Apartments

 

 

3,579

 

 

1,498

 

 

 —

 

 

2,081

 

 

1,498

Millennium Waterway Apartments (j)

 

 

3,208

 

 

3,183

 

 

4,169

 

 

25

 

 

(986)

One Lakes Edge (a)

 

 

5,324

 

 

3,651

 

 

994

 

 

1,673

 

 

2,657

Summerlin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Constellation Apartments (k)

 

 

15

 

 

 —

 

 

 —

 

 

15

 

 

 —

Seaport District

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

85 South Street (l)

 

 

194

 

 

523

 

 

494

 

 

(329)

 

 

29

Total Multi-family NOI

 

 

12,320

 

 

8,855

 

 

5,657

 

 

3,465

 

 

3,198

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hospitality

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Embassy Suites at Hughes Landing (m)

 

 

4,816

 

 

3,563

 

 

(25)

 

 

1,253

 

 

3,588

The Westin at The Woodlands (m)

 

 

6,189

 

 

1,739

 

 

 —

 

 

4,450

 

 

1,739

The Woodlands Resort & Conference Center (n)

 

 

8,740

 

 

7,591

 

 

10,560

 

 

1,149

 

 

(2,969)

Total Hospitality NOI

 

 

19,745

 

 

12,893

 

 

10,535

 

 

6,852

 

 

2,358

Total Retail, Office, Multi-family, and Hospitality NOI

 

 

146,902

 

 

129,232

 

 

112,893

 

 

17,670

 

 

16,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands Ground leases

 

 

1,608

 

 

1,461

 

 

1,230

 

 

147

 

 

231

The Woodlands Parking Garages

 

 

(178)

 

 

(417)

 

 

(483)

 

 

239

 

 

66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Properties (o) (c)

 

 

894

 

 

1,012

 

 

1,431

 

 

(118)

 

 

(419)

Total Other NOI

 

 

2,324

 

 

2,056

 

 

2,178

 

 

268

 

 

(122)

44

(In thousands) Bridgeland Columbia Summerlin The Woodlands The Woodlands Hills Total MPC
Balance December 31, 2016 $441,598
 $22,428
 $882,543
 $219,970
 $103,022
 $1,669,561
Acquisitions 3,001
 —
 —
 1,415
 (25) 4,391
Development expenditures (a) 74,798
 21
 88,964
 17,798
 11,506
 193,087
Cost of sales (12,792) (5,839) (83,343) (18,470) (672) (121,116)
MUD reimbursable costs (b) (53,491) —
 —
 (3,785) (5,793) (63,069)
Transfer to Strategic Development —
 —
 (22,991) (8,151) —
 (31,142)
Other 5,794
 18
 (12,940) (2,728) 422
 (9,434)
Balance December 31, 2017 $458,908
 $16,628
 $852,233
 $206,049
 $108,460
 $1,642,278
Acquisitions 506
 —
 —
 8,320
 —
 8,826
Development expenditures (a) 87,737
 15
 75,485
 12,398
 19,869
 195,504
MPC Cost of sales (16,097) —
 (87,229) (16,563) (4,325) (124,214)
MUD reimbursable costs (b) (59,842) 

 

 (2,521) (7,994) (70,357)
Transfer to Strategic Developments (812) 

 (6,705) (3,235) —
 (10,752)
Other (c) 3,451
 (9) (3,876) (167) 1,976
 1,375
Balance December 31, 2018 $473,851
 $16,634
 $829,908
 $204,281
 $117,986
 $1,642,660

Table of Contents

 

 

Year Ended December 31,

 

2017-2016

 

2016-2015

(In thousands)

 

2017

  

2016

  

2015

 

Change

 

Change

Operating Assets NOI excluding properties sold or in redevelopment

 

$

149,226

 

$

131,288

 

$

115,071

 

$

17,938

 

$

16,217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redevelopments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seaport District

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seaport District NYC -  Historic Area / Uplands (c)

 

$

 —

 

$

(589)

 

$

(2,692)

 

$

589

 

$

2,103

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Landmark Mall (p)

 

 

 —

 

 

(676)

 

 

(347)

 

 

676

 

 

(329)

Total Operating Assets Redevelopments NOI

 

 

 —

 

 

(1,265)

 

 

(3,039)

 

 

1,265

 

 

1,774

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dispositions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Club at Carlton Woods

 

 

 —

 

 

 —

 

 

(942)

 

 

 —

 

 

942

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Park West (q)

 

 

(60)

 

 

1,835

 

 

1,812

 

 

(1,895)

 

 

23

Cottonwood Square

 

 

750

 

 

705

 

 

677

 

 

45

 

 

28

Total Operating Assets Dispositions NOI

 

 

690

 

 

2,540

 

 

1,547

 

 

(1,850)

 

 

993

Total Operating Assets NOI - Consolidated

 

$

149,916

 

$

132,563

 

$

113,579

 

$

17,353

 

$

18,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Straight-line rent amortization (r)

 

 

7,999

 

 

10,689

 

 

7,391

 

 

(2,690)

 

 

3,298

Demolition costs (s)

 

 

(1,605)

 

 

(194)

 

 

(2,412)

 

 

(1,411)

 

 

2,218

Development-related marketing costs

 

 

(3,346)

 

 

(947)

 

 

(7,934)

 

 

(2,399)

 

 

6,987

Provision for impairment (q)

 

 

 —

 

 

(35,734)

 

 

 —

 

 

35,734

 

 

(35,734)

Depreciation and Amortization (t)

 

 

(122,421)

 

 

(86,313)

 

 

(89,075)

 

 

(36,108)

 

 

2,762

Write-off of lease intangibles and other

 

 

(575)

 

 

(25)

 

 

(671)

 

 

(550)

 

 

646

Other income, net (u)

 

 

(315)

 

 

4,601

 

 

524

 

 

(4,916)

 

 

4,077

Equity in earnings (loss) from Real Estate Affiliates

 

 

3,267

 

 

2,802

 

 

1,883

 

 

465

 

 

919

Interest, net

 

 

(61,584)

 

 

(50,427)

 

 

(32,931)

 

 

(11,157)

 

 

(17,496)

Total Operating Assets segment EBT (v)

 

$

(28,664)

 

$

(22,985)

 

$

(9,646)

 

$

(5,679)

 

$

(13,339)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Assets NOI - Equity and Cost Method Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Millennium Six Pines Apartments (w)

 

$

 —

 

$

1,537

 

$

1,414

 

$

(1,537)

 

$

123

Stewart Title of Montgomery County, TX

 

 

1,329

 

 

1,977

 

 

2,007

 

 

(648)

 

 

(30)

Woodlands Sarofim # 1

 

 

901

 

 

1,541

 

 

1,496

 

 

(640)

 

 

45

Columbia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Metropolitan Downtown Columbia

 

 

5,858

 

 

4,137

 

 

1,194

 

 

1,721

 

 

2,943

Summerlin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

Constellation (k)

 

 

1,549

 

 

(108)

 

 

 —

 

 

1,657

 

 

(108)

Las Vegas 51s (w)

 

 

(295)

 

 

68

 

 

305

 

 

(363)

 

 

(237)

Seaport District

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33 Peck Slip (x)

 

 

 —

 

 

1,347

 

 

 —

 

 

(1,347)

 

 

1,347

Total NOI - equity investees

 

 

9,342

 

 

10,499

 

 

6,416

 

 

(1,157)

 

 

4,083

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments to NOI (y)

 

 

(9,813)

 

 

(9,527)

 

 

(3,069)

 

 

(286)

 

 

(6,458)

Equity Method Investments EBT

 

 

(471)

 

 

972

 

 

3,347

 

 

(1,443)

 

 

(2,375)

Less: Joint Venture Partner's Share of EBT

 

 

(355)

 

 

786

 

 

3,211

 

 

(1,141)

 

 

(2,425)

Equity in earnings (loss) from Real Estate Affiliates

 

 

(116)

 

 

186

 

 

136

 

 

(302)

 

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions from Summerlin Hospital Investment

 

 

3,383

 

 

2,616

 

 

1,747

 

 

767

 

 

869

Segment equity in earnings from Real Estate and Other Affiliates

 

$

3,267

 

$

2,802

 

$

1,883

 

$

465

 

$

919

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company's Share of Equity Method Investments NOI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Millennium Six Pines Apartments (w)

 

$

 —

 

$

1,252

 

$

1,151

 

$

(1,252)

 

$

101

Stewart Title of Montgomery County, TX

 

 

665

 

 

989

 

 

1,004

 

 

(324)

 

 

(15)

Woodlands Sarofim # 1

 

 

180

 

 

308

 

 

299

 

 

(128)

 

 

 9

Columbia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Metropolitan Downtown Columbia

 

 

2,929

 

 

2,069

 

 

597

 

 

860

 

 

1,472

Summerlin

 

 

 

 

 

 

 

 

 

 

 

 —

 

 

 —

Constellation (k)

 

 

775

 

 

(54)

 

 

 —

 

 

829

 

 

(54)

Las Vegas 51s (w)

 

 

(148)

 

 

34

 

 

153

 

 

(182)

 

 

(119)

Seaport District

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33 Peck Slip (x)

 

 

 —

 

 

471

 

 

 —

 

 

(471)

 

 

471

Company's share NOI - equity investees

 

$

4,401

 

$

5,069

 

$

3,204

 

$

(668)

 

$

1,865

45

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

Economic

 

 

December 31, 2017

(In thousands)

 

Ownership

 

 

Total Debt

 

Total Cash

The Woodlands

 

 

 

 

 

 

 

 

 

 

Stewart Title of Montgomery County, TX

 

 

50.00

%

 

$

 —

 

$

139

Woodlands Sarofim # 1

 

 

20.00

 

 

 

5,282

 

 

688

Columbia

 

 

 

 

 

 

 

 

 

 

The Metropolitan Downtown Columbia

 

 

50.00

 

 

 

70,000

 

 

340

(a)

NOI increase for the year ended December 31, 2017 as compared to the same periods in 2016 and 2015 relates to an increase in occupancy and/or effective rent, or relates to properties recently placed in service.

(b)

(a)

The decrease in NOI for the year ended December 31, 2017 as compared to the same period in 2016 is due to the expirationDevelopment expenditures are inclusive of a lease in October 2016. As of December 31, 2017, the building is 100% leased.

capitalized interest and property taxes.

(c)

(b)

Please referMUD reimbursable costs represent land development expenditures transferred to discussion in the following sections regarding this property.

MUD Receivables.

(d)

(c)

The decreasePrimarily consists of changes in NOI at Ward Village for the year ended December 31, 2017 as compared to the same periods in 2016 and 2015 is generally due to the closure and transfer of buildings from Operating Assets to Strategic Developments in anticipation of redevelopment.

development expenditures payable.

(e)

The increase in NOI for the year ended December 31, 2017 as compared to the same period in 2016 is due to bad debt expense for a tenant in 2016. The increase for the year ended December 31, 2016 compared to the same period in 2015 is primarily due to a delinquent tenant who is no longer occupying the space. 

(f)

The decrease in NOI for the year ended December 31, 2017 compared to the same periods in 2016 and 2015 is generally due to a decrease in occupancy due to a tenant relocating to 1725 Hughes Landing Boulevard.

(g)

The decrease in NOI for the year ended December 31, 2017 as compared to the same period in 2016 is generally due to an increase in repairs and maintenance and a termination fee received in April 2016. The decrease in NOI for the year ended 2016 compared to 2015 is due to a slight decline in occupancy and a general decline in rental revenues due to rental rates resetting to lower market rates.

(h)

The NOI increase for the year ended December 31, 2017 as compared to the same period in 2016 is primarily due to increased occupancy at Columbia Association and an overall decrease in operating expenses. The decrease in NOI for the year ended December 31, 2016 as compared to the same period in 2015 is due to a general decline in rental revenue due to rental rates resetting to lower market rates.

(i)

The decrease in NOI is due to our termination of the lease to facilitate redevelopment and tenant rent abatement through the January 2018 lease termination date.

(j)

NOI decrease for the year ended December 31, 2016 as compared to the same period in 2015 is generally due to an increase in concessions to increase occupancy.

(k)

NOI increase for the year ended December 31, 2017 as compared to the same period in 2016 due to the consolidation of Constellation as a result of the buyout of our joint venture partner’s 50% interest on December 28, 2017. The property’s NOI is now included with our 100% owned multi-family properties.

(l)

The decrease in NOI for the year ended December 31, 2017 compared to the same period in 2016 is due to the buyout of a tenant in a rent controlled unit.

(m)

NOI increase for the year ended December 31, 2017 as compared to the same period in 2016 is due to improved occupancy and an increase in revenue per available room.

(n)

The NOI increase for the year ended December 31, 2017 as compared to the same period in 2016 is due to improved occupancy and an increase in revenue per available room. The decrease in NOI for the year ended December 31, 2016 as compared to the same period in 2015 is due to a decrease in occupancy and conference center services.

(o)

NOI decrease for the year ended December 31, 2017 as compared to the same period in 2016 in Other Properties is due to the transfer of the Merriweather Post Pavilion in 2016, offset by the ground lease with a hockey team and consolidation of Las Vegas 51s in 2017.

(p)

Landmark Mall was closed for redevelopment and moved to our Strategic Developments segment as of January 2017.

(q)

Park West was impaired in the third quarter of 2016 prior to its sale in December 2016, and 2017 activity relates to an adjusted increase of property expenses per the terms of the sales agreement.

(r)

Amortization of straight-line rent decreased for the year ended December 31, 2017 as compared to the same period in 2016 primarily due to the write-off of straight-line rent at Ward Village associated with a bankrupt tenant in 2016.

(s)

The demolition costs for the year ended December 31, 2017 relate to the demolition of Ward Warehouse, a portion of Ward Village Retail.

(t)

Increased depreciation and amortization for the year ended December 31, 2017 as compared to the same period in 2016, relates to an increase in the number of operating properties in service as well as accelerated depreciation of $25.5 million reflecting the shorter remaining useful lives for properties pending redevelopment.

(u)

The decrease in other income, net for the year ended December 31, 2017 compared to the same period in 2016 is due to the final participation payments received for TPC Las Vegas and TPC Summerlin in July 2016.

(v)

For a detailed breakdown of our Operating Assets segment EBT, please refer to Note 17 – Segments in the consolidated financial statements.

(w)

NOI variance in Millennium Six Pines and Las Vegas 51s for the year ended December 31, 2017, respectively, as compared to the same period in 2016 is due to the consolidation of the asset as a result of the purchase of our joint venture partners’ interests.

(x)

The 33 Peck Slip hotel was closed for redevelopment at the end of December 2016. Please see further discussion in the Strategic Developments discussion of the Seaport District.

(y)

Adjustments to NOI include straight line-rent and market lease amortization, demolition costs, depreciation and amortization and interest expense, net at our joint venture properties.

46

Table of Contents

Retail Properties

Some of the leases related to our retail properties are triple net leases, which generally require tenants to pay their pro-rata share of property operating costs, such as real estate taxes, utilities and insurance, and the direct costs of their leased space. We also enter into certain leases which require tenants to pay a fixed-rate per square foot reimbursement for common area costs which is increased annually according to the terms of the lease. 

The following table summarizes the leases we executed at our retail properties during the year ended December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square Feet

 

Per Square Foot per Annum

Retail Properties (a)

 

Total Executed

 

Avg. Lease Term (Months)

 

Total Leased

 

Associated with Tenant Improvements

 

Associated with Leasing Commissions

 

 

Avg. Starting Rents

 

 

Total Tenant Improvements

 

 

Total Leasing Commissions

Pre-leased (b)

 

26

 

112

 

229,889

 

105,501

 

131,493

 

$

53.43

 

$

7.31

 

$

0.97

Comparable - Renewal (c)

 

 9

 

47

 

33,504

 

1,454

 

 —

 

 

31.39

 

 

3.33

 

 

 —

Comparable - New (d)

 

12

 

76

 

33,491

 

20,245

 

15,125

 

 

31.44

 

 

4.13

 

 

2.16

Non-comparable (e)

 

32

 

91

 

136,974

 

120,765

 

117,740

 

 

24.63

 

 

6.94

 

 

0.99

Total

 

 

 

 

 

433,858

 

247,965

 

264,358

 

 

 

 

 

 

 

 

 

(a)

Excludes executed leases with a term of 12 months or less.

(b)

Pre-leased information is associated with our projects under development at December 31, 2017. The majority of our pre-leased retail relates to Seaport District properties in New York where rental rates are higher relative to other geographies.

(c)

Comparable - Renewal information is associated with stabilized assets for which the space was occupied by the same tenant within 12 months prior to the executed agreement. These leases represent an increase in cash rents from $31.26 per square foot to $31.39 per square foot, or 0.4% over previous rents.

(d)

Comparable - New information is associated with stabilized assets for which the space was occupied by a different tenant within 12 months prior to the executed agreement. These leases represent an increase in cash rents from $28.94 per square foot to $31.44 per square foot, or 8.6% over previous rents.

(e)

Non-comparable information is associated with space that was previously vacant for more than 12 months or has never been occupied.

Our retail square feet placed in service in the year ended December 31, 2017 relates to a portion of our Seaport District project, discussed below:

Seaport District

Seaport District NYC - Historic Area/Uplands

The decrease in NOI  for the year ended December 31, 2017 as compared to the same period ended December 31, 2016 in the Seaport District NYC - Historic Area/Uplands (a portion of our larger Seaport District redevelopment project, as discussed further herein in Strategic Developments) primarily relates to an increase in expenses, including operating expenses for Fulton Market Building and for seasonal marketing events, partially offset by rental income from the 46,000 square foot iPic Theater in the newly renovated Fulton Market Building, which opened in the fourth quarter of 2016. Ongoing leasing and redevelopment activities are expected to substantially reposition the approximately 180,000 square feet of retail space in the Uplands in 2018.

Office Properties

All of the office properties, except for 110 North Wacker and ONE Summerlin, are located in Columbia, Maryland or in The Woodlands, Texas. Leases related to our office properties in The Woodlands and 110 North Wacker are generally triple net leases. Leases at properties located in Columbia, Maryland, and ONE Summerlin are generally gross leases.

47

Table of Contents

The following table summarizes our executed office property leases during the year ended December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square Feet

 

Per Square Foot per Annum

 

 

 

 

Avg.

 

 

 

Associated

 

Associated

 

Avg.

 

 

Total

 

 

Total

 

 

Total

 

Lease Term

 

Total

 

with Tenant

 

with Leasing

 

Starting

 

 

Tenant

 

 

Leasing

Office Properties (a)

  

Executed

  

(Months)

 

Leased

 

Improvements

  

Commissions

  

Rents (f)

 

 

Improvements

 

  

Commissions

Pre-leased (b)

 

 4

 

156

 

842,367

 

842,367

 

842,367

 

$

49.84

 

$

6.16

 

$

1.06

Comparable - Renewal (c)

 

13

 

55

 

41,242

 

33,439

 

26,730

 

 

28.35

 

 

3.23

 

 

1.26

Comparable - New (d)

 

 7

 

44

 

39,613

 

32,830

 

36,951

 

 

37.28

 

 

4.09

 

 

2.20

Non-comparable (e)

 

54

 

73

 

318,647

 

277,804

 

296,559

 

 

32.17

 

 

8.23

 

 

1.90

Total

 

 

 

 

 

1,241,869

 

1,186,440

 

1,202,607

 

 

 

 

 

 

 

 

 

(a)

Excludes executed leases with a term of 12 months or less.

(b)

Pre-leased information is associated with projects under development at December 31, 2017. 

(c)

Comparable - Renewal information is associated with stabilized assets for which the space was occupied by the same tenant within 12 months prior to the executed agreement. These leases represent a decrease in cash rents from $29.60 per square foot to $28.35 per square foot, or (4.2%) under previous rents.

(d)

Comparable - New information is associated with stabilized assets for which the space was occupied by a different tenant within 12 months prior to the executed agreement. These leases represent a decrease in cash rents from $39.21 per square foot to $37.28 per square foot, or (4.9%) under previous rents.

(e)

Non-comparable information is associated with space that was previously vacant for more than 12 months or has never been occupied.

(f)

Avg. Starting Rents is based on the gross rents, including recoveries.

The following discussions summarize our recently completed or acquired office properties, which were placed in service in 2017:

Columbia

One Merriweather

Located in the Merriweather District, this 202,603 square foot, eight-story multi-tenant Class A office building includes 12,500 leasable square feet of retail and restaurant space, is situated on 1.3 acres of land and was placed in service in 2017. Adjacent to the building on 1.6 acres is a nine-story parking garage which will contain approximately 1,129 spaces. The garage provides parking for One and Two Merriweather. The total development costs are approximately $78 million, inclusive of $15 million in costs for the parking garage (allocated evenly with Two Merriweather), and remaining costs relate to final lease-up and tenant build-out. We expect to reach annual stabilized NOI of approximately $5.1 million in 2020. As of December 31, 2017, the building is 81.3% leased.

Two Merriweather

We began construction on Two Merriweather, a Class A mixed-use office building, in the third quarter of 2016. The project is being delivered in stages, with the first portion placed in service in the fourth quarter of 2017. Two Merriweather consists of approximately 100,000 square feet of office and approximately 30,000 square feet of retail space. Total development costs are expected to be approximately $41 million, of which $29.8 million has been incurred through December 31, 2017. We expect to reach projected annual stabilized NOI of approximately $3.6 million in 2020. As of December 31, 2017, 58.2% of the total project is leased.

Other

The properties that are included in Other Properties in our Operating Assets NOI and EBT table for the years ended December 31, 2017, 2016 and 2015 include the Kewalo Basin Harbor, Merriweather Post Pavilion (until its transfer to the Downtown Columbia Arts and Culture Commission in November 2016), HHC 242 Self-Storage and HHC 2978 Self-Storage for the year ended December 31, 2017 as discussed below, Las Vegas 51s since the consolidation of the property on March 1, 2017, and participation interests in the golf courses at TPC Summerlin and TPC Las Vegas golf courses until the June 2016 receipt of $2.8 million, which represents our final participation payment for these interests.

The following discussions summarize our recently completed self-storage properties, which were placed in service in 2017:

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HHC 242 Self-Storage

Located in Alden Bridge, a neighborhood within The Woodlands, this facility is located on 4.0 acres and comprises 654 units aggregating approximately 82,000 square feet. Total development costs are expected to be approximately $9 million. As expected given a slower lease-up period for self-storage facilities as compared to other assets, we expect to reach annual stabilized NOI of approximately $0.8 million in 2020. The facility opened in the first quarter of 2017, and as of December 31, 2017, the project is 37.0% leased.

HHC 2978 Self-Storage

Located in Alden Bridge, this facility is located on 3.1 acres and comprises 784 units aggregating approximately 79,000 square feet. Total development costs are expected to be approximately $9 million. As expected given a slower lease-up period for self-storage facilities as compared to other assets, we expect to reach annual stabilized NOI of approximately $0.8 million in 2020. The facility opened in the second quarter of 2017, and as of December 31, 2017, the project is 33.9% leased.

Strategic Developments

Our Strategic Developments segment assets generally require substantial future development to maximize their value. Other than our condominium properties, most of the properties and projects in this segment do not generate no revenues. For our condominium projects we currently use percentage of completion accounting to recognize revenues during the construction phase, and apply the full accrual method to sales of units in fully completed buildings. Please see Note 1 –- Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements for a discussion of changes in accounting for condominium projects as a result of adoption of the new revenue recognition accounting standardNew Revenue Standard on January 1, 2018.the Adoption Date. Our expenses relating to Strategic Developmentsthese assets are primarily related to costs associated with selling condominiums, marketing costs associated with our developments,Strategic Developments, carrying costs such asincluding, but not limited to, property taxes and insurance, and other ongoing costs relating to maintaining the assets in their current condition. If we decide to redevelop or develop a Strategic Developments asset, we would expect that with the exception of the residential portion of our condominium projects, upon completion of development, the asset would likely be reclassified to the Operating Assets segment when the asset is placed in service and NOI would become a meaningful measure of its operating performance. All development costs discussed herein are exclusive of land costs.

Total revenues and expenses

EBT for the Strategic Developments segment are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

2017-2016

 

2016-2015

(In thousands)

 

2017

  

2016

  

2015

 

Change

 

Change

Minimum rents

 

$

565

 

$

447

 

$

899

 

$

118

 

$

(452)

Condominium rights and unit sales

 

 

464,251

 

 

485,634

 

 

305,284

 

 

(21,383)

 

 

180,350

Other land, rental and property revenues

 

 

8,206

 

 

455

 

 

1,734

 

 

7,751

 

 

(1,279)

Total revenues

 

 

473,022

 

 

486,536

 

 

307,917

 

 

(13,514)

 

 

178,619

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condominium rights and unit cost of sales

 

 

338,361

 

 

319,325

 

 

191,606

 

 

19,036

 

 

127,719

Other property operating costs

 

 

19,981

 

 

5,472

 

 

4,673

 

 

14,509

 

 

799

Real estate taxes

 

 

2,662

 

 

2,408

 

 

2,282

 

 

254

 

 

126

Rental property maintenance costs

 

 

560

 

 

359

 

 

476

 

 

201

 

 

(117)

Provision for doubtful accounts

 

 

(2)

 

 

63

 

 

32

 

 

(65)

 

 

31

Demolition costs

 

 

318

 

 

2,018

 

 

885

 

 

(1,700)

 

 

1,133

Development-related marketing costs

 

 

17,158

 

 

21,237

 

 

17,532

 

 

(4,079)

 

 

3,705

Depreciation and amortization

 

 

1,210

 

 

2,744

 

 

3,240

 

 

(1,534)

 

 

(496)

Other income

 

 

(108)

 

 

(611)

 

 

104

 

 

503

 

 

(715)

Gains on sales of properties

 

 

(51,242)

 

 

(140,549)

 

 

 —

 

 

89,307

 

 

(140,549)

Interest expense (income), net (a)

 

 

(25,467)

 

 

(17,437)

 

 

(8,655)

 

 

(8,030)

 

 

(8,782)

Equity in earnings in Real Estate and Other Affiliates

 

 

550

 

 

(10,515)

 

 

(1,838)

 

 

11,065

 

 

(8,677)

Total expenses, net of other income

 

 

303,981

 

 

184,514

 

 

210,337

 

 

119,467

 

 

(25,823)

Strategic Developments segment EBT*

 

$

169,041

 

$

302,022

 

$

97,580

 

$

(132,981)

 

$

204,442


(*)    For a reconciliation of Strategic Developments segment EBT to consolidated income (loss) before taxes, refer to Note 17 – Segments in our Consolidated Financial Statements.

(a)

Negative interest expense amounts are due to interest capitalized in our Strategic Developments segment related to Operating Assets segment debt and to the Senior Notes.

 Year Ended December 31, 2018 - 2017 2017 - 2016
(In thousands)2018 2017 2016 Change Change
Minimum rents$1,183
 $565
 $447
 $618
 $118
Condominium rights and unit sales357,720
 464,251
 485,634
 (106,531) (21,383)
Other land, rental and property revenues17,059
 8,206
 455
 8,853
 7,751
Total revenues375,962
 473,022
 486,536
 (97,060) (13,514)
Condominium rights and unit cost of sales262,562
 338,361
 319,325
 75,799
 (19,036)
Other property operating costs37,454
 19,981
 5,472
 (17,473) (14,509)
Real estate taxes2,793
 2,662
 2,408
 (131) (254)
Rental property maintenance costs1,951
 560
 359
 (1,391) (201)
Provision for doubtful accounts15
 (2) 63
 (17) 65
Total operating expenses304,775
 361,562
 327,627
 56,787
 (33,935)
Segment operating income71,187
 111,460
 158,909
 (40,273) (47,449)
Depreciation and amortization3,307
 1,210
 2,744
 (2,097) 1,534
Other loss (income), net(3,015) (108) (611) 2,907
 (503)
Gains on sales of properties—
 (51,242) (140,549) (51,242) (89,307)
Interest (income) expense, net(18,767) (25,467) (17,437) (6,700) 8,030
Equity in (earnings) loss from Real Estate and Other Affiliates(2,124) 550
 (10,515) 2,674
 (11,065)
EBT$91,786
 $186,517
 $325,277
 $(94,731) $(138,760)

Minimum rents primarily relate to projects that are nearing completion, contribute minimal rental revenue in all years presented and are included in the Strategic Developments segment as the project is not substantially complete.

Minimum rents increased for the year ended December 31, 2018 compared to 2017 primarily due to Creekside Apartments revenues during the phasing in of the asset.

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TableCondominium rights and unit sales decreased for the year ended December 31, 2018 compared to 2017 as it was meaningfully impacted by the New Revenue Standard on the Adoption Date; see Note 1 - Summary of Contents

Significant Accounting Policies for additional information. The New Revenue Standard makes the 2018 and prior periods no longer comparable. However, we view condominium closings as a useful metric across all periods. At Ward Village, we closed on 315 condominium units during the year ended December 31, 2018 compared to 326 units during the year ended December 31, 2017. The decrease in condominium closings is primarily attributable to the decrease in available inventory for sale at our two towers that have been delivered partially offset by closings at Ae‘o which started in the fourth quarter of 2018. As highlighted below, the overall pace of sales at Ward Village remains strong, and as of December 31, 2018, we have entered into contracts for 80.0% of the units at ‘A‘ali‘i since launching public sales in January 2018. At December 31, 2018, our five towers are 91.8% sold, and four and seven units remain to be sold at Anaha and Waiea, respectively. The decrease in condominium rights and unit sales for the year ended December 31, 2017 as compared to 2016 is due to less revenues on a percentage of completion basis at our Waiea tower, which hashad sold 94.8% of its units, partially offset by more revenues from Anaha, Ae`Ae‘o and Ke Kilohana towers. The increase in condominium rights and unit sales for the year ended December 31, 2016 as compared to 2015 related to revenue recognition at our Waiea and Anaha condominium projects for which we began recognizing revenue in 2015 on the percentage of completion basis.

Other land, rental and property revenues increased in 2018 compared to the same periods in 2017 and 2016 primarily due to an increase in revenue from the Ward Village Homeowners’ Associations (“HOAs”) of $6.6 million as well as parking revenue generated at 250 Water Street after its acquisition in the second quarter of 2018. We began consolidating the HOAs for the Waiea and Anaha residential towers in 2017 and the HOAs for the Ae‘o and Ke Kilohana towers in 2018, however, all revenue and expense related to the HOAs are attributable to non-controlling interests and do not impact net income attributable to common stockholders.
Condominium rights and unit costs of sales decreased for the year ended December 31, 2018 compared to the same period in 2016 and 20152017 due to the consolidationadoption of the Home Owners’ Associations (“HOAs”) for the recently opened Waiea and Anaha residential towers in 2017. We expect to transfer controlNew Revenue Standard as of the HOAs to homeowners in future periods.

Adoption Date; see Note 1 - Summary of Significant Accounting Policies. Condominium rights and unit costs of sales for the year ended December 31, 2018 represent costs associated with units closed at Anaha and Ae‘o as well as anticipated window repairs at Ward Village. Condominium rights and unit costs of sales for the years ended December 31, 2017 and 2016 represent development and construction costs relating to the revenues recognized on a percentage of completion basis at Waiea, Anaha, Ae’oAe‘o and Ke Kilohana and also includes costs related to sales at our Waiea tower which was opened to new homeowners at the end of 2016.Condominium rights and unit costs of sales for the years ended December 31, 2016 and 2015 primarily represent development and construction costs relating to the revenues recognized on a percentage of completion basis at Waiea and Anaha. The book value of condominium rights sold to the ONE Ala Moana joint venture were also recorded as cost of sales in 2015.

Other property operating costs increased in 2017 asfor the year ended December 31, 2018 compared to the same period in 2017 primarily due to an increase in costs associated with the HOAs of $4.1 million, as well as the write-off of development costs related to canceled projects. Other property operating costs increased for the year ended December 31, 2017 compared to the same period in 2016 and 2015 primarily due to opening and carrying costs associated with unsold inventory at Waiea and pre-opening costs at Anaha

condominium projects, costs associated with various projects under development at the Seaport District, as well as costs associated with the HOAs at Waiea and Anaha as a result of the consolidation of the HOAs for these towers in 2017.

Demolition costs decreased All revenue and expense related to the HOAs are attributable to non-controlling interests and do not impact net income attributable to common stockholders.

Depreciation and amortization increased for the year ended December 31, 2018 compared to the same period in 2017 as compared to 2016primarily due to costs incurredthe depreciation of model and manager units for condominium projects under the New Revenue Standard. Previously, the model and manager units were expensed to cost of sales with the related project. Under the New Revenue Standard, however, the model and manager units were placed in 2016 to demolish preexisting structures primarily at Seaportservice and Ward Village where we have plans to redevelop. Demolition costs increased in 2016depreciated as compared to 2015of the Adoption Date. Depreciation and amortization decreased for the same reason.

Development-related marketing costs are primarily incurred to enhance our brand, generate demand for our development and redevelopment projects and sustain consumer and industry relationships. For the year ended December 31, 2017 development-related marketing costs decreased compared to 2016 primarily due to less costs incurred at Pier 17, Ae`oand Waiea, offset by costs incurred at `A`ali`i.  For the year ended December 31, 2016, development-related marketing costs increased compared to 2015 primarily due to costs incurred at Pier 17, Ae`oand Waiea.

Depreciation and amortization decreased in 2017 as compared to the same periodsperiod in 2016 and 2015 due to the IBM building being transferred to our Operating Assets segment in the second quarter of 2017.

Other income, net increased for the year ended December 31, 2018 compared to the same periods in 2017 and 2016 due to insurance proceeds received for Waiea and Ae‘o in 2018 with no comparable proceeds in previous years.
Gains on sales of properties for the year ended December 31, 2017, are primarily related to the sale of 36 acres of undeveloped land at The Elk Grove Collection, the sale of 70 acres of undeveloped land at Kendall Town Center, the sale of Century Plaza, and the sale of the Volo Land. The gross sales price of The Elk Grove Collection was $36.0 million and resulted in a pre-tax gain of $32.2 million. The gross sales price of Kendall Town Center was $40.5 million and resulted in a pre-tax gain of $20.2 million. Century Plaza and Volo Land sold for combined proceeds of $3.6 million and a combined net loss of $1.2 million. Gains on sales of properties for the year ended December 31, 2016 relate to the sale of 80 South Street Assemblage for net cash proceeds of $378.3 million, resulting in a pre-tax gain of $140.5 million. The 80 South Street Assemblage was a 42,694 square foot lot with 817,784 square feet of available development rights in the Seaport District. 

There were no sales for the year ended December 31, 2018.

Interest income, net decreased for the year ended December 31, 2018 compared to the same period in 2017 due to more assets being placed into service in 2018, and therefore, less interest capitalized. Interest income, net increased for the year ended December 31, 2017 2016 and 2015 as compared to prior yearsthe same period in 2016 as we had more projects under construction in those years2017, and therefore, capitalized more of our interest incurred.

Equity in earnings (loss) from Real Estate and Other Affiliates for the year ended December 31, 2018 is due to our share of earnings related to Circle T Ranch and Power Center and KR Holdings. Equity in earnings (loss) from Real Estate and Other Affiliates for the year ended December 31, 2016 is primarily related to our earnings from the sale of a certain land parcel by our Circle T Ranch and Power Center joint venture in June 2016, which did not recur in 2017. In 2015, our Equity in earnings from Real Estate and Other Affiliates represented our share of the earnings in the ONE Ala Moana condominium venture, in which all of the units available for sale have been sold and closed.

2017 or 2018.

Strategic Developments Projects
The following describes the status of our major construction projects and announced Strategic Developments projects as of December 31, 2017.2018. For projects that have been under construction for a substantial period and are nearing completion, please refer to the Projects under Construction table below for an update on the project’s individual metrics and associated timeline for completion. For information on the construction financings on our projects, please refer to Note 8 –7 - Mortgages, Notes and

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Loans Payable, Net in our Notes to Consolidated Financial Statements.

Downtown Columbia Redevelopment District

The Downtown Columbia market contains 3.2 million square feet of office space, of which we own 1.6 million square feet, located close to shopping, restaurants and entertainment venues. We believe there is a significant opportunity to redevelop this area over future years. Existing entitlements initially obtained in 2010 and amended in 2017, totaling approximately 14.0 million square feet for all of Downtown Columbia Redevelopment District, have densities for up to 6,200 residential units, 4.3 million square feet of commercial office space, 1.3 million square feet of retail space and 640 hotel rooms. The majority of these entitlements exist on land, surface parking lots and other assets controlled by us. We have been advised that these entitlements have no expiration date under Maryland law.

Pursuant to a 2010 development agreement with General Growth Properties, Inc., we have a preferred residential and office development covenant that provides us the right of first offer for new development densities of both residential and office space within the Columbia Mall Ring Road. This covenant expires in 2030. The development agreement contains the key terms, conditions, responsibilities and obligations with respect to future development of this area within the greater Downtown Columbia Redevelopment District.


We are continuing predevelopment activities on our third neighborhood within the Downtown Columbia Redevelopment District, the Lakefront District and expectDistrict. We received approval on aof the final Development Plan for that areaa portion of the Lakefront District in 2018. Additionally, we expect to receive approval of the first halffinal Development Plan for a second portion of 2018.

Tax increment financing (“TIF”)the Lakefront District in 2019.


TIF bonds

In November 2016, the Howard County Council authorized the issuance of up to $90.0 million of TIF bonds for the Downtown Columbia Redevelopment District’s master plan. The Final Limited Offering Memorandum for the first tranche relates to the Merriweather District, and closing on the $48.2 million of Series 2017 A Special Obligation Bonds (“Phase One Bonds”) occurred in October 2017. As part of the legislation approved concurrently with TIF legislation in 2016, an additional 744 residential units may be constructed for the local community to provide for affordable housing needs, which would, if built, increase the previous density to over 6,200 residential units. The TIF will provide capital for the development of key roads and infrastructure supporting our local office buildings and other commercial development within the Merriweather District. The Phase One Bonds are secured by incremental property taxes from the anticipated increased assessed values of specified properties in the Downtown Columbia Development District, and “Special Taxes” which may be levied if necessary to fund the debt service and other costs of the bonds in the event there is a shortfall in the projected property tax increment. We, through our wholly-owned subsidiaries, currently own the majority of the acreage in the Development District, and all of the developable land within the “Special Taxing District.” In the Funding Agreement for the TIF, one of our wholly-owned subsidiaries, The Howard Research and Development Corporation, has agreed to complete certain defined public improvements and to indemnify Howard County, and we have guaranteed these obligations, with a limit of $1.0 million, expiring 36 months after bond issuance.

m.flats/TEN.M

We are a 50% partner with Kettler, Inc. (“Kettler”) to construct a 437-unit, Class A multi-family project with 29,000 square feet During the year, we received reimbursements of ground floor retail, which is adjacent to The Metropolitan Downtown Columbia in Columbia, Maryland. Construction on the project, which began in$22.7 million from the first quartertranche of 2016, includes two separate buildings, m.flats and TEN.M. Kettler provides construction and property management services for the development. In September 2017, we completed construction of TEN.M and residents began taking occupancy. We anticipate project completion of m.flats$38.5 million in the first quarter of 2018. We expect the property to reach projected annual stabilized NOI of approximately $7.9 million at the end of 2019, of which our share would be $3.9 million. Total development costs are expected to be approximately $109 million, and costs incurred through December 31, 2017 were approximately $96.9 million. The project is financed with an $88.0 million construction loan, which is non-recourse to us.

ThreeTIF bonds issued by Howard County.

6100 Merriweather and shared parking garage –
In 2017, we announced construction of Three6100 Merriweather, a 12-story, Class AClass-A mixed-use office building. Construction is expected to beginbegan in the first half of 2018, with planned completion of the project in the third quarter of 2019. Three6100 Merriweather will consist of approximately 307,000 rentable square feet of office and 13,000 square feet of retail space. Building amenities will include a rooftop terrace with conference and meeting space that overlooks the Merriweather Post Pavilion concert venue and a fitness center at the ground level with direct access to the 100-

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mile100-mile running and biking pathway network throughout Columbia. A 9‐nine‐level parking garage that will provide parking for the office, retail and community events and will be constructed in two phases as part of the project for a total of approximately 2,000 spaces at completion. Total development costs are expected to be approximately $138 million, and in the third quarter of 2018, we expect to obtain constructionclosed on an $89.8 million financing during the first half of 2018.for this project. As of December 31, 20172018, approximately 50%, of the building is pre-leased to Tenable, Inc. We expect to reach annual stabilized NOI of approximately $9.2 million in 2023.

Columbia Multi-family
Columbia Multi-family will be a seven-story, 382-unit multi-family development with 56,755 square feet of retail on the ground level. The project will include a 563 space parking garage, a fitness center and yoga studio, a clubroom with an outdoor terrace, a swimming pool, along with other amenities. Total development costs are expected to be approximately $116 million, and we closed on an $85.7 million construction loan for this project in the third quarter of 2018. We began construction in the second quarter of 2018 and anticipate project completion in 2019. We expect to reach projected annual stabilized NOI of $9.2 million in 2023.
Sterrett Place
In November 2017, we acquired the note secured by the land and improvements of this 119,000 square foot office building for a purchase price of $5.3 million. In 2018, we foreclosed on the property, resulting in the acquisition of the land and improvements. We are currently evaluating the highest and best use for this asset.

The Woodlands

100 Fellowship Drive

In November 2016, we entered into a build-to-suit arrangement to develop a three-story, 203,000 rentable square foot medical building with approximately 550 surface parking spaces. The building is 100% pre-leased as of December 31, 2017.2018. Total development costs are expected to be approximately $63 million. We began construction in the second quarter of 2017 and anticipate project completion in the second quarter of 2019. We expect to reach projected annual stabilized NOI of $5.1 million in 2019. The project is financed with a $51.4 million construction loan, which is non-recourse to us.

Creekside Park Apartments

In March 2017, we commenced construction of Creekside Park Apartments, a 292-unit

Two Lakes Edge

Two Lakes Edge is our second apartment complex offeringin Hughes Landing, a 66-acre mixed-use development in The Woodlands. The project will be an eight-story, Class-A, 386-unit multi-family development with retail and a restaurant on the first rental product in Creekside Park Village Center. Construction completionground level. Community amenities include a resort-style pool and grand opening is expected in the third quarter of 2018.outdoor entertainment area overlooking Lake Woodlands, a Sky Lounge, built-in wine storage, a fitness center with a large yoga room and an outdoor fitness lawn. Total development costs are expected to be approximately $42$108 million andwhich will be funded in large partpartially financed with a $30.0$74.0 million increase to The Woodlands Master Credit Facility completedconstruction loan. We began construction in April 2017 (describedthe second quarter of 2018 and anticipate project completion in Note 8 – Mortgages, Notes and Loan Payable).2020. We expect to reach projected annual stabilized NOI of $3.5$8.5 million in 2019.

Lake Woodlands Crossing Retail

Construction of Lake Woodlands Crossing Retail began during the fourth quarter of 2017 with completion expected in the fourth quarter of 2018. The center2024.

Creekside Park West
Creekside Park West will be approximately 60,300 rentablethe second phase of retail in Creekside Village and will include a 42,389 square feet consisting of 25,000 square feet of anchor space, 10,000 square feet of junior anchor spacefoot theater and 25,30030,235 square feet of inline and restaurant space.retail. The project, which is situated on 7.7 acresanchored by Moviehouse & Eatery, is a walkable amenity to current and future multi-family product in Creekside Park and is in close proximity to Market Street and The Woodlands Mall within The Woodlands Town Center.currently 54% pre-leased. Total development costs are expected to be approximately $15 million.$23 million which are expected to be partially financed with a $17.5 million construction loan. We began construction in the fourth quarter of 2018 and anticipate project completion in 2019. We expect to reach projected annual stabilized NOI of approximately $1.7$2.2 million in the fourth quarter of 2020. As of December 31, 2017, the project is 63.7% pre-leased, and we obtained a $15.5 million construction loan on January 25, 2018.  The loan has a 50% repayment guaranty until construction is complete, at which point the repayment guaranty will drop to 15% provided the property is 90% leased.

2022.

Bridgeland

Bridgeland Apartments

Bridgeland Apartments

Lakeside Row
Lakeside Row is our first apartment complex within Bridgeland. The project will be a 312-unit, multi-family development located at the northeast corner of Bridgeland Creek Parkway and Mason Road, situated on approximately 15.0 acres. The project is comprised of two, four-story garden style buildings, comprising 192 units and 12 townhome style buildings consisting of 120 units. The project also offers the best in class finishes and amenities unique to the market, which would includeincluding a 24/7 fitness center, clubhouse with full kitchen, pool, pet care center, storage and children’s area. Construction is expected to beginbegan in the second quarter of 2018, with completion anticipatedand we closed on a $34.2 million construction loan in the fourththird quarter of 2019. We are currently seeking construction financing for this project.2018. Total development costs are expected to be approximately $48.4$48 million, and weproject completion is anticipated for the fourth quarter of 2019. We expect to reach annual stabilized NOI of approximately $3.7$3.9 million in the third quarter of 2022.

2021.

Seaport District

The revitalization of Lower Manhattan into a media and entertainment hub continues in our Seaport District, which encompasses seven buildings spanning several city blocks along the East River waterfront includingand includes (i) the Uplands, which is west of the FDR Drive and consists of approximately 183,000 square feet of retail space, including the 100,000 square foot Fulton Market Building, a portion of which was placed in service in the fourth quarter of 2016, (see discussion in the Operating Assets segment), and (ii) approximately 213,000 square feet of experiential retail, studio and creative office space at Pier 17, which opened throughout 2018, with an additional approximate 53,00053,396 square feet at the Seaport District NYC - Tin Building located east of the FDR Drive, all of which is under

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development and discussed further below.

Pier 17 andSeaport District NYC - Tin Building 

Construction on Pier 17 continues, and the openings of various components of Pier 17 are expected throughout 2018. On October 9, 2017, we announced that ESPN’s studio provider NEP Imaging Group, LLC (“ESPN”) will occupy 19,000 square feet of rentable space on the third floor of Pier 17 through a long-term lease. ESPN expects to begin broadcasting in April 2018 and will be joined by the culinary experiences of restaurants managed by Jean-Georges Vongerichten and the Momofuku Group led by David Chang on the first floor. Pier 17 will feature dynamic food offerings and retail on the first two levels, office, studio, and event space on levels three and four, and a 1.5-acre rooftop featuring an outdoor event and entertainment venue for a summer concert series, private events, community open space and a vibrant winter village.

In January 2017, we executed a ground lease amendment with the City of New York, incorporating the Seaport District NYC - Tin Building into our leased premises and modifying other related provisions. As part of the Tin Buildingasset's redevelopment, important historical elements are being salvaged and catalogued during the building’s deconstruction. We will reconstruct are in the process of completing reconstruction of the platform pier where the Seaport District NYC - Tin Building currently sitspreviously stood and will restore the building. The project includes construction of turn-key, interior fit-out for the Food Hall space, also leased by Jean-Georges Vongerichten,, which will feature a variety of fresh specialty foods, seafood, exceptional dining experiences and other products.

In February 2018, we executed an agreement with an affiliate

250 Water Street
We acquired 250 Water Street in the second quarter of Noho Hospitality Group, cofounded by two-time James Beard award-winning chef, Andrew Carmellini, to open2018. This one-acre site, currently used as a new restaurant in 2019 in Pier Village that will total approximately 11,000 square feet.  We also negotiated multi-year agreements with Ticketmaster and Heineken (through NYC Seaport SP Group, LLC). Asparking lot, is at the Exclusive Ticketing Partner of the Pier 17 rooftop, Ticketmaster will provide ticketing services for the rooftop. Heineken will be a Founding Sponsorentrance of the Seaport District and activate the property with unique consumer experiences.

33 Peck Slip

In January 2016, we entered intoencompasses a joint venture with Grandview SHG, LLC to purchase an operating hotel totaling 43,889 square feet located at 33full city block bounded by Peck Slip, inPearl Street, Water Street, and Beekman Street. We are currently evaluating the Seaport District of New York. We advanced a bridge loan of $25.0 million at a 5.0% interest rate to the joint venture at closing to expedite the acquisition, which was repaid in full in June 2016 upon completion of a refinancing of the property with a $36.0 million redevelopment loan. Our total investment in the joint venture is $8.7 million as of December 31, 2017, which represents our 35% ownership share of the total equity in the project. Under the terms of the joint venture agreement, cash will be distributed to the members as follows: (1) each member will be paid a 6.5% preferred return on their initial invested capitalhighest and will be repaid their initial invested capital; and (2) all remaining cash will be distributed 50% to us and 50% to the other members. The 33 Peck Slip hotel was closed at the end of December 2016 for redevelopment and construction began in January 2017. We anticipate completion in the second quarter of 2018 and expect the 66-room, renovated hotel to be an added amenity to the Seaport District experience. Total costs of the project are expected to be approximately $67 million, and as of December 31, 2017, $59.7 million of costs have been incurred by the joint venture. We expect stabilized NOI to be $3.4 million, of which $1.2 million is our share. 

Summerlin

Aristocrat

In the second quarter of 2017, we entered into a build-to-suit arrangement with Aristocrat Technologies, a global leader in gaming solutions, and commenced construction of a corporate campus located less than four miles from Downtown Summerlin. The campus will be situated on approximately 12 acres, will include two office buildings of approximately 90,000 square feet each and is 100% pre-leased. Construction began in June 2017, with core and shell completion anticipated in the second quarter of 2018 and an opening in the fourth quarter of 2018. Total development costs are expected to be approximately $47 million, and in the fourth quarter of 2017, we closed on a $64.6 million financingbest use for this project in conjunction with the financing of Two asset.

Summerlin discussed below, of which $31.1 million is allocated to Aristocrat. We expect to reach projected annual stabilized NOI of $4.1 million in the first quarter of 2019.

Downtown Summerlin Area

Summerlin’s developing urban core is comprised of nearly 400 acres and is centrally located within Summerlin with easy

53

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access to the Las Vegas Valley’s 215 Beltway. It is currently home to our Downtown Summerlin retail asset, an approximately 106-acre


fashion, dining and entertainment venue, and the new City National Arena, home to the Las Vegas Golden Knights NHL team’s practice facility.facility and the new Summerlin Ballpark discussed below. There are approximately 170 acres of land available for development.

Downtown Summerlin

Tanager Apartments –
We commenced construction on Downtown SummerlinTanager Apartments in the first quarter of 2018. The project will be a 267-unit, multi-family development in Downtown Summerlin, situated on approximately 9.0 acres, in close proximity to our Downtown Summerlin retail venue. The project is comprised of three garden–style, walk–up residential buildings with elevators, surface parking, 22 tuck under garages, a clubhouse with an attached pool and an amenity area. We anticipate obtainingclosed on construction financing of approximately $44.1 million during the first quarter of 2018. Total development costs are expected to be approximately $59 million. We expect to complete this project in the third quarter of 2019 and reach projected annual stabilized NOI of approximately $4.4 million in the third quarter of 2020.

Las Vegas

Summerlin Ballpark –
In October 2017, we announced the development of a new ballpark for our wholly-owned Las Vegas 51sAviators Triple-A professional baseball team and signed a 20-year, $80.0 million naming rights agreement for the future stadium with the Las Vegas Convention and Visitor’s Authority. The approximately 10,000-fan capacity ballpark will be located on 9nine acres in the Downtown Summerlin area and serve as another amenity for the rapidly growing retail and entertainment destination in the heart of Summerlin’s urban core. DuringThe ballpark will also host civic, community, nonprofit and sporting events. We began construction during the first halfquarter of 2018 we expect to continue to complete predevelopment activities, finalize the development budget and closed on construction timeline, and obtain construction financing.

Two Summerlin – During the second quarterfinancing of 2017, we commenced construction of our second office building in Downtown Summerlin and expect completion by the end of$51.2 million during the third quarter of 2018. The Class A office building will beBallpark is expected to cost approximately 145,000 square feet, with an adjacent 424-space parking structure, situated on$122 million and contribute approximately four acres, it will be located just east of Downtown Summerlin and adjacent to land which we ground lease to the NHL practice facility, which is in close proximity$7.0 million to our Downtown Summerlin retail venue. This office building will be the first office project we have developed within our 200-acre master parcel across from Downtown Summerlin and will initiate development of our planned 1.2 million square feet of office, 77,000 square feet of neighborhood retail and 4,000 residential units. Total development costs for Two Summerlin are expected to be approximately $49 million. In the fourth quarter of 2017, we closed on a $64.6 million financing for this project in conjunction with the financing of Aristocrat, discussed above, of which $33.5 million is allocated to Two Summerlin. We expect to reach projected annual stabilized NOI of approximately $3.5 million in 2020, and the building is 22.0% pre-leased as of December 31, 2017, of which 11.0% is intended for use by our local operations.

upon stabilization.

Ward Village

We continue to transform Ward Village into a vibrant neighborhood offering unique retail experiences, dining and entertainment, along with exceptional residences and workforce housing set among open public spaces and pedestrian-friendly streets. We believe we have found the optimal mix of price point and product in the Honolulu market for condominium development as evidenced by the demand for our condominium projects discussed below. The ongoing construction at our fourfive mixed-use projects includes the construction of approximately 114,500125,836 square feet of new retail to serve our new residents and the community at large. In addition, during the last half of 2017, we have removed 226,466 square feet of old retail space from service to prepare it for redevelopment. Many of the tenants occupying the closed space have beenwere relocated within Ward Village. As we move forward with the execution of our master plan which ultimately contemplates a total of approximately 1.0 million square feet of retail at completion, we will periodically redevelop the older existing retail space and replace it as part of new mixed-use projects.

Condominium Projects Delivered or Under Construction

Sales contracts for condominium units are subject to a 30-day rescission period, and the buyers are typically required to make an initial deposit at signing and an additional deposit 30 days later at which point their total deposit becomes non-refundable. Buyers are typically then required to make a final deposit within approximately 90 days of our receipt of their second deposit. Certain buyers are required to deposit the remainder of the sales price on a predetermined pre-closing date, which is specified in the sales contracts for each condominium project.

Contracted amounts disclosed below represent sales that are past the 30-day rescission period.

54

Ward Village Condominiums as of December 31, 2018
($ in millions) Total Units Closed or Under Contract Percent of Units Sold Total Projected Costs Costs Paid to Date Estimated
Completion
Date
Waiea 174
 167
 96.0% $452.0
 $403.4
 Open
Anaha 317
 313
 98.7% 401.3
 386.6
 Open
Ae‘o 465
 461
 99.1% 428.5
 380.1
 Open
Ke Kilohana 423
 413
 97.6% 218.9
 174.7
 Q2 2019
‘A‘ali‘i 750
 600
 80.0% 411.8
 22.6
 Q2 2021
Total under construction 2,129
 1,954
 91.8% $1,912.5
 $1,367.3
  


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Ward Village Condominiums as of December 31, 2017

 

($ in millions)

    

Total Units

    

Closed or Under Contract

    

Percent of Units Sold

 

Total Projected Costs

 

Costs Paid to Date

 

Estimated
Completion
Date

 

Waiea

 

174

 

165

 

94.8

%

 

$

424.6

 

$

391.6

 

Opened

(a)

Anaha

 

317

 

309

 

97.5

 

 

 

401.3

 

 

371.7

 

Opened

(b)

Ae`o

 

466

 

422

 

90.6

 

 

 

428.5

 

 

222.3

 

Q1 2019

 

Ke Kilohana

 

424

 

390

 

92.0

 

 

 

218.9

 

 

64.9

 

2019

 

Total under construction

 

1,381

 

1,286

 

93.1

%

 

$

1,473.3

 

$

1,050.5

 

 

 

(a)

Waiea opened and residents began occupying units in November 2016. We have closed on 159 units as of December 31, 2017.

(b)

Anaha opened and residents began occupying units in October 2017. We have closed on 305 units as of December 31, 2017.

Waiea –As of December 31, 2017, we–We have entered into 167 contracts forand closed on 165 of the 174 units and closed on 159as of those units. AllDecember 31, 2018. These units under contract and closed represent 96.0% and 94.8% of total units, respectively, and 89.9%91.8% and 90.1%, of the total residential square feet available for sale. Total development costs are expected to be approximately $425 million, which includes $12.6 millionsale, respectively, as of development-related marketing costs that were expensed as incurred. We have recognized 100% of the revenue and costs for on units that have either closed or are under qualifying contracts under the percentage-of-completion method. Remaining costs to complete primarily relate to the finish out of the remaining unsold units.December 31, 2018. The retail portion of the project is 100% leased and will behas been placed in service by the end of the second quarter of 2018.service. Total development costs are expected to be approximately $452 million.

Anaha – In 2014, we began constructionWe have entered into contracts and closed on 313 of Anaha,the 317 units as of December 31, 2018. These units under contract and openedclosed represent 98.7% of total units and 96.3% of the condominium tower during the fourth quartertotal residential square feet available for sale as of 2017, with the initial residents taking occupancy at that time.December 31, 2018. Additionally, we have leased 58.5%and placed in service 78.9% of the 16,100 square feet of retail space. As of December 31, 2017, 309 of the 317 total units were closed or under contract. These contracted sales represent 97.5% of total units and 94.3% of the total residential square feet available for sale. Total development costs are expected to be approximately $401 million, which includes $8.6 million of development-related marketing costs that are being expensed as incurred. Remaining costs to complete primarily relate to punch list items and unsold units. During 2015, we met all the necessary requirements to begin recognizing revenue on the percentage of completion basis.million.

Ae`Ae‘o – In February 2016, we began constructionWe have entered into 461 contracts and closed on 299 of the 389,000 square foot Ae`o tower465 units as of December 31, 2018. These units under contract and closed represent 99.1% and 64.3% of total units, respectively, and 98.6% and 62.4% of the 68,300total residential square feet available for sale, respectively, as of December 31, 2018. We have closed an additional 161 units, reflecting 460 or 98.9% of total closed units as of February 22, 2019. The retail primarily comprised of a 57,000 square foot Whole Foods Market, located on the same block. We expect to complete developmentportion of the entire project by early 2019.is 99.0% leased and has been placed in service. Total development costs are expected to be approximately $429 million. As of December 31, 2017, 422 of the 466 total units were under contract, representing 90.6% of total units and 87.5% of the total residential square feet available for sale. During the second quarter of 2017, we satisfied all requirements to begin recognizing revenue on the percentage of completion basis. As of December 31, 2017, the project was approximately 64.9% complete.

Ke Kilohana – In October 2016,We have entered into contracts for 413 of the 423 units as of December 31, 2018. These units under contract represent 97.6% of total units available for sale as of December 31, 2018. We entered into five additional contracts through February 22, 2019. As previously announced, we began constructionhave pre-leased all of Ke Kilohana and anticipate completion in 2019. The tower will consistthe approximately 22,000 square feet of 424 residences, 375 of which are designated as workforce housing units and are being offeredavailable retail space to local residents of Hawai‘i who meet certain maximum income and net worth requirements.CVS/Longs Drugs. Total development costs are expected to be approximately $219 million. Public pre-sales on
‘A‘ali‘i – ‘A‘ali‘i will be a 42-story, 750-unit mixed-use condominium project located off of Queen Street next to Ae‘o and the flagship Whole Foods Market. The project will consist of studio, one and two-bedroom residences and will include 150 workforce units beganunder the Hawai‘i Community Development Authority (“HCDA”) Reserved Housing Program. The units will range from approximately 300 square feet to 900 square feet. Additionally, there will be up to 15,000 square feet of new street level retail and one acre of indoor and outdoor amenities for residents. Public sales launched in January 2018, and we broke ground on October 15, 2018, expanding the first quarterselection of 2016, and 100%new homes at Ward Village. We have entered into contracts for 600 of thosethe 750 units were under contract by the end of July 2016. The market rate units began public pre-sales in July 2016. Asas of December 31, 2017, we sold 15 of the 49 market units, and we expect to sell the remainder over the next two years. All2018. We entered into six additional contracts through February 22, 2019. These units under contract represent 92.0%80.0% and 80.8% of the total units and 88.2%75% and 76.0% of the total residential square feet available for sale. As previously announced, we have pre-leased approximately 22,000 square feet, 100% of the available retail space, to CVS/Longs Drugs on the ground floor of Ke Kilohana. During the first quarter of 2017, we met all the necessary requirements to begin recognizing revenue on the percentage of completion basis. Assale as of December 31, 2017,2018 and February 22, 2019, respectively. Total development costs are expected to be approximately $412 million.
Kô‘ula – As a result of strong demand demonstrated by sales at ‘A‘ali‘i, we launched public sales of our sixth condominium project at Ward Village. Kô‘ula will be a 41-story, 565-unit mixed-use condominium project located on Auahi Street between the Ward Entertainment Center and Victoria Ward Park. The project waswill consist of studio, one, two and three-bedroom residences. The units will range from approximately 300 square feet to 1,450 square feet. Additionally, there will be up to 35,000 square feet of commercial leasable area, 10,800 square feet of open space, and 58,000 square feet of recreational space. Public sales launched in January 2019. We have entered into contracts for 252 of the 565 units as of February 22, 2019 which represent 44.6% of total units. These 252 contracts represent only those contracts past the 30-day rescission period.36.6% complete.

Kewalo Basin Harbor - Kewalo Basin Harbor is a harbor that leases slips for charter, commercial fishing and recreational vessels. It is located in Honolulu across Ala Moana Boulevard from Ward Village. In August 2014, we entered into a 35-year lease with a 10-year extension option with the Hawaii Community Development Authority (“HCDA”)HCDA to make improvements, manage, and serve as the operator of Kewalo Basin Harbor. During the third quarter of 2017, we began capital improvement activities, and completion is expected in 2019. The planned improvements include replacement of the existing pier decking, addition of a fueling facility, improved security features and upgraded access to utilities. These modernization efforts focus on achieving a market-leading boating facility to drive occupancy. Total development costs are expected to be approximately $23$24.5 million, and in the third quarter of 2017, we closed on an $11.6 million partial recourse construction loan to finance this project. We anticipate annual stabilized NOI of approximately $1.5 million in the first quarter of 2020.

55

Other Development Projects

110 North Wacker

Table of Contents

Gateway Towers – Construction of the two towers will be subject to obtaining an acceptable level of pre-sales and financing for the projects. Pre-sales forDuring the first residential tower containing 125 unitsquarter of 2018, we completed demolition and began construction of a new 1.5 million square foot office building at 110 North Wacker in July 2015. As expected, contracted unit sales in this tower have been slower than Waiea, Anaha and Ae 'o becauseChicago, Illinois. During the pricing and marketingsecond quarter of these units is targeted towards2018, we executed a significantly smaller segment of the market. We have incurred $16.2 million of predevelopment costs for the first tower as of December 31, 2017 and are finalizingjoint venture agreement with USAA related to the project budget. We have incurred $13.0 million of predevelopment costs of the second tower as of December 31, 2017.

`A`ali`i – In response to the strong demand for housing at lower price points in the Honolulu market, in September 2016 we announced plans to develop our next market rate tower. `A`ali`i will be a 42-story, 751-unit mixed-use condominium project located off of Queen Street next to Ae’o and the flagship Whole Foods Market, which is currently under construction. The project will consist of studio, one and two-bedroom residences and will include 150 workforce units under the HCDA’s Reserved Housing Program. The units will range from approximately 300 square feet to 900 square feet. Additionally, there will be up to 15,000 square feet of new street level retail and one acre of indoor and outdoor amenities for residents. The market rate units began pre-sales during the fourth quarter of 2017. We anticipate launching sales of the workforce units later in 2018. We are targeting to start construction during 2018. We continue to finalize the development budget and seek financing for this project. As of December 31, 2017, we have incurred $10.7 million of costs.

Other Development Projects

Century Plaza

In December 2017, we sold Century Plaza, approximately 59 acres in Birmingham, Alabama, for net cash proceeds of $3.0 million, resulting in a pre-tax loss of $1.4 million and an income tax loss of $14.8 million.

Circle T Ranch and Power Center

We are a 50% partner in two joint ventures with Hillwood Development Company, Ltd, a local Texas developer. The ventures are known as Westlake Retail Associates, Ltd and 170 Retail Associates, and we have collectively referred to them as Circle T Ranch and Power Center. On June 1, 2016, the Westlake Retail Associates venture closed on a 72-acre land sale with an affiliate$494.5 million construction loan for 110 North Wacker, of Charles Schwab Corporation, and becausewhich we guaranteed approximately $89.0 million. During the third quarter of 2018, upon expanding the land sale,original plans for the year ended December 31, 2016 reflects the recognition of $10.5 million in Equity in earnings from Real Estate and Other Affiliates.

Kendall Town Center

In December 2017, we sold Kendall Town Center, approximately 70 acres in Kendall, Florida, for net sales proceeds of $40.5 million, resulting in a pre-tax gain of $20.2 million and an income tax loss of $32.6 million.

80 South Street Assemblage

In March 2016, we sold the 80 South Street Assemblage for net cash proceeds of $378.3 million, resulting in a pre-tax gain of $140.5 million. The 80 South Street Assemblage was a 42,694 square foot lot with 817,784 square feet of available development rights.

The Elk Grove Collection

In January 2017,building due to strong leasing demand, we closed on an amendment to increase the $494.5 million construction loan to $512.6 million and simultaneously


increased our guarantee to approximately $92.3 million. The total project costs are estimated to be $713 million, which we expect will generate a land sale of approximately 36 acres of our 100-acre property, The Elk Grove Collection, for gross sales proceeds of $36.0 million, resulting7.9% unlevered yield on cost. We expect to complete the project in a pre-tax gain of $32.2 million and an income tax loss of $41.8 million. We plan to develop the remaining 64 acres. Commencement of construction is dependent on meeting financing and internal pre-leasing requirements for the project.

2020.

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Table of Contents

Projects Under Construction

The following table summarizes our projects under construction and related debt forheld in Operating Assets and Strategic Developments as of December 31, 2017.2018. Projects that are substantially complete and which have been placed into service in the Operating Assets segment are included in the following table if the project hadhas more than $1$1.0 million of estimated costs remaining to be incurred. Typically, these amounts represent budgeted tenant allowances necessary to bring the asset to stabilized occupancy. Projects that are substantially complete and therefore have been placed in serviceTenant build-out costs represent a significant portion of the remaining costs for the following properties in the Operating Assets segment may still require some capitalsegment:
One Merriweather
Two Merriweather
1725-35 Hughes Landing Boulevard
Lake Woodlands Crossing Retail
Three Hughes Landing
Aristocrat
Two Summerlin
Lakeland Village Center at Bridgeland

The total estimated costs and costs paid are prepared on a cash basis to reflect the total anticipated cash requirements for remaining tenant build-out.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in thousands)

    

Total Estimated Costs (a)

    

Costs Paid Through December 31, 2017 (b)

    

Estimated Remaining to be Spent

    

Remaining Buyer Deposits/Holdback to be Drawn

    



Debt to be Drawn (c)

    

Costs Remaining to be Paid, Net of Debt and Buyer Deposits/Holdbacks to be Drawn (c)

 

Estimated
Completion
Date

Operating Assets

 

 

(A)

 

 

(B)

 

 

(A) - (B) = (C)

 

 

(D)

 

 

(E)

 

 

(C) - (D) - (E) = (F)

 

 

 

Columbia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One Merriweather

 

$

78,187

 

$

67,984

 

$

10,203

 

$

 -

 

$

7,597

 

$

2,606

(d) (e)

 

Complete

Two Merriweather

 

 

40,941

 

��

26,985

 

 

13,956

 

 

 -

 

 

13,727

 

 

229

(d) (e)

 

Complete

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1725-35 Hughes Landing Boulevard

 

 

218,367

 

 

189,736

 

 

28,631

 

 

 -

 

 

25,583

 

 

3,048

(d) (e)

 

Complete

Three Hughes Landing

 

 

90,162

 

 

67,055

 

 

23,107

 

 

 -

 

 

20,397

 

 

2,710

(d) (e)

 

Complete

HHC 2978 Self-Storage

 

 

8,476

 

 

7,754

 

 

722

 

 

 -

 

 

734

 

 

(12)

(f) (e)

 

Complete

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lakeland Village Center at Bridgeland

 

 

16,274

 

 

13,658

 

 

2,616

 

 

 -

 

 

2,530

 

 

86

(d) (e)

 

Complete

Kewalo Basin Harbor

 

 

22,718

 

 

5,807

 

 

16,911

 

 

 -

 

 

11,562

 

 

5,349

(g)

 

2019

Total Operating Assets

 

 

475,125

 

 

378,979

 

 

96,146

 

 

 -

 

 

82,130

 

 

14,016

 

 

 

Strategic Developments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Creekside Park Apartments

 

 

42,111

 

 

14,527

 

 

27,584

 

 

 -

 

 

30,000

 

 

(2,416)

(f) (h)

 

Q3 2018

100 Fellowship Drive

 

 

63,278

 

 

12,965

 

 

50,313

 

 

 -

 

 

51,425

 

 

(1,112)

(f) (i)

 

2019

Lake Woodlands Crossing Retail

 

 

15,381

 

 

551

 

 

14,830

 

 

 -

 

 

 -

 

 

14,830

(g)

 

Q4 2018

Seaport District

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seaport District NYC - Pier 17 and Historic Area / Uplands

 

 

622,883

 

 

434,475

 

 

188,408

 

 

 -

 

 

 -

 

 

188,408

(g) (j)

 

Q4 2018

Seaport District NYC - Tin Building

 

 

161,812

 

 

12,590

 

 

149,222

 

 

 -

 

 

 -

 

 

149,222

(j)

 

Q1 2020

Summerlin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aristocrat

 

 

46,661

 

 

6,691

 

 

39,970

 

 

 -

 

 

31,118

 

 

8,852

(g)

 

Q2 2018

Two Summerlin

 

 

49,538

 

 

8,368

 

 

41,170

 

 

 -

 

 

33,432

 

 

7,738

(g)

 

Q3 2018

Ward Village

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ae`o

 

 

428,508

 

 

222,292

 

 

206,216

 

 

1,254

 

 

177,449

 

 

27,513

(d)

 

Q1 2019

Anaha

 

 

401,314

 

 

371,695

 

 

29,619

 

 

 -

 

 

 -

 

 

29,619

(g) (k)

 

Opened

Ke Kilohana

 

 

218,898

 

 

64,900

 

 

153,998

 

 

225

 

 

141,386

 

 

12,387

(d)

 

2019

Waiea

 

 

424,604

 

 

391,637

 

 

32,967

 

 

 

 

 

 -

 

 

32,967

(g) (k)

 

Opened

Total Strategic Developments

 

 

2,474,988

 

 

1,540,691

 

 

934,297

 

 

1,479

 

 

464,810

 

 

468,008

 

 

 

Combined Total at December 31, 2017

 

$

2,950,113

 

$

1,919,670

 

$

1,030,443

 

$

1,479

 

$

546,940

 

$

482,024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lake Woodlands Crossing estimated financing

 

 

(15,523)

 

 

 

 

 

 

 

 

 

Estimated costs to be funded net of financing, assuming closing on estimated financing

 

$

466,501

 

 

 

the projects. This table does not include projects for which construction has not yet started.

($ in thousands)  Total Estimated
Costs (a)		  Costs Paid Through December 31, 2018 (b)  Estimated Remaining to be Spent  Remaining Buyer Deposits/Holdback to be Drawn  Debt
to be Drawn
(c)		  Costs Remaining to be Paid, Net of Debt and Buyer Deposits/Holdbacks to be Drawn (c) Estimated
Completion
Date
Operating Assets (A) (B) (A) - (B) = (C) (D) (E) (C) - (D) - (E) = (F)    
Columbia                
One Merriweather $78,187
 $74,663
 $3,524
 $—
 $—
 $3,524
  (e)(g) Open
Two Merriweather 40,941
 32,524
 8,417
 —
 9,156
 (739)  (e)(f) Open
The Woodlands                
1725-1735 Hughes Landing Boulevard 206,356
 191,537
 14,819
 —
 —
 14,819
  (e)(g) Open
Creekside Park Apartments 42,111
 35,961
 6,150
 —
 30,000
 (23,850)  (f)(k) Open
Lake Woodlands Crossing Retail 15,381
 9,311
 6,070
 —
 6,049
 21
  (d)(e) Open
Three Hughes Landing 90,162
 75,461
 14,701
 —
 13,929
 772
  (d)(e) Open
Seaport District                
Seaport District NYC - Pier 17 and Historic Area / Uplands 624,713
 526,941
 97,772
 —
 —
 97,772
  (h)(l) Open
Summerlin                
Aristocrat 46,661
 33,376
 13,285
 —
 9,973
 3,312
  (d) Open
Two Summerlin 49,320
 36,243
 13,077
 —
 19,139
 (6,062)  (e)(f) Open
Bridgeland                
Lakeland Village Center at Bridgeland 16,274
 14,250
 2,024
 —
 —
 2,024
  (e)(g) Open
Other                
Kewalo Basin Harbor 24,454
 14,433
 10,021
 —
 8,063
 1,958
  (d) 2019
Total Operating Assets 1,234,560
 1,044,700
 189,860
 —
 96,309
 93,551
    
                 
Strategic Developments                
Chicago                
110 North Wacker 712,962
 128,467
 584,495
 —
 548,757
 35,738
  (i) 2020
Columbia                
6100 Merriweather and Garage 138,221
 36,258
 101,963
 —
 89,844
 12,119
  (h) Q3 2019
Columbia Multi-family 116,386
 23,532
 92,854
 —
 85,657
 7,197
  (h) Q4 2019
The Woodlands                
100 Fellowship Drive 63,278
 46,110
 17,168
 —
 15,945
 1,223
  (d) Q2 2019
Creekside Park West 22,625
 372
 22,253
 —
 —
 22,253
  (j) Q4 2019
Hughes Landing Daycare 3,206
 278
 2,928
 —
 —
 2,928
  (h) Q1 2019
Two Lakes Edge 107,706
 10,457
 97,249
 —
 74,035
 23,214
  (h) 2020
Bridgeland                
Lakeside Row 48,412
 10,548
 37,864
 —
 34,231
 3,633
  (h) Q4 2019
Seaport District                
Seaport District NYC - Tin Building 159,982
 35,335
 124,647
 —
 —
 124,647
  (h) Q4 2020
Summerlin                
Tanager Apartments 59,276
 24,470
 34,806
 —
 44,100
 (9,294)  (f) Q3 2019
Summerlin Ballpark 122,452
 53,736
 68,716
 —
 24,465
 44,251
  (h)(m) Q2 2019
Ward Village                
 ‘A‘ali‘i 411,777
 22,596
 389,181
 71,196
 —
 317,985
  (h) Q2 2021
Ae‘o 428,508
 380,099
 48,409
 —
 —
 48,409
  (d) (n) Open
Anaha 401,314
 386,554
 14,760
 —
 —
 14,760
  (o) Open
Ke Kilohana 218,898
 174,686
 44,212
 3,022
 38,555
 2,635
  (d) Q2 2019
Waiea 452,041
 403,400
 48,641
 —
 —
 48,641
  (o)(p) Open
Total Strategic Developments 3,467,044
 1,736,898
 1,730,146
 74,218
 955,589
 700,339
    
Combined Total at December 31, 2018 $4,701,604
 $2,781,598
 $1,920,006
 $74,218
 $1,051,898
 $793,890
    
                 
       ‘A‘ali‘i estimated financing  (293,700)    
      Creekside West Retail estimated financing  (17,469)    
Estimated costs to be funded net of financing, assuming closing on estimated financing  $482,721
    

(a)

Total Estimated Costs represent all costs to be incurred on the project which include construction costs, demolition costs, marketing costs, capitalized leasing, payroll or project development fees, deferred financing costs and advances for certain accrued costs from lenders and excludes land costs and capitalized corporate interest allocated to the project. Waiea, Anaha, Ae`o, Ke Kilohana, One MerriweatherTotal Estimated Costs for assets at Ward Village and Two MerriweatherColumbia exclude Master Planmaster plan infrastructure and amenity costs at Ward Village and the Merriweather District.

(b)

Costs included in (a) above which have been paid through December 31, 2017.

2018.

(c)

With respect to our condominium projects, remaining debt to be drawn is reduced by deposits utilized for construction.

(d)

These positivePositive balances represent cash drawn in advance of costs paid.

(e)

Final completion is pendingdependent on lease-up and tenant build-out.

(f)

Negative balances represent cash to be received in excess of Estimated Remaining to be Spent. These items are primarily related to December 20172018 costs that were paid by us but not yet reimbursed by the lender.our lenders. We expect to receive funds from our lenders for these costs in the future.


(g)

Construction loans for One Merriweather, 1725-1735 Hughes Landing Boulevard and Lakeland Village Center have been repaid in full.

These positive

(h)Positive balances represent cash equity to be invested.

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(h)

(i)

Creekside Apartments was approved in December 2016. We closed110 N Wacker Total Estimated Costs excludes the land value of $86.0 million; The Debt to be Drawn includes future draws on the additionalconstruction loan and anticipated equity partner and JV partner contributions. Costs Remaining to be Paid represent our remaining equity commitment. At loan closing, we received a $52.2 million cash distribution from the venture and will reinvest funds over future periods to meet its remaining equity commitment.

(j)Positive balances represent future spending which we anticipate will be funded through a combination of construction loans which we are currently seeking and equity.
(k)The Woodlands Master Credit Facility was increased by $30.0 million of financing through our Woodlands Credit Facility in April 2017.

of 2017 to fund the construction of Creekside Park Apartments. The additional funds are available to be drawn, but we have not drawn down the facility to date.

(i)

(l)

In the fourth quarter of 2016, 100 Fellowship was approved to begin construction. We closed on a $51.4 million construction loan in May 2017.

(j)

Seaport District NYC - Pier 17 and Historic Area / Uplands Total Estimated Costs and Costs Paid Through December 31, 20172018 include costs required for the Pier 17 and Historical Area/Uplands and are gross of insurance proceeds received to date. We are currently seeking financing for this project.

(k)

(m)

Excludes costs to acquire the Las Vegas Aviators.

(n)The Ae‘o facility was repaid in December 2018 in conjunction with closing on the sales of units at the property.
(o)The Waiea and Anaha facility was repaid on October 27, 2017 in conjunction with the closing of a substantial numberportion of Anaha and Waiea units. Approximately 96.5%Waiea.
(p)Total estimate has been increased primarily as a result of warranty repairs that will be required. However, we anticipate recovering a substantial amount of these costs in the unitsfuture which is not reflected in these towers were sold and closed by December 31, 2017.

this schedule.

Corporate expenses and other items

The following table contains certain corporate related and other items not related to segment activities and that are not otherwise included within the segment analyses. Variances related to income and expenses included in NOI or EBT are explained within the previous segment discussions. Significant variances for consolidated items not included in NOI or EBT are described below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

2017-2016

 

2016-2015

(In thousands)

 

2017

  

2016

  

2015

 

Change

 

Change

General and administrative

 

$

89,882

 

$

86,588

 

$

81,345

 

$

3,294

 

$

5,243

Corporate interest expense, net

 

 

48,700

 

 

52,460

 

 

52,995

 

 

(3,760)

 

 

(535)

Loss on redemption of senior notes due 2021

 

 

46,410

 

 

 —

 

 

 —

 

 

46,410

 

 

 —

Warrant liability loss (gain)

 

 

43,443

 

 

24,410

 

 

(58,320)

 

 

19,033

 

 

82,730

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

 

 

(23,332)

 

 

(27,088)

 

 

 —

 

 

3,756

 

 

(27,088)

(Gain) loss on disposal of operating assets

 

 

(3,868)

 

 

1,117

 

 

(29,073)

 

 

(4,985)

 

 

30,190

Corporate other (income), net

 

 

45

 

 

(6,241)

 

 

(1,409)

 

 

6,286

 

 

(4,832)

Corporate gains on sales of properties

 

 

(125)

 

 

 —

 

 

 —

 

 

(125)

 

 

 —

Equity in earnings in Real Estate and Other Affiliates

 

 

453

 

 

 —

 

 

 —

 

 

453

 

 

 —

Corporate depreciation and amortization

 

 

8,298

 

 

6,496

 

 

6,042

 

 

1,802

 

 

454

Total Corporate and other items

 

$

209,906

 

$

137,742

 

$

51,580

 

$

72,164

 

$

86,162

 Year Ended December 31, 2018-2017 2017-2016
(In thousands)2018 2017 2016 Change Change
General and administrative$104,625
 $89,882
 $86,588
 $(14,743) $(3,294)
Corporate interest expense, net47,677
 48,700
 52,460
 1,023
 3,760
Loss on redemption of senior notes due 2021—
 46,410
 —
 46,410
 (46,410)
Warrant liability loss—
 43,443
 24,410
 43,443
 (19,033)
(Gain) on acquisition of joint venture partner's interest—
 (23,332) (27,088) (23,332) (3,756)
Loss (gain) on disposal of operating assets4
 (3,868) 1,117
 (3,872) 4,985
Corporate other expense, net866
 45
 (6,241) (821) (6,286)
Corporate gains on sales of properties—
 (125) —
 (125) 125
Equity in earnings in Real Estate and Other Affiliates(17) 453
 —
 470
 (453)
Corporate depreciation and amortization9,438
 8,298
 6,496
 (1,140) (1,802)
Demolition Costs17,329
 1,923
 2,212
 (15,406) 289
Development related marketing costs29,250
 20,504
 22,184
 (8,746) 1,680
Provision (benefit) for income taxes15,492
 (45,801) 118,450
 (61,293) 164,251
Total Corporate and other items$224,664
 $186,532
 $280,588
 $(38,132) $94,056
General and administrative expenses increased for the yearsyear ended December 31, 2018 compared to the same period in 2017 due to increased labor costs as a result of higher headcount, as well as recognition of restricted stock awards and newly granted option awards, partially offset by forfeitures. Labor costs were meaningfully impacted by additional headcount at the Seaport District as we open new operating businesses, resulting in an increase of approximately $4.2 million over the prior year. The increase in stock compensation expense accounted for approximately $2.8 million of the increase over the prior year. General and administrative expenses increased for the year ended December 31, 2017 and 2016 compared to the same periodsperiod in 2016 and 2015, respectively, due to higher labor costs relating generally to increases in salaries.

Corporate interest expense, net decreased for the year ended December 31, 2018 compared to the same period in 2017 asand from December 31, 2017 compared to the same period in 2016 primarily due to increased interest income due toas a result of increases in market interest rates and investing excess cash on hand in competitive investments yielding higher interest rates. See further discussion in Note 8 –7 - Mortgages, Notes and Loans Payable, Netin our Notes to Consolidated Financial Statements.

Loss on redemption of senior notes due in 2021 for the year ended December 31, 2017 is due to the redemption in the first quarter of 2017 of our $750.0 million 6.875% senior notes due in 2021. See further discussion in Note 8 –7 - Mortgages, Notes and Loans Payable, Netin our Notes to Consolidated Financial Statements.

Warrant liability loss decreased for the year ended December 31, 2018 compared to the same period in 2017 and increased for the year ended December 31, 2017 as compared to the same period in 2016 as all warrants which qualified for liability accounting

treatment and were marked-to-market periodically have now beenwere exercised and settled.settled as of December 31, 2017. See further discussion in Note 3 –13 - Warrants in our Notes to Consolidated Financial Statements.Warrant liability loss increased $82.7 million for the year ended December 31, 2016 compared to the same period in 2015 due to fluctuations in our stock price.

We realized a gain of $17.8 million for the year ended December 31, 2017 related to the acquisition of our joint venture partner’s interest in Constellation. In accordance with ASC 805, we remeasured to fair value our equity interest held in the joint venture as of the December 28, 2017 acquisition date. We realized a gain of $27.1 million for the year ended December 31, 2016 related to the acquisition of our joint venture partner’s interest in Millennium Six Pines Apartments. In accordance with ASC 805, we remeasured to fair value our equity interest held in the joint venture as of the July 20, 2016 acquisition date.

We realized a gain on disposal of operating assets related to the sale of Cottonwood Square in 2017. We realized a gain of $29.1 million in the year ended December 31, 2015 relating to the September 2015 sale of The Club at Carlton Woods for net cash proceeds of $25.1 million and purchaser’s assumption of net liabilities of $4.0 million.

The

Corporate other income,expense, net for the year ended December 31, 2017 decreased asincreased compared to the same period in 2016 due to the Seaport District NYC insurance proceeds received in the year ended December 31, 2016 which did not recur in 2017.

Corporate depreciation and amortization increased for the year ended December 31, 2018 compared to the same period in 2017, as well as the year ended December 31, 2017 compared to the same period in 2016, primarily due to higher balances of depreciable assets being in service in each year.
Demolition costs increased for the year ended December 31, 2018 compared to the same period in 2017 primarily due to costs related to demolition at Seaport District NYC - Tin Building and 110 North Wacker.
Development related marketing costs increased for the year ended December 31, 2018 compared to the same period in 2017, primarily related to increased marketing at Ward Village and the Seaport District.
Provision (benefit) for income taxes increased for the year ended December 31, 2018 compared to the same period in 2017 and decreased for the year ended December 31, 2017 compared to the same period in 2016 due to the Tax Act which resulted in a reduction in the federal income tax rate from 35% to 21% in 2017. As a result, we had an income tax benefit in 2017 that did not recur in 2018.
Capitalized internal costs
The following table represents our capitalized internal costs by segment for the years ended December 31, 2018, 2017 2016 and 2015:

2016:

58

 Capitalized Internal Costs Capitalized Internal Costs Related to
Compensation Costs
 Year Ended December 31, Year Ended December 31,
(In millions)2018 2017 2016 2018 2017 2016
MPC segment$9.6
 $9.6
 $9.7
 $7.6
 $7.7
 $7.6
Operating Assets segment0.2
 2.5
 5.3
 0.2
 2.1
 4.0
Strategic Developments segment30.1
 24.9
 24.2
 26.4
 21.1
 18.5
Total$39.9
 $37.0
 $39.2
 $34.2
 $30.9
 $30.1

Capitalized internal costs (which include compensation costs) for the year ended December 31, 2018 decreased for Operating Assets as compared to 2017 primarily due to fewer projects under development in the current year in Operating Assets. The capitalized internal costs increased for Strategic Developments due to the increase in projects at several locations as well as increased personnel for the additional projects. As projects continue to begin construction, internal costs will continue to be capitalized within these segments.

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capitalized Internal Costs

 

Capitalized Internal Costs Related to
Compensation Costs

 

 

Year Ended December 31, 

 

Year Ended December 31, 

(In millions)

    

2017

    

2016

    

2015

    

2017

    

2016

    

2015

MPC segment

 

$

9.6

 

$

9.7

 

$

9.5

 

$

7.7

 

$

7.6

 

$

7.3

Operating Assets segment

 

 

2.5

 

 

5.3

 

 

4.0

 

 

2.1

 

 

4.0

 

 

2.9

Strategic Developments segment

 

 

24.9

 

 

24.2

 

 

25.9

 

 

21.1

 

 

18.5

 

 

19.7

Total

 

$

37.0

 

$

39.2

 

$

39.4

 

$

30.9

 

$

30.1

 

$

29.9

Capitalized internal costs (which include compensation costs) for the year ended December 31, 2017 decreased as compared to 2016 primarily due to fewer projects under development in the current year for the Operating Assets segment. The capitalized internal costs slightly increased for the Strategic Developments segment due to the increases in projects at several locations. At the MPC segment, capitalized internal costs slightly decreased for the year ended December 31, 2017 due to fluctuations in the level of development activity at our newer MPCs. As projects continue to begin construction, internal costs will continue to be capitalized within these segments.

Capitalized internal costs (which include compensation costs) for the year ended December 31, 2016 decreased at our Strategic Developments and increased at our MPC segments compared to 2015, primarily due to higher staff allocations as a result of more development activity within the segments. As projects continue to begin construction, internal costs will continue to be capitalized within these segments. Capitalized internal costs increased for the year ended December 31, 2016 in our Operating Assets segment compared to 2015, primarily due to higher staff allocations with respect to our properties undergoing redevelopment.



Liquidity and Capital Resources


Our primary sources of cash include cash flow from land sales in our MPC, segment, cash generated from our operating assets, and sales of properties, condominium closings, deposits from condominium sales (which are restricted to funding construction of the related developments), first mortgage financings secured by our assets and the corporate bond markets. Additionally, strategic sales of certain assets may provide additional cash proceeds to our operating or investing activities. Our primary uses of cash include working capital, overhead, debt service, property improvements, acquisitions and development costs. We believe that our sources of cash, including existing cash on hand, will provide sufficient liquidity to meet our existing non-discretionary obligations and anticipated ordinary course operating expenses for at least the next twelve12 months. The development and redevelopment opportunities in our Operating Assets and Strategic Developments segments are capital intensive and will require significant additional funding.funding, if and when pursued. Any additional funding, if available, would be raised with a mix of construction, bridge and long-term financings, by entering into joint venture arrangements and the sale of non-core assets at the appropriate time. We cannot provide assurance that financing arrangements for our properties particularly those in our Strategic Developments segment, will be on favorable terms or occur at all, which could have a negative impact on our liquidity and capital resources. In addition, we typically must provide completion guarantees to lenders in connection with their providing financing for our projects. We have also provided a completion guarantee to the City of New York for the redevelopment of Seaport District NYC - Pier 17 project.  

On February 23, 2018, we repurchased 475,920 shares of our 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 $57,267,453 in the aggregate. The repurchase transaction was consummated on February 21, 2018, and was funded with cash on hand.

Seaport District NYC - Tin Building.  


Total outstanding debt was $2.9$3.2 billion as of December 31, 2017.2018. Please refer to Note 8 –7 - Mortgages, Notes and Loans Payable, Net in our Notes to Consolidated Financial Statements for a table showing our debt maturity dates. Certain mortgages may require paydowns in order to exercise contractual extension terms. Our proportionate share of the debt of our Real Estate and Other Affiliates, which is non-recourse to us, totaled $85.0$96.2 million as of December 31, 2017.2018.


The following table summarizes our net debt on a segment basis as of December 31, 2017.2018. Net debt is defined as mortgages, notes and loans payable, including our ownership share of debt of our Real Estate and Other Affiliates,, reduced by liquidity sources to satisfy such obligations such as our ownership share of cashCash and cash equivalents and SID, MUD and MUDTIF receivables. Although net debt is not a recognized GAAPnon-GAAP financial measure, it is readily computable from existing GAAP information and we believe as with our other non-GAAP measures, that such information is useful to our investors and other users of our

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Table of Contents

financial statements. However, it should not be used as an alternative to our consolidated debt calculated in accordance with GAAP.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)
Segment Basis (a)

    

Master
Planned
Communities

 

Operating
Assets

 

Strategic
Developments

 

Segment
Totals

    

Non-
Segment
Amounts

    

Total
December 31, 2017

Mortgages, notes and loans payable

 

$

239,764

 

 

$

1,625,494

(c)

 

$

82,530

(d)

 

$

1,947,788

 

$

995,140

 

$

2,942,928

Less: cash and cash equivalents

 

 

(104,256)

(b)

 

 

(71,520)

(e)

 

 

(44,202)

(f)

 

 

(219,978)

 

 

(674,701)

 

 

(894,679)

Special Improvement District receivables

 

 

(26,430)

 

 

 

 —

 

 

 

 —

 

 

 

(26,430)

 

 

 —

 

 

(26,430)

Municipal Utility District receivables

 

 

(184,811)

 

 

 

 —

 

 

 

 —

 

 

 

(184,811)

 

 

 —

 

 

(184,811)

Net Debt

 

$

(75,733)

 

 

$

1,553,974

 

 

$

38,328

 

 

$

1,516,569

 

$

320,439

 

$

1,837,008

(In thousands)
Segment Basis (a)		 Master
Planned
Communities		 Operating
Assets		 Strategic
Developments		 Segment
Totals		 Non-
Segment
Amounts		 Total December 31, 2018
Mortgages, notes and loans payable $231,384
(b) $1,728,109
(d) $339,494
  $2,298,987
 $978,411
 $3,277,399
Less: cash and cash equivalents (151,519)(c) (71,124)(e) (32,251)(f) (254,894) (302,301) (557,195)
Special Improvement District receivable (18,838)  —
  —
  (18,838) —
 (18,838)
Municipal Utility District receivables, net (222,269)  —
  —
  (222,269) —
 (222,269)
TIF receivable —
  —
  (2,470)  (2,470) —
 (2,470)
Net Debt $(161,242)  $1,656,985
  $304,773
  $1,800,516
 $676,110
 $2,476,626

(a)

Please refer to Note 17 - –Segments in our Notes to Consolidated Financial Statements.

(b)

Includes MPC cash and cash equivalents, including $30.8 million of cash related to The Summit joint venture.

(c)

Includes our $36.1 million proportionate share of debt of our Real Estate and Other Affiliates in Operating Assets segment (Woodlands Sarofim #1 and The Metropolitan Downtown Columbia).

(d)

Includes our $48.9$4.8 million share of debt of our Real Estate and Other Affiliates in Strategic Developments segment (33 Peck SlipMPC related to The Summit joint venture.

(c)Includes MPC cash and m.flats/TEN.M).

cash equivalents, including $55.4 million of cash related to The Summit joint venture.

(e)

(d)

Includes our $0.4$91.4 million share of cashdebt of our real estate and other affiliates in Operating Assets (Woodlands Sarofim #1, The Metropolitan Downtown Columbia, Mr. C Seaport and m.flats/TEN.M)

(e)Includes our $1.1 million share of Cash and cash equivalents of our Real Estate and Other Affiliates in Operating Assets segment (WoodlandsAsset (Woodlands Sarofim #1, The Metropolitan Downtown Columbia and Stewart Title of Montgomery County, TX,) Mr. C Seaport and m.flats/TEN.M).

(f)

Includes our $2.5$0.9 million share of cashCash and cash equivalents of our Real Estate and Other Affiliates in Strategic Developments segment (KR(KR Holdings, LLC, HHMK Development, LLC and Circle T Ranch and Power Center, 33 Peck Slip and m.flats/TEN.M)Center).


Cash Flows

Operating Activities

The cash flows and earnings generated from each business segment’s activities will likely vary significantly from year to year given the changing nature of our development focus. Condominium deposits received from contracted units offset by other various cash uses related to condominium development and sales activities are a substantial portion of our operating activities in 2017.2018. Operating cash continued to be utilized in 20172018 to fund ongoing development expenditures in our Strategic Developments and MPC segments, consistent with prior years.

The cash flows and earnings from the MPC business may fluctuate more than from our operating assets because the MPC business generates revenues from land sales rather than recurring contractual revenues from operating leases. MPC land sales are a substantial

portion of our cash flows from operating activities and are partially offset by development costs associated with the land sales business and acquisitions of land that is intended to ultimately be developed and sold.

Net cash provided by operating activities was $319.0$210.5 million for the year ended December 31, 20172018 compared to net cash provided by operating activities of $58.9$165.6 million for the year ended December 31, 2016.

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2017. The $260.1$45.0 million net increase in cash from operating activities in 20172018 was primarily related to the following:

Increases in operating cash flow:

·

Release of condominium buyer deposits from escrow of $264.9 million;

timing of condominium development expenditures.

·

Increase in MPC land sales of $33.3 million;

·

Increase in income tax refund net of taxes paid of $30.6 million;

·

NOI contribution of $22.0 million primarily from property openings and acquisitions in 2016;

·

Accounts payable decrease $22.0 million;

·

Bridgeland easement sales of $14.1 million;

·

Decrease in MPC operating expenses of $3.6 million;

·

Insurance reimbursement for certain legal expenses of $3.5 million;

·

Increase in interest income of $2.7 million;

·

Increase in builder price participation payments of $1.4 million;

·

Other condo rental revenue of $1.1 million;

·

Decrease in real estate taxes paid of $1.1 million;

·

Increase in land sales deposits of $0.3 million; and

·

Other insignificant net increases of $1.4 million.

Decreases in operating cash flow:

·

Increase in MPC expenditures and land acquisitions of $47.8 million;

·

Greater condominium expenditures of $22.1 million;

·

Decrease in cash dividends from Equity in Earnings from Real Estate and Other Affiliates of $22.1 million;

·

Decrease in condominium revenue of $20.7 million;

·

Leasing and sales commissions paid, primarily for 110 North Wacker, Hughes Landing office buildings and condominiums of $7.5 million;

·

Deposit for Langham Creek MUD project net of reimbursements of $5.5 million;

·

Increase in interest payments of $5.3 million due to a higher debt balance;

·

Absence in 2017 of insurance proceeds from Superstorm Sandy of $3.1 million;

·

Absence in 2017 of the ExxonMobil reimbursement of $3.0 million;

·

Absence in 2017 of cash received for our participation interests in Summerlin TPC golf courses of $2.8 million; and

·

Increase in condominium operating expenses of $2.0 million.

The $35.0$73.5 million net increasedecrease in cash from operating activities in the year ended December 31, 2016 as2017 compared to December 31, 20152016 was primarily related to the following:

Increases in operating cash flow:

·

Release of condominium buyer deposits from escrow of $171.0 million;

increased MPC segment development expenditures, as well as increased condominium development expenditures.

·

Decreased MPC expenditures and land acquisitions of $54.6 million compared to 2015;

·

Increase in cash dividends from Equity in Earnings from Real Estate and Other Affiliates of $32.6 million;

·

NOI contribution of $19.0 million primarily from property openings and acquisitions in 2015;

·

Received additional insurance proceeds from Superstorm Sandy of $3.1 million;

·

Increased MUD collections of $5.0 million; and

·

Other miscellaneous items of $1.6 million. 

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Decreases in operating cash flow:

·

Greater condominium expenditures of $139.4 million;

·

Absence in 2016 of the ExxonMobil tenant improvements of $46.4 million;

·

Absence in 2016 of notes receivable collections of $25.5 million primarily from a builder;

·

Decreased MPC Land sales of $19.9 million;

·

Increase in income taxes paid of $7.9 million;

·

Increase in interest payments of $7.3 million due to a higher debt balance; and

·

Lower builder price participation revenues of $5.5 million.

Investing Activities

Net cash used in investing activities was $322.7$841.8 million, $38.6$315.6 million, and $575.6$34.0 million for the years ended December 31, 2018, 2017 2016 and 2015,2016, respectively. Cash used for property developments expenditures and operating property improvements, was $625.2 million, $390.4 million, $436.8 million, and $602.4$432.6 million for the years ended December 31, 2018, 2017 2016 and 2015,2016, respectively. The decreasedincreased development expenditures in 2018 compared to 2017 relate primarily to ongoing development activity at 110 North Wacker, the Seaport District, Summerlin Ballpark, 6100 Merriweather and 100 Fellowship Drive.
The lower development spending in 2017 compared to 2016the prior year relate primarily to lower development spending as compared to the prior year on construction of One Merriweather, HHC 242 Self-Storage, HHC 2978 Self-Storage, Waiea and others. The decreased development expenditures were offset by less cash provided from proceeds from disposition of assets for the year ended December 31, 2017.2017 compared to 2016. For the year ended December 31, 2016, net proceeds from the disposition of assets totaled $378.3 million and related to the sale of the 80 South Street Assemblage.

The decreased development expenditures in 2016 compared to 2015 relate primarily to lower development spending as compared to the prior year on construction of Downtown Summerlin, One Lakes Edge, Three Hughes Landing, 1725-35 Hughes Landing Boulevard, The Westin at The Woodlands, Embassy Suites at Hughes Landing and others. The development expenditures were offset by

Financing Activities
Net cash provided by investingfinancing activities was $391.2 million for the year ended December 31, 2016 relating2018. The net proceeds from new loan borrowings and refinancing activities exceeded principal payments on our debt and were used to partially fund development activity at our development projects. Cash provided by financing activities also included $99.6 million related to the saleissuance of noncontrolling interests at our 110 North Wacker project. Cash used in financing activities included $58.7 million for the 80 South Street Assemblage, which generated net proceedspurchase of $378.3 million.

Financing Activities

treasury stock.

Net cash provided by financing activities was $199.2 million for the year ended December 31, 2017. The net proceeds from new loan borrowings and refinancing activities slightly exceeded principal payments on our debt and were used to partially fund development activity at our condominium and other development projects. In 2017, including $1.0 billion in cash received from the issuance of the Senior Notes, cash provided by financing activities included loan proceeds of $501.0 million from new borrowings or refinancings of existing debt primarily relating to Constellation, Anaha, Ae`Ae‘o, Three Hughes Landing, One Merriweather and The Woodlands. Additionally in 2017, we received $52.0 million in cash from the purchases of warrants by our CEO and President, offset by the $40.0 million premium paid to redeem our 6.875% Senior Notessenior notes due 2021.

Net cash provided by financing activities was $199.9 million for the year ended December 31, 2016. The net proceeds from new loan borrowings and refinancing activities were slightly offset by scheduled amortization payments on our debt and were used to partially fund development activity at our condominium and other development projects. In 2016, cash provided by financing activities included loan proceeds of $535.5 million from new borrowings or refinancings of existing debt primarily relating to Millennium Six Pines, Anaha, Waiea, Hughes Landing Retail, One Merriweather and Bridgeland MPC.

In 2015, cash provided by financing activities included loan proceeds of $583.8 million from new borrowings or refinancings of existing debt relating to Bridgeland and The Woodlands MPCs, The Woodlands Resort & Conference Center, Two Hughes Landing, 10-60 Columbia Corporate Center, 1725-1735 Hughes Landing Boulevard, Embassy Suites at Hughes Landing, The Westin at The Woodlands, Hughes Landing Retail, One Lakes Edge and 3831 Technology Forest. Additionally, we issued $54.0 million in SID bonds to benefit our Summerlin MPC, of which $39.2 million was held in escrow as of December 31, 2015.

Principal payments on mortgages, notes and loans payable were $838.5 million, $1.4 billion and $333.3 million for the years ended December 31, 2018, 2017 and 2016, respectively. Payments for the year ended December 31, 2017 were inclusive of $750 million used to repay the 6.875% senior notes, $333.3 million and $103.8 million for the years ended December 31, 2017, 2016 and 2015, respectively.

notes.

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Contractual Cash Obligations and Commitments


The following table aggregates our contractual cash obligations and commitments as of December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Less than 1 year

 

1-3 years

 

3-5 years

 

5 years and thereafter

 

Total

Mortgages, notes and loans payable (a)

 

$

78,207

 

$

902,184

 

$

535,904

 

$

1,361,494

 

$

2,877,789

Interest Payments (b)

 

 

130,849

 

 

347,517

 

 

164,699

 

 

185,105

 

 

828,170

Ground lease and other leasing commitments

 

 

8,769

 

 

16,378

 

 

15,527

 

 

314,129

 

 

354,803

Total

 

$

217,825

 

$

1,266,079

 

$

716,130

 

$

1,860,728

 

$

4,060,762

2018:
(In thousands) 2019 2020 2021 2022 2023 Thereafter Total
Mortgages, notes and loans payable (a) $93,358
 $357,246
 $419,697
 $216,471
 $696,248
 $1,432,191
 $3,215,211
Interest Payments (b) 159,152
 150,954
 127,939
 112,342
 96,223
 174,401
 821,011
Ground lease and other leasing commitments 8,199
 7,871
 7,380
 6,713
 8,380
 291,611
 330,154
Total $260,709
 $516,071
 $555,016
 $335,526
 $800,851
 $1,898,203
 $4,366,376

(a)

Based on final maturity, inclusive of extension options.

(b)

Interest is based on the borrowings that are presently outstanding and current floating interest rates.


We lease land or buildings at certain properties from third parties. Rental payments are expensed as incurred and have been, to the extent applicable, straight-lined over the term of the lease. Contractual rental expense, including participation rent, was $9.7 million, $8.6 million and $8.4 million for the years ended December 31, 2018, 2017 and $9.1 million for 2017, 2016, and 2015, respectively. The amortization of above and below-market ground leases and straight-line rents included in the contractual rent amount were not significant.


Off-Balance Sheet Financing Arrangements


We do not have any material off-balance sheet financing arrangements. Although we have interests in certain property owning non-consolidated ventures which have mortgage financing, the financings are non-recourse to us and totaled $183.9$201.5 million as of December 31, 2017.

2018.


Seasonality


In general, business fluctuates only moderately with the seasons and is relatively stable. Business at our resort property may be seasonal depending on location.


Critical Accounting Policies


Critical accounting policies are those that are both significant to the overall presentation of our financial condition position and results of operations and require management to make difficult, complex or subjective judgments. For further discussion about the Company’s critical accounting policies, please refer to Note 1 - –Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements.


Recently Issued Accounting Pronouncements and Developments


Please refer to Note 1 - –Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements for additional information about new accounting pronouncements.



Inflation


Revenue from our Operating Assets segment may be impacted by inflation. In addition, materials and labor costs relating to our development activities may significantly increase in an inflationary environment. Finally, inflation poses a risk to us due to the possibility of future increases in interest rates in the context of loan refinancings.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 


We are subject to interest rate risk with respect to our variable rate financings in that increases in interest rates will increase our payments under these variable rates. With respect to fixed-rate financings, increases in interest rates could make it more difficult to refinance such debt when due. We manage a portion of our variable interest rate exposure by using interest rate swaps, collars and caps. As of December 31, 2017,2018, of our $1.4$1.6 billion of variable rate debt outstanding, $428.3$665.0 million has been swapped to a fixed-rate. We also have may enter into interest rate cap contracts forto mitigate our $230.0 million Ae`o facility andexposure to rising interest rates. We have a cap contract for our $180.0 million Master Credit Facility for The Woodlands,, $150.0 million of which is currently outstanding to mitigateand $75 million of which is currently capped. We also have a cap contract that was associated with our exposure to rising interest rates.$230.0 million Ae‘o facility, which was repaid in December 2018. Of the remaining $562$811.3 million, $176.9$45.3 million has been placed into service over the last year, and as the properties are placed in service and become stabilized, we typically refinance the variable rate debt with long-term fixed-rate debt.

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As of December 31, 2017,2018, annual interest costs would increase approximately $9.2$8.9 million for every 1.00% increase in floating interest rates. Generally, a significant portion of our interest expense is capitalized due to the level of assets we currently have under development; therefore, the current impact of a change in our interest rate on our Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income (Loss) would be less than the total change, but we would incur higher cash payments and the development costs of our assets would be higher.higher. For additional information concerning our debt and management’s estimation process to arrive at a fair value of our debt as required by GAAP, please refer to the Liquidity and Capital Resources section of “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Note 8 –7 - Mortgages, Notes and Loans Payable, Net and Note 13 –9 - Derivative Instruments and HedgingActivities in our Consolidated Financial Statements.


The following table summarizes principal cash flows on our debt obligations and related weighted-average interest rates by expected maturity dates as of December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual Maturity Date

 

 

 

(In thousands)

    

2018

    

2019

    

2020

    

2021

    

2022

    

Thereafter

    

Total

Mortgages, notes and loans payable

 

$

78,207

 

 

$

256,338

 

 

$

178,836

 

 

$

467,010

 

 

$

251,086

 

 

 

$

1,646,312

 

 

$

2,877,789

Weighted - average interest rate

 

 

4.61

%

 

 

4.70

%

 

 

4.79

%

 

 

4.90

%

 

 

4.89

%

 

 

 

4.89

%

(a)

 

 

2018:

(a)

The weighted average interest rate is calculated as interest expense for the year divided by an average of the beginning and ending year debt balance, except for the year 2025 due to March maturity of the Senior Notes, in which case the average debt balance was calculated on a monthly basis.

  Contractual Maturity Date  
(In thousands) 2019 2020 2021 2022 2023 Thereafter Total
Mortgages, notes and loans payable $93,358
 $357,246
 $419,697
 $216,471
 $696,248
 $1,432,191
 $3,215,211
Weighted - average interest rate 5.06% 5.06% 4.86% 4.90% 4.92% 5.09%  



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Information with respect to this Item is set forth beginning on page F-1. See “Item 15. – Exhibits, Financial Statement Schedule” below.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


None.


ITEM 9A.  CONTROLS AND PROCEDURES


Disclosure Controls and Procedures


We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in our reports to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.


As required by SEC rules, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal financial and accounting officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2017,2018, the end of the period covered by this report. Based on the foregoing, our principal executive officer and principal financial and accounting officer concluded that our disclosure controls and procedures were effective as of December 31, 2017.

2018.


Internal Controls over Financial Reporting


There have been no changes in our internal control over financial reporting during the period covered by this report that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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Management’s Report on Internal Control Over Financial Reporting


Management is responsible for establishing and maintaining a system of internal control over financial reporting designed to provide reasonable assurance that transactions are executed in accordance with management authorization and that such transactions are properly recorded and reported in the financial statements, and that records are maintained so as to permit preparation of the financial statements in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has assessed the effectiveness of the Company’s internal control over financial reporting utilizing the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013 Framework). Management concluded, based on its assessment, that The Howard Hughes Corporation’s internal control over financial reporting was effective as of December 31, 2017.2018. Ernst & Young, LLP, an independent registered public accounting firm, has audited the Company’s internal control over financial reporting as of December 31, 2017,2018, as stated in their report which is included in this Annual Report on Form 10-K.


ITEM 9B.  OTHER INFORMATION


On February 21, 2018,2019, Howard Hughes Management Co., LLC, a wholly owned subsidiary of the Company, entered into a new offer letter (the “Offer Letter”) with Saul Scherl, our President - New York Tri-State Region. Pursuant to the Offer Letter, Mr. Scherl will continue to serve in connectionsuch capacity and to report to our Chief Executive Officer. Mr. Scherl’s base salary will be $600,000 with an annual target bonus of $600,000 subject to satisfaction of overall Company and individual performance goals. In addition, for the completed 2018 performance year, Mr. Scherl will receive a one-time annual compensation reviewbonus of $780,000 in recognition of Mr. Scherl’s achievements in advancing the redevelopment plan of the Seaport District during 2018.

Under the Offer Letter, Mr. Scherl will be entitled to an annual restricted stock award under The Howard Hughes Corporation 2010 Amended and Restated Incentive Plan (the “Plan”) with an annual target equal to 100% of Mr. Scherl’s base salary, subject to Mr. Scherl’s performance. One-half of each such award will be eligible to vest at the end of a five-year performance period, subject to achievement of applicable performance goals, and the remaining one-half of each such award will vest in equal annual installments over a five-year period, in each case subject to approval of the Compensation Committee.

In addition, on February 21, 2019, the Company’s Compensation Committee approved two long-term incentive awards for Mr. Scherl. The first long-term incentive award is a one-time grant of restricted stock under the BoardPlan with a value of Directors (the “Compensation Committee”), entered into an amended and restated employment agreement$1.15 million (calculated based on our closing stock price on February 21, 2019) which will vest in equal annual installments over a five-year period. The second long-term incentive award is a one-time award of restricted stock under the Plan with David O’Reilly,a value of $1.0 million to be granted to Mr. Scherl only upon the Chief Financial Officerachievement of one or more performance goals that have been approved by the Compensation Committee. If granted, the shares of restricted stock will vest in equal annual installments over a five-year period. Each of these awards will be subject to accelerated vesting if there is a sale or change in control of certain assets of the Company (the “Amended and Restated Employment Agreement”),and/or upon Mr. Scherl’s termination without cause, as more fully described in order to, among other things, amend certain provisions of Mr. O’Reilly’s previous employment agreement, dated October 17, 2016 (the “Initial Employment Agreement”) to be consistent with the employment agreements of certain of the Company’s other executive officers (the “Amendments”). The Amendments are summarized below.

·

Mr. O’Reilly’s annual cash bonus eligibility has been changed from Mr. O’Reilly being eligible to earn up to 140% of his annual base salary based upon the achievement of performance goals established by the Compensation Committee to being eligible to earn a target annual cash bonus of $900,000 (“Target Bonus Amount”), which is based upon the achievement of certain performance goals that will be established annually by the Compensation Committee and subject to certain requirements set forth in Section 162(m) of the Internal Revenue Code of 1986, as amended (the “162(m) Performance Goal”). If the 162(m) Performance Goal is achieved for any given year, then the annual bonus for such year will be equal to at least 60%, but not more than 140%, of the Target Bonus Amount. 

applicable restricted stock agreement.

·

Mr. O’Reilly is no longer eligible for an annual equity award of restricted shares of Company common stock valued at up $1,600,000, and instead, commencing in 2017, and continuing during each subsequent calendar year of his employment, Mr. O’Reilly will be eligible to receive an annual equity award (the “Annual LTIP Award”), which will be awarded each year by the Compensation Committee based upon its evaluation of performance measures and objectives established by the Compensation Committee from time to time. The Annual LTIP Award will be a long-term equity or equity-based incentive award with an aggregate grant value (with respect to the portion of the Annual LTIP Award that is subject to performance metrics, based on the achievement of the applicable performance metrics that cause the award to vest at the level of 100%) on the date of grant equal to $1,200,000, with the number of shares of Company common stock subject to such Annual LTIP Award determined by dividing the aggregate grant value by the closing price per share of Company common stock or as otherwise provided for in The Howard Hughes Corporation Amended and Restated 2010 Incentive Plan (the “Incentive Plan”) (or a successor plan) on the date of grant. Fifty percent of each Annual LTIP Award granted to Mr. O’Reilly will provide for pro rata time vesting over five years (“Time Vesting LTIP Awards”) and the other fifty percent of such award will provide for performance-based vesting (“Performance Vesting LTIP Awards”), and each of the Time Vesting LTIP Awards and the Performance Vesting LTIP Awards will be subject to the terms and conditions of the Incentive Plan (or a successor plan) and any applicable award agreements thereunder.


·

Mr. O’Reilly’s cash severance formula has been changed from being the sum of (1) 200% of his annual base salary, plus (2) 200% of his target annual bonus to the sum of (1) 200% of his annual base salary, plus (2) $1,000,000.

·

The initial term of Mr. O’Reilly’s employment agreement has been extended from October 17, 2022 to December 31, 2022.

The foregoing summary of the AmendmentsOffer Letter is not intended to be complete and is qualified in its entirety by reference to the full text of the Amended and Restated Employment AgreementOffer Letter filed as Exhibit 10.1110.21 to this Annual Report and incorporated herein by reference. In addition, certain provisions of the Amended and Restated Employment Agreement that have not been amended from the Initial Employment Agreement are summarized in the Company’s Current Report on Form 8-K filed with the Securities Exchange Commission on October 11, 2016.

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Report of Independent Registered Public Accounting Firm


To the Stockholders and the Board of Directors of

The Howard Hughes Corporation


Opinion on Internal Control over Financial Reporting


We have audited The Howard Hughes Corporation’s internal control over financial reporting as of December 31, 2017,2018, based on criteria established in Internal Control—IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, The Howard Hughes Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2018, based on the COSO criteria.


We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 20172018 consolidated financial statements of the Company and our report dated February 26, 201827, 2019 expressed an unqualified opinion thereon.


Basis for Opinion


The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.


Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.


Definition and Limitations of Internal Control Over Financial Reporting


A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



/s/ Ernst & Young LLP


Dallas, Texas

February 26, 2018

27, 2019

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PART III


ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE


The information required by Item 10 is incorporated by reference to the relevant information included in our proxy statement for our 20182019 Annual Meeting of Stockholders.


ITEM 11.  EXECUTIVE COMPENSATION


The information required by Item 11 is incorporated by reference to the relevant information included in our proxy statement for our 20182019 Annual Meeting of Stockholders.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS


The information required by Item 12 is incorporated by reference to the relevant information included in our proxy statement for our 20182019 Annual Meeting of Stockholders.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE


The information required by Item 13 is incorporated by reference to the relevant information included in our proxy statement for our 20182019 Annual Meeting of Stockholders.


ITEM 14.  PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES


The information required by Item 14 is incorporated by reference to the relevant information included in our proxy statement for our 20182019 Annual Meeting of Stockholders.


PART IV


ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULE

(a)

Financial Statements and Financial Statement Schedule.

(a)

Financial Statements and Financial Statement Schedule.


The Consolidated Financial Statements and Schedule listed in the accompanying Index to Consolidated Financial Statements and Financial Statement Schedule are filed as part of this Annual Report. No additional financial statement schedules are presented since the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is enclosed in the Consolidated Financial Statements and notes thereto.

(b)

Exhibits.


(b)Exhibits.

Exhibit No.

Description of Exhibit

3.1

1.1

Underwriting Agreement, dated January 2, 2018, by and among The Howard Hughes Corporation, certain stockholders named therein and J.P. Morgan Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Jeffries LLC (incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K, filed on January 5, 2018)
3.1
Second Amended and Restated Certificate of Incorporation of the Howard Hughes Corporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed May 24, 2016)

3.2

Amendment No. 1 to the Amended and Restated Bylaws of The Howard Hughes Corporation (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed May 24, 2016)

3.3

Certificate of Designations of Series A Junior Participating Preferred Stock, filed with the Secretary of State of Delaware on February 29, 2012 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed February 29, 2012)


4.1

4.1
Section 382 Rights Agreement, dated as of February 27, 2012, by and between The Howard Hughes Corporation and Computershare Trust Company, N.A., as rights agent (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed February 29, 2012)

4.2

Amendment No. 1 to Rights Agreement dated as of February 26, 2015, by and between The Howard Hughes Corporation and Computershare Trust Company, N.A., as rights agent (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed March 3, 2015)

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4.3

4.3
Amendment No. 2 to Rights Agreement, dated as of January 2, 2018, by and between The Howard Hughes Corporation and Computershare Trust Company, N.A., as rights agent (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed January 2, 2018)

4.4

Indenture, dated as of March 16, 2017 by and between The Howard Hughes Corporation and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on March 21, 2017)

10.1

Form of indemnification agreement for directors and certain executive officers of The Howard Hughes Corporation (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K, filed November 12, 2010)

10.2

Warrant Agreement, dated November 9, 2010, between The Howard Hughes Corporation and Mellon Investor Services LLC (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K, filed November 12, 2010)

10.3

Letter Agreement, dated November 9, 2010, between The Howard Hughes Corporation and Pershing Square Capital Management, L.P. (incorporated by reference to Exhibit 10.11 to the Company’s Current Report on Form 8-K, filed November 12, 2010)

10.4

Registration Rights Agreement, dated November 9, 2010, between The Howard Hughes Corporation and Pershing Square Capital Management, L.P., Blackstone Real Estate Partners VI L.P., Blackstone Real Estate Partners (AIV) VI L.P., Blackstone Real Estate Partners VI.F L.P., Blackstone Real Estate Partners VI.TE.1 L.P., Blackstone Real Estate Partners VI.TE.2 L.P., Blackstone Real Estate Holdings VI L.P., and Blackstone GGP Principal Transaction Partners L.P. (incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K, filed November 12, 2010)

10.5*+

Form of Restricted Stock Agreement for Nonemployee Directors under The Howard Hughes Corporation 2010 Amended and Restated Incentive Plan


10.6*+

Restricted Stock Agreement dated as of February 16, 2018, between The Howard Hughes Corporation and David Weinreb
10.7*+
Form of Time-based Restricted Stock Agreement for Executive Officers under theThe Howard Hughes Corporation 2010 Amended and Restated 2010 Incentive Plan


10.7*10.8*+

Form of Performance-based Restricted Stock Agreement for Executive Officers under The Howard Hughes Corporation 2010 Amended and Restated Incentive Plan

10.9*+
Form of Time-based Restricted Stock Agreement for Employees under The Howard Hughes Corporation Amended and Restated 2010 Incentive Plan


10.8*

10.10*+

Form of Performance-based Restricted Stock Agreement for Employees under The Howard Hughes Corporation Amended and Restated 2010 Incentive Plan


10.11*
Employment Agreement, dated as of August 29, 2017, between The Howard Hughes Corporation and David R. Weinreb (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed September 5, 2017)

10.9*

10.12*

Employment Agreement, dated as of October 2, 2017, between The Howard Hughes Corporation and Grant Herlitz (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed October 5, 2017)

10.10*

10.13*

Employment Agreement, dated as of November 6, 2017, between The Howard Hughes Corporation and Peter F. Riley (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed November 9, 2017)

10.11*+

10.14*

Amended and Restated Employment Agreement, dated as of February 21, 2018, between The Howard Hughes Corporation and David O’Reilly.O’Reilly (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K, filed February 26, 2018)

10.12*

10.15*

Restricted Stock Agreement, dated as of August 29, 2017, between The Howard Hughes Corporation and David R. Weinreb (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed September 5, 2017)

10.13*

10.16*

Restricted Stock Agreement, dated as of October 2, 2017, between The Howard Hughes Corporation and Grant Herlitz (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed October 5, 2017)

10.14*

10.17*

Restricted Stock Agreement, dated as of November 8, 2017, between The Howard Hughes Corporation and Peter F. Riley (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed November 9, 2017)

10.15*

10.18*

Warrant Grant Agreement, dated as of June 16, 2017, between The Howard Hughes Corporation and David R. Weinreb (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed June 20, 2017)

10.16*

10.19*

Warrant Grant Agreement, dated as of October 4, 2017, between The Howard Hughes Corporation and Grant Herlitz (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed October 5, 2017)

10.17*

10.20*

Warrant Purchase Agreement, dated October 7, 2016, between The Howard Hughes Corporation and David O’Reilly (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed October 11, 2016)

68

Table of Contents

10.18

10.21*+
Saul Scherl offer letter, dated as of February 21, 2019
10.22
Loan Agreement dated as of September 29, 2011, by and among Victoria Ward, Limited along with certain Victoria Ward, Limited’s subsidiaries, as borrowers, Wells Fargo Bank, National Association, as Administrative Agent and lead lender, CIBC, First Hawaiian Bank, Bank of Hawaii and Central Pacific Bank, as lenders, and Wells Fargo Securities, L.L.C., as Sole Lead Arranger and Sole Bookrunner (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed October 4, 2011)

10.19

10.23

Loan Agreement dated as of July 15, 2014, by and among The Shops at Summerlin North, LP, The Shops at Summerlin South, LP, Wells Fargo Bank, National Association, as Administrative Agent and lead lender, U.S. Bank National Association, as Syndication Agent and a lender, the other lending institutions party thereto, and Wells Fargo Securities, L.L.C., as sole Lead Arranger and Sole Bookrunner (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed July 16, 2014)


10.20*

10.24
Loan Agreement dated as of September 18, 2018, by and among Victoria Ward, Limited; Victoria Ward Center L.L.C.; Victoria Ward Entertainment Center L.L.C.; 1240 Ala Moana, LLC; Anaha Retail Holdings, LLC; Waiea Retail Holdings, LLC; 10 CCC, LLC; 20 CCC, LLC; 30 CCC, LLC; 10/20/30 CCC Parking Deck, LLC; 40 CCC, LLC; 40 CCC Parking Deck, LLC; 50 CCC, LLC; 60 CCC, LLC; 70 CC, LLC; 50/60/70 CCC Parking Deck, LLC; One Mall North, LLC; Crescent Area 1 Holdings, LLC; Crescent Area 1 Parking Deck 1, LLC; HL Champion Holding Company, LLC; Lakeland Village Holding Company, LLC; Waterway Hotel Holdings, LLC; HL-Hotel Holding Company, LLC; CSPV Holdings, LLC; 1701 Lake Robbins, LLC; Wells Fargo Bank, National Association, as administrative agent and a lender; Wells Fargo Securities, L.L.C., as sole lead arranger and sole book-runner; and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed September 24, 2018)
10.25*
The Howard Hughes Corporation 2010 Amended and Restated Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed June 14, 2012)

10.21*

10.26*

Form of The Howard Hughes Corporation Deferred Compensation Plan (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed September 17, 2014)

10.22

10.27*

Settlement of Tax Indemnity and Mutual Release Agreement dates as of December 12, 2014, by and between The Howard Hughes Corporation, a Delaware Corporation, and General Growth Properties, Inc., a Delaware Corporation (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed December 18, 2014)

10.23*

The Howard Hughes Corporation Management Co., LLC Separation Benefit Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed August 16, 2017)

21.1+

List of Subsidiaries

23.1+

Consent of Ernst & Young LLP

24.1+

Power of Attorney

31.1+

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2+

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1+

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS+

XBRL Instance Document

101.SCH+

XBRL Taxonomy Extension Schema Document

101.CAL+

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB+

XBRL Taxonomy Extension Label Linkbase Document

101.PRE+

XBRL Taxonomy Extension Presentation  Linkbase Document

101.DEF+

XBRL Taxonomy Extension Definition Linkbase Document

*Management contract, compensatory plan or arrangement

+Filed herewith


Attached isas Exhibit 101 to this report are the following documents formatted in XBRL (ExtensibleExtensible Business Reporting Language)Language (XBRL): (i) the Consolidated Statements of Operations for the years ended December 31, 2018, 2017 2016 and 2015,2016, (ii) the Consolidated Balance Sheets at December 31, 20172018 and 2016,2017, (iii) the Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 2016 and 2015,2016, (iv) the Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2018, 2017 2016 and 2015.

2016.

69


Table of Contents

ITEM 16.  FORM 10-K SUMMARY


Not applicable.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

THE HOWARD HUGHES CORPORATION

/s/ David R. Weinreb

David R. Weinreb

Chief Executive Officer

February 26, 2018

27, 2019

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature

Title

Date

Signature

TitleDate
*  

Chairman of the Board and Director 

February 26, 2018

27, 2019

William Ackman

/s/ David R. Weinreb

Director and Chief Executive Officer

February 26, 2018

27, 2019

David R. Weinreb

(Principal Executive Officer)

/s/ David R. O’Reilly

Chief Financial
Officer (Principal Financial and Accounting Officer)

February 26, 2018

27, 2019

David O’Reilly

*

Director

February 26, 2018

27, 2019

Adam Flatto

*

Director

February 26, 2018

27, 2019

Jeffrey Furber

*

Director

February 26, 2018

27, 2019

Beth Kaplan

*

Director

February 26, 2018

27, 2019

Allen Model

*

Director

February 26, 2018

27, 2019

R. Scot Sellers

*

Director

February 26, 2018

27, 2019

Steven Shepsman

*

Director

February 26, 2018

27, 2019

Burton M. Tansky

*

Director

February 26, 2018

27, 2019

Mary Ann Tighe

*/s/ David R. Weinreb

David R. Weinreb

Attorney-in-fact


70


Table of Contents

THE HOWARD HUGHES CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

9

Consolidated Financial Statements

Page Number

Report of Independent Registered Public Accounting Firm

F-2

Consolidated Balance Sheets as of December 31, 2018 and 2017 and 2016

F-3

Consolidated Statements of Operations for the years ended December 31, 2018, 2017 2016 and 20152016

F-4

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2018, 2017 2016 and 20152016

F-5

Consolidated Statements of Equity for the years ended December 31, 2018, 2017 2016 and 20152016

F-6

Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 2016 and 20152016

F-7

Notes to Consolidated Financial Statements

F-9

F-8

Financial Statement Schedule

Schedule III – Real Estate and Accumulated Depreciation

F-47

F-51


F-1

Table of Contents

Report of Independent Registered Public Accounting Firm


To the Stockholders and the Board of Directors of

The Howard Hughes Corporation


Opinion on the Financial Statements


We have audited the accompanying consolidated balance sheets of The Howard Hughes Corporation (the Company) as of December 31, 20172018 and 2016,2017, the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for each of the three years in the period ended December 31, 2017,2018, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively(collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20172018 and 2016,2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2018, in conformity with U.S. generally accepted accounting principles.


We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 201827, 2019 expressed an unqualified opinion thereon.


Adoption of ASU No. 2014-09 (Topic 606)

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenue recognition on contracts with customers specifically as it relates to condominium units sold in the 2018financial statements that reflect the accounting method changedue to the adoption of ASU 2014-09Revenue from Contracts with Customers (Topic 606).

Basis for Opinion


These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.



/s/ Ernst & Young LLP


We have served as the Company’s auditor since 2013.


Dallas, Texas

February 26, 2018

27, 2019

F-2


Table of Contents

THE HOWARD HUGHES CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

December 31, 

(In thousands, except share amounts)

 

2017

 

2016

Assets:

    

 

 

 

 

 

Investment in real estate:

 

 

 

 

 

 

Master Planned Community assets

 

$

1,642,278

 

$

1,669,561

Buildings and equipment

 

 

2,238,617

 

 

2,027,363

Less: accumulated depreciation

 

 

(321,882)

 

 

(245,814)

Land

 

 

277,932

 

 

320,936

Developments

 

 

1,196,582

 

 

961,980

Net property and equipment

 

 

5,033,527

 

 

4,734,026

Investment in Real Estate and Other Affiliates

 

 

76,593

 

 

76,376

Net investment in real estate

 

 

5,110,120

 

 

4,810,402

Cash and cash equivalents

 

 

861,059

 

 

665,510

Accounts receivable, net 

 

 

13,041

 

 

9,883

Municipal Utility District receivables, net

 

 

184,811

 

 

150,385

Notes receivable, net

 

 

5,864

 

 

155

Deferred expenses, net

 

 

80,901

 

 

64,531

Prepaid expenses and other assets, net

 

 

473,268

 

 

666,516

Total assets

 

$

6,729,064

 

$

6,367,382

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Mortgages, notes and loans payable, net

 

$

2,857,945

 

$

2,690,747

Deferred tax liabilities

 

 

160,850

 

 

200,945

Warrant liabilities

 

 

 —

 

 

332,170

Accounts payable and accrued expenses

 

 

521,718

 

 

572,010

Total liabilities

 

 

3,540,513

 

 

3,795,872

 

 

 

 

 

 

 

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, 43,300,253 shares

issued and 43,270,880 outstanding as of December 31, 2017 and 39,802,064 shares

issued and 39,790,003 outstanding as of December 31, 2016

 

 

433

 

 

398

Additional paid-in capital

 

 

3,302,502

 

 

2,853,269

Accumulated deficit

 

 

(109,508)

 

 

(277,912)

Accumulated other comprehensive loss

 

 

(6,965)

 

 

(6,786)

Treasury stock, at cost, 29,373 shares and 12,061 shares as of December 31, 2017 and 2016, respectively

 

 

(3,476)

 

 

(1,231)

Total stockholders' equity

 

 

3,182,986

 

 

2,567,738

Noncontrolling interests

 

 

5,565

 

 

3,772

Total equity

 

 

3,188,551

 

 

2,571,510

Total liabilities and equity

 

$

6,729,064

 

$

6,367,382

  December 31,
(In thousands, except par values and share amounts) 2018 2017
Assets:    
Investment in real estate:    
Master Planned Community assets $1,642,660
 $1,642,278
Buildings and equipment 2,932,963
 2,238,617
Less: accumulated depreciation (380,892) (321,882)
Land 297,596
 277,932
Developments 1,290,068
 1,196,582
Net property and equipment 5,782,395
 5,033,527
Investment in Real Estate and Other Affiliates 102,287
 76,593
Net investment in real estate 5,884,682
 5,110,120
Cash and cash equivalents 499,676
 861,059
Restricted cash 224,539
 103,241
Accounts receivable, net 12,589
 13,041
Municipal Utility District receivables, net 222,269
 184,811
Notes receivable, net 4,694
 5,864
Deferred expenses, net 95,714
 80,901
Prepaid expenses and other assets, net 411,636
 370,027
Total assets $7,355,799
 $6,729,064
     
Liabilities:    
Mortgages, notes and loans payable, net $3,181,213
 $2,857,945
Deferred tax liabilities 157,188
 160,850
Accounts payable and accrued expenses 779,272
 521,718
Total liabilities 4,117,673
 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, 43,511,473 shares
issued and 42,991,624 outstanding as of December 31, 2018 and 43,300,253 shares
issued and 43,270,880 outstanding as of December 31, 2017		 436
 433
Additional paid-in capital 3,322,433
 3,302,502
Accumulated deficit (120,341) (109,508)
Accumulated other comprehensive loss (8,126) (6,965)
Treasury stock, at cost, 519,849 and 29,373 shares as of December 31, 2018 and 2017, respectively (62,190) (3,476)
Total stockholders' equity 3,132,212
 3,182,986
Noncontrolling interests 105,914
 5,565
Total equity 3,238,126
 3,188,551
Total liabilities and equity $7,355,799
 $6,729,064
See Notes to Consolidated Financial Statements.

F-3


Table of Contents

THE HOWARD HUGHES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 

(In thousands, except per share amounts)

    

2017

    

2016

    

2015

Revenues:

 

 

 

 

 

 

 

 

 

Condominium rights and unit sales

 

$

464,251

 

$

485,634

 

$

305,284

Master Planned Community land sales

 

 

248,595

 

 

215,318

 

 

187,399

Minimum rents

 

 

183,025

 

 

173,268

 

 

150,760

Tenant recoveries

 

 

45,814

 

 

44,330

 

 

39,542

Hospitality revenues

 

 

76,020

 

 

62,252

 

 

45,374

Builder price participation

 

 

22,835

 

 

21,386

 

 

26,846

Other land revenues

 

 

28,166

 

 

16,232

 

 

14,803

Other rental and property revenues

 

 

31,414

 

 

16,585

 

 

27,080

Total revenues

 

 

1,100,120

 

 

1,035,005

 

 

797,088

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Condominium rights and unit cost of sales

 

 

338,361

 

 

319,325

 

 

191,606

Master Planned Community cost of sales

 

 

121,116

 

 

95,727

 

 

88,065

Master Planned Community operations

 

 

38,777

 

 

42,371

 

 

44,907

Other property operating costs

 

 

91,729

 

 

65,978

 

 

72,751

Rental property real estate taxes

 

 

29,185

 

 

26,847

 

 

24,138

Rental property maintenance costs

 

 

13,432

 

 

12,392

 

 

10,712

Hospitality operating costs

 

 

56,362

 

 

49,359

 

 

34,839

Provision for doubtful accounts

 

 

2,710

 

 

5,664

 

 

4,030

Demolition costs

 

 

1,923

 

 

2,212

 

 

3,297

Development-related marketing costs

 

 

20,504

 

 

22,184

 

 

25,466

General and administrative

 

 

89,882

 

 

86,588

 

 

81,345

Depreciation and amortization

 

 

132,252

 

 

95,864

 

 

98,997

Total expenses

 

 

936,233

 

 

824,511

 

 

680,153

 

 

 

 

 

 

 

 

 

 

Operating income before other items

 

 

163,887

 

 

210,494

 

 

116,935

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

Provision for impairment

 

 

 —

 

 

(35,734)

 

 

 —

Gains on sales of properties

 

 

51,367

 

 

140,549

 

 

 —

Other (loss) income, net

 

 

3,248

 

 

11,453

 

 

1,829

Total other

 

 

54,615

 

 

116,268

 

 

1,829

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

218,502

 

 

326,762

 

 

118,764

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

4,043

 

 

1,359

 

 

586

Interest expense

 

 

(64,568)

 

 

(65,724)

 

 

(59,744)

Loss on redemption of senior notes due 2021

 

 

(46,410)

 

 

 —

 

 

 —

Warrant liability (loss) gain

 

 

(43,443)

 

 

(24,410)

 

 

58,320

Gain on acquisition of joint venture partner's interest

 

 

23,332

 

 

27,088

 

 

 —

Gain (loss) on disposal of operating assets

 

 

3,868

 

 

(1,117)

 

 

29,073

Equity in earnings from Real Estate and Other Affiliates

 

 

25,498

 

 

56,818

 

 

3,721

Income before taxes

 

 

120,822

 

 

320,776

 

 

150,720

(Benefit) provision for income taxes

 

 

(45,801)

 

 

118,450

 

 

24,001

Net income

 

 

166,623

 

 

202,326

 

 

126,719

Net loss (income) attributable to noncontrolling interests

 

 

1,781

 

 

(23)

 

 

 —

Net income attributable to common stockholders

 

$

168,404

 

$

202,303

 

$

126,719

 

 

 

 

 

 

 

 

 

 

Basic income per share:

 

$

4.07

 

$

5.12

 

$

3.21

 

 

 

 

 

 

 

 

 

 

Diluted income per share:

 

$

3.91

 

$

4.73

 

$

1.60

  Year Ended December 31,
(In thousands, except per share amounts) 2018 2017 2016
Revenues:      
Condominium rights and unit sales $357,720
 $464,251
 $485,634
Master Planned Community land sales 261,905
 248,595
 215,318
Minimum rents 207,315
 183,025
 173,268
Tenant recoveries 49,993
 45,814
 44,330
Hospitality revenues 82,037
 76,020
 62,252
Builder price participation 27,085
 22,835
 21,386
Other land revenues 21,314
 28,166
 16,232
Other rental and property revenues 57,168
 31,414
 16,585
Total revenues 1,064,537
 1,100,120
 1,035,005
Expenses:      
Condominium rights and unit cost of sales 262,562
 338,361
 319,325
Master Planned Community cost of sales 124,214
 121,116
 95,727
Master Planned Community operations 45,217
 38,777
 42,371
Other property operating costs 133,761
 91,729
 65,978
Rental property real estate taxes 32,183
 29,185
 26,847
Rental property maintenance costs 15,813
 13,432
 12,392
Hospitality operating costs 59,195
 56,362
 49,359
Provision for doubtful accounts 6,078
 2,710
 5,664
Demolition costs 17,329
 1,923
 2,212
Development-related marketing costs 29,249
 20,504
 22,184
General and administrative 104,625
 89,882
 86,588
Depreciation and amortization 126,565
 132,252
 95,864
Total expenses 956,791
 936,233
 824,511
Other:      
Provision for impairment —
 —
 (35,734)
Gains on sales of properties —
 51,367
 140,549
Other (loss) income, net (936) 3,248
 11,453
Total other (936) 54,615
 116,268
Operating income 106,810
 218,502
 326,762
Interest income 8,486
 4,043
 1,359
Interest expense (82,028) (64,568) (65,724)
Loss on redemption of senior notes due 2021 —
 (46,410) —
Warrant liability loss —
 (43,443) (24,410)
Gain on acquisition of joint venture partner's interest —
 23,332
 27,088
(Loss) gain on disposal of operating assets (4) 3,868
 (1,117)
Equity in earnings from Real Estate and Other Affiliates 39,954
 25,498
 56,818
Income before taxes 73,218
 120,822
 320,776
Provision (benefit) for income taxes 15,492
 (45,801) 118,450
Net income 57,726
 166,623
 202,326
Net (income) loss attributable to noncontrolling interests (714) 1,781
 (23)
Net income attributable to common stockholders $57,012
 $168,404
 $202,303
Basic income per share: $1.32
 $4.07
 $5.12
Diluted income per share: $1.32
 $3.91
 $4.73
See Notes to Consolidated Financial Statements.

F-4


Table of Contents

THE HOWARD HUGHES CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 

(In thousands)

    

2017

    

2016

    

2015

Net income

 

$

166,623

 

$

202,326

 

$

126,719

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Interest rate swaps (a)

 

 

(9)

 

 

2,196

 

 

40

Capitalized swap interest expense (b)

 

 

(170)

 

 

(203)

 

 

(217)

Pension adjustment (c)  

 

 

 —

 

 

(890)

 

 

 —

Other comprehensive income (loss)

 

 

(179)

 

 

1,103

 

 

(177)

Comprehensive income

 

 

166,444

 

 

203,429

 

 

126,542

Comprehensive income attributable to noncontrolling interests

 

 

1,781

 

 

(23)

 

 

 —

Comprehensive income attributable to common stockholders

 

$

168,225

 

$

203,406

 

$

126,542

  Year Ended December 31,
(In thousands) 2018 2017 2016
Net income $57,726
 $166,623
 $202,326
Other comprehensive income (loss):      
Interest rate swaps (a) 955
 (9) 2,196
Capitalized swap interest income (expense) (b) 30
 (170) (203)
Pension adjustment (c) 759
 —
 (890)
Adoption of ASU 2018-02 (d) (1,148) —
 —
Adoption of ASU 2017-12 (e) (739) —
 —
Terminated swap amortization (1,018) —
 —
Other comprehensive (loss) income (1,161) (179) 1,103
Comprehensive income 56,565
 166,444
 203,429
Comprehensive (income) loss attributable to noncontrolling interests (714) 1,781
 (23)
Comprehensive income attributable to common stockholders $55,851
 $168,225
 $203,406

(a)

NetAmounts are shown net of deferred tax benefit of $0.3 million for the yearyears ended December 31, 2018 and 2017 and deferred tax expense of $1.3 million and $1.0 million for the yearsyear ended December 31, 2016 and 2015, respectively.

2016.

(b)

NetThe deferred tax impact was not meaningful for the year ended December 31, 2018. Amount is net of deferred tax benefit of $0.1 million,  $0.1 million and $0.1 million for the years ended December 31, 2017 2016 and 2015, respectively.

2016.

(c)

Net of deferred tax expense of $0.5 million for the year ended December 31, 2018 and deferred tax benefit of $0,zero and $0.5 million and $0 for the years ended December 31, 2017 and 2016, and 2015, respectively.

(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 1 - Summary of Significant Accounting Policiesfor 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 1 - Summary of Significant Accounting Policies for further discussion.

See Notes to Consolidated Financial Statements.

F-5



Table of Contents

THE HOWARD HUGHES CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Accumulated

 

Comprehensive

 

Treasury Stock

 

Stockholders'

 

Noncontrolling

 

Total

(In thousands, except shares)

    

Shares

    

Amount

    

Capital

    

Deficit

    

(Loss)

    

Shares

    

Amount

    

Equity

 

Interests

    

Equity

Balance January 1, 2015

 

39,638,094

 

$

396

 

$

2,838,013

 

$

(606,934)

 

$

(7,712)

 

 -

 

$

 -

 

$

2,223,763

 

$

3,743

 

$

2,227,506

Net income

 

 -

 

 

 -

 

 

 -

 

 

126,719

 

 

 -

 

 -

 

 

 -

 

 

126,719

 

 

 -

 

 

126,719

Adjustment to noncontrolling interest

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

29

 

 

29

Interest rate swaps, net of tax $966

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

40

 

 -

 

 

 -

 

 

40

 

 

 -

 

 

40

Capitalized swap interest, net of tax $74

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(217)

 

 -

 

 

 -

 

 

(217)

 

 

 -

 

 

(217)

Stock plan activity

 

76,744

 

 

 2

 

 

9,810

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

9,812

 

 

 -

 

 

9,812

Balance December 31, 2015

 

39,714,838

 

 

398

 

 

2,847,823

 

 

(480,215)

 

 

(7,889)

 

 -

 

 

 -

 

 

2,360,117

 

 

3,772

 

 

2,363,889

Net income

 

 -

 

 

 -

 

 

 -

 

 

202,303

 

 

 -

 

 -

 

 

 -

 

 

202,303

 

 

23

 

 

202,326

Preferred dividend payment on behalf of subsidiary

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

(23)

 

 

(23)

Interest rate swaps, net of tax $1,345

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

2,196

 

 -

 

 

 -

 

 

2,196

 

 

 -

 

 

2,196

Pension adjustment, net of tax of $543

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(890)

 

 -

 

 

 -

 

 

(890)

 

 

 -

 

 

(890)

Capitalized swap interest, net of tax $109

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(203)

 

 -

 

 

 -

 

 

(203)

 

 

 -

 

 

(203)

Issuance of management warrants

 

 -

 

 

 -

 

 

1,000

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

1,000

 

 

 -

 

 

1,000

Acquisition of noncontrolling partner's interest

 

 -

 

 

 -

 

 

(5,000)

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

(5,000)

 

 

 -

 

 

(5,000)

Stock plan activity

 

87,226

 

 

 -

 

 

9,446

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

9,446

 

 

 -

 

 

9,446

Treasury stock activity

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

(12,061)

 

 

(1,231)

 

 

(1,231)

 

 

 -

 

 

(1,231)

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

 

 -

 

 

 -

 

 

 -

 

 

168,404

 

 

 -

 

 -

 

 

 -

 

 

168,404

 

 

(1,781)

 

 

166,623

Preferred dividend payment on behalf of subsidiary

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

(12)

 

 

(12)

Initial consolidation of HOAs

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

3,586

 

 

3,586

Interest rate swaps, net of tax of $323

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(9)

 

 -

 

 

 -

 

 

(9)

 

 

 -

 

 

(9)

Capitalized swap interest, net of tax of $91

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(170)

 

 -

 

 

 -

 

 

(170)

 

 

 -

 

 

(170)

Stock plan activity

 

445,736

 

 

 4

 

 

21,651

 

 

 -

 

 

 -

 

(17,312)

 

 

(2,245)

 

 

19,410

 

 

 -

 

 

19,410

Exercise of warrants

 

3,052,453

 

 

31

 

 

375,582

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

375,613

 

 

 -

 

 

375,613

Issuance of management warrants

 

 -

 

 

 -

 

 

52,000

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

52,000

 

 

 -

 

 

52,000

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

          Accumulated          
      Additional   Other     Total    
(In thousands, except shares) Common Stock Paid-In Accumulated Comprehensive Treasury Stock Stockholders' Noncontrolling Total
 Shares Amount Capital Deficit (Loss) Shares Amount Equity Interests Equity
Balance, January 1, 2016 39,714,838
 $398
 $2,847,823
 $(480,215) $(7,889) —
 $—
 $2,360,117
 $3,772
 $2,363,889
Net income —
 —
 —
 202,303
 —
 —
 —
 202,303
 23
 202,326
Preferred dividend payment on behalf of subsidiary —
 —
 —
 —
 —
 —
 —
 —
 (23) (23)
Interest rate swaps, net of tax $1,345 —
 —
 —
 —
 2,196
 —
 —
 2,196
 —
 2,196
Pension adjustment, net of tax of $543 —
 —
 —
 —
 (890) —
 —
 (890) —
 (890)
Capitalized swap interest, net of tax $109 —
 —
 —
 —
 (203) —
 —
 (203) —
 (203)
Issuance of Management Warrants —
 —
 1,000
 —
 —
 —
 —
 1,000
 —
 1,000
Acquisition of noncontrolling partner's interest —
 —
 (5,000) —
 —
 —
 —
 (5,000) —
 (5,000)
Stock plan activity 87,226
 —
 9,446
 —
 —
 —
 —
 9,446
 —
 9,446
Treasury stock activity —
 —
 —
 —
 —
 (12,061) (1,231) (1,231) —
 (1,231)
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 —
 —
 —
 168,404
 —
 —
 —
 168,404
 (1,781) 166,623
Preferred dividend payment on behalf of subsidiary —
 —
 —
 —
 —
 —
 —
 —
 (12) (12)
Initial consolidation of HOAs —
 —
 —
 —
 —
 —
 —
 —
 3,586
 3,586
Interest rate swaps, net of tax of $323 —
 —
 —
 —
 (9) —
 —
 (9) —
 (9)
Capitalized swap interest, net of tax of $91 —
 —
 —
 —
 (170) —
 —
 (170) —
 (170)
Stock plan activity 445,736
 4
 21,651
 —
 —
 (17,312) (2,245) 19,410
 —
 19,410
Exercise of warrants 3,052,453
 31
 375,582
 —
 —
 —
 —
 375,613
 —
 375,613
Issuance of Management Warrants —
 —
 52,000
 —
 —
 —
 —
 52,000
 —
 52,000
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 income —
 —
 —
 57,012
 —
 —
 —
 57,012
 714
 57,726
Preferred dividend payment on behalf of subsidiary —
 —
 —
 —
 —
 —
 —
 —
 (11) (11)
Interest rate swaps, net of tax of $342 —
 —
 —
 —
 955
 —
 —
 955
 —
 955
Terminated swap amortization —
 —
 —
 —
 (1,018) —
 —
 (1,018) —
 (1,018)
Pension adjustment, net of tax of $467 —
 —
 —
 —
 759
 —
 —
 759
 —
 759
Capitalized swap interest, net of tax of $8 —
 —
 —
 —
 30
 —
 —
 30
 —
 30
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) —
 —
 —
 —
 —
Restricted stock activity —
 —
 —
 —
 —
 (14,556) (1,447) (1,447) —
 (1,447)
Repurchase of common shares —
 —
 —
 —
 —
 (475,920) (57,267) (57,267) —
 (57,267)
Contributions to joint ventures —
 —
 —
 —
 —
 —
 —
 —
 99,646
 99,646
Stock plan activity 211,220
 3
 19,931
 —
 —
 —
 —
 19,934
 —
 19,934
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
See Notes to Consolidated Financial Statements.

F-6


Table of Contents

THE HOWARD HUGHES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

(in thousands)

 

2017

 

 

2016

 

 

2015

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net income

$

166,623

 

$

202,326

 

$

126,719

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

116,401

 

 

81,878

 

 

82,275

Amortization

 

15,851

 

 

13,986

 

 

16,722

Amortization of deferred financing costs

 

5,587

 

 

6,977

 

 

5,734

Amortization of intangibles other than in-place leases

 

(1,327)

 

 

(1,857)

 

 

462

Straight-line rent amortization

 

(5,401)

 

 

(7,401)

 

 

(4,985)

Deferred income taxes

 

(43,463)

 

 

113,698

 

 

21,152

Restricted stock and stock option amortization

 

7,385

 

 

6,707

 

 

7,284

Net gain on sales and acquisitions of properties

 

(78,568)

 

 

(166,520)

 

 

(29,073)

Loss on redemption of senior notes due 2021

 

46,410

 

 

 -

 

 

 -

Warrant liability loss (gain)

 

43,443

 

 

24,410

 

 

(58,320)

Equity in earnings from Real Estate and Other Affiliates, net of distributions

 

(9,325)

 

 

(19,329)

 

 

1,182

Provision for doubtful accounts

 

2,710

 

 

5,664

 

 

4,030

Master Planned Community land acquisitions

 

(4,391)

 

 

(94)

 

 

(7,293)

Master Planned Community development expenditures

 

(193,087)

 

 

(149,592)

 

 

(197,020)

Master Planned Community cost of sales

 

107,218

 

 

88,065

 

 

69,104

Condominium development expenditures

 

(352,813)

 

 

(330,720)

 

 

(191,313)

Condominium rights and units cost of sales

 

338,361

 

 

319,325

 

 

191,606

Deferred rental income

 

 —

 

 

 —

 

 

46,366

Provision for impairment

 

 —

 

 

35,734

 

 

 —

Percentage of completion revenue recognition from sale of condominium rights

 

(464,251)

 

 

(485,634)

 

 

(305,284)

Net Changes:

 

 

 

 

 

 

 

 

Accounts and notes receivable

 

24,034

 

 

29,295

 

 

50,228

Prepaid expenses and other assets

 

1,091

 

 

2,763

 

 

(1,869)

Change in restricted cash operating accounts

 

(9,418)

 

 

 —

 

 

 —

Condominium Deposits Received

 

315,901

 

 

465,701

 

 

81,881

Deferred expenses

 

(15,156)

 

 

(8,911)

 

 

(11,743)

Accounts payable and accrued expenses

 

8,181

 

 

(46,322)

 

 

29,867

Condominium Deposits Held in Escrow

 

(315,901)

 

 

(465,701)

 

 

(81,881)

Condominium Deposits Released from Escrow

 

613,692

 

 

348,745

 

 

177,724

Other, net

 

(755)

 

 

(4,278)

 

 

375

 Cash provided by operating activities

 

319,032

 

 

58,915

 

 

23,930

 

 

 

 

 

 

 

 

 

Cash Flows from  Investing Activities:

 

 

 

 

 

 

 

 

Property and equipment expenditures

 

(6,968)

 

 

(9,662)

 

 

(15,439)

Operating Property Improvements

 

(14,389)

 

 

(20,247)

 

 

(8,409)

Property Development and Redevelopment

 

(369,086)

 

 

(402,669)

 

 

(578,506)

Reimbursement of development cost

 

12,777

 

 

4,582

 

 

 —

Acquisition of assets

 

(23,299)

 

 

(25,480)

 

 

 —

Proceeds from sales of properties

 

88,384

 

 

410,917

 

 

25,139

Proceeds from insurance claims

 

 —

 

 

3,107

 

 

 —

Investment in KR Holdings, LLC

 

 —

 

 

 —

 

 

9,121

Notes issued to Real Estate and Other Affiliates and third party

 

(5,252)

 

 

(25,000)

 

 

 —

Proceeds from repayment of note to Real Estate and Other Affiliates

 

 —

 

 

25,000

 

 

 —

Distributions from Real Estate and Other Affiliates

 

 —

 

 

16,550

 

 

 —

Investments in Real Estate and Other Affiliates, net

 

(1,138)

 

 

(11,056)

 

 

(2,171)

Change in restricted cash

 

(3,710)

 

 

(4,605)

 

 

(6,580)

Other

 

 —

 

 

 —

 

 

1,277

 Cash used in investing activities

 

(322,681)

 

 

(38,563)

 

 

(575,568)

  Year Ended December 31,
(in thousands) 2018 2017 2016
Cash Flows from Operating Activities:      
Net income $57,726
 $166,623
 $202,326
Adjustments to reconcile net income to cash provided by operating activities:      
Depreciation 113,518
 116,401
 81,878
Amortization 13,047
 15,851
 13,986
Amortization of deferred financing costs 9,347
 5,587
 6,977
Amortization of intangibles other than in-place leases 1,681
 (1,327) (1,857)
Straight-line rent amortization (12,584) (5,401) (7,401)
Deferred income taxes 16,195
 (43,463) 113,698
Restricted stock and stock option amortization 12,128
 7,385
 6,707
Net gain on sales and acquisitions of properties —
 (78,568) (166,520)
Loss on redemption of senior notes due 2021 —
 46,410
 —
Warrant liability loss (gain) —
 43,443
 24,410
Equity in earnings from Real Estate and Other Affiliates, net of distributions (24,809) (9,325) (19,329)
Provision for doubtful accounts 6,078
 2,710
 5,664
Master Planned Community land acquisitions (3,565) (4,391) (94)
Master Planned Community development expenditures (195,504) (193,087) (149,592)
Master Planned Community cost of sales 113,282
 107,218
 88,065
Condominium development expenditures (289,084) (352,813) (330,720)
Condominium rights and units cost of sales 262,562
 338,361
 319,325
Provision for impairment —
 —
 35,734
Percentage of completion revenue recognition from sale of condominium rights —
 (464,251) (485,634)
Net Changes:      
Accounts and notes receivable 26,209
 24,034
 29,295
Prepaid expenses and other assets (6,942) (4,123) (1,579)
Condominium deposits received 108,061
 315,901
 465,701
Deferred expenses (17,697) (15,156) (8,911)
Accounts payable and accrued expenses 20,676
 8,181
 (46,322)
Condominium Receivables —
 140,122
 67,574
Other, net 195
 (755) (4,278)
Cash provided by operating activities 210,520
 165,567
 239,103
Cash Flows from  Investing Activities:      
Property and equipment expenditures (4,485) (6,968) (9,662)
Operating Property Improvements (47,750) (14,389) (20,247)
Property Development and Redevelopment (572,966) (369,086) (402,669)
Reimbursement of development cost —
 12,777
 4,582
Acquisition of assets (234,541) (23,299) (25,480)
Proceeds from sales of properties —
 88,384
 410,917
Proceeds from insurance claims —
 —
 3,107
Reimbursements under Tax Increment Financings 22,651
 —
 —
Notes issued to Real Estate and Other Affiliates and third party (3,795) (5,252) (25,000)
Proceeds from repayment of note to Real Estate and Other Affiliates —
 —
 25,000
Distributions from Real Estate and Other Affiliates 1,732
 —
 16,550
Investments in Real Estate and Other Affiliates, net (2,617) (1,138) (11,056)
Maturity of long term investment —
 3,367
 —
Cash used in investing activities (841,771) (315,604) (33,958)

F-7

(in thousands) Year Ended December 31,
Cash Flows from Financing Activities: 2018 2017 2016
Proceeds from mortgages, notes and loans payable 1,172,622
 1,501,290
 535,505
Principal payments on mortgages, notes and loans payable (838,462) (1,350,226) (333,302)
Purchase of treasury stock (58,715) —
 —
Premium paid to redeem 2021 Senior Notes —
 (39,966) —
Special Improvement District bond funds released from (held in) escrow 8,051
 35,678
 11,236
Deferred financing costs and bond issuance costs, net (15,833) (14,188) (5,531)
Taxes paid on stock options exercised and restricted stock vested (3,995) (11,672) (1,231)
Issuance of Management Warrants —
 52,000
 1,000
Acquisition of 1%  partnership interest in 110 North Wacker —
 —
 (8,000)
Gain on unwinding of swaps 16,104
 —
 —
Stock options exercised 11,748
 22,708
 180
Issuance of noncontrolling interests 99,646
 3,586
 —
Preferred dividend payment on behalf of REIT subsidiary —
 (12) —
Cash provided by financing activities 391,166
 199,198
 199,857
Net change in cash, cash equivalents and restricted cash (240,085) 49,161
 405,002
Cash, cash equivalents and restricted cash at beginning of period 964,300
 915,139
 510,137
Cash, cash equivalents and restricted cash at end of period $724,215
 $964,300
 $915,139
Supplemental disclosure of cash flow information      
Interest paid $149,693
 $129,022
 $123,687
Interest capitalized 77,918
 73,207
 64,344
Income taxes paid (refunded), net 70
 (19,381) 11,191
Non-Cash Transactions:      
Special Improvement District bond transfers associated with land sales 10,937
 13,898
 7,662
Accrued interest on construction loan borrowing 7,584
 1,559
 4,386
Acquisition of below market lease intangible 1,903
 —
 —
Exercise of Sponsor and Management Warrants —
 375,581
 —
Capitalized stock compensation 2,434
 1,121
 2,559
Net assets acquired in the acquisition of Las Vegas Aviators —
 31,311
 —
Net assets acquired in the acquisition of Constellation —
 41,744
 —
Net assets acquired in the acquisition of Six Pines —
 —
 30,191
Merriweather Post Pavilion donation      
Developments —
 —
 18,066
Prepaid and other assets —
 —
 (10,597)
Mortgage, notes and loans payable —
 —
 (2,834)
Other liabilities —
 —
 (4,635)

Table of Contents

 

 

 

 

 

 

 

 

 

(in thousands)

 

Year Ended December 31,

Cash Flows from Financing Activities:

 

2017

 

 

2016

 

 

2015

Proceeds from mortgages, notes and loans payable

 

1,501,290

 

 

535,505

 

 

583,822

Principal payments on mortgages, notes and loans payable

 

(1,350,226)

 

 

(333,302)

 

 

(103,808)

Premium paid to redeem 2021 Senior Notes

 

(39,966)

 

 

 —

 

 

 —

Special Improvement District bond funds released from (held in) escrow

 

35,678

 

 

11,236

 

 

(39,241)

Deferred financing costs and bond issuance costs, net

 

(14,188)

 

 

(5,531)

 

 

(4,285)

Taxes paid on stock options exercised and restricted stock vested

 

(11,672)

 

 

(1,231)

 

 

 —

Issuance of management warrants

 

52,000

 

 

1,000

 

 

 —

Acquisition of 1%  partnership interest in 110 North Wacker

 

 —

 

 

(8,000)

 

 

 —

Stock options exercised

 

22,708

 

 

180

 

 

 —

Issuance of noncontrolling interests

 

3,586

 

 

 —

 

 

 —

Preferred dividend payment on behalf of REIT subsidiary

 

(12)

 

 

 —

 

 

 —

Cash provided by financing activities

 

199,198

 

 

199,857

 

 

436,488

Net change in cash and cash equivalents

 

195,549

 

 

220,209

 

 

(115,150)

Cash and cash equivalents at beginning of period

 

665,510

 

 

445,301

 

 

560,451

Cash and cash equivalents at end of period

$

861,059

 

$

665,510

 

$

445,301

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Interest paid

$

129,022

 

$

123,687

 

$

99,296

Interest capitalized

 

73,207

 

 

64,344

 

 

47,221

Income taxes paid (refunded), net

 

(19,381)

 

 

11,191

 

 

3,318

Non-Cash Transactions:

 

 

 

 

 

 

 

 

Special Improvement District bond transfers associated with land sales

 

13,898

 

 

7,662

 

 

18,775

Property developments and redevelopments

 

 —

 

 

 —

 

 

2,530

Accrued interest on construction loan borrowing

 

1,559

 

 

4,386

 

 

2,863

MPC land contributed to Real Estate and Other Affiliates

 

 —

 

 

 —

 

 

15,234

Exercise of Sponsor and Management warrants

 

375,581

 

 

 —

 

 

 —

Special Improvement District bond transfers to Real Estate and Other Affiliates

 

 —

 

 

 —

 

 

(1,518)

Capitalized stock compensation

 

1,121

 

 

2,559

 

 

2,526

Net assets acquired in the acquisition of Las Vegas 51s

 

31,804

 

 

 —

 

 

 —

Net assets acquired in the acquisition of Constellation

 

41,744

 

 

 —

 

 

 —

Net assets acquired in the acquisition of Six Pines

 

 —

 

 

30,191

 

 

 —

Merriweather Post Pavilion donation

 

 

 

 

 

 

 

 

Developments

 

 —

 

 

18,066

 

 

 —

Prepaid and other assets

 

 —

 

 

(10,597)

 

 

 —

Mortgage, notes and loans payable

 

 —

 

 

(2,834)

 

 

 —

Other liabilities

 

 —

 

 

(4,635)

 

 

 —

See Notes to Consolidated Financial Statements.

F-8


F-7

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


General


The Howard Hughes Corporation (“HHC”is a Delaware corporation that was formed on July 1, 2010. Together with its subsidiaries (herein, “HHC” or the “Company”) specializes in the development of, HHC develops Master Planned Communities (“MPCs”), the development of and residential condominiums, and the ownership, management and development or repositioning of real estate assets currently generating revenues, also called operating assets, as well asinvests in other strategic real estate opportunities in the form of entitled and unentitled land and other development rights also called strategic developments. We are a Delaware corporation that was formed on July 1, 2010. Unless the context otherwise requires, references(“Strategic Developments”) and owns, manages and operates real estate assets currently generating revenues (“Operating Assets”), which may be redeveloped or repositioned from time to “we,” “us” and “our” refer to HHC and its subsidiaries.

time.


Management has evaluated all material events occurring subsequent to the date of the Consolidated Financial Statements up to the date and time this Annual Report is filed and concluded there were no events or transactions occurring during this period that required recognition or disclosure in the financial statements other than as mentioned herein.  


Principles of Consolidation and Basis of Presentation


The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), with all intercompany balances eliminated. The presentation includes the accounts of the Company and those entities in which we haveHHC has a controlling financial interest. The Company also consolidates certain variable interest entities (“VIEs”) in accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 810 Consolidation(“ (“ASC 810”). The outside equity interests in certain entities controlled by the Company are reflected in the consolidated financial statementsConsolidated Financial Statements as a noncontrolling interest. Certain amounts in 2016 have been reclassified to conform to the 2017 presentation. Specifically, we have reclassified straight-line rent receivables of $39.1Approximately $103.2 million and $31.5$249.6 million in restricted cash was reclassified from Accounts receivable to Prepaid expenses and other assets, net as ofto Restricted cash on the Consolidated Balance Sheets at December 31, 2017 and 2016, respectively.respectively, to conform to the 2018 presentation as a result of the adoption of Accounting Standards Update ("ASU") 2016-18,

Statement of Cash Flows - Restricted Cash.


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, and 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, revenue recognition accounted for under the percentage of completion method, 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, the fair value of warrants, debt and options granted. Actual results could differ from these and other estimates.


Segments


Segment information is prepared on the same basis that management reviews information for operational decision-making purposes. Management evaluates the performance of each of ourHHC's real estate assets or investments individually and aggregates such properties into segments based on their economic characteristics and types of revenue streams. We operateThe Company operates in three business segments:  (i) MPCs;Operating Assets; (ii) Operating Assets;MPC; and (iii) Strategic Developments.


Investment in Real Estate


Master Planned Community Assets, Land, Buildings and Equipment


Real estate assets are stated at cost less any provisions for impairments. Expenditures for significant improvements to ourthe Company's assets are capitalized. Tenant improvements relating to ourthe Company's operating assets are capitalized and depreciated over the shorter of their economic lives or the lease term. Maintenance and repair costs are charged to expense when incurred.

F-9


F-8

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


We

The Company periodically reviewreviews the estimated useful lives of properties. Depreciation or amortization expense is computed using the straight‑line method based upon the following estimated useful lives:

Asset Type

Years

Location of Asset

Buildings and improvements

107 - 45

40

Buildings and Equipment

Equipment and fixtures

5 - 10

20

Buildings and Equipment

Computer hardware and software, and vehicles

3 - 5

Prepaid expensesBuildings and other assets, net

Equipment

Tenant improvements

Lesser of lease term or useful life

Buildings and Equipment

Leasing costsRelated lease termPrepaid expenses and other assets, net

Leasing costs

Related lease term

Prepaid expenses and other assets, net

From


From time to time, wethe Company may reassess the development strategies for certain buildings and improvements which results in changes to ourthe Company's estimate of their remaining useful lives. As a result, wethe Company recognized an additional $25.5$25.5 million, or $0.59 per diluted share, $1.0 million, or $0.02 per diluted share, and $17.1 million, or $0.40 per diluted share, in depreciation expense during the yearsyear ended December 31, 2017 2016 and 2015, respectively, due to the change in useful lives of these buildings and improvements.

The Company did not recognize additional depreciation expense of significance for the years ended December 31, 2018 and 2016.


Developments


Development costs, which primarily include direct costs related to placing the asset in service associated with specific development properties, are capitalized as part of the property being developed.

Construction and improvement costs incurred in connection with the development of new properties or the redevelopment of existing properties are capitalized before they are placed into service. Costs include planning, engineering, design, direct material, labor and subcontract costs. Real estate taxes, utilities, direct legal and professional fees related to the sale of a specific unit, interest, insurance costs and certain employee costs incurred during construction periods are also capitalized. Capitalization commences when the development activities begin and ceases when a project is completed, put on hold or we decideat the date that the Company decides to not move forward with a project. Capitalized costs related to a project where we haveHHC has determined not to move forward are expensed.expensed if they are not deemed recoverable. Capitalized interest costs are based on qualified expenditures and interest rates in place during the construction period. Demolition costs associated with these redevelopments are expensed as incurred.incurred unless the demolition was included in the Company's development plans and imminent as of the acquisition date of an asset. Once the assets are placed into service, they are depreciated in accordance with ourHHC's policy. In the event that management no longer has the ability or intent to complete a development, the costs previously capitalized are evaluated for impairment.

Our


Developments consist of the following categories:

 

 

 

 

 

 

 

 

 

December 31, 

(In thousands)

    

2017

    

2016

Land and improvements

 

$

202,875

 

$

188,544

Development costs

 

 

675,691

 

 

567,650

Condominium projects

 

 

318,016

 

 

205,786

Total Developments

 

$

1,196,582

 

$

961,980

Investment in

  December 31,
(In thousands) 2018 2017
Land and improvements $456,450
 $202,875
Development costs 829,842
 675,691
Condominium projects 3,776
 318,016
Total Developments $1,290,068
 $1,196,582

Real Estate and Other Affiliates


In the ordinary course of business, we enterHHC enters into partnerships or joint ventures primarily for the development and operation of real estate assets which are referred to as “Real Estate and Other Affiliates.”

We assess our The Company assesses its joint ventures at inception to determine if any meet the qualifications of a variable interest entity (“VIE”). We considerVIE. HHC considers a partnership or joint venture a  VIE if: (a) the total equity investment is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) characteristics of a controlling financial interest are missing (either the ability to make decisions through voting or other rights, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity); or (c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity and/or their rights to receive the expected residual returns of the entity, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few

F-10

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

voting rights. Upon the occurrence of certain events outlined in ASC 810, wethe Company reassess ourits initial determination of whether the partnership or joint venture is a VIE.

We


F-9
Table of Contents
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The Company also performperforms a qualitative assessment of each VIE to determine if we areHHC is the primary beneficiary. Under ASC 810, a company concludes that it is the primary beneficiary and consolidates the VIE if the company has both (a) the power to direct the economically significant activities of the entity and (b) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. The companyCompany considers the contractual agreements that define the ownership structure, distribution of profits and losses, risks, responsibilities, indebtedness, voting rights and board representation of the respective parties in determining if the company is the primary beneficiary. As required by ASC 810, management’s assessment of whether the company is the primary beneficiary of a VIE is continuously performed.

We account


The Company accounts for VIEs for which we areit is not considered to be the primary beneficiary but havehas significant influence using the equity method, and investments in VIEs where we doHHC does not have significant influence on the joint venture’s operating and financial policies using the cost method.

We account The Company accounts for investments in joint ventures where we ownit owns a non‑controllingnoncontrolling interest using the equity method, and investments in joint ventures where we havethe Company has virtually no influence on the joint venture’s operating and financial policies using the cost method. For cost method investments, we recognizethe Company recognizes earnings to the extent of distributions received from such investments.


Under the equity method, the cost of ouran investment is adjusted for ourthe Company's share of the equity in earnings or losses of such Real Estate Affiliates from the date of investment and reduced by distributions received. Generally, the operating agreements with respect to our Real Estate and Other Affiliates provide that assets, liabilities and funding obligations are shared in accordance with ourHHC's ownership percentages. WeThe Company generally also shareshares in the profit and losses, cash flows and other matters relating to ourits Real Estate and Other Affiliates in accordance with ourthe respective ownership percentages. For certain equity method investments, when the preferences on profit sharing on liquidation rights and priorities differ from the ownership percentages, we considerHHC considers ASC 970 and applyapplies the Hypothetical Liquidation Book Value (“HLBV”) method.method. Under this method, we recognizethe Company recognizes income or loss based on the change in ourthe underlying share of the venture’s net assets on a hypothetical liquidation basis as of the reporting date. 


Acquisitions of Properties

We account


The Company accounts for the acquisition of real estate properties in accordance with ASC 805 Business Combinations (“ASC 805”). This methodology requires that assets acquired and liabilities assumed be recorded at their fair values on the date of acquisition.


Costs directly related to asset acquisitions are considered additions to the purchase price and increase the cost basis recorded for the Investment in Real Estate. Acquisition costs related to the acquisition of a business are expensed as incurred.


The fair value of tangible assets of an acquired property (which includes land, buildings and improvements) is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, buildings and improvements based on management’s determination of the fair value of these assets. The “as-if-vacant” values are derived from several sources which incorporate significant unobservable inputs that are classified as Level 3 inputs in the fair value hierarchy and primarily include a discounted cash flow analysis using discount and capitalization rates based on recent comparable market transactions, where available.


The fair value of acquired intangible assets consisting of in-place, above-market and below-market leases is recorded based on a variety of considerations, some of which incorporate significant unobservable inputs that are classified as Level 3 inputs in the fair value hierarchy. In-place lease considerations include, but are not necessarily limited to: (1) the value associated with avoiding the cost of originating the acquired in-place leases (i.e., the market cost to execute a lease, including leasing commissions and tenant improvements); (2) the value associated with lost revenue related to tenant reimbursable operating costs incurred during the assumed lease-up period (i.e., real estate taxes, insurance and certain other operating expenses); and (3) the value associated with lost rental revenue from existing leases during the assumed lease-up period. Above-market and below-market leases are valued at the present value, using a discount rate that reflects the risks associated with the leases acquired, of the difference between (1) the contractual amounts to be paid pursuant to the in-place lease; and (2) management’s estimate of current market lease rates, measured over the remaining non-cancelable lease term, including any below-market renewal option periods.

F-11



F-10

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Impairment

We review our


HHC reviews its long-lived assets (including those held by ourits Real Estate and Other Affiliates) for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized if the carrying amount of an asset is not recoverable and exceeds its fair value. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future economic conditions, such as occupancy, rental rates, capital requirements and sales values that could differ materially from actual results in future periods. If impairment indicators exist and it is expected that undiscounted cash flows generated by the asset are less than its carrying amount, less costs to sell in the case of assets classified as held for sale, an impairment provision is recorded to write-down the carrying amount of the asset to its fair value.


Impairment indicators for ourHHC's assets or projects within our MPC segmentMPCs are assessed separately and include, but are not limited to, significant decreases in sales pace or average selling prices, significant increases in expected land development and construction costs or cancellation rates, and projected losses on expected future sales. MPC assets have extended life cycles that may last 20 to 40 years, or longer, and have few long‑term contractual cash flows. Further, MPC assets generally have minimal to no residual values because of their liquidating characteristics. MPC development periods often occur through several economic cycles. Subjective factors such as the expected timing of property development and sales, optimal development density and sales strategy impact the timing and amount of expected future cash flows and fair value.


Impairment indicators for our Operating Assets segment are assessed separately for each property and include, but are not limited to, significant decreases in net operating income, significant decreases in occupancy, ongoing low occupancy and significant net operating losses.


Impairment indicators for development costs in our Strategic Developments segment are assessed by project and include, but are not limited to, significant changes in projected completion dates, revenues or cash flows, development costs, market factors, significant decreases in comparable property sale prices and feasibility.


The cash flow estimates used both for determining recoverability and estimating fair value are inherently judgmental and reflect current and projected trends in rental, occupancy, pricing, development costs, sales pace and capitalization rates, and estimated holding periods for the applicable assets. Although the estimated fair value of certain assets may be exceeded by the carrying amount, a real estate asset is only considered to be impaired when its carrying amount is not expected to be recovered through estimated future undiscounted cash flows. To the extent an impairment provision is necessary, the excess of the carrying amount of the asset over its estimated fair value is expensed to operations. In addition, the impairment provision is allocated proportionately to adjust the carrying amount of the asset. The adjusted carrying amount, which represents the new cost basis of the asset, is depreciated over the remaining useful life of the asset or, for MPCs, is expensed as a cost of sales when land is sold. Assets that have been impaired will in the future have lower depreciation and cost of sale expenses. The impairment will have no impact on cash flow.


With respect to ourHHC's 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 AffiliateAffiliates is evaluated periodically and as deemed necessary for recoverability and valuation declines that are other‑than‑temporary. If the decrease in value of an Investment in a Real Estate and Other AffiliateAffiliates is deemed to be other‑than‑temporary, ourHHC's investment is reduced to its estimated fair value. In addition to the property‑specific impairment analysis that we performare performed on the underlying assets of the investment, wethe Company also considerconsiders the ownership, distribution preferences, limitations, and rights to sell and repurchase ourits ownership interests.


For the years ended December 31, 2018, 2017 and 2016, and 2015, weHHC evaluated whether impairment indicators existed at any of ourits assets. In most instances, wethe Company concluded no impairment indicators were present. For the year ended December 31, 2016, wethe Company recognized an impairment charge of $35.7 million for Park West during the third quarter of 2016 due to a change in strategy and reduction of the anticipated holding period. For the years ended December 31, 2018 and 2017, and 2015, weHHC concluded that there were no impairments. Please refer to Note 6 –4 - Impairmentin our Consolidated Financial Statements for additional information.



F-11
Table of Contents
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Cash and Cash Equivalents


Cash and Cash Equivalents consist of highly-liquid investments with maturities at date of purchase of three months or less and

F-12

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

include registered money market mutual funds which are invested in United States Treasury bills that are valued at the net asset value of the underlying shares in the funds as of the close of business at the end of each period as well as deposits with major banks throughout the United States. Such deposits are in excess of FDIC limits and are placed with high quality institutions in order to minimize concentration of counterparty credit risk.


Restricted Cash

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

Accounts Receivable, net


Accounts receivable includes tenant rents, tenant recoveries and other receivables.

We record


The Company records allowances against ourits receivables that we considerit considers uncollectible. These allowances are reviewed periodically and are adjusted based on management’s estimate of receivables that will not be realized in subsequent periods. Management exercises judgment in establishing these allowances and considers payment history, current credit status and if the tenant is currently occupying the space in developing these estimates.


The following table summarizes the changes in allowance for doubtful accounts against our accounts receivables:

 

 

 

 

 

 

 

 

 

 

(In thousands)

    

2017

    

2016

    

2015

Balance as of January 1

 

$

7,799

 

$

4,406

 

$

7,619

Provision for doubtful accounts

 

 

2,710

 

 

5,664

 

 

4,030

Write-offs

 

 

(1,209)

 

 

(2,271)

 

 

(7,243)

Balance as of December 31, 

 

$

9,300

 

$

7,799

 

$

4,406

(In thousands) 2018 2017 2016
Balance as of January 1, $9,300
 $7,799
 $4,406
Provision for doubtful accounts 6,078
 2,710
 5,664
Write-offs (4,714) (1,209) (2,271)
Balance as of December 31, $10,664
 $9,300
 $7,799

The increase in the Provision for doubtful accounts for the year ended December 31, 2018 compared to 2017 is primarily due to the reserve for a tenant at Ward Village. For the year ended December 31, 2018 compared to 2017, the increase in Write-offs is primarily due to $3.2 million of increased write-offs for a tenant at Downtown Summerlin and a tenant at the Seaport District. The decrease in the provision for the year ended December 31, 2017 compared to 2016 is primarily due to the reserve for a termination fee for a tenant in 2016 and a delinquent paying tenant in 2016 at another property. The increase in the provision for the year ended December 31, 2016 compared to 2015 is consistent with the growth of the Operating Assets portfolio and increase in the number of tenants. The significant decrease in write-offs in the allowance for doubtful accounts in the year ended December 31, 2016 as compared to 2015 relates primarily to the recovery of uncollectible receivables from a tenant at an operating property that vacated its space.

property.


Notes Receivable, net


Notes receivable, net includes non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, they are recorded at amortized cost less any provision for impairment. We will evaluate ourThe Company evaluates its notes receivable for impairment when it is probable the payment of interest and principal will not be made in accordance with the contractual terms of the note agreement. In the fourth quarter of 2017, we made an investment in a $5.3 million note collateralized by a building in Columbia. The note is carried at cost.


Municipal Utility District Receivables, net


In Houston, Texas, certain development costs are reimbursable through the creation of a Municipal Utility DistrictsDistrict (“MUDs”MUD”), also known as Water Control and Improvement Districts),Districts, which are separate political subdivisions authorized by Article 16, Section 59 of the Texas Constitution and governed by the Texas Commission on Environmental Quality (“TCEQ”). MUDs are formed to provide municipal water, waste water, drainage services, recreational facilities and roads to those areas where they are currently unavailable through the regular city services. Typically, the developer advances funds for the creation of the facilities, which must be designed, bid and constructed in accordance with the City of Houston’s and TCEQ requirements.


The developer initiates the MUD process by filing the applications for the formation of the MUD, and once the applications have been approved, a Board of Directors is elected for the MUD and given the authority to issue ad valorem tax bonds and the authority to tax residents. The MUD Board authorizes and approves all MUD development contracts, and pay requests. MUD bond sale proceeds are used to reimburse the developer for its construction costs, including interest. MUD taxes are used to payAt the debt service ondate the bonds andexpenditures occur, the operating expensesCompany estimates

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the costs it believes will be eligible for reimbursement and recognizes that as MUD receivables. Our MUD receivables are pledged as security to creditors under the debt facilities relating to our Bridgeland and The Woodlands MPCs. MUD receivables are shown net of an allowance of $0.8 million and $0.9 million as of December 31, 2017 and 2016, respectively, in the accompanying Consolidated Balance Sheets. 

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Prepaid Expenses and Other Assets, net


The major components of Prepaid expenses and other assets, net include Straight-line rent assets, various Intangibles, Special Improvement District (“SID”) receivables, tax increment financing (“TIF”) receivables, condominium inventory (and condominium receivables and condominium deposits (asprior to the Adoption Date as discussed below in Revenue Recognition and Related Matters), Special Improvement District (“SID”) receivables and Straight-line rent receivables.

prepaid expenses related to the Company's properties.


SID receivables are amounts due from SID bonds related to ourthe Company's MPCs. Proceeds from SID bonds are held in escrow by a third-party and are used to reimburse usthe Company for a portion of the development costs incurred in our Summerlin MPC.Summerlin. SID receivables are $26.4$18.8 million and $61.6$26.4 million as of December 31, 2018 and 2017, respectively. TIF receivables are amounts which the Company has submitted for reimbursement from Howard County, Maryland, in conjunction with development costs expended on key roads and 2016, respectively. 

infrastructure work within the Merriweather District of Columbia specified per the terms of the county’s TIF legislation and Special Obligation Bonds issued in October 2017. TIF receivables as of December 31, 2018 were $2.5 million.


The Company's intangibles include in-place lease assets and above-market lease assets where HHC is the lessor, below-market ground leases where HHC is the lessee, trademark/tradename intangibles related to MPCs, and other indefinite lived intangibles relating to properties and businesses acquired in previous real estate transactions. The Company amortizes finite-lived intangible assets less any residual value, if applicable, on a straight-line basis over the term of the related lease or the estimated useful life of the asset. Intangible assets with an indefinite useful life, primarily attributable to the acquisition of the joint venture partner’s interest in the Las Vegas Aviators baseball team, are not amortized. The Company reviews for any changes in business that would lead to a reconsideration that the life is finite and should be subject to amortization.All indefinite-lived intangible assets are tested for impairment annually as of October 1 of each year, or sooner if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. The quantitative impairment test for an indefinite-lived intangible asset consists of a comparison of the fair value of the asset to its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, the Company recognizes an impairment loss in an amount equal to that excess, and the adjusted carrying amount of the intangible asset becomes the new accounting basis.

Income Taxes


Deferred income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities using enacted tax rates currently in effect. Deferred income taxes also reflect the impact of operating loss and tax credit carryforwards.


A valuation allowance is provided if we believethe Company believes it is more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance that results from a change in circumstances, and which causes a change in ourthe judgment about the realizability of the related deferred tax asset, is included in the deferred tax provision. There are events or circumstances that could occur in the future that could limit the benefit of deferred tax assets. In addition, we recognizethe Company recognizes and reportreports interest and penalties, if necessary, related to uncertain tax positions within ourthe provision for income tax expense.


In ourHHC's MPCs, gains with respect to land sales, whether for commercial use or for single family residences, are reported for tax purposes either on the modified accrual method or on the percentage-of-completion method. Under the percentage-of-completion method, a gain is recognized for tax purposes as costs are incurred in satisfaction of contractual obligations. The method used for determining the percentage complete for income tax purposes is different than that used for financial statement purposes.


Deferred Expenses, net


Deferred expenses consist principally of leasing costs. Deferred leasing costs are amortized to amortization expense using the straight‑line method over periods that approximate the related lease terms.term. Deferred expenses are shown net of accumulated amortization of $18.9$24.8 million and $14.1$18.9 million as of December 31, 2018 and 2017, and 2016, respectively.



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Deferred financing fees are amortized to interest expense over the terms of the respective financing agreements using the effective interest method (or other methods which approximate the effective interest method).


Marketing and advertising

Strategic Developments, Operating Assets and MPC segments incur various marketing and advertising costs as part of their development, branding, leasing or sales initiatives. These costs include special events, broadcasts, direct mail and online digital and social media programs, and they are expensed as incurred.

Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, marketable securities, escrows, receivables, accounts payable, accrued expenses and other assets and liabilities are reasonable estimates of their fair values because of the short maturities of these instruments.

Derivative Instruments and Hedging Activities

Derivative instruments and hedging activities require management to make judgments on the nature of its derivatives and their effectiveness as hedges. These judgments determine if the changes in fair value of the derivative instruments are reported in the Consolidated Statements of Operations as a component of Net Income or as a component of Comprehensive Income as a component of Equity on the Consolidated Balance Sheets. While management believes its judgments are reasonable, a change in a derivative’s effectiveness as a hedge could materially affect expenses, net income and equity. The Company accounts for the changes in the fair value of an effective hedge in other comprehensive income (loss) and subsequently reclassifies the balance from other comprehensive income (loss) to earnings over the term that the hedged transaction affects earnings. The Company accounts for the changes in the fair value of an ineffective hedge directly in earnings. 

Stock-Based Compensation

At December 31, 2018, the Company has a stock-based employee compensation plan. The Company applies the provisions of ASC 718 Stock Compensation which requires all share‑based payments to employees, including grants of employee stock options, to be recognized in the Consolidated Statements of Operations based on their fair values. All unvested options outstanding under option plans have grant prices equal to the market price of the Company’s stock on the dates of grant. Compensation cost for restricted stock is determined based on fair market value of the Company’s stock at the date of grant. The Company recognizes forfeitures as they occur.

Revenue Recognition and Related Matters


Condominium Rights and Unit Sales


Revenue recognition for contractedfrom the sale of an individual unitsunit 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 amounts are accountedrecorded in Restricted cash until 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 when the following criteria are met: (a) construction is beyond a preliminary stage; (b) buyer is unable to require a refund of its deposit, except for non‑deliverymethod. As of the unit; (c) sufficient unitsadoption of ASU 2014-09, Revenues from Contracts with Customers (Topic 606) and all its related amendments (the “New Revenue Standard”) as of January 1, 2018 (the “Adoption Date”), condominium receivables are sold to assure that it will not revert to a rental property; (d) sales prices are collectible; and (e) aggregate sales proceeds and costs can be reasonably estimated. Those units that do not meet the criteria use the full accrual method or deposit method which defers revenue recognition until the unit is closed. Revenue related to condominium sales will change when the new revenue recognition standard is adopted. See Recently Issued Accounting Pronouncements below. 

Revenue recognized on the percentage-of-completion method is based upon the ratio ofrecorded only in limited circumstances. Real estate project costs incurreddirectly associated with a condominium project, which are HHC's costs to date compared to total estimated project cost.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 ourthe land, site planning, architectural, construction costs,


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and financing costs, andas well as indirect cost allocations. The allocations forinclude 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. ChangesCosts incurred to sell condominium units are evaluated for capitalization in estimated projectaccordance with ASC 340-40, and incremental costs impactof obtaining and fulfilling 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.

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amount of revenue and profit recognized on a percentage of completion basis during the period in which they are determined. Revenue recognized in excess of amounts collected from buyers is classified as Condominium receivables and amounts collected from buyers in excess of revenue recognized to date are classified as Condominium deposits liability.

Master Planned Community Land Sales


Revenues from land sales are recognized usingat 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 accrual method at closing, whenupon transfer of the land title has passed to the buyer, adequate consideration foris 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 within the Company's MPCs, 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 been receivedcompleted the closing of a developed land parcel or superpad and we have no continuing involvement withconsideration is paid in full, but a portion of HHC's performance obligation relating to the property. Revenue thatenhancement of the land is notstill unsatisfied, revenue related to HHC's obligation is recognized underover time. The Company recognizes only the full accrual methodportion 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 recognized whenis presented in Accounts payable and accrued expenses. The Company measures the required obligations are met.

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 through completion.sold. In accordance with ASC 970,970-360-30-1, when developed land is sold, costs are allocated to each sold superpad or lot based upon the relative sales value of each superpad or lot.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, however, the specific identification method is used to determine the cost of sales, including acquired parcels that we dothe Company does not intend to develop or for which development was complete at the date of acquisition.

acquisition, the specific identification method is used to determine the cost of sales.


Minimum Rents and Tenant Recoveries


Revenue associated with ourthe Company's operating assets includes minimum rent, percentage rent in lieu of fixed minimum rent, tenant recoveries and overage rent.


Minimum rent revenues are recognized on a straight‑line basis over the terms of the related leases when collectability is reasonably assured and the tenant has taken possession of, or controls, the physical use of the leased asset. Percentage rent in lieu of fixed minimum rent is recognized as sales are reported from tenants. Minimum rent revenues also include amortization related to above and below‑market tenant leases on acquired properties.


Recoveries from tenants are stipulated in the leases, are generally computed based upon a formula related to real estate taxes, insurance and other real estate operating expenses, and are generally recognized as revenues in the period the related costs are incurred.


Overage rent is recognized on an accrual basis once tenant sales exceed contractual thresholds contained in the lease and is calculated by multiplying the tenant sales in excess of the minimum amount by a percentage defined in the lease.


If the lease provides for tenant improvements, we determinethe Company determines whether the tenant improvements are owned by the tenant or by us.HHC. When we areHHC is the owner of the tenant improvements, rental revenue begins when the improvements are substantially complete. When the tenant is the owner of the tenant improvements, any tenant allowance funded by usthe Company is treated as a lease incentive and amortized as an adjustment to rental revenue over the lease term.

Hospitality Revenues

Revenue from our hospitality properties is primarily related to room rentals and food and beverage sales and is recognized as services are performed.

Builder Price Participation

Builder price participation revenue is based on an agreed-upon percentage of the sales price of homes closed in excess of contractual amounts established when the homebuilder buys lots from us. Revenue related to builder price participation rights is recognized as the underlying homes are sold by homebuilders and fluctuates based upon the number of homes closed that qualify for builder price participation payments.

Other land revenues

Other land revenues is primarily related to easement revenue, ground maintenance revenue and advertising revenue and is recognized as services are performed.

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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 December 31, 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 management fee revenue and revenue from providing exclusive cable and internet services at the Company's MPCs 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 MPCs, 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 revenues

revenue - over time and point in time


Other rental and property revenues is primarily 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. Single tickets and total net sales from retail operations are recognized at a point in time, at the time of sale when payment is received and the customer takes possession of the merchandise. 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. Events-related service revenue is recorded at the time the customer receives the benefit of the service.

Baseball-related and other tenantsponsorships generally cover a season or contractual period of time, and the related revenue is generally recognized on a straight-line basis over time, as time elapses, unless a specific performance obligation exists within the sponsorship contract where point-in-time delivery occurs and recognition at a specific performance or delivery date is more appropriate. Advertising and sponsorship agreements that allow third parties to display their advertising and products at HHC's venues for a certain amount of time relate to a single performance obligation, consideration terms for these services are fixed in each respective agreement, and HHC generally recognizes the related revenue on a straight-line basis over time, as time elapses.

In May 2014, the FASB issued 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. The Company adopted the New Revenue Standard as of the Adoption Date using the modified retrospective transition method, and prior period amounts presented have not been adjusted.


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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. Condominium rights and unit sales revenues were previously required to be recognized under the percentage of completion method. Under the new guidance, revenue and overage rent revenuecost of sales for condominium units sold are not recognized until the construction is complete, the sale closes and is recognizedthe title to the property has transferred to the buyer (point in time). Additionally, certain real estate selling costs, such as servicesthe costs related to the Company's condominium model units, are performed.

Marketingeither expensed immediately or capitalized as property and advertising

Our Strategic Development, Operating Assetsequipment and MPC segments incur various marketingdepreciated over their estimated useful life. The cumulative effect adjustments as of the Adoption Date consist of:


a decrease to Condominium receivables of $154.2 million;
an increase to Buildings and advertising costs as partequipment, net, of their development, branding, leasing or sales initiatives. These costs include special events, broadcasts, direct mail and online digital and social media programs, and they are expensed as incurred.

Fair Value$3.4 million;

an increase to Developments of Financial Instruments

The carrying values of cash and cash equivalents, marketable securities, escrows, receivables, accounts payable, accrued$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 are reasonable estimates of their fair values because$19.6 million; and
an increase to Accumulated deficit of $69.7 million, net of taxes of $19.6 million.

The following Balance Sheet line items were affected as of December 31, 2018, as a result of HHC's adoption of the short maturities of these instruments.

Derivative Instruments and Hedging Activities

Derivative instruments and hedging activities require management to make judgments onNew Revenue Standard:

  December 31, 2018
Consolidated Balance Sheets (in thousands) Recognition Under Previous Guidance Impact of Adoption of ASC Topic 606 Recognition Under ASC Topic 606
Buildings and equipment, net $2,544,982
 $7,089
 $2,552,071
Developments 1,136,320
 153,748
 1,290,068
Deferred expenses, net 90,914
 4,800
 95,714
Prepaid expenses and other assets, net 486,693
 (75,057) 411,636
Deferred tax liabilities 173,282
 (16,094) 157,188
Accounts payable and accrued expenses 613,747
 165,525
 779,272
Accumulated deficit (61,490) (58,851) (120,341)

For the nature of its derivatives and their effectiveness as hedges. These judgments determine ifyear ended December 31, 2018, the changes in fair value of the derivative instruments are reported in thefollowing Consolidated Statements of Operations line items were affected as a componentresult of net income orHHC's adoption of the New Revenue Standard:
  Year ended December 31, 2018
Consolidated Statements of Operations (in thousands) Recognition Under Previous Guidance Impact of Adoption of ASC Topic 606 Recognition Under ASC Topic 606
Condominium rights and unit sales $488,115
 $(130,395) $357,720
Condominium rights and unit cost of sales 410,281
 (147,719) 262,562
Depreciation and amortization 123,671
 2,894
 126,565
Operating income (loss) before other items 93,315
 14,431
 107,746
Provision (benefit) for income taxes 11,943
 3,549
 15,492
Net income (loss) 46,844
 10,882
 57,726
Net income (loss) attributable to common stockholders 46,130
 10,882
 57,012

For the year ended December 31, 2018, the following Consolidated Statements of Comprehensive Income line items were affected as a componentresult of comprehensive income andHHC's adoption of the New Revenue Standard:

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  Year ended December 31, 2018
Consolidated Statements of Comprehensive Income (in thousands) Recognition Under Previous Guidance Impact of Adoption of ASC Topic 606 Recognition Under ASC Topic 606
Net income (loss) $46,844
 $10,882
 $57,726
Comprehensive income (loss) 45,683
 10,882
 56,565
Comprehensive income (loss) attributable to common stockholders 44,969
 10,882
 55,851

The following Consolidated Statements of Cash Flows line items were affected as of December 31, 2018, as a componentresult of equity onHHC's adoption of the Consolidated Balance Sheets. While management believes itsNew Revenue Standard:
  Year ended December 31, 2018
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) $46,844
 $10,882
 $57,726
Depreciation and amortization 123,671
 2,894
 126,565
Deferred income taxes 12,646
 3,549
 16,195
Condominium rights and unit cost of sales 410,281
 (147,719) 262,562
Percentage of completion revenue recognition from sale of condominium rights and unit sales (130,395) 130,395
 —

The New Revenue Standard and related policy updates
As discussed above, 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.


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The following table presents HHC's revenues disaggregated by revenue source:
  Year Ended
(In thousands) December 31, 2018
Revenues  
From contracts with customers  
Recognized at a point in time:  
Condominium rights and unit sales $357,720
Master Planned Communities land sales 261,905
Hospitality revenues 82,037
Builder price participation 27,085
Total revenue from contracts with customers 728,747
   
Recognized at a point in time and/or over time:  
Other land revenues 21,314
Other rental and property revenues 57,168
Total other income 78,482
   
Rental and other income (lease-related revenues)  
Minimum rents 207,315
Tenant recoveries 49,993
Total rental income 257,308
   
Total revenues $1,064,537
   
Revenues by segment  
Master Planned Communities revenues $309,451
Operating Assets revenues 379,124
Strategic Developments revenues 375,962
   
Total revenues $1,064,537

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

Contract Assets and Liabilities

Contract assets are reasonable,the Company's right to consideration in exchange for goods or services that have been transferred to a change in a derivative’s effectivenesscustomer, excluding any amounts presented as a hedge could materially affect expenses, net income and equity. The Company accountsreceivable. Contract liabilities are the Company's obligation to transfer goods or services to a customer for the effective portion of changes in the fair value of a derivative in other comprehensive income (loss) and subsequently reclassifies the effective portion to earnings over the term that the hedged transaction affects earnings. The Company accounts for the ineffective portion of changes in the fair value of a derivative directly in earnings. 

Stock-Based Compensation

At December 31, 2017,which the Company has received consideration.


The beginning and ending balances of contract assets and liabilities and significant activity during the period is as follows:

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  Contract Contract
(In thousands) Assets Liabilities
Balance as of January 1, 2018 $—
 $179,179
Consideration earned during the period (35,834) (308,898)
Consideration received during the period 35,834
 426,215
Balance as of December 31, 2018 $—
 $296,496
Remaining Unsatisfied Performance Obligations

The Company’s remaining unsatisfied performance obligations as of December 31, 2018 represent a stock-based employee compensation plan. We applymeasure of the provisionstotal dollar value of ASC 718 Stock Compensation (“ASC 718”) which requires all share‑based payments to employees, including grants of employee stock options,work to be recognizedperformed on contracts executed and in progress. These performance obligations are associated with contracts that generally are noncancelable by the Consolidated Statementscustomer after 30 days; however, purchasers of Operations based on their fair values. All unvested options outstanding under our option plansHHC's condominium units have grant prices equalthe 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 market priceCompany's remaining unsatisfied performance obligations as of December 31, 2018 is $0.9 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 $511,461
 $29,049
 $402,974

The Company’s stock on the datesremaining 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 grant. Compensation cost for restricted stock is determined based on fair market value of the Company’s stock at the date of grant.

variable consideration which are constrained, such as BPP, as discussed above.


Recently Issued Accounting Pronouncements


The following is a summary of recently issued and other notable accounting pronouncements which relate to ourHHC's business.


In August 2017,October 2018, the FinancialFASB issued ASU 2018-16, Derivatives and Hedging (Topic 815), Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Standards Board’s (“FASB”) issued Accounting Standards Update (“ASU”)Purposes, which added the overnight index swap (OIS) rate based on the Secured Overnight Financing Rate (SOFR) to the list of US benchmark interest rates in ASC 815 that are eligible to be hedged. Entities can designate changes in this rate, which was identified as a preferred alternative to LIBOR, as the hedged risk in hedges of interest rate risk for fixed rate financial instruments. Entities may designate the new benchmark rate in hedging relationships they enter into on or after the date they adopt the new hedging guidance in ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, as further discussed below. Entities such as HHC that have already adopted ASU 2017-12 may begin to apply this guidance in any interim period. The Board also added a project to its agenda to consider transition relief for switching to SOFR OIS from LIBOR for existing hedging relationship as well as other changes to US GAAP that may be needed to facilitate a market-wide transition to SOFR from LIBOR. The Company adopted ASU 2018-16 as of October 1, 2018 and, as a result, will apply this guidance prospectively to new or redesignated hedging relationships entered into on or after this date. The Company does not expect the adoption of this ASU to have a material impact 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 does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

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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 is currently evaluating the impact that the adoption of ASU 2018-13 may have on its consolidated financial statements.
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, 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. We are currently evaluating the potential impactThe Company adopted ASU 2017-12 as of this ASU on our consolidated financial statements.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–StockCompensation-Stock Compensation. Stakeholders observed that the definition of the term “modification” is broad and

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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. OnceThe Company adopted HHCASU 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-GainsIncome - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). The standard defines an “in-substance non-financialnonfinancial 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 accounting for partial sales of non-financialnonfinancial 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. We are currently evaluatingThe Company adopted ASU 2017-05 as of January 1, 2018, and it did not have an impact on the potential impactCompany’s financial position or results of this ASU on our consolidated financial statements.operations.

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. We doThe Company does not expect the adoption of this ASU to have a material impact on ourits consolidated financial statements.

In January 2017, the FASB formally issued, and we early adopted ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition


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Table of a Business, as permitted, on a prospective basis. The standard provides criteria to determine when an integrated set of assets and activities is not a business. The criteria requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. However, to be considered a business, the set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. Under the new guidance, the acquisition of a property with an in-place lease generally will no longer be accounted for as an acquisition of a business, but instead as an asset acquisition, meaning the transaction costs of such an acquisition will now be capitalized instead of expensed. Our adoption did not have a material impact on our accounting for acquisitions.

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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 statementstatements of cash flows. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period, but any adjustments must be reflectedAs required, the Company adopted ASU 2016-18 retrospectively as of the beginning of the fiscal year that includes that interim period. The new standard must be adopted retrospectively. ASU 2016-18 will impact ourJanuary 1, 2018, resulting in presentation of an additional $153.5 million in Cash used in operating activities and $7.1 million in Cash provided by investing activities for the year ended December 31, 2017 and financingan additional $180.2 million in Cash provided by operating activities and $4.6 million in Cash provided by investing activities for the year ended December 31, 2016 related to restrictedchanges in Restricted cash on our consolidated statements of cash flows. 

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control. The standard requires reporting entities to evaluate whether they should consolidate a variable interest entity (“VIE”) in certain situations involving entities under common control. Specifically, the standard changes the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a reporting entity that is a single decision maker of a VIE treats indirect interests in the entityConsolidated Statements of Cash Flows in the respective periods. 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 through related parties that are under common control with the reporting entity. The new standard was effective January 1, 2017, and must be adopted retrospectively. We currently have no VIEs involving entities under common control, and accordingly, adoption of this ASU had no impact on our consolidated financial statements.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 statementstatements 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

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December 15, 2017, with early adoption permitted.2017. The newCompany adopted this standard must be adopted retrospectively.retrospectively, as of January 1, 2018. ASU 2016-15 willhad no impact ouron the Company's presentation of operating, investing and financing activities related to certain cash receipts and payments on ourits 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. We areThe Company is currently evaluating the impact that the adoption of ASU 2016-13 may have on ourits consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting. The standard amends several aspects of accounting for share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. We adopted the ASU as of January 1, 2017, and it did not have a material impact on our accounting for excess tax benefits and tax deficiencies as our stock compensation plans, which permit net-share settlement, had minimal vesting and exercise activity prior to January 1, 2017. The new guidance requires entities to recognize all income tax effects of awards in the Consolidated Statements of Operations when the awards vest or are settled, in contrast to prior guidance wherein such effects are recorded in additional paid-in capital (“APIC”). The amounts recorded in APIC prior to our adoption remain in APIC per the new standard. The new standard also allows an employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. Our plans allow us, at the employee’s request, to withhold shares with a fair value up to the amount of tax owed using the maximum statutory tax rate for the employee’s applicable jurisdiction. We elected to continue to estimate forfeitures as allowed by an election under the new guidance. Our consolidated statements of cash flows for the year ended December 31, 2017, 2016 and 2015 present excess tax benefits as an operating activity and employee taxes paid as a financing activity as required by ASU 2016-09.

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 is codified in Accounting Standards Codification (“ASC”)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 requiresallows for either a modified retrospective or cumulative-effect adjustment transition approach for all leases existing at, or entered into after, the date of initial application. WeThe Company is currently finalizing its assessment of the right-of-use asset and liability values, which are currently evaluatingprimarily comprised of ground and office leases where the impact of adopting ASU 2016-02 on our consolidated financial statements. We anticipate a material increase to our assets and liabilities as weCompany is the lessee, that will be required to capitalize our ground leases, office leases and certain office equipment where we areincluded on the lessee. We will also be considering certain services that are considered non-lease components suchConsolidated Balance Sheets as common area maintenance underof January 1, 2019. Management does not expect the new guidance. Upon adoption of ASC 842 these servicesto have a material impact on the Company's results of operations or cash flows. The Company has reviewed the adoption elections associated with the standard and elected to i) not separate lease and nonlease components, ii) not recognize right of use assets and lease liabilities for leases with terms of less than 12 months, and iii) present right of use assets and lease liabilities as separate line items on the consolidated balance sheets. The Company will apply practical expedients that allow certain aspects of existing leases to be accounted forscoped out of reassessment under ASU 2014-09, Revenues from Contracts with Customers (Topic 606), which is further discussed below.the new standard.


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 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 all ournone of the Company's equity investments do not have readily determinable fair values, the adoption of this ASU does not have an impact on its consolidated financial statements.


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NOTE 2  REAL ESTATE AND OTHER AFFILIATES

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
  December 31, December 31, December 31, December 31, Year Ended December 31,
($ in thousands) 2018 2017 2018 2017 2018 2017 2016
Equity Method Investments              
Master Planned Communities:              
The Summit (a) —
 —
 $72,171
 $45,886
 $36,284
 $23,234
 $43,501
Operating Assets:              
Las Vegas Aviators (b) 100% 100% —
 —
 —
 (152) 12
Constellation (b) (c) 100% 100% (96) —
 (96) (323) (54)
The Metropolitan Downtown Columbia (d) 50% 50% —
 —
 467
 390
 (800)
Millennium Six Pines Apartments (b) 100% 100% —
 —
 —
 —
 44
Stewart Title of Montgomery County, TX 50% 50% 3,920
 3,673
 573
 386
 696
Woodlands Sarofim #1 20% 20% 2,760
 2,696
 94
 53
 182
m.flats/TEN.M (e) 50% 50% 4,701
 —
 (2,478) —
 —
Mr. C Seaport (f) 35% 35% 8,721
 —
 (465) —
 —
Strategic Developments:              
Circle T Ranch and Power Center 50% 50% 5,989
 4,455
 1,534
 —
 10,497
HHMK Development 50% 50% 10
 10
 —
 —
 —
KR Holdings 50% 50% 159
 749
 830
 41
 18
m.flats/TEN.M (e) 50% 50% —
 6,521
 —
 (415) —
Mr. C Seaport (f) 35% 35% —
 8,651
 (240) (643) 106
      98,335
 72,641
 36,503
 22,571
 54,202
Cost method investments     3,952
 3,952
 3,451
 2,927
 2,616
Investment in Real Estate and Other Affiliates     $102,287
 $76,593
 $39,954
 $25,498
 $56,818
(a)Please refer to the discussion below for a description of the joint venture ownership structure.
(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. See Note 3 - Acquisitions and Dispositions for additional information regarding the transaction.
(c)Carrying Value and Share of Earnings/Dividends balances represent immaterial residual activity recorded subsequent to HHC's acquisition of the joint venture partner's interest in 2017.
(d)The Metropolitan Downtown Columbia was in a deficit position of $3.8 million and $2.6 million at December 31, 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 December 31, 2018 and 2017.
(e)Property was transferred from Strategic Developments to Operating Assets during the three months ended March 31, 2018.
(f)The Mr. C Seaport hotel was closed in December 2016 for redevelopment and was transferred to the Strategic Developments segment as of January 1, 2017. The property was transferred from Strategic Developments to Operating Assets during the three months ended September 30, 2018 when the redeveloped hotel opened for business.

As of December 31, 2018, HHC is not the primary beneficiary of any of the joint ventures listed above because it does not have the power to direct the activities that most significantly impact the economic performance of the joint ventures; therefore, the Company reports its interests in accordance with the equity method. At December 31, 2018, the Mr. C Seaport VIE does not have sufficient equity at risk to finance its operations without additional financial support. The aggregate carrying value of Mr. C Seaport is $8.7 million and is classified as Investment in Real Estate and Other Affiliates in the Consolidated Balance Sheets. The Company's maximum exposure to loss as a result of this investment is limited to the aggregate carrying value of the investment as HHC has not provided any guarantees or otherwise made firm commitments to fund amounts on behalf of this VIE. As of December 31, 2018, approximately $201.5 million of indebtedness was secured by the properties owned by HHC's Real Estate and Other Affiliates of which HHC's share was approximately $96.2 million based upon economic ownership. All of this indebtedness is without recourse to HHC.

As of December 31, 2018, HHC is the primary beneficiary of six VIEs which are consolidated in its financial statements. HHC began consolidating 110 North Wacker and its underlying entities in the second quarter of 2018 as further discussed below. The creditors of the consolidated VIEs do not have recourse to the Company, except for 18%, or $9.0 million, of the 110 North Wacker outstanding loan balance. As of December 31, 2018, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $190.6 million and $99.8 million, respectively. As of December 31, 2017, HHC was the primary beneficiary of three VIEs which are consolidated in its financial statements. The creditors of the other three consolidated VIEs do

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not have recourse to the Company. 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, and USAA contributed $64.0 million in cash. 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 and its joint venture partners have also entered into a construction loan agreement further described in Note 7 - Mortgages, Notes and Loans Payable, Net. 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 HLBV 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, HHC and USAA are entitled to distributions pari passu to their profit ownership interests of 90% and 10%, respectively.

Significant activity for Real Estate and Other Affiliates and the related accounting considerations are described below.

The Summit

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 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 their capital contribution, and the Company has no further capital obligations. The gains on the contributed land will be 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 HLBV 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. Please refer to Note 1 - Summary of Significant Accounting Policies for a description of the HLBV method. 

Relevant financial statement information for The Summit is summarized as follows:
  December 31,
(In millions) 2018 2017
Total Assets $218.9
 $166.9
Total Liabilities 144.6
 118.9
Total Equity 74.3
 48.0
  December 31,
(In millions) 2018 2017 2016
Revenues (a) $101.2
 $58.6
 $79.8
Net income 36.3
 23.2
 43.5
Gross Margin 41.9
 31.2
 47.1
(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 2019.

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Circle T Ranch and Power Center

On June 1, 2016, the Westlake Retail Associates joint venture closed on a 72-acre land sale with an affiliate of Charles Schwab Corporation. The year ended December 31, 2016 reflects the recognition of $10.5 million in Equity in earnings from Real Estate and Other Affiliates resulting from the land sale.

m.flats/TEN.M

On October 4, 2013, HHC entered into a joint venture agreement with a local developer, Kettler, Inc., to construct an apartment complex with ground floor retail in Downtown Columbia, Maryland. HHC contributed approximately five acres of land having a book value of $4.0 million to the joint venture and subsequently incurred an additional $3.1 million in capitalized development costs for a total book value contribution of $7.1 million. HHC's land was valued at $23.4 million, or $53,500 per constructed unit. In January 2016, the joint venture closed on an $88.0 million construction loan which is non-recourse to HHC and bears interest at one-month LIBOR plus 2.40% with an initial maturity date of February 2020, with three, one-year extension options. Upon closing of the loan, Kettler, Inc. contributed $16.1 million in cash and $7.3 million was distributed to HHC, of which $6.3 million was reinvested in the project in 2016. HHC accounted for this transaction as a partial sale of the land and recognized a net profit of $0.2 million at December 31, 2016.

Mr. C Seaport  

In January 2016, HHC entered into a joint venture to purchase a hotel located at Mr. C Seaport in the Seaport District of New York with a capital contribution of $6.0 million. HHC advanced a bridge loan of $25.0 million at a 5.0% interest rate to the joint venture at closing to expedite the acquisition, which was repaid in full in June 2016. In the second quarter of 2016, upon completion of a refinancing of the property with a $36.0 million redevelopment loan, HHC made additional capital contributions of $2.3 million in 2016 and $0.7 million in 2017. The Mr. C Seaport hotel was closed in December 2016 for redevelopment and was transferred to the Strategic Developments segment. The hotel was transferred back to the Operating Assets segment in the third quarter of 2018 when redevelopment was complete.

NOTE 3  ACQUISITIONS AND DISPOSITIONS

On September 7, 2018, the Company acquired Lakefront North, two Class-A office buildings previously occupied by CB&I and immediately adjacent to the Hughes Landing development. The Company purchased the four- and six-story buildings, totaling approximately257,000 rentable square feet, as well as 12.9 acres of land for $53.0 million.

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.

In the third and fourth quarters of 2017, the Company closed on the sales of five non-core assets for total proceeds of $52.6 million, resulting in a net gain of $23.1 million, of which $19.2 million and $3.9 million are included in Gains on sales of properties and Gains on sales of operating properties, respectively, on the Consolidated Statements of Operations.

On December 28, 2017 (the “Constellation Acquisition Date”), the Company acquired its joint venture partner’s 50.0% interest in Constellation for $8.0 million in cash and 50% of the joint venture’s liabilities for a total of $16.0 million. Simultaneously with the buyout of this luxury apartment development, HHC replaced the joint venture’s existing $15.8 million construction loan with a $24.2 million mortgage at 4.07% maturing January 1, 2033. As a result of the change in control, HHC recognized a gain of $17.8 million in Gain on acquisition of joint venture partner's interest in conjunction with this acquisition relating to the step-up to fair value of the assets acquired.The following table summarizes the accounting of the purchase price:

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Asset ($ in millions)Acquisition Date Fair Value
Building$38,213
Land3,069
Improvements957
Furniture, fixtures and equipment590
Leases in place714
Other identifiable assets18
Total$43,561

Prior to the acquisition, the Company accounted for its investment in Constellation under the equity method within Investment in Real Estate and Other Affiliates and recognized a loss of $0.3 million in equity in earnings for the year to date period through the Constellation Acquisition Date. Revenues and pre-tax net income from operations included in the Consolidated Statements of Operations from the Constellation Acquisition Date through December 31, 2017 are not material. 

On March 1, 2017 (the “Las Vegas 51s Acquisition Date”), the Company acquired its joint venture partner’s 50.0% interest in the Las Vegas 51s (now known as the Las Vegas Aviators) minor league baseball team for $16.4 million and became the sole owner of this Triple-A baseball team. As a result of the change in control, HHC recognized a gain of $5.4 million in Gain on acquisition of joint venture partner's interest in conjunction with this acquisition relating to the step-up to fair value of the assets acquired. Using the income approach, the allocated fair values included a $0.4 million contingent liability recorded in Accounts payable and accrued expenses per the terms of the purchase agreement relating to a credit for the use of seats in a future stadium for the team, if and when constructed by HHC, $7.9 million in finite-lived intangibles, which have a weighted average amortization period of 11 years, and $24.9 million to indefinite-lived intangibles, primarily related to the franchise relationship agreement, all of which is recorded in Prepaid expenses and other assets, net. Accordingly, the values of assets acquired and liabilities assumed and consolidated into the Company's financial statements total $36.0 million and$3.2 million, respectively, and are included in the Operating Assets segment. Prior to the acquisition, the Company accounted for its investment in the Las Vegas 51s under the equity method within Investment in Real Estate and Other Affiliates. The joint venture had revenues of $1.3 million, and HHC recognized a net loss of $0.2 million included in equity in earnings for the year ended December 31, 2017. Included in the Consolidated Statements of Operations from the Las Vegas 51s Acquisition Date through December 31, 2017 are revenues of $6.8 million and a pre-tax net loss from operations of $0.6 million.

On January 18, 2017, the Company closed on a land sale of approximately 36 acres of a 100-acre property, Elk Grove Collection, for gross sales proceeds of $36.0 million, resulting in a pre-tax gain of $32.2 million. The Company is assessing its plans for the remaining 64 acres of this non-core asset. Previous development plans for the project have been placed on hold as the Company believes it can allocate capital into core assets and achieve a better risk-adjusted return.

On January 6, 2017, the Company acquired the 11.4-acre Macy’s store and parking lot at Landmark Mall in Alexandria, VA, for $22.2 million. The Macy’s parcel is adjacent to the Landmark Mall, which is in the Strategic Developments segment, and is located approximately nine miles from Washington, D.C. The Company plans to redevelop the mall and the Macy’s parcel into an open-air, mixed-use community.

NOTE 4  IMPAIRMENT

The Company reviews its real estate assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment or disposal of long‑lived assets in accordance with ASC 360 requires that if impairment indicators exist and expected undiscounted cash flows generated by the asset over an anticipated holding period are less than its carrying amount, an impairment provision should be recorded to write down the carrying amount of the asset to its fair value. The impairment analysis does not consider the timing of future cash flows and whether the asset is expected to earn an above or below-market rate of return.

Each investment in Real Estate and Other Affiliates as discussed in Note 2 - Real Estate and Other Affiliates is evaluated periodically for recoverability and valuation declines that are other-than-temporary. If the decrease in value of an investment in a Real Estate and Other Affiliates is deemed to be other-than-temporary, the investment in such Real Estate and Other Affiliates is reduced to its estimated fair value.


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THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


No impairment charges were recorded during the years ended December 31, 2018 and 2017. During the third quarter of 2016, the Company implemented a plan to sell Park West, a 249,177 square foot open-air shopping, dining and entertainment destination in Peoria, Arizona and recognized a $35.7 million impairment charge due to a shorter than previously anticipated holding period, adjusting the net carrying value down to its estimated fair market value. On December 29, 2016, the Company sold Park West for proceeds of $32.5 million, recognized a loss of $1.1 million, net of transaction costs, in conjunction with the sale and redeployed the net cash proceeds from this unleveraged asset into its existing developments.

The following table summarizes the Company's provision for impairment:
      Provision for impairment as of December 31,
Impaired Asset Location Method of Determining Fair Value 2018 2017 2016
      (In thousands)
Operating Assets:        
Park West Peoria, AZ Discounted cash flow analysis using capitalization rate of 6.75% $—
 $—
 $35,734

NOTE 5  OTHER ASSETS AND LIABILITIES

Prepaid expenses and other assets

The following table summarizes the significant components of Prepaid expenses and other assets:
  December 31,
(In thousands) 2018 2017
Condominium inventory $198,352
 $—
Straight-line rent 50,493
 39,136
Intangibles 33,955
 34,802
Other 20,364
 4,798
Special Improvement District receivable 18,838
 26,430
Below-market ground leases 18,296
 18,647
Security and escrow deposits 17,670
 16,949
Prepaid expenses 16,981
 11,731
Equipment, net of accumulated depreciation of $8.3 million and $6.9 million, respectively 15,543
 16,955
Tenant incentives and other receivables 8,745
 8,482
In-place leases 6,539
 10,821
TIF receivable 2,470
 14,444
Federal income tax receivable 2,000
 2,198
Above-market tenant leases 1,044
 1,648
Interest rate swap derivative assets 346
 4,470
Condominium receivables —
 158,516
Prepaid expenses and other assets, net $411,636
 $370,027

The $41.6 million net increase primarily relates to a $198.4 million increase in Condominium inventory, offset by a $158.5 million decrease in Condominium receivables, of which $99.6 million relates to the adoption of the New Revenue Standard. Condominium inventory represents units at completed projects for which sales have not yet closed. The increase at December 31, 2018 is primarily attributable to units at Ae'o, which was delivered in December 2018 and has contracted units that will continue to close in early 2019.

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THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Accounts Payable and Accrued Expenses

The following table summarizes the significant components of Accounts payable and accrued expenses:
  December 31,
(In thousands) 2018 2017
Condominium deposit liabilities $263,636
 $55,975
Construction payables 258,749
 217,838
Deferred income 42,734
 53,337
Accrued payroll and other employee liabilities 42,591
 41,236
Accounts payable and accrued expenses 38,748
 35,887
Other 29,283
 34,699
Accrued real estate taxes 26,171
 22,289
Accrued interest 23,080
 20,322
Tenant and other deposits 20,893
 18,937
Straight-line ground rent liability 16,870
 14,944
Interest rate swap derivative liabilities 16,517
 5,961
Above-market ground leases —
 293
Accounts payable and accrued expenses $779,272
 $521,718

The $257.6 million net increase in total Accounts payable and accrued expenses primarily relates to a $207.7 million increase in Condominium deposit liabilities, $99.6 million of which relates to the impact of the adoption of the New Revenue Standard, with the remainder representing new sales, primarily at Ae‘o and ‘A‘ali‘i, and a $40.9 million increase in Construction payables predominantly related to the condominium towers under construction at Ward Village as the projects move toward completion.

NOTE 6  INTANGIBLES

The following table summarizes the Company's intangible assets and liabilities:
  As of December 31, 2018 As of December 31, 2017
  Gross Accumulated Net Gross Accumulated Net
  Asset (Amortization) Carrying Asset (Amortization) Carrying
(In thousands) (Liability) / Accretion Amount (Liability) / Accretion Amount
Intangible Assets:            
Indefinite lived intangibles $25,028
 $—
 $25,028
 $25,028
 $—
 $25,028
Goodwill 1,307
 —
 1,307
 1,307
 —
 1,307
Other intangibles 10,278
 (2,658) 7,620
 10,278
 (1,812) 8,466
             
Tenant leases:            
In-place value 19,966
 (13,427) 6,539
 22,304
 (11,483) 10,821
Above-market 3,313
 (2,269) 1,044
 4,171
 (2,523) 1,648
Below-market (7,326) 3,140
 (4,186) (6,454) 2,688
 (3,766)
             
Ground leases:            
Above-market —
 —
 —
 (293) —
 (293)
Below-market 23,096
 (4,800) 18,296
 23,096
 (4,449) 18,647
             
Total indefinite lived intangibles     $26,335
     $26,335
Total amortizing intangibles     $29,313
     $35,523

The tenant in-place, above-market and below-market lease intangible assets and the above-market and below-market ground lease intangible assets resulted from real estate acquisitions. The in‑place value, above-market value of tenant leases and below-market

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THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


ground lease are included in Prepaid expenses and other assets as detailed in Note 5 - Other Assets and Liabilities and are amortized over periods that approximate the related lease terms. The above-market ground lease and below‑market tenant leases are included in Accounts payable and accrued expenses as detailed in Note 5 - Other Assets and Liabilities and are amortized over the remaining non‑cancelable terms of the respective leases.

Amortization/accretion of these intangible assets and liabilities decreased the Company's pre-tax income, excluding the impact of noncontrolling interest and the provision for income taxes, by $6.0 million in 2018; $8.9 million in 2017 and $6.3 million in 2016.

Future amortization/accretion is estimated to decrease pre-tax income, excluding the impact of noncontrolling interest and the provision for income taxes, by $2.3 million in 2019; $2.3 million in 2020; $1.7 million in 2021; $1.3 million in 2022 and $21.7 million thereafter. 

NOTE 7  MORTGAGES, NOTES AND LOANS PAYABLE, NET

Mortgages, notes and loans payable, net are summarized as follows:
  December 31,
(In thousands) 2018 2017
Fixed-rate debt:    
Unsecured 5.375% Senior Notes $1,000,000
 $1,000,000
Secured mortgages, notes and loans payable 648,707
 499,299
Special Improvement District bonds 15,168
 27,576
Variable-rate debt:    
Mortgages, notes and loans payable (a) 1,551,336
 1,350,914
Unamortized bond issuance costs (6,096) (6,898)
Deferred financing costs (27,902) (12,946)
Total mortgages, notes and loans payable, net $3,181,213
 $2,857,945
(a)As more fully described below, $615.0 million and $428.3 million of variable rate debt has been swapped to a fixed rate for the term of the related debt as of December 31, 2018 and 2017, respectively. An additional $50.0 million of variable rate debt was subject to interest rate collars as of December 31, 2018. As of December 31, 2018 and 2017, $75.0 million and $108.6 million, respectively, of variable rate debt was capped at a maximum interest rate.

The following table presents the Company's mortgages, notes, and loans payable by property, presented within each segment in order of extended maturity date:
        Maximum Carrying Value
  Initial / Extended Interest   Facility December 31, December 31,
($ in thousands) Maturity (a) Rate   Amount 2018 2017
Master Planned Communities          
  
Summerlin South SID Bonds - S124 December 2019 5.95%     $—
 $84
Summerlin South SID Bonds - S128 December 2020 7.30%     213
 390
Summerlin South SID Bonds - S132 December 2020 6.00%     562
 912
The Woodlands Master Credit Facility April 2020 / April 2021 5.25% (b) $180,000
 150,000
 150,000
Bridgeland Credit Facility November 2020 / November 2022 5.96% (b) 65,000
 65,000
 65,000
Summerlin South SID Bonds - S151 June 2025 6.00%     913
 3,763
Summerlin South SID Bonds - S128C December 2030 6.05%     3,211
 4,283
Summerlin South SID Bonds - S159 June 2035 6.00%     —
 139
Summerlin West SID Bonds - S812 October 2035 6.00%     6,709
 15,193
Master Planned Communities Total         226,608
 239,764
Operating Assets            
1725-1735 Hughes Landing Boulevard June 2018 / June 2019 3.14% (b), (c) 143,000
 —
 117,417
The Westin at The Woodlands August 2018 / August 2019 4.14% (b), (c) 57,946
 —
 57,946
Outlet Collection at Riverwalk October 2019 / October 2020 5.00% (b)   47,552
 53,841
Three Hughes Landing December 2019 / December 2020 5.10% (b) 62,000
 55,759
 45,058
Lakeland Village Center at Bridgeland May 2018 / May 2020 3.84% (b), (c) 14,000
 —
 11,470
Embassy Suites at Hughes Landing October 2018 / October 2020 3.99% (b), (c) 37,100
 —
 31,245
The Woodlands Resort & Conference Center February 2019 / February 2021 5.75% (b)   62,500
 65,500

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


One Merriweather February 2020 / February 2021 3.64% (b), (c) 49,929
 —
 42,332
Downtown Summerlin September 2020 / September 2021 4.65% (b)   266,755
 274,088
Two Merriweather October 2020 / October 2021 5.00% (b) 33,156
 24,000
 19,429
HHC 242 Self-Storage October 2019 / October 2021 5.10% (b) 6,658
 6,604
 6,243
HHC 2978 Self-Storage Facility January 2020 / January 2022 5.10% (b) 6,368
 6,042
 5,634
70 Columbia Corporate Center May 2020 / May 2022 3.49% (b), (c)   —
 20,000
One Mall North May 2020 / May 2022 3.74% (b), (c)   —
 14,463
10-60 Columbia Corporate Centers May 2020 / May 2022 3.33% (b), (c)   —
 80,000
20/25 Waterway Avenue May 2022 4.79%     13,395
 13,646
Millennium Waterway Apartments June 2022 3.75%     54,083
 55,095
Aristocrat October 2022 5.90% (b) 31,118
 21,296
 —
Two Summerlin October 2022 5.90% (b) 33,432
 14,431
 —
Lake Woodlands Crossing Retail January 2023 4.30% (b) 15,523
 9,539
 —
Ward Village September 2021 / September 2023 3.82% (b), (c)   —
 238,718
Lakefront North December 2022 / December 2023 4.50% (b) 51,821
 21,120
 —
Senior Secured Credit Facility September 2023 4.61% (f) 700,000
 615,000
 —
9303 New Trails December 2023 4.88%     11,610
 12,003
4 Waterway Square December 2023 4.88%     33,998
 35,151
3831 Technology Forest Drive March 2026 4.50%     21,571
 21,954
Kewalo Basin Harbor September 2027 5.25% (b) 11,562
 3,499
 —
Millennium Six Pines Apartments August 2028 3.39%     42,500
 42,500
3 Waterway Square August 2028 3.94%     49,013
 50,327
One Hughes Landing December 2029 4.30%     52,000
 52,000
Two Hughes Landing December 2030 4.20%     48,000
 48,000
Hockey Ground Lease SIDS December 2020 - December 2030 6.05% - 7.30%
     141
 —
Downtown Summerlin SID Bonds - S128 December 2030 6.05%     2,652
 2,812
One Lakes Edge March 2029 4.50%     69,440
 69,440
Constellation Apartments January 2033 4.07%     24,200
 24,200
Hughes Landing Retail December 2036 3.50%     35,000
 35,000
Columbia Regional Building��February 2037 4.48%     25,000
 25,000
Operating Assets Total         1,636,700
 1,570,512
Strategic Developments            
250 Water Street December 2018 / June 2020 6.00%     129,723
 —
Ke Kilohana December 2019 / December 2020 5.75% (b) 142,656
 96,757
 —
Ae‘o December 2019 / December 2021 5.49% (b) 215,000
 —
 33,603
100 Fellowship Drive May 2022 4.00% (b) 51,426
 35,481
 1
Lakeside Row July 2022 / July 2023 4.75% (b) 34,231
 —
 —
Two Lakes Edge October 2022 / October 2023 4.65% (b) 74,000
 —
 —
110 North Wacker (d) April 2022 / April 2024 5.50% (b), (d) 512,573
 50,000
 18,926
6100 Merriweather September 2022 / September 2024 5.25% (b) 89,844
 —
 —
Columbia Multi-family September 2022 / September 2024 5.25% (b) 85,657
 —
 —
Tanager Apartments October 2021 / October 2024 4.75% (b) 44,100
 —
 —
Other SID Bonds December 2020 - December 2030 6.00% - 7.30%
 (e)   767
 —
Summerlin Ballpark December 2039 4.92%   51,231
 26,766
 —
Strategic Developments Total         339,494
 52,530
Other corporate financing arrangements May 2023 4.33%     12,409
 14,983
Senior Notes March 2025 5.38%     1,000,000
 1,000,000
Unamortized bond issuance costs         (6,096) (6,898)
Deferred financing costs         (27,902) (12,946)
Total mortgages, notes, and loans payable         $3,181,213
 $2,857,945
(a)Maturity dates presented include initial maturity date as well as the extended or final maturity date as contractually stated. Extension periods generally can be exercised at HHC's option at the initial maturity date, subject to customary extension terms that are based on current property performance projections. Such extension terms may include, but are not limited to, minimum debt service coverage, minimum occupancy levels or condominium sales levels, as applicable and other performance criteria. In certain cases due to property performance not meeting covenants, HHC may have to pay down a portion of the loan in order to obtain the extension.
(b)The interest rate presented is based on the one-month LIBOR, three-month LIBOR or Prime rate, as applicable, which was 2.50%, 2.81% and 5.50%, respectively, at December 31, 2018.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(c)Rates and maturities were not changed as the line is retained for prior year presentation purposes only. Property is collateral for the Senior Secured Credit Facility, and their prior balances were repaid upon execution of the Senior Secured Credit Facility agreement on September 18, 2018.
(d)100.0% of the outstanding principal of $50.0 million is subject to fixed interest rate collar contracts for the remaining term of the debt.
(e)
Includes SID Bonds related to Two Summerlin, Aristocrat, Tanager Apartments, and Summerlin Ballpark. Maturity dates range between December 2020 and December 2030 and interest rates range between 6.00% and 7.30%.
(f)100.0% of the outstanding principal of the $615.0 million Term Loan is swapped to a fixed rate equal to 4.61%.

The weighted average interest rate on the Company's mortgages, notes and loans payable, excluding interest rate hedges, was 5.06% and 4.61% as of December 31, 2018 and 2017, respectively.

HHC's mortgages, notes and loans payable are secured by the properties listed in the table above and are non-recourse to HHC except for:
i.$1.0 billion of Senior Notes due 2025;
ii.$266.8 million financing for the Downtown Summerlin development which has an initial maximum recourse of 35% of the outstanding balance, which will reduce to 15% upon achievement of a 1.15:1.0 debt service coverage ratio. The recourse further reduces to 10% upon achievement of a 1.25:1.0 debt service coverage ratio, a 90% occupancy level, and average tenant sales of at least $500.00 per net rentable square foot. As of December 31, 2018, 35% of the outstanding loan balance remains recourse to HHC;
iii.30% or $29.0 million of the Ke Kilohana outstanding loan balance;
iv.50%, or $23.8 million, of the Outlet Collection at Riverwalk outstanding loan balance;
v.100%, or $12.4 million, of the Other Corporate Financing Arrangements outstanding loan balance;
vi.18%, or $9.0 million, of the 110 North Wacker outstanding loan balance;
vii.25% of the Tanager outstanding loan balance;
viii.25% of the Lakeside Row outstanding loan balance;
ix.25% of the Columbia Multi-family outstanding loan balance and;
x.25% of the 6100 Merriweather outstanding loan balance.

The Woodlands Land Development Company has recourse loans totaling $72.3 million for 100 Fellowship Drive, Lakefront North, Three Hughes Landing, The Woodlands Resort & Conference Center and Lake Woodlands Crossing. The debt is not recourse to HHC, however, it is partially recourse to The Woodlands Land Development Company, which is a subsidiary of HHC.

Certain of the Company's loans contain provisions which grant the lender a security interest in the operating cash flow of the property that represents the collateral for the loan. Certain mortgage notes may be prepaid subject to a prepayment penalty equal to a yield maintenance premium, defeasance, or a percentage of the loan balance. As of December 31, 2018, land, buildings and equipment and developments with a net book value basis of $4.2 billion have been pledged as collateral for HHC's mortgages, notes and loans payable. 

The following table summarizes the contractual obligations relating to the Company's mortgages, notes and loans payable as of December 31, 2018 based on extended maturity dates:
  Mortgages, notes
  and loans payable
(In thousands) principal payments
2019 $93,358
2020 357,246
2021 419,697
2022 216,471
2023 696,248
Thereafter 1,432,191
Total principal payments 3,215,211
Deferred financing costs, net and unamortized underwriting fees (33,998)
Total mortgages, notes and loans payable $3,181,213

As of December 31, 2018, the Company was in compliance with all financial covenants included in the debt agreements governing its indebtedness. 


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Master Planned Communities

The Woodlands Master Credit Facility was amended and restated on April 27, 2017 to a $180.0 million maximum facility amount consisting of a $100.0 million term loan and an $80.0 million revolver (together, the "TWL Facility"). The TWL Facility bears interest at one-month LIBOR plus 2.75% with an initial maturity date of April 27, 2020 and a one-year extension option. The TWL Facility and The Woodlands Resort & Conference Center loans are recourse to the entities that directly own The Woodlands operations. The TWL Facility also contains certain covenants that, among other things, require the maintenance of specified financial ratios, limit the incurrence of additional recourse indebtedness at The Woodlands, and limit distributions from The Woodlands to HHC based on a loan‑to‑value test.

The Summerlin MPC uses SID bonds to finance certain common infrastructure improvements. These bonds are issued by the municipalities and are secured by the assessments on the land. The majority of proceeds from each bond issued is held in a construction escrow and disbursed to the Company as infrastructure projects are completed, inspected by the municipalities and approved for reimbursement. Accordingly, the SID bonds have been classified as debt, and the Summerlin MPC pays the debt service on the bonds semi‑annually. As Summerlin sells land, the buyers assume a proportionate share of the bond obligation at closing, and the residential sales contracts provide for the reimbursement of the principal amounts that the Company previously paid with respect to such proportionate share of the bond. In the years ended December 31, 2018 and 2017, no new SID bonds were issued and $10.9 million and $13.9 million in obligations were assumed by buyers, respectively.

Operating Assets

On December 20, 2018, the Company amended the $62.5 million Woodlands Resort & Conference Center financing to extend the initial maturity date to February 28, 2019. The financing bears interest at one-month LIBOR plus 3.25% and has two, one-year extension options.

On December 17, 2018, the Company closed on a $51.8 million construction loan for Lakefront North. The loan bears interest at one-month LIBOR plus 2.00% with an initial maturity of December 17, 2022, and a one-year extension option.

On December 5, 2018, the Company modified and extended the Three Hughes Landing facility. The total commitment was reduced from $65.5 million to $62.0 million. The loan bears interest at one-month LIBOR plus 2.60% with an initial maturity of December 5, 2019, and a one-year extension option. The Company had previously extended the facility on January 5, 2018.

On October 29, 2018, the Company modified and extended the Outlet Collection at Riverwalk loan. The total commitment was reduced from $56.1 million to $47.9 million. The loan bears interest at one-month LIBOR plus 2.50% with two, six-month extension options.

On September 18, 2018, certain wholly-owned subsidiaries (the “Borrowers”) of the Company entered into a $700.0 million loan agreement (the “Loan Agreement”), which provides for a $615.0 million term loan (the “Term Loan”) and an $85.0 million revolver loan (the “Revolver Loan” and together with the Term Loan, the “Senior Secured Credit Facility” or the "Loans"), with Wells Fargo Bank, National Association, as administrative agent and a lender, as well as other lenders. The Loans bear interest at one-month LIBOR plus 1.65% and mature September 18, 2023. The Borrowers have a one-time right to request an increase of $50.0 million in the aggregate amount of the Revolver Loan commitment. Concurrent with the funding of the Term Loan on September 21, 2018, the Company entered into a swap agreement to fix 100% of the outstanding principal of the Term Loan to an overall rate equal to 4.61%.

The Loans are secured by a first priority security interest in certain of the Company’s properties which are directly owned by the Borrowers (the “Mortgaged Properties”). In connection with the Loans, the Company provided the administrative agent, on behalf of the lenders, a non-recourse carve-out guarantee and a hazardous materials indemnity agreement.

The Borrowers drew $615.0 million under the Term Loan at closing. All the net proceeds after costs and fees related to the Loans were used to repay all outstanding indebtedness encumbering the Mortgaged Properties, including debt held by lenders not party to the Loan Agreement. The total debt repaid was approximately $608.7 million and was associated with the following Mortgaged Properties: 10-60 Columbia Corporate Centers, 70 Columbia Corporate Center, One Mall North, One Merriweather, Embassy Suites at Hughes Landing, The Westin at The Woodlands, 1725-1735 Hughes Landing Boulevard and Ward Village. The Mortgaged Properties also include Creekside Village Green and 1701 Lake Robbins. The Company has not made any draws under the Revolver Loan.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The Company evaluated the terms of the Loans to determine if the new debt instruments should be accounted for as modifications or extinguishments on a lender-by-lender basis, per Mortgaged Property subject to refinancing. The majority of the transaction was accounted for as a debt modification. As a result, the Company capitalized $8.6 million in related fees and costs and recognized a $0.7 million loss on debt extinguishment and modification, which was primarily related to third-party fees incurred in procuring the Loans. The $0.7 million loss is included in Interest expense in the Consolidated Statements of Operations.

On April 13, 2018, the Company repaid the $11.8 million loan for Lakeland Village Center at Bridgeland.

On January 25, 2018, the Company closed on a $15.5 million construction loan for Lake Woodlands Crossing Retail. The loan bears interest at one-month LIBOR plus 1.80%, matures on January 25, 2023, and has an initial maximum recourse of 50% of the outstanding balance prior to completion of construction, at which point the repayment guarantee will reduce to 15% provided the project is 90% leased.

On December 28, 2017, the Company closed on a $24.2 million non‑recourse financing for Constellation. The loan bears interest at 4.07% and matures on January 1, 2033.

On October 19, 2017, the Company closed on a construction loan totaling $64.6 million, of which $31.1 million will be used for development of Aristocrat and $33.4 million will be used for development of Two Summerlin. The loan bears interest at Wall Street Journal Prime plus 0.40% with a maturity of October 19, 2022.

On September 13, 2017, the Company modified and extended its $311.8 million Downtown Summerlin facility with a $30.0 million pay down. The modified loan has a maximum facility of $275.9 million and bears interest at one-month LIBOR plus 2.15% with a maturity of September 13, 2020 and a one-year extension option.

On August 11, 2017, the Company closed on a construction loan totaling $11.6 million for Kewalo Basin Harbor. The loan bears interest at one-month LIBOR plus 2.75% with a maturity of September 1, 2027.

On January 19, 2017, the Company closed on a non‑recourse financing totaling $25.0 million replacing the $23.0 million construction loan on the Columbia Regional Building. The loan bears interest at 4.48% and matures on February 11, 2037.

On February 23, 2017, the Company refinanced the One Lakes Edge construction loan with a 12-year Fannie Mae loan. The new loan amount is $69.4 million with a fixed rate of 4.50% . The loan is interest-only for four years then begins amortizing on a 30-year basis.

Strategic Developments

In December 2018, the Company repaid the $174.0 million outstanding balance on the construction loan relating to Ae‘o. Three repayments were made in conjunction with closing on the sales of units at the property.

On October 11, 2018, the Company closed on a $74.0 million construction loan for Two Lakes Edge, bearing interest at one-month LIBOR plus 2.15% with an initial maturity date of October 11, 2022 and a one-year extension option.

On September 11, 2018, the Company closed on an $89.8 million construction loan for 6100 Merriweather and an $85.7 million construction loan for Columbia Multi-family. Each loan bears interest at one-month LIBOR plus 2.75%, has an initial maturity date of September 11, 2022, has two, one-year extension options and is cross-collateralized.

On July 27, 2018, the Company closed on a $34.2 million construction loan for Lakeside Row, bearing interest at one-month LIBOR plus 2.25% with an initial maturity date of July 27, 2022 and a one-year extension option.

On July 20, 2018, the Company closed on a $51.2 million construction note for Summerlin Ballpark, bearing interest at 4.92% per annum and maturing on December 15, 2039. The note is secured by the ballpark and by the proceeds of the Naming Rights and Marketing agreement between the Company and the Las Vegas Convention and Visitors Authority, which provides an annual payment of $4.0 million to the Company in each of the next 20 years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



On June 8, 2018, the Company closed on a $129.7 million note payable for 250 Water Street. 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. The Company exercised its first extension option on December 3, 2018.

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 guaranteed approximately $89.0 million. The loan initially bears interest at one-month 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 September 25, 2018, the Company and its joint venture partners closed on an amendment to increase the $494.5 million construction loan to $512.6 million, modify the lenders and commitments included in the loan syndication and increase the Company's guarantee to approximately $92.3 million.

On March 26, 2018, the Company closed on a $44.1 million construction loan for Tanager Apartments, bearing interest at one-month LIBOR plus 2.25% with an initial maturity date of October 1, 2021 and a three-year extension option.

On January 19, 2018, the Company paid off the $18.9 million mortgage loan for 110 North Wacker and settled the related swap liability of $0.3 million.

On October 27, 2017, the Company repaid the $195.3 million outstanding on the construction loan relating to Waiea and Anaha in conjunction with closing on the sales of units at Anaha.

On May 31, 2017, the Company closed on a $51.4 million construction loan for 100 Fellowship Drive. The loan bears interest at one-month LIBOR plus 1.50% with a maturity of May 31, 2022.

Corporate

On March 16, 2017, the Company issued $800.0 million in aggregate principal amount of 5.375% senior notes due March 15, 2025 (the “2025 Notes”) and completed a tender offer and consent solicitation for any and all of its $750.0 million existing 6.875% senior notes due October 1, 2021. The Company recognized a loss on redemption of $46.4 million in conjunction with this transaction. On June 12, 2017, the Company issued an additional $200.0 million of the 2025 Notes at a premium to par of 2.25%. Interest on the 2025 Notes is paid semi-annually, on March 15th and September 15th of each year, beginning on September 15, 2017. At any time prior to March 15, 2020, the Company may redeem all or a portion of the 2025 Notes at a redemption price equal to 100% of the principal plus a “make-whole” declining call premium. At any time prior to March 15, 2020, the Company may also redeem up to 35% of the 2025 Notes at a price of 105.38% with net cash proceeds of certain equity offerings, plus accrued and unpaid interest. The 2025 Notes contain customary terms and covenants and have no financial maintenance covenants.

NOTE 8  FAIR VALUE

ASC 820, Fair Value Measurement, emphasizes that fair value is a market-based measurement that should be determined using assumptions market participants would use in pricing an asset or liability. The standard establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring assets or liabilities at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the asset or liability. Assets or liabilities with readily available active quoted prices, or for which fair value can be measured from actively quoted prices, generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

The following table presents the fair value measurement hierarchy levels required under ASC 820 for each of the Company's assets and liabilities that are measured at fair value on a recurring basis:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


  December 31, 2018 December 31, 2017
  Fair Value Measurements Using Fair Value Measurements Using
(In thousands) Total Quoted Prices
in Active
Markets for
Identical 
Assets
(Level 1)		 Significant
Other
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)		 Total Quoted Prices
in Active
Markets for
Identical 
Assets
(Level 1)		 Significant
Other
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)
Assets:                
Cash equivalents $—
 $—
 $—
 $—
 $50,135
 $50,135
 $—
 $—
Interest rate swap derivative assets 346
 —
 346
 —
 4,470
 —
 4,470
 —
Liabilities:                
Interest rate swap derivative liabilities 16,517
 —
 16,517
 —
 5,961
 —
 5,961
 —

Cash equivalents consist of registered money market mutual funds which are invested in United States Treasury bills that are valued at the net asset value of the underlying shares in the funds as of the close of business at the end of each period.

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates derived from observable market interest rate curves.
As discussed further in Note 13 - Warrants, as of December 31, 2018, all Sponsor Warrants and Management Warrants had been exercised. The following table presents a rollforward of the valuation of the Company's Warrant liabilities:
(In thousands) 2018 2017 2016
Balance as of January 1, $—
 $332,170
 $307,760
Warrant liability loss (gain) (a) —
 43,443
 24,410
Exercises of Sponsor and Management Warrants —
 (375,613) —
Balance as of December 31, $—
 $—
 $332,170
(a)For 2017, this amount represents losses recognized relating to each warrant prior to the respective exercise date. For 2016, represents unrealized losses recorded for outstanding warrants at the end of the period. Changes in the fair value of the Sponsor Warrants and Management Warrants prior to exercise were recognized in net income as a warrant liability gain or loss.

The valuation of warrants was based on an option pricing valuation model, utilizing inputs which were classified as Level 3 due to the unavailability of comparable market data. The inputs to the valuation model included the fair value of stock related to the warrants, exercise price and term of the warrants, expected volatility, risk-free interest rate, dividend yield and, as appropriate, a discount for lack of marketability. Generally, an increase in expected volatility would increase the fair value of the liability. The impact of the volatility on fair value diminished as the market value of the stock increased above the strike price. As the period of restriction lapsed, the marketability discount reduced to zero and increased the fair value of the warrants.

There were no significant unobservable inputs used in the fair value measurement of the Company's warrant liabilities as of December 31, 2017.

The estimated fair values of HHC's financial instruments that are not measured at fair value on a recurring basis are as follows:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


    December 31, 2018 December 31, 2017
(In thousands) Fair Value
Hierarchy		 Carrying
Amount		 Estimated
Fair Value		 Carrying
Amount		 Estimated
Fair Value
Assets:          
Cash and Restricted cash Level 1 $724,215
 $724,215
 $914,165
 $914,165
Accounts receivable, net (a) Level 3 12,589
 12,589
 13,041
 13,041
Notes receivable, net (b) Level 3 4,694
 4,694
 5,864
 5,864
Liabilities:          
Fixed-rate debt (c) Level 2 1,663,875
 1,608,635
 1,526,875
 1,554,766
Variable-rate debt (c) Level 2 1,551,336
 1,551,336
 1,350,914
 1,350,914
(a)Accounts receivable, net is shown net of an allowance of $10.7 million and $9.3 million at December 31, 2018 and 2017, respectively.
(b)Notes receivable, net is shown net of an allowance of $0.1 million at December 31, 2018 and 2017.
(c)Excludes related unamortized financing costs.

The fair value of the Company's 2025 Notes, included in fixed-rate debt in the table above, is based upon the trade price closest to the end of the period presented. The fair value of other fixed-rate debt in the table above (please refer to Note 7 - Mortgages, Notes and Loans Payable, Net), was estimated based on a discounted future cash payment model, which includes risk premiums and a risk free rate derived from the current LIBOR or U.S. Treasury obligation interest rates. The discount rates reflect the Company's judgment as to what the approximate current lending rates for loans or groups of loans with similar maturities and credit quality would be if credit markets are operating efficiently and assuming that the debt is outstanding through maturity.

The carrying amounts for the Company's variable-rate debt approximate fair value given that the interest rates are variable and adjust with current market rates for instruments with similar risks and maturities.

The carrying amounts of cash and cash equivalents and accounts receivable approximate fair value because of the short‑term maturity of these instruments. 

NOTE 9  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to interest rate risk related to its variable interest rate debt, and it manages this risk by utilizing interest rate derivatives. To add stability to interest costs by reducing the Company's exposure to interest rate movements, the Company uses interest rate swaps, collars and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company's fixed‑rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate collars designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above an established ceiling rate and payment of variable amounts to a counterparty if interest rates fall below an established floor rate, in exchange for an up‑front premium. No payments or receipts are exchanged on interest rate collar contracts unless interest rates rise above or fall below the established ceiling and floor rates. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up‑front premium. The Company's interest rate caps are not currently designated as hedges, and therefore, any gain or loss is recognized in current period earnings. These derivatives are recorded on a gross basis at fair value on the balance sheet.
Assessments of hedge effectiveness are performed quarterly using regression analysis. The change in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in Accumulated Other Comprehensive Income (“AOCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings within the same income statement line item being hedged. During the year ended December 31, 2017, the ineffective portion recorded in Other (loss) income, net was $0.7 million and during the year ended December 31, 2016, the ineffective portion recorded in Other (loss) income, net was insignificant. As discussed in Note 1 - Summary of Significant Accounting Policies, the Company reclassified ineffectiveness recorded in 2017 and prior to Accumulated deficit as of January 1, 2018, upon adoption of ASU 2017-12.
HHC is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company evaluates counterparty credit risk through monitoring the creditworthiness of counterparties, which includes review of debt ratings and financial performance. To mitigate its credit risk, the Company enters into agreements with counterparties that are considered credit-worthy, such as large financial institutions with favorable credit ratings. As of December 31, 2018 and 2017, there were no events of default related to the interest rate swaps.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


If the derivative contracts are terminated prior to their maturity, the amounts previously recorded in AOCI are recognized into earnings over the period that the hedged transaction impacts earnings. If the hedging relationship is discontinued because it is probable that the forecasted transaction will not occur in accordance with the original strategy, any related amounts previously recorded in AOCI are recognized in earnings immediately. During the year ended December 31, 2018, the Company recorded $1.2 million reduction in Interest expense related to missed forecasts and the amortization of terminated swaps, as discussed below.
During the year ended December 31, 2018, the Company settled four interest rate swap agreements with notional amounts of $18.9 million, $250.0 million, $40.0 million and $119.4 million, all designated as cash flow hedges of interest rate variability, and received total payments of $15.8 million, net of a termination fee of $0.3 million. The Company has deferred the effective portion of the fair value changes of three interest rate swap agreements in Accumulated other comprehensive income (loss) on the accompanying Consolidated Balance Sheets and will recognize the impact as a component of interest expense, net, over the next 9.0, 1.3 and 2.7 years, which are the original forecasted periods.
Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable‑rate debt. Over the next 12 months, HHC estimates that an additional $0.9 million of net gains will be reclassified to interest expense.
The following table summarizes certain terms of the Company's derivative contracts:
        Fixed     Fair Value Asset (Liability)
      Notional Interest Effective Maturity December 31, December 31,
(In thousands)   Balance Sheet Location Amount Rate (a) Date Date 2018 2017
Derivative instruments not designated as hedging instruments:            
Interest Rate Cap (b) Prepaid expenses and other assets, net $75,000
 5.00% 9/1/2017 8/31/2019 $—
 $—
Interest Rate Cap (b) Prepaid expenses and other assets, net 230,000
 2.50% 12/22/2016 12/23/2019 333
 164
Derivative instruments designated as hedging instruments:            
Interest Rate Swap (c) Accounts payable and accrued expenses 18,926
 2.96% 5/10/2011 10/31/2019 —
 (286)
Interest Rate Swap (d) Prepaid expenses and other assets, net 40,000
 1.66% 5/6/2015 5/1/2020 —
 299
Interest Rate Swap (d) Prepaid expenses and other assets, net 119,359
 1.14% 10/3/2016 9/12/2021 —
 4,007
Interest Rate Swap (e) Accounts payable and accrued expenses 50,000
 2.65% 12/31/2017 12/31/2027 —
 (1,124)
Interest Rate Swap (e) Accounts payable and accrued expenses 100,000
 2.68% 12/31/2017 12/31/2027 —
 (2,509)
Interest Rate Swap (e) Accounts payable and accrued expenses 100,000
 2.62% 12/31/2017 12/31/2027 —
 (2,042)
Interest Rate Collar (f) Prepaid expenses and other assets, net 51,592
 1.50% - 2.50%
 7/1/2018 5/1/2019 13
 —
Interest Rate Collar (f) Accounts payable and accrued expenses 193,967
 2.00% - 3.00%
 5/1/2019 5/1/2020 (37) —
Interest Rate Collar (f) Accounts payable and accrued expenses 354,217
 2.25% - 3.25%
 5/1/2020 5/1/2021 (730) —
Interest Rate Collar (f) Accounts payable and accrued expenses 381,404
 2.75% - 3.50%
 5/1/2021 4/30/2022 (1,969) —
Interest Rate Swap (g) Accounts payable and accrued expenses 615,000
 2.96% 9/21/2018 9/18/2023 (13,781) —
Total fair value derivative assets             $346
 $4,470
Total fair value derivative liabilities             $(16,517) $(5,961)
(a)These rates represent the strike rate on HHC's interest swaps, caps and collars.
(b)Interest (income) expense of $(0.2) million is included in the Consolidated Statements of Operations for the year ended December 31, 2018 related to these contracts.
(c)
On January 19, 2018, the Company repaid in full the $18.9 million mortgage loan for 110 North Wacker and settled the related swap liability of $0.3million.
(d)
On September 21, 2018, the Company settled $40.0millionand $119.4millionin interest rate swaps.
(e)
On May 17, 2018, the Company settled $250.0million in forward starting swaps.
(f)On May 17, 2018 and May 18, 2018, the Company entered into interest rate collars which are designated as cash flow hedges.
(g)
Concurrent with the funding of the new $615.0millionTerm Loan discussed in Note 7 - Mortgages, Notes and Loans Payable, Net, on September 21, 2018, the Company entered into this interest rate swap which is designated as a cash flow hedge.

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THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The tables below present the effect of the Company's derivative financial instruments on the Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016:
  Amount of Gain (Loss) Recognized
  in AOCI on Derivative
  December 31,
Derivatives in Cash Flow Hedging Relationships 2018 2017 2016
Interest rate derivatives $2,090
 $(726) $831
  Amount of Gain (Loss) Reclassified from
  AOCI into Operations
  December 31,
Location of Loss Reclassified from AOCI into Operations 2018 2017 2016
Interest expense $1,135
 $(905) $(1,364)

  Total Interest Expense Presented
  in the Results of Operations in which
  the Effects of Cash Flow Hedges are Recorded
  December 31,
Interest Expense Presented in Results of Operations 2018 2017 2016
Interest expense $82,028
 $64,568
 $65,724

Credit-risk-related Contingent Features

The Company has agreements with certain derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has agreements with certain derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness.

As of December 31, 2018 and 2017, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $18.2 million and $6.0 million, respectively. As of December 31, 2018, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at December 31, 2018, it could have been required to settle its obligations under the agreements at their termination value of $18.2 million.

NOTE 10  COMMITMENTS AND CONTINGENCIES

In the normal course of business, from time to time, the Company is involved in legal proceedings relating to the ownership and operations of its properties. In addition, on June 14, 2018, the Company was served with a petition involving approximately 500 individuals or entities who claim that their properties, located in the Timarron Park neighborhood of The Woodlands, were damaged by flood waters that resulted from the unprecedented rainfall that occurred throughout Harris County and surrounding areas during Hurricane Harvey in August 2017. The complaint was filed in State Court in Harris County of the State of Texas. In general, the plaintiffs allege negligence in the development of Timarron Park and violations of Texas’ Deceptive Trade Practices Act and name as defendants The Howard Hughes Corporation, The Woodlands Land Development Company and two unaffiliated parties involved in the planning and engineering of Timarron Park. The Company intends to vigorously defend the matter as it believes that these claims are baseless and without merit and that it has substantial legal and factual defenses to the claims and allegations contained in the complaint. Based upon the present status of this matter, the Company does not believe it is probable that a loss will be incurred. Accordingly, the Company has not recorded a charge as a result of this action.
In management’s opinion, the liabilities, if any, that may ultimately result from normal course of business legal actions, and the Woodlands legal proceeding discussed above, are not expected to have an impacta material effect on ourHHC's consolidated financial statements.

In May 2014, the FASB and International Accounting Standards Board issued ASU 2014-09. The standard’s core principle is that a company will recognize revenue when it transfers promised goodsposition, results of operations 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. The ASU requires companies to identify performance obligations in the contract, estimate the amount of variable consideration to include in the transaction price and allocate the transaction price to each separate performance obligation. The effective date of this standard is for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. We have

liquidity.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


concluded

As of December 31, 2018 and December 31, 2017, the Company had outstanding letters of credit and a guarantee totaling $15.3 million and $13.8 million and surety bonds totaling $101.2 million and $88.5 million, respectively. These letters of credit, guarantee and bonds were issued primarily in connection with insurance requirements, special real estate assessments and construction obligations.

The Company leases land or buildings at certain properties from third parties. Rental payments are expensed as incurred and, to the extent applicable, have been straight-lined over the term of the lease. Contractual rental expense, including participation rent, was $9.7 million, $8.6 million and $8.4 million for the years ended December 31, 2018, 2017 and 2016, respectively. The amortization of above and below‑market ground leases and straight‑line rents included in the contractual rent amount was not significant.

HHC's obligations for minimum rentals under non-cancelable operating leases are as follows:
            Subsequent/  
(In thousands) 2019 2020 2021 2022 2023 Other Total
Ground lease and other leasing commitments $8,199
 $7,871
 $7,380
 $6,713
 $8,380
 $291,611
 $330,154
The Company has entered into guarantee agreements as part of certain development projects. In conjunction with the execution of the ground lease for the Seaport District NYC, the Company executed a completion guarantee for the redevelopment of Seaport District NYC - Pier 17 and Seaport District NYC - Tin Building. As part of the Funding Agreement for the Downtown Columbia Redevelopment District TIF bonds, one of HHC's wholly-owned subsidiaries has agreed to complete certain defined public improvements and to indemnify Howard County, Maryland for certain matters. The Company has guaranteed these obligations, with a limit of $1.0 million, expiring on October 31, 2020. To the extent that after adoption we will no longer be ableincreases in taxes do not cover debt service payments on the TIF bonds, HHC’s wholly-owned subsidiary is obligated to recognize revenuepay special taxes. The Company evaluates the likelihood of future performance under these guarantees and did not record an obligation as of December 31, 2018 and December 31, 2017.


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THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11  STOCK BASED PLANS

On November 9, 2010, HHC adopted The Howard Hughes Corporation Amended and Restated 2010 Incentive Plan (the “Incentive Plan”). Pursuant to the Incentive Plan, 3,698,050 shares of HHC common stock were reserved for condominium projectsissuance. New shares are issued on exercise of options. The Incentive Plan provides for grants of options, stock appreciation rights, restricted stock, other stock‑based awards and market‑based compensation. Directors, employees and consultants of HHC and its subsidiaries and affiliates are eligible for awards. The Incentive Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”). Option grant amounts are awarded by the Committee.

Compensation costs for share‑based payment arrangements totaled $12.1 million, $8.4 million and $9.4 million, of which $2.4 million, $1.1 million and $2.6 million were capitalized for 2018, 2017, and 2016, respectively. As of December 31, 2018, there were a maximum of 2,199,894 shares available for future grant under the Company's various stock plans.
Stock Options

The following tables summarize stock option activity:
      Weighted Average  
      Remaining Aggregate
    Weighted Average Contractual Term Intrinsic
  Shares Exercise Price (In years) Value
Stock options outstanding at January 1, 2016 1,086,040
 $77.11
    
Granted 162,100
 109.42
    
Exercised (3,000) 60.33
    
Forfeited (68,500) 122.93
    
Expired —
 —
    
Stock options outstanding at December 31, 2016 1,176,640
 $78.87
    
         
Granted 58,000
 $119.85
    
Exercised (395,482) 58.81
    
Forfeited (54,976) 105.17
    
Expired (1,000) 57.77
    
Stock options outstanding at December 31, 2017 783,182
 $90.22
    
         
Granted 265,000
 $124.56
    
Exercised (183,592) 65.72
    
Forfeited (46,592) 121.34
    
Expired —
 —
    
Stock options outstanding at December 31, 2018 817,998
 $105.06
 6.3 8,608,841
         
Stock options exercisable at December 31, 2018 268,298
 $67.82
 3.0 8,524,841
Stock options vested and expected to vest at December 31, 2018 797,320
 $104.61
 6.3 8,607,055

Information related to stock options outstanding as of December 31, 2018 is summarized below:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


        Weighted Average  
        Remaining  
    Number Weighted Average Contractual Term Number
Range of Exercise Prices Outstanding Exercise Price (In years) Exercisable
$46.46
 $55.82
 11,100
 $49.93
 2.8 11,100
$57.77
 $60.33
 162,401
 57.99
 2.3 162,401
$61.64
 $69.75
 49,129
 66.65
 3.4 49,129
$81.80
 $110.50
 68,960
 101.69
 6.2 38,960
$112.64
 $151.72
 526,408
 124.77
 8.0 6,708
    817,998
 $105.06
 6.3 268,298

The fair value on the grant date and the significant assumptions used in the Black‑Scholes option‑pricing model are as follows:
  As of December 31,
  2018 2017 2016
Grant date fair value $48.27
 $34.51
 $36.55
Expected life of options (in years) 8.4
 8.4
 7.4
Risk-free interest rate 2.7% 2.2% 1.8%
Expected volatility 24.7% 22.8% 33.1%
Expected annual dividend per share —
 —
 —

The computation of the expected volatility assumption used in the Black‑Scholes calculations is based on the median asset volatility of comparable companies as of each of the grant dates. 

Generally, options granted vest over requisite service periods or on a percentage of completion basis. Adoptiongraduated scale based on total shareholder returns, expire ten years after the grant date and generally do not become exercisable until their restrictions on exercise lapse after the five-year anniversary of the ASU will also impactgrant date. For options that vest based on shareholder returns, the timinggrant date fair values are calculated using a Monte-Carlo approach which simulates the Company's stock price on the corresponding vesting dates before applying the Black-Scholes model.

The balance of recognitionunamortized stock option expense as of December 31, 2018 is $15.3 million, which is expected to be recognized over a weighted‑average period of 5.1 years. Net of amounts capitalized relating to the Company's developments, $2.2 million, $1.6 million and classification$2.9 million of expense associated with stock options are included in General and administrative expense in the accompanying Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016, respectively.

Restricted Stock

Restricted stock awards issued under the Incentive Plan provide that shares awarded may not be sold or otherwise transferred until restrictions have lapsed as established by the Committee. In addition to the granting of restricted stock to certain real estate selling costs, suchmembers of management, the Company awards restricted stock to non‑employee directors as part of their annual retainer. The management awards vest over five years, and the costsrestriction on the non‑employee director shares lapses on the date of the Company's annual meeting of shareholders, or June 1st of the award year, whichever is earlier.

Generally, upon termination of employment or directorship, restricted stock units and restricted shares which have not vested are forfeited.

The following table summarizes restricted stock activity:

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THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


  Weighted Average
  Grant Date
  Shares Fair Value
Restricted stock outstanding at January 1, 2016 242,556
 $100.15
Granted 136,198
 67.80
Vested (37,670) 83.47
Forfeited (51,972) 90.14
Restricted stock outstanding at December 31, 2016 289,112
 $88.88
Granted 177,708
 85.88
Vested (68,819) 88.58
Forfeited (43,482) 76.10
Restricted stock outstanding at December 31, 2017 354,519
 $89.00
Granted 142,332
 83.09
Vested (52,479) 124.50
Forfeited (37,828) 91.71
Restricted stock outstanding at December 31, 2018 406,544
 $82.10

The grant date fair value of restricted stock is based on the closing sales price of common stock on the grant date. For restricted stock awards that vest based on shareholder returns, the grant date fair values are calculated using a Monte-Carlo approach which simulates the Company's stock price on the corresponding vesting dates before applying the Black-Scholes model.

Net of amounts capitalized relating to the Company's developments, HHC recognized compensation expense related to our condominium model units. Currently, these selling costs are capitalizedrestricted stock awards of $7.5 million, $5.7 million and $4.5 million for the years ended December 31, 2018, 2017 and 2016, respectively, included in General and Administrative expense in the accompanying Consolidated Statements of Operations. The fair value of restricted stock that vested during 2018 was $5.5 million. The balance of unamortized restricted stock expense as real estate project costs and recognized as costs of sales on a percentage of completion basis in our consolidated financial statements. Under the new guidance, some of these costs may needDecember 31, 2018 was $21.6 million, which is expected to be expensed immediately or will be capitalized as property and equipment and depreciatedrecognized over their estimated useful life. Entities havea weighted‑average period of 3.8 years.

NOTE 12  INCOME TAXES

On December 22, 2017, President Trump signed into law the optionTax Act that significantly changes the United States federal income tax system. The Tax Act includes a number of using eitherchanges in existing law including a full retrospective or a modified retrospective approach. We have electedpermanent reduction in the federal income tax rate from 35% to apply a modified retrospective approach of adoption. Upon adoption of this ASU21%. The rate reduction took effect on January 1, 2018. As a result of the reduction in the federal income tax rate to 21% and other changes under the Tax Act that impact timing differences, the Company recorded a one-time transitional tax benefit of $101.7 million in its consolidated statement of operations related to the remeasurement of its net deferred tax liabilities. As of December 31, 2017, the Company had not fully completed its accounting for the tax effects of the Tax Act. Accordingly, the Company's provision for income taxes for the year ended December 31, 2017 was based in part on a reasonable estimate of the effects on its transition tax and existing deferred tax balances. The Company completed its analysis of the effects of the Tax Act in 2018 since buyersbased upon the guidance, interpretations and data available as of December 31, 2018, and there were no additional adjustments of significance.

Deferred income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities using enacted tax rates currently in effect. Deferred income taxes also reflect the impact of operating loss and tax credit carryforwards.

The provision for (benefit from) income taxes for the years ended December 31, 2018, 2017 and 2016 were as follows:
(In thousands) 2018 2017 2016
Current $(703) $(2,338) $4,752
Deferred 16,195
 (43,463) 113,698
Total $15,492
 $(45,801) $118,450
Income tax expense is computed by applying the Federal corporate tax rate for the years ended December 31, 2018, 2017 and 2016 and is reconciled to the provision for income taxes as follows:

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THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(In thousands) 2018 2017 2016
Tax at statutory rate on earnings from continuing operations before income taxes $15,226
 $42,911
 $112,264
Increase (decrease) in valuation allowance, net 8,033
 (175) (1,326)
State income taxes, net of Federal income tax benefit (4,933) 1,408
 4,004
Tax benefit from Tax Act —
 (101,688) —
Tax (benefit) expense from other change in rates, prior period adjustments and other permanent differences (1,292) 2,941
 (4,591)
Tax benefit on equity compensation (1,490) (6,403) —
Tax expense on compensation disallowance 1,168
 —
 —
Tax benefit on historic tax credit (1,220) —
 —
Non-deductible warrant liability loss —
 15,205
 8,544
Uncertain tax position benefit excluding interest —
 —
 (407)
Uncertain tax position interest, net of Federal income tax benefit —
 —
 (38)
Income tax expense (benefit) $15,492
 $(45,801) $118,450

Realization of a deferred tax benefit is dependent upon generating sufficient taxable income in future periods. HHC's net operating loss carryforwards are currently scheduled to expire in subsequent years through 2038. Some of the net operating loss carryforward amounts are subject to the separate return limitation year rules (“SRLY”). It is possible that in the future the Company could experience a change in control pursuant to Section 382 that could put limits on the benefit of deferred tax assets. On February 27, 2012, HHC entered into a Section 382 Rights Agreement, with a three-year term, to protect the Company from such an event and protect its deferred tax assets. On February 26, 2015, the Board of Directors extended the term of the Section 382 Rights Agreement to March 14, 2018, and HHC's stockholders approved the terms on May 21, 2015. However, on January 2, 2018, the Board of Directors approved, and HHC entered into, an amendment to the Section 382 Rights Agreement to provide for an amended expiration date of January 2, 2018 and, as a result, the Section 382 Right Agreement was no longer in effect as of such date. Currently, the Company's deferred tax assets are not required to pay usprotected by a Section 382 Rights Plan.

As of December 31, 2018, the amounts and expiration dates of operating loss and tax credit carryforwards for performance undertax purposes are as follows:
    Expiration
(In thousands) Amount Date
Net operating loss carryforwards - Federal $145,671
  2024-2038
Net operating loss carryforwards - Federal 25,065
  n/a
Net operating loss carryforwards - State 460,802
  2019-2038
Tax credit carryforwards - Federal AMT 3,699
  n/a
Tax credit carryforwards - Historic Tax Credit 1,610
 2038

As of December 31, 2018 and 2017, the sales contractsCompany had gross deferred tax assets totaling $182.9 million and $172.4 million, and gross deferred tax liabilities of $314.8 million and $316.0 million, respectively. The Company has established a valuation allowance in the amount of $25.3 million and $17.3 million as of December 31, 2018 and 2017, respectively, against certain deferred tax assets for which it is more likely than not that such deferred tax assets will not be realized.


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THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The tax effects of temporary differences and carryforwards included in the condominiums are constructed, revenue and cost of sales for condominium units sold will no longer be recognized until the construction is complete, the sale closes, and the title to the property has transferred to the buyer. Therefore, on the adoption date of this new standard, we will report an adjustment to reduce retained earnings by an estimated $70.0 - $90.0 million for amounts previously recognized in earnings on a percentage of completion basis for those sale contracts existingnet deferred tax liabilities at December 31, 2017. This same amount will be reported2018 and 2017 are summarized as follows:
(In thousands) 2018 2017
Deferred tax assets:    
Operating and Strategic Developments properties, primarily differences in basis of assets and liabilities $83,263
 $92,210
Interest deduction carryforwards 34,611
 29,247
Operating loss and tax credit carryforwards 65,071
 50,914
Total deferred tax assets 182,945
 172,371
Valuation allowance (25,304) (17,271)
Total net deferred tax assets $157,641
 $155,100
Deferred tax liabilities:    
Property associated with MPCs, primarily differences in the tax basis of land assets and treatment of interest and other costs $(146,124) $(157,181)
Operating and Strategic Developments properties, primarily differences in basis of assets and liabilities (59,517) (60,430)
Deferred income (109,188) (98,339)
Total deferred tax liabilities (314,829) (315,950)
Total net deferred tax liabilities $(157,188) $(160,850)

The deferred tax liability associated with the Company's MPCs is largely attributable to the difference between the basis and value determined as of the date of the acquisition by its predecessors in future periods when2004 adjusted for sales that have occurred since that time. The cash cost related to this deferred tax liability is dependent upon the sales closeprice of future land sales and title transfersthe method of accounting used for income tax purposes. The deferred tax liability related to deferred income is the difference between the income tax method of accounting and the financial statement method of accounting for prior sales of land in the Company's MPCs.

Although the Company believes its tax returns are correct, the final determination of tax examinations and any related litigation could be different from what was reported on the returns. In HHC's opinion, the Company has made adequate tax provisions for years subject to examination. Generally, the Company is currently open to audit under the statute of limitations by the Internal Revenue Service as well as state taxing authorities for the years ended December 31, 2015 through 2017.

The Company applies the generally accepted accounting principle related to accounting for uncertainty in income taxes, which prescribes a recognition threshold that a tax position is required to meet before recognition in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues.

HHC recognizes and reports interest and penalties, if applicable, within the provision for income tax expense. The Company did not recognize any interest expense related to the buyer.

unrecognized tax benefits for the years ended December 31, 2018, 2017 and 2016.


A reconciliation of the change in unrecognized tax benefits for the years ended December 31, 2018, 2017 and 2016 is as follows:
(In thousands) 2018 2017 2016
Unrecognized tax benefits, opening balance $—
 $—
 $36,524
Gross increases - tax positions in prior period —
 —
 —
Gross decreases - tax positions in prior periods —
 —
 (36,524)
Unrecognized tax benefits, ending balance $—
 $—
 $—

The reduction in unrecognized tax benefits of $36.5 million in 2016 was the result of the Company filing a request with the IRS to change its tax accounting method related to a subsidiary from an impermissible accounting method to a permissible accounting method. The IRS approved the method change in 2018.

Periodically the Company makes payments to taxing jurisdictions that reduce its uncertain tax benefits but are not included in the reconciliation above, as the position is not yet settled. The Company made no such payments in the years ending December 31, 2018, 2017 or 2016. As of December 31, 2018 and 2017, there are no unrecognized tax benefits.


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THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 213  WARRANTS

On November 9, 2010, the Company entered into warrant agreements with certain funds of Pershing Square Capital Management, L.P. (“Pershing Square”) to purchase 1,916,667 shares of common stock at an exercise price of $50.00 per share (the “Sponsor Warrants”). Pershing Square exercised its Sponsor Warrants on June 30, 2017, resulting in a net issuance of 1,136,517 shares in accordance with the warrant provisions. In November 2010 and February 2011, HHC entered into certain warrant agreements (the “Management Warrants”) with David R. Weinreb, the Chief Executive Officer, Grant Herlitz, the President, and Andrew C. Richardson, the former Chief Financial Officer, in each case prior to his appointment to such position, to purchase 2,367,985,  315,731 and 178,971 shares, respectively, of common stock. The Management Warrants were granted at fair value in exchange for a combined total of approximately $19.0 million in cash from such executives at the commencement of their respective employment. Mr. Weinreb and Mr. Herlitz’s warrants had an exercise price of $42.23 per share, and Mr. Richardson’s warrants had an exercise price of $54.50 per share.

Mr. Herlitz exercised his Management Warrants in early January 2017, resulting in the net issuance of 198,184 shares in accordance with the warrant provisions. Mr. Herlitz also donated 6,850 shares to a charitable trust, which were net share settled for 4,400 shares in accordance with the warrant provisions. In February, March and June 2017, Mr. Richardson exercised his Management Warrants, resulting in the net issuance of 98,549 shares in accordance with the warrant provisions. In June 2017, Mr. Weinreb exercised his Management Warrants, resulting in the net issuance of 1,614,803 shares in accordance with the warrant provisions.

As of December 31, 2017, all Sponsor Warrants and Management Warrants have been exercised. The fair values for the Sponsor Warrants and Management Warrants as of December 31, 2016 were recorded as liabilities in the Consolidated Balance Sheets because the holders of these warrants could require the Company to settle such warrants in cash upon a change of control. The estimated fair values for the outstanding Sponsor Warrants and Management Warrants totaled $332.2 million as of December 31, 2016. The fair values were estimated using an option pricing model and Level 3 inputs due to the unavailability of comparable market data, as further discussed in Note 8 - Fair Value. Decreases and increases in the fair value of the Sponsor Warrants and Management Warrants prior to their settlements in 2017 were recognized as warrant liability gains or losses in the Consolidated Statements of Operations in the years ended December 31, 2017 and 2016.

On October 7, 2016, HHC entered into a warrant agreement with its new Chief Financial Officer, David R. O’Reilly, prior to his appointment to the position. Upon exercise of Mr. O’Reilly’s warrant, Mr. O’Reilly may acquire 50,125 shares of common stock at an exercise price of $112.08 per share. Mr. O’Reilly’s warrant was issued at fair value in exchange for a $1.0 million payment in cash from Mr. O’Reilly. The O’Reilly Warrant becomes exercisable on April 6, 2022, subject to earlier exercise upon certain change in control, separation and termination provisions. On June 16, 2017 and October 4, 2017, HHC also entered into new warrant agreements with Mr. Weinreb and Mr. Herlitz to acquire 1,965,409 shares and 87,951 shares of common stock for the purchase price of $50.0 million and $2.0 million, respectively. Mr. Weinreb’s new warrant becomes exercisable on June 15, 2022, at an exercise price of $124.64 per share, and Mr. Herlitz’s new warrant becomes exercisable on October 3, 2022, at an exercise price of $117.01 per share, subject to earlier exercise upon certain change in control, separation and termination provisions.The purchase prices paid by the respective executives for the O’Reilly Warrant and Mr. Weinreb’s and Mr. Herlitz’s new warrants, which qualify as equity instruments, are included within additional paid-in capital in the Consolidated Balance Sheets at December 31, 2018 and 2017. 

NOTE 14  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables summarizechanges in AOCI by component, all of which are presented net of tax:

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THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Balance as of January 1, 2017$(6,786)
Other comprehensive income (loss) before reclassifications(1,084)
Loss reclassified from accumulated other comprehensive loss to net income905
Net current-period other comprehensive income (loss)(179)
Balance as of December 31, 2017(6,965)
Other comprehensive income (loss) before reclassifications2,120
(Gain) loss reclassified from accumulated other comprehensive loss to net income(1,135)
Adjustment related to adoption of ASU 2018-02(1,148)
Adjustment related to adoption of ASU 2017-12(739)
Pension adjustment759
Terminated swap amortization(1,018)
Net current-period other comprehensive income (loss)(1,161)
Balance as of December 31, 2018$(8,126)

The following table summarizes the amounts reclassified out of AOCI:
    Amounts reclassified from 
Accumulated Other Comprehensive Income (Loss)
Accumulated Other Comprehensive Income (Loss) Components Affected line items in the For the Year Ended
(In thousands) Statements of Operations 2018 2017
(Gains) losses on cash flow hedges Interest expense $(1,437) $1,443
Interest rate swap contracts Provision for income taxes 302
 (538)
Total reclassifications of (income) loss for the period Net of tax $(1,135) $905


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THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 15  EARNINGS PER SHARE


Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted‑average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of all potentially dilutive common shares. The dilutive effect of options and nonvested stock issued under stock‑based compensation plans is computed using the treasury stock method. The dilutive effect of the Sponsor Warrants and Management Warrants is computed using the if‑converted method. Gains associated with the changes in the fair value of the Sponsor Warrants and Management Warrants are excluded from the numerator in computing diluted earnings per share because inclusion of such gains in the computation would be anti‑dilutive.


Information related to ourthe Company's EPS calculations is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 

(In thousands, except per share amounts)

  

2017

    

2016

    

2015

Basic EPS:

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

166,623

 

$

202,326

 

$

126,719

Net income attributable to noncontrolling interests

 

 

1,781

 

 

(23)

 

 

 —

Net income attributable to common stockholders

 

$

168,404

 

$

202,303

 

$

126,719

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

 

41,364

 

 

39,492

 

 

39,470

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

168,404

 

$

202,303

 

$

126,719

Less: Warrant liability gain

 

 

 —

 

 

 —

 

 

(58,320)

Adjusted net income attributable to common stockholders

 

$

168,404

 

$

202,303

 

$

68,399

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

 

41,364

 

 

39,492

 

 

39,470

Restricted stock and stock options

 

 

279

 

 

343

 

 

411

Warrants

 

 

1,446

 

 

2,894

 

 

2,873

Weighted average diluted common shares outstanding

 

 

43,089

 

 

42,729

 

 

42,754

 

 

 

 

 

 

 

 

 

 

Basic income per share:

 

$

4.07

 

$

5.12

 

$

3.21

 

 

 

 

 

 

 

 

 

 

Diluted income per share:

 

$

3.91

 

$

4.73

 

$

1.60

F-19

  December 31,
(In thousands, except per share amounts) 2018 2017 2016
Basic EPS:      
Numerator:      
Net income $57,726
 $166,623
 $202,326
Net income attributable to noncontrolling interests (714) 1,781
 (23)
Net income attributable to common stockholders $57,012
 $168,404
 $202,303
       
Denominator:      
Weighted average basic common shares outstanding 43,036
 41,364
 39,492
       
Diluted EPS:      
Numerator:      
Net income attributable to common stockholders $57,012
 $168,404
 $202,303
       
Denominator:      
Weighted average basic common shares outstanding 43,036
 41,364
 39,492
Restricted stock and stock options 201
 279
 343
Warrants —
 1,446
 2,894
Weighted average diluted common shares outstanding 43,237
 43,089
 42,729
       
Basic income per share: $1.32
 $4.07
 $5.12
Diluted income per share: $1.32
 $3.91
 $4.73

TableThe diluted EPS computation as of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018 excludes 425,908 stock options because their inclusion would have been anti-dilutive and 205,979 shares of restricted stock because certain stock price conditions provided for in the restricted stock awards have not been satisfied.


The diluted EPS computation as of December 31, 2017 excludes 313,500 stock options because their inclusion would have been anti-dilutive and 161,155 shares of restricted stock because marketcertain stock price conditions provided for in the restricted stock awards have not been met.

satisfied.


The diluted EPS computation as of December 31, 2016 excludes 379,500 stock options because their inclusion would have been anti‑dilutive and 130,286 shares of restricted stock because marketcertain stock price conditions provided for in the restricted stock awards have not been met.

The diluted EPS computation as of December 31, 2015 excludes 141,776 stock options because their inclusion would have been anti‑dilutive.

satisfied.


On February 23, 2018, wethe Company repurchased 475,920 of our shares of its common stock, par value $0.01 per share, in a private transaction with an unaffiliated transactionentity at an averagea purchase price of $120.33 per share, for $57,267,454or approximately $57,267,453 in the aggregate. The repurchase transaction was consummated on February 21, 2018, and was funded with cash on hand.

NOTE 3  WARRANT LIABILITIES

On November 9, 2010, we entered into warrant agreements with certain funds of Pershing Square Capital Management, L.P. (“Pershing Square”) to purchase 1,916,667 shares of our common stock at an exercise price of $50.00 per share (the “Sponsor Warrants”). Pershing Square exercised its Sponsor Warrants on June 30, 2017, resulting in a net issuance of 1,136,517 shares in accordance with the warrant provisions. In November 2010 and February 2011, we entered into certain warrant agreements (the “Management Warrants”) with David R. Weinreb, our Chief Executive Officer, Grant Herlitz, our President, and Andrew C. Richardson, our former Chief Financial Officer, in each case prior to his appointment to such position, to purchase 2,367,985,  315,731 and 178,971 shares, respectively, of our common stock. The Management Warrants were granted at fair value in exchange for a combined total of approximately $19.0 million in cash from such executives at the commencement of their respective employment. Mr. Weinreb and Mr. Herlitz’s warrants had an exercise price of $42.23 per share, and Mr. Richardson’s warrants had an exercise price of $54.50 per share.

Mr. Herlitz exercised his Management Warrants in early January 2017, resulting in the net issuance of 198,184 shares in accordance with the warrant provisions. Mr. Herlitz also donated 6,850 shares to a charitable trust, which were net share settled for 4,400 shares in accordance with the warrant provisions. In February, March and June 2017, Mr. Richardson exercised his Management Warrants, resulting in the net issuance of 98,549 shares in accordance with the warrant provisions. In June 2017, Mr. Weinreb exercised his Management Warrants, resulting in the net issuance of 1,614,803 shares in accordance with the warrant provisions.

As of December 31, 2017, all Sponsor Warrants and Management Warrants have been exercised. The fair values for the Sponsor Warrants and Management Warrants as of December 31, 2016 were recorded as liabilities in our Consolidated Balance Sheets because the holders of these warrants could require us to settle such warrants in cash upon a change of control. The estimated fair values for the outstanding Sponsor Warrants and Management Warrants totaled $332.2 million as of December 31, 2016. The fair values were estimated using an option pricing model and Level 3 inputs due to the unavailability of comparable market data, as further discussed in Note 7 –  Fair Value of Financial Instruments. Decreases and increases in the fair value of the Sponsor and Management Warrants prior to their settlements in 2017 were recognized as warrant liability gains or losses in the Consolidated Statements of Operations in the years ending December 31, 2017, 2016 and 2015.

On October 7, 2016, we entered into a warrant agreement with our new Chief Financial Officer, David R. O’Reilly, prior to his appointment to the position. Upon exercise of Mr. O’Reilly’s warrant, Mr. O’Reilly may acquire 50,125 shares of common stock at an exercise price of $112.08 per share. Mr. O’Reilly’s warrant was issued at fair value in exchange for a $1.0 million payment in cash from Mr. O’Reilly. The O’Reilly Warrant becomes exercisable on April 6, 2022, subject to earlier exercise upon certain change in control, separation and termination provisions. On June 16, 2017 and October 4, 2017, we also entered into new warrant agreements with Mr. Weinreb and Mr. Herlitz to acquire 1,965,409 shares and 87,951 shares of common stock for the purchase price of $50.0 million and $2.0 million, respectively. Mr. Weinreb’s new warrant becomes exercisable on June 15, 2022, at an exercise price of $124.64 per share, and Mr. Herlitz’s new warrant becomes exercisable on October 3, 2022, at an exercise price of $117.01 per share, subject to earlier exercise upon certain change in control, separation and termination provisions.The purchase prices paid by the respective executives for the O’Reilly Warrant and Mr. Weinreb’s and Mr. Herlitz’s new warrants, which qualify as equity instruments, are included within additional paid-in capital in the Consolidated Balance Sheets at December 31, 2017.

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THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4  ACQUISITIONS AND DISPOSITIONS

In the third and fourth quarters of 2017, we closed on the sales of five of our non-core assets for total proceeds of $52.6 million, resulting in a net gain of $23.1 million, of which $19.2 million and $3.9 million are included in Gains on sales of properties and Gains on sales of operating properties, respectively, on our Consolidated Statements of Operations.

On December 28, 2017 (the “Constellation Acquisition Date”), we acquired our joint venture partner’s 50.0% interest in Constellation for $8.0 million in cash and 50% of the joint venture’s liabilities for a total of $16.0 million. Simultaneously with the buyout of this luxury apartment development, we replaced the joint venture’s existing $15.8 million construction loan with a $24.2 million mortgage at 4.07% maturing January 1, 2033. As a result of the change in control, we recognized a gain of $17.8 million in Gain on acquisition of joint venture partner's interest in conjunction with this acquisition relating to the step-up to fair value of the assets acquired.The following table summarizes the accounting of the purchase price:

 

 

 

 

Asset

    

Acquisition date fair value

Building

 

$

38,213

Land

 

 

3,069

Improvements

 

 

957

Furniture, fixtures and equipment

 

 

590

Leases in place

 

 

714

Other identifiable assets

 

 

18

Total

 

$

43,561

Prior to the acquisition, we accounted for our investment in Constellation under the equity method within Investment in Real Estate and Other Affiliates and recognized a loss of $0.3 million in equity in earnings for the year to date period through the Constellation Acquisition Date. Revenues and pre-tax net income from operations included in the Consolidated Statements of Operations from the Constellation Acquisition Date through December 31, 2017 are not material. 

On March 1, 2017 (the “Las Vegas 51s Acquisition Date”), we acquired our joint venture partner’s 50.0% interest in the Las Vegas 51s minor league baseball team for $16.4 million and became the sole owner of this Triple-A baseball team. As a result of the change in control, we recognized a gain of $5.4 million in Gain on acquisition of joint venture partner's interest in conjunction with this acquisition relating to the step-up to fair value of the assets acquired. Using the income approach, the allocated fair values included a $0.4 million contingent liability recorded in Accounts payable and accrued expenses per the terms of the purchase agreement relating to a credit for the use of seats in a future stadium for the team, if and when constructed by us, $7.9 million in finite-lived intangibles, which have a weighted average amortization period of 11 years, and $24.9 million to indefinite-lived intangibles, primarily related to the franchise relationship agreement, all of which is recorded in Prepaid expenses and other assets, net. Accordingly, the values of assets acquired and liabilities assumed and consolidated into our financial statements total $36.0 million and $3.2 million, respectively, and are included in our Operating Assets segment. Prior to the acquisition, we accounted for our investment in the Las Vegas 51s under the equity method within Investment in Real Estate and Other Affiliates. The joint venture had revenues of $1.3 million, and we recognized a net loss of $0.2 million included in equity in earnings for the year ended December 31, 2017. Included in the Consolidated Statements of Operations from the Las Vegas 51s Acquisition Date through December 31, 2017 are revenues of $6.8 million and a pre-tax net loss from operations of $0.6 million.

On January 18, 2017, we closed on a land sale of approximately 36 acres of our 100-acre property, Elk Grove Collection, for gross sales proceeds of $36.0 million, resulting in a pre-tax gain of $32.2 million. We plan to develop the remaining 64 acres. Commencement of construction is dependent on meeting internal pre-leasing and financing requirements for the project.

On January 6, 2017, we acquired the 11.4-acre Macy’s store and parking lot at Landmark Mall in Alexandria, VA, for $22.2 million. The Macy’s parcel is adjacent to the Landmark Mall, which is in our Strategic Developments segment, and is located approximately nine miles from Washington, D.C. We plan to redevelop the mall and the Macy’s parcel into an open-air, mixed-use community.

On December 29, 2016, we sold Park West, a non-core 249,177 square foot open-air shopping, dining and entertainment destination in Peoria, Arizona for net cash proceeds of $32.5 million, resulting in a loss of $1.1 million, net of transaction costs.


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THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

This loss is in addition to an impairment charge recorded in the third quarter of 2016 to adjust the asset to fair value in anticipation of its sale (also see Note 6 – Impairment). As this asset was unleveraged, the sale allowed us to redeploy the net cash proceeds into acquisitions and other existing developments. 

On December 20, 2016, we acquired the American City Building, a 117,098 square foot building in Columbia, Maryland, for $13.5 million. We are in the process of formulating redevelopment plans for this property. 

On December 19, 2016, we acquired One Mall North, a 97,500 square foot, office building in Columbia, Maryland, for $22.2 million. The office building parcel and surface parking total 5.37 acres.

On July 20, 2016, we acquired our joint venture partner’s 18.57% interest in the 314-unit Millennium Six Pines Apartments for $4.0 million resulting in the dissolution of the joint venture and consolidation of the asset in our financial statements. Concurrently with the acquisition, we replaced the joint venture’s existing $37.7 million construction loan with a $42.5 million fixed rate loan at 3.39% maturing August 1, 2028. Total assets of $67.9 million and liabilities of $42.7 million, including the fixed rate loan noted above, were consolidated into our financial statements at fair value as of the acquisition date. In accordance with GAAP, we recognized a gain of $27.1 million in conjunction with this acquisition relating to the step-up to fair value of the assets acquired. Prior to the acquisition, we accounted for our investment in Millennium Six Pines Apartments under the equity method. We now own 100% of this Class A multi-family property located in The Woodlands Town Center. Included in the Consolidated Statements of Operations for the year ended December 31, 2016 are revenues of $2.7 million and a pre-tax net loss of $0.4 million since the acquisition date.

On March 16, 2016, we sold the 80 South Street Assemblage for net cash proceeds of $378.3 million, resulting in a pre-tax gain of $140.5 million. 80 South Street Assemblage was comprised of a 42,694 square foot lot with certain air rights, providing total residential and commercial development rights of 817,784 square feet that had been acquired over the course of 2014 and 2015.

On September 4, 2015, we sold The Club at Carlton Woods, its 36-hole golf and country club in The Woodlands, for net cash proceeds of $25.1 million, and purchaser’s assumption of net liabilities of $4.0 million, resulting in a pre-tax gain of $29.1 million. The property was comprised of total assets of $20.9 million and total liabilities of $24.9 million. The property was developed and operated by us as an amenity for selling residential lots in a gated community in The Woodlands. Most of the lots had been previously sold, and the sale of this property allowed us to redeploy capital to our development activities.

NOTE 5  INVESTMENTS IN REAL ESTATE AND OTHER AFFILIATES

Our investment 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

 

 

December 31, 

 

December 31, 

 

December 31, 

 

December 31, 

 

Year Ended December 31,

($ in thousands)

   

2017

   

2016

   

2017

   

2016

   

2017

   

2016

   

2015

Equity Method Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Master Planned Communities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Summit (a)

 

 —

%  

 

 —

% 

 

$

45,886

 

$

32,653

 

$

23,234

 

$

43,501

 

$

 —

Operating Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Las Vegas 51s, LLC (b) (c)

 

100.00

 

 

50.00

 

 

 

 —

 

 

11,062

 

 

(152)

 

 

12

 

 

152

Constellation (b) (c)

 

100.00

 

 

50.00

 

 

 

 —

 

 

2,730

 

 

(323)

 

 

(54)

 

 

 —

The Metropolitan Downtown Columbia (d)

 

50.00

 

 

50.00

 

 

 

 —

 

 

(1,064)

 

 

390

 

 

(800)

 

 

(13)

Millennium Six Pines Apartments (b)

 

100.00

 

 

100.00

 

 

 

 —

 

 

 —

 

 

 —

 

 

44

 

 

(1,165)

Stewart Title of Montgomery County, TX

 

50.00

 

 

50.00

 

 

 

3,673

 

 

3,611

 

 

386

 

 

696

 

 

996

Woodlands Sarofim #1

 

20.00

 

 

20.00

 

 

 

2,696

 

 

2,683

 

 

53

 

 

182

 

 

166

Strategic Developments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Circle T Ranch and Power Center (a)

 

50.00

 

 

50.00

 

 

 

4,455

 

 

4,956

 

 

 —

 

 

10,497

 

 

 —

HHMK Development

 

50.00

 

 

50.00

 

 

 

10

 

 

10

 

 

 —

 

 

 —

 

 

549

KR Holdings

 

50.00

 

 

50.00

 

 

 

749

 

 

707

 

 

41

 

 

18

 

 

1,289

m.flats/TEN.M (a)

 

50.00

 

 

50.00

 

 

 

6,521

 

 

6,379

 

 

(415)

 

 

 —

 

 

 —

33 Peck Slip (a)

 

35.00

 

 

35.00

 

 

 

8,651

 

 

8,243

 

 

(643)

 

 

106

(e)

 

 —

 

 

 

 

 

 

 

 

 

72,641

 

 

71,970

 

 

22,571

 

 

54,202

 

 

1,974

Cost method investments

 

 

 

 

 

 

 

 

3,952

 

 

4,406

 

 

2,927

 

 

2,616

 

 

1,747

Investment in Real Estate and Other Affiliates

 

 

 

 

 

 

 

$

76,593

 

$

76,376

 

$

25,498

 

$

56,818

 

$

3,721

(a)

Please refer to the discussion below for a description of the joint venture ownership structure.

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THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(b)

We acquired our joint venture partner’s interest and have fully consolidated the assets and liabilities of the entity. See Note 4 – Acquisitions and Dispositions for additional information regarding this transaction.

(c)

Equity method VIE as of December 31, 2017.

(d)

The Metropolitan Downtown Columbia was in a deficit position of $2.6 million and $1.1 million at December 31, 2017 and December 31, 2016, respectively, due to distributions from operating cash flows in excess of basis. This deficit balance is presented in Accounts payable and accrued expenses at December 31, 2017. The deficit balance as of December 31, 2016 has been presented as previously reported.

(e)

The 33 Peck Slip hotel was closed in December 2016 for redevelopment and was transferred to the Strategic Developments segment as of January 1, 2017. The share of earnings for the year ended December 31, 2016 was recorded in the Operating Assets segment but is reflected above in the Strategic Developments segment for comparative purposes.

As of December 31, 2017, we are not the primary beneficiary of any of the joint ventures listed above because we do not have the power to direct activities that most significantly impact the economic performance of the joint ventures, and therefore, we report our interests in accordance with the equity method. At December 31, 2017, our 33 Peck Slip VIE with an aggregate carrying value of $8.7 million does not have sufficient equity at risk to finance its operations without additional financial support, as further discussed below. Our maximum exposure to loss as a result of this investment is limited to the aggregate carrying value of the investment as we have not provided any guarantees or otherwise made firm commitments to fund amounts on behalf of this VIE. The aggregate carrying value of unconsolidated VIEs (Las Vegas 51s and Constellation at December 31, 2016, prior to our acquisition) was $13.8 million as of December 31, 2016, and was classified as Investment in Real Estate and Other Affiliates in the Consolidated Balance Sheets.

As of December 31, 2017, approximately $183.9 million of indebtedness was secured by the properties owned by our Real Estate and Other Affiliates of which our share was approximately $85.0 million based upon our economic ownership. All of this indebtedness is without recourse to us.

We are the primary beneficiary of three VIEs which are consolidated in the financial statements. The creditors of the consolidated VIEs do not have recourse to us. 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. As of December 31, 2016, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $21.7 million and $1.4 million, respectively. The assets of the VIEs are restricted for use only by the particular VIEs and are not available for our general operations.

Significant activity for our investments in Real Estate Affiliates and the related accounting considerations are described below.

The Summit

During the first quarter of 2015, we formed DLV/HHPI Summerlin, LLC (“The Summit”) a joint venture with Discovery Land Company (“Discovery”), and we contributed land with a book basis of $13.4 million and transferred 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 their capital contribution and we have no further capital obligations. The gains on the contributed land will be recognized in Equity in earnings from Real Estate and Other Affiliates as the joint venture sells lots. 

After receipt of our 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. Discovery is the manager of the project, and development began in the second quarter of 2015. Given the nature of the venture’s capital structure and the provisions for the liquidation of assets, our share of the venture’s income-producing activities will be recognized based on the HLBV method. Please refer to Note 1 – Summary of Significant Accounting Policies for a description of the HLBV method.

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

 

 

 

 

 

 

 

 

 

December 31,

(in millions)

 

2017

 

2016

Total Assets

 

$

166.9

 

$

151.4

Total Liabilities

 

 

118.9

 

 

116.6

Total Equity

 

 

48.0

 

 

34.8

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THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

Year Ended December 31,

(in millions)

 

2017

   

2016

Revenues (a)

 

$

58.6

 

$

79.8

Net income

 

 

23.2

 

 

43.5

Gross Margin

 

 

31.2

 

 

47.1

(a)

Revenues related to land sales at the joint venture are recognized on a percentage of completion basis.

Circle T Ranch and Power Center

On June 1, 2016, the Westlake Retail Associates joint venture closed on a 72-acre land sale with an affiliate of Charles Schwab Corporation. The year ended December 31, 2016 reflects the recognition of $10.5 million in Equity in earnings from Real Estate and Other Affiliates resulting from the land sale.

m.flats/TEN.M

On October 4, 2013, we entered into a joint venture agreement with a local developer, Kettler, Inc., to construct an apartment complex with ground floor retail in Downtown Columbia, Maryland. We contributed approximately five acres of land having a book value of $4.0 million to the joint venture and subsequently incurred an additional $3.1 million in capitalized development costs for a total book value contribution of $7.1 million. Our land was valued at $23.4 million, or $53,500 per constructed unit. In January 2016, the joint venture closed on an $88.0 million construction loan which is non-recourse to us and bears interest at one-month LIBOR plus 2.40% with an initial maturity date of February 2020, with three, one-year extension options. Upon closing of the loan, Kettler, Inc. contributed $16.1 million in cash and $7.3 million was distributed to us, of which we subsequently reinvested $6.3 million in the project in 2016. We accounted for this transaction as a partial sale of the land for which we recognized a net profit of $0.2 million at December 31, 2016.

33 Peck Slip

In January 2016, we entered into a joint venture to purchase a hotel located at 33 Peck Slip in the Seaport District of New York with a capital contribution of $6.0 million. We advanced a bridge loan of $25.0 million at a 5.0% interest rate to the joint venture at closing to expedite the acquisition, which was repaid in full in June 2016. In the second quarter of 2016, upon completion of a refinancing of the property with a $36.0 million redevelopment loan, we made additional capital contributions of $2.3 million in 2016 and $0.7 million in 2017. The 33 Peck Slip hotel was closed in December 2016 for redevelopment and was transferred to the Strategic Developments segment. Our total investment in the joint venture is $8.7 million as of December 31, 2017.

NOTE 6  IMPAIRMENT

We review our real estate assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment or disposal of long‑lived assets in accordance with ASC 360 requires that if impairment indicators exist and expected undiscounted cash flows generated by the asset over our anticipated holding period are less than its carrying amount, an impairment provision should be recorded to write down the carrying amount of the asset to its fair value. The impairment analysis does not consider the timing of future cash flows and whether the asset is expected to earn an above or below-market rate of return.

Each investment in Real Estate and Other Affiliates as discussed in Note 5 – Real Estate and Other Affiliates is evaluated periodically for recoverability and valuation declines that are other-than-temporary. If the decrease in value of our investment in a Real Estate and Other Affiliate is deemed to be other-than-temporary, our investment in such Real Estate and Other Affiliate is reduced to its estimated fair value.

No impairment charges were recorded during the years ended December 31, 2017 and 2015. During the third quarter of 2016, we implemented a plan to sell Park West, a 249,177 square foot open-air shopping, dining and entertainment destination in Peoria, Arizona and recognized a $35.7 million impairment charge due to our shorter than previously anticipated holding

F-24

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

period, adjusting the net carrying value down to its estimated fair market value. On December 29, 2016, we sold Park West for proceeds of $32.5 million, recognized a loss of $1.1 million, net of transaction costs, in conjunction with the sale and redeployed the net cash proceeds from this unleveraged asset into our existing developments.

The following table summarizes our provision for impairment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for impairment as of December 31, 

Impaired Asset

 

Location

 

Method of Determining Fair Value

 

2017

    

2016

 

2015

 

 

 

 

 

 

(In thousands)

Operating Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Park West

 

Peoria, AZ

 

Discounted cash flow analysis using capitalization rate of 6.75%

 

$

 —

 

$

35,734

 

$

 —

NOTE 7  FAIR VALUE

ASC 820, Fair Value Measurement, emphasizes that fair value is a market-based measurement that should be determined using assumptions market participants would use in pricing an asset or liability. The standard establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring assets or liabilities at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the asset or liability. Assets or liabilities with readily available active quoted prices, or for which fair value can be measured from actively quoted prices, generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

The following table presents the fair value measurement hierarchy levels required under ASC 820 for each of our assets and liabilities that are measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

December 31, 2016

 

 

Fair Value Measurements Using

 

Fair Value Measurements Using

(In thousands)

    

Total

    

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

    

Significant
Other
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

    

Total

    

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

    

Significant
Other
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

50,135

 

$

50,135

 

$

 —

 

$

 —

 

$

18

 

$

18

 

$

 —

 

$

 —

Interest rate swap derivative assets

 

 

4,470

 

 

 —

 

 

4,470

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap derivative liabilities

 

 

5,961

 

 

 —

 

 

5,961

 

 

 —

 

 

(149)

 

 

 —

 

 

(149)

 

 

 —

Warrants

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

332,170

 

 

 —

 

 

 —

 

 

332,170

Cash equivalents consist of registered money market mutual funds which are invested in United States Treasury bills that are valued at the net asset value of the underlying shares in the funds as of the close of business at the end of each period.

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates derived from observable market interest rate curves.

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Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As discussed further in Note 3 –Warrant Liabilities, as of December 31, 2017, all Sponsor and Management warrants had been exercised. The following table presents a rollforward of the valuation of our Warrant liabilities:

 

 

 

 

 

 

 

 

 

 

(In thousands)

    

2017

    

2016

    

2015

Balance as of January 1

 

$

332,170

 

$

307,760

 

$

366,080

Warrant liability loss (gain) (a)

 

 

43,443

 

 

24,410

 

 

(58,320)

Exercises of Sponsor and Management Warrants

 

 

(375,613)

 

 

 —

 

 

 —

Balance as of December 31

 

$

 —

 

$

332,170

 

$

307,760

(a)

For 2017, this amount represents losses recognized relating to each warrant prior to the respective exercise date. For 2016, represents unrealized losses recorded for outstanding warrants at the end of the period. Changes in the fair value of the Sponsor Warrants and Management Warrants prior to exercise were recognized in net income as a warrant liability gain or loss.

The valuation of warrants was based on an option pricing valuation model, utilizing inputs which were classified as Level 3 due to the unavailability of comparable market data. The inputs to the valuation model included the fair value of stock related to the warrants, exercise price and term of the warrants, expected volatility, risk-free interest rate, dividend yield and, as appropriate, a discount for lack of marketability. Generally, an increase in expected volatility would increase the fair value of the liability. The impact of the volatility on fair value diminished as the market value of the stock increased above the strike price. As the period of restriction lapsed, the marketability discount reduced to zero and increased the fair value of the warrants.

The significant unobservable inputs used in the fair value measurement of our warrant liabilities as of December 31, 2016 were as follows:

Unobservable Inputs

Expected
Volatility (a)

Marketability
Discount (b)

December 31, 2017 (c)

N/A

N/A

December 31, 2016

31.0%

0.0% - 1.0%

(a)

Based on our implied equity volatility.

(b)

Marketability discount decreases as the contractual expiration date of the marketability restrictions approaches.

(c)

See Note 3 – Warrant Liabilities  for additional information.

The estimated fair values of our financial instruments that are not measured at fair value on a recurring basis are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

December 31, 2016

(In thousands)

    

Fair Value
Hierarchy

    

Carrying
Amount

    

Estimated
Fair Value

    

Carrying
Amount

    

Estimated
Fair Value

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

Level 1

 

$

810,924

 

$

810,924

 

$

665,492

 

$

665,492

Accounts receivable, net (a)

 

Level 3

 

 

13,041

 

 

13,041

 

 

9,883

 

 

9,883

Notes receivable, net (b)

 

Level 3

 

 

5,864

 

 

5,864

 

 

155

 

 

155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate debt (c)

 

Level 2

 

$

1,526,875

 

$

1,554,766

 

$

1,184,141

 

$

1,224,573

Variable-rate debt (c)

 

Level 2

 

 

1,350,914

 

 

1,350,914

 

 

1,524,319

 

 

1,524,319

(a)

Accounts receivable, net is shown net of an allowance of $9.3 million and $7.9 million at December 31, 2017 and 2016, respectively.

(b)

Notes receivable, net is shown net of an allowance of $0.1 million at December 31, 2017 and 2016.

(c)

Excludes related unamortized financing costs.

The fair value of our 2025 Notes, included in fixed-rate debt in the table above, is based upon the trade price closest to the end of the period presented. The fair value of other fixed-rate debt in the table above (please refer to Note 8 – Mortgages, Notes and Loans Payable in our Consolidated Financial Statements), was estimated based on a discounted future cash payment model, which includes risk premiums and a risk free rate derived from the current London Interbank Offered Rate (“LIBOR”) or U.S. Treasury obligation interest rates. The discount rates reflect our judgment as to what the approximate current lending rates for

F-26

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THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

loans or groups of loans with similar maturities and credit quality would be if credit markets are operating efficiently and assuming that the debt is outstanding through maturity.

The carrying amounts for our variable-rate debt approximate fair value given that the interest rates are variable and adjust with current market rates for instruments with similar risks and maturities.

The carrying amounts of cash and cash equivalents and accounts receivable approximate fair value because of the short‑term maturity of these instruments.

NOTE 8  MORTGAGES, NOTES AND LOANS PAYABLE, NET

Mortgages, notes and loans payable, net are summarized as follows:

 

 

 

 

 

 

 

 

 

December 31, 

(In thousands)

    

2017

    

2016

Fixed-rate debt:

 

 

 

 

 

 

Unsecured 5.375% Senior Notes

 

$

1,000,000

 

$

 —

Unsecured 6.875% Senior Notes

 

 

 —

 

 

750,000

Secured mortgages, notes and loans payable

 

 

499,299

 

 

390,118

Special Improvement District bonds

 

 

27,576

 

 

44,023

Variable-rate debt:

 

 

 

 

 

 

Mortgages, notes and loans payable (a)

 

 

1,350,914

 

 

1,524,319

Unamortized bond issuance costs

 

 

(6,898)

 

 

(5,779)

Deferred financing costs

 

 

(12,946)

 

 

(11,934)

Total mortgages, notes and loans payable, net

 

$

2,857,945

 

$

2,690,747

(a)

As more fully described below, $428.3 million and $182.1 million of variable rate debt has been swapped to a fixed rate for the term of the related debt as of December 31, 2017 and 2016, respectively.

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THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents our mortgages, notes, and loans payable by property, presented within each segment in order of extended maturity date

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maximum

 

Carrying Value

 

 

Initial / Extended

 

Interest

 

 

Facility

 

December 31, 

 

December 31,

($ in thousands)

  

Maturity (a)

  

Rate

 

    

Amount

  

2017

 

2016

Master Planned Communities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summerlin South SID Bonds - S124

 

December 2019

 

5.95

%

 

 

 

 

$

84

 

$

123

Summerlin South SID Bonds - S128

 

December 2020

 

7.30

%

 

 

 

 

 

390

 

 

440

Summerlin South SID Bonds - S132

 

December 2020

 

6.00

%

 

 

 

 

 

912

 

 

1,268

The Woodlands Master Credit Facility

 

April 2020 / April 2021

 

4.24

%

(b)

$

180,000

 

 

150,000

 

 

150,000

Bridgeland Credit Facility

 

November 2020 / November 2022

 

4.76

%

(b)

 

65,000

 

 

65,000

 

 

65,000

Summerlin South SID Bonds - S151

 

June 2025

 

6.00

%

 

 

 

 

 

3,763

 

 

4,159

Summerlin South SID Bonds - S128C

 

December 2030

 

6.05

%

 

 

 

 

 

4,283

 

 

4,600

Summerlin South SID Bonds - S159

 

June 2035

 

6.00

%

 

 

 

 

 

139

 

 

2,389

Summerlin West SID Bonds - S812

 

October 2035

 

6.00

%

 

 

 

 

 

15,193

 

 

27,459

        Master Planned Communities Total

 

 

 

 

 

 

 

 

 

 

239,764

 

 

255,438

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1701 Lake Robbins

 

April 2017

 

5.81

%

 

 

 

 

 

 —

 

 

4,600

Outlet Collection at Riverwalk

 

October 2017 / October 2018

 

4.24

%

(b)

 

53,841

 

 

53,841

 

 

55,778

1725-35 Hughes Landing Boulevard

 

June 2018 / June 2019

 

3.14

%

(b)

 

143,000

 

 

117,417

 

 

105,647

The Westin at The Woodlands (c)

 

August 2018 / August 2019

 

4.14

%

(b)

 

57,946

 

 

57,946

 

 

58,077

110 North Wacker (d)

 

October 2019

 

5.21

%

 

 

 

 

 

18,926

 

 

22,704

Three Hughes Landing

 

January 2018 / December 2019

 

3.84

%

(b)

 

65,455

 

 

45,058

 

 

35,053

Lakeland Village Center at Bridgeland

 

May 2018 / May 2020

 

3.84

%

(b)

 

14,000

 

 

11,470

 

 

9,979

Embassy Suites at Hughes Landing

 

October 2018 / October 2020

 

3.99

%

(b)

 

37,100

 

 

31,245

 

 

29,461

The Woodlands Resort & Conference Center (c)

 

December 2018 / December 2020

 

4.74

%

(b)

 

               65,500

 

 

65,500

 

 

70,000

One Merriweather

 

February 2020 / February 2021

 

3.64

%

(b)

 

49,929

 

 

42,332

 

 

23,588

Downtown Summerlin (e)

 

September 2020 / September 2021

 

4.69

%

(b)

 

274,088

 

 

274,088

 

 

302,981

Two Merriweather

 

October 2020 / October 2021

 

3.99

%

(b)

 

33,156

 

 

19,429

 

 

 —

HHC 242 Self-Storage

 

October 2019 / October 2021

 

4.09

%

(b)

 

6,658

 

 

6,243

 

 

3,708

HHC 2978 Self-Storage Facility

 

January 2020 / January 2022

 

4.09

%

(b)

 

6,368

 

 

5,634

 

 

1,715

70 Columbia Corporate Center

 

May 2020 / May 2022

 

3.49

%

(b)(f)

 

 

 

 

20,000

 

 

20,000

One Mall North

 

May 2020 / May 2022

 

3.74

%

(b)(f)

 

 

 

 

14,463

 

 

 —

10-60 Columbia Corporate Centers (g)

 

May 2020 / May 2022

 

3.33

%

(b)(f)

 

 

 

 

80,000

 

 

80,000

20/25 Waterway Avenue

 

May 2022

 

4.79

%

 

 

 

 

 

13,646

 

 

13,886

Millennium Waterway Apartments

 

June 2022

 

3.75

%

 

 

 

 

 

55,095

 

 

55,584

Ward Village (h)

 

September 2021 / September 2023

 

3.82

%

(b)

 

 

 

 

238,718

 

 

238,718

9303 New Trails

 

December 2023

 

4.88

%

 

 

 

 

 

12,003

 

 

12,378

4 Waterway Square

 

December 2023

 

4.88

%

 

 

 

 

 

35,151

 

 

36,249

3831 Technology Forest Drive

 

March 2026

 

4.50

%

 

 

 

 

 

21,954

 

 

22,383

Kewalo Basin Harbor

 

September 2027

 

4.24

%

(b)

 

11,562

 

 

 —

 

 

 —

Millennium Six Pines Apartments

 

August 2028

 

3.39

%

 

 

 

 

 

42,500

 

 

42,500

3 Waterway Square

 

August 2028

 

3.94

%

 

 

 

 

 

50,327

 

 

51,590

One Hughes Landing

 

December 2029

 

4.30

%

 

 

 

 

 

52,000

 

 

52,000

Downtown Summerlin SID Bonds - S128

 

December 2030

 

6.05

%

 

 

 

 

 

2,812

 

 

3,350

Two Hughes Landing

 

December 2030

 

4.20

%

 

 

 

 

 

48,000

 

 

48,000

One Lakes Edge

 

March 2029 / March 2031

 

4.50

%

 

 

 

 

 

69,440

 

 

68,874

Constellation Apartments

 

January 2033

 

4.07

%

 

 

 

 

 

24,200

 

 

 —

Hughes Landing Retail

 

December 2036

 

3.50

%

 

 

 

 

 

35,000

 

 

35,000

Columbia Regional Building

 

February 2037

 

4.48

%

 

 

 

 

 

25,000

 

 

22,188

Other

 

Various

 

3.60

%

 

 

 

 

 

 —

 

 

236

        Operating Assets Total

 

 

 

 

 

 

 

 

 

 

1,589,438

 

 

1,526,227

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Strategic Developments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Waiea and Anaha

 

November 2017 / November 2019

 

8.24

%

(b)

 

 

 

 

 —

 

 

160,847

Ke Kilohana

 

December 2019 / December 2020

 

4.74

%

(b)

 

142,656

 

 

 —

 

 

 —

Ae`o

 

December 2019 / December 2021

 

5.49

%

(b)

 

230,000

 

 

33,603

 

 

 —

100 Fellowship Drive

 

May 2022

 

2.99

%

(b)

 

51,426

 

 

 1

 

 

 —

Aristocrat

 

October 2022

 

4.90

%

(b)

 

31,118

 

 

 —

 

 

 —

Two Summerlin

 

October 2022

 

4.90

%

(b)

 

33,432

 

 

 —

 

 

 —

          Strategic Developments Total

 

 

 

 

 

 

 

 

 

 

33,604

 

 

160,847

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other corporate financing arrangements

 

July 2018

 

3.00

%

 

 

 

 

 

14,983

 

 

15,948

Senior Notes

 

October 2021

 

6.88

%

 

 

 

 

 

 —

 

 

750,000

Senior Notes

 

March 2025

 

5.38

%

 

 

 

 

 

1,000,000

 

 

 —

Unamortized bond issuance costs

 

 

 

 

 

 

 

 

 

 

(6,898)

 

 

(5,779)

Deferred financing costs

 

 

 

 

 

 

 

 

 

 

(12,946)

 

 

(11,934)

Total mortgages, notes, and loans payable

 

 

 

 

 

 

 

 

 

$

2,857,945

 

$

2,690,747

(a)

Maturity dates presented include initial maturity date as well as the extended or final maturity date as contractually stated. Extension periods generally can be exercised at our option at the initial maturity date, subject to customary extension terms that are based on current property performance projections. Such extension terms may include, but are not limited to, minimum debt service coverage, minimum occupancy levels or condominium sales levels, as

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THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

applicable and other performance criteria. In certain cases due to property performance not meeting covenants, we may have to paydown a portion of the loan in order to obtain the extension.

(b)

The interest rate presented is based on the one month LIBOR, three month LIBOR or Prime rate, as applicable, which was 1.49%,  1.61% and 4.50%, respectively, at December 31, 2017.

(c)

Based on current performance of The Westin at The Woodlands and The Woodlands Resort and Conference Center, a paydown may be required in order to exercise the extension option.

(d)

LIBOR on the $18.9 million outstanding principal balance is swapped to a 2.96% fixed-rate through maturity resulting an overall fixed rate of 5.21%.

(e)

The forward starting swaps related to this debt became effective on December 31, 2017. LIBOR on the $100.0 million of the outstanding principal balance is swapped to a 2.68% fixed-rate through maturity, LIBOR on another $100.0 million of the outstanding principal balance is swapped to a 2.62% fixed-rate through maturity, and LIBOR on $50.0 million of the outstanding principal balance is swapped to a 2.65% fixed-rate through maturity resulting in an overall rate of 4.69%

(f)

These three notes are part of one master facility, with all three respective properties collateralizing the total $114.5 million indebtedness.

(g)

LIBOR on $40.0 million of the outstanding principal balance is swapped to a 1.66% fixed-rate through maturity resulting in an overall fixed rate of 3.33%.

(h)

LIBOR on $119.4 million of the outstanding principal balance is swapped to a 1.14% fixed-rate through maturity resulting in an overall fixed rate of 3.82%.

The weighted average interest rate on our mortgages, notes and loans payable, excluding interest rate hedges, was 4.61% and 4.71% as of December 31, 2017 and 2016, respectively.

Except for the items listed below, all of the mortgage debt is secured by the individual properties listed in the table above and is non-recourse to HHC:

i.

$1.0 billion of Senior Notes due 2025;

ii.

$274.1 million financing for the Downtown Summerlin development which has an initial maximum recourse of 35% of the outstanding balance, which will reduce to 15.0% upon achievement of a 1.15:1.0 debt service coverage ratio. The recourse further reduces to 10% upon achievement of a 1.25:1.0 debt service coverage ratio, a 90% occupancy level, and average tenant sales of at least $500.00 per net rentable square foot. As of December 31, 2017, 35% of the outstanding loan balance remains recourse to HHC;

iii.

$26.9 million, or 50% of the Outlet Collection at Riverwalk outstanding loan balance is recourse to HHC;

iv.

$15.0 million of Other Corporate Financing Arrangements; and

v.

$18.9 million of the 110 North Wacker mortgage.

Certain of our loans contain provisions which grant the lender a security interest in the operating cash flow of the property that represents the collateral for the loan. Certain mortgage notes may be prepaid subject to a prepayment penalty equal to a yield maintenance premium, defeasance, or a percentage of the loan balance. As of December 31, 2017, land, buildings and equipment and developments with a net book value basis of $3.4 billion have been pledged as collateral for our mortgages, notes and loans payable. 

The following table summarizes the contractual obligations relating to our mortgages, notes and loans payable as of December 31, 2017 based on extended maturity dates:

 

 

 

 

 

 

Mortgages, notes

 

 

and loans payable

(In thousands)

 

 principal payments

2018

 

$

78,207

2019

 

 

256,338

2020

 

 

178,836

2021

 

 

467,010

2022

 

 

251,086

Thereafter

 

 

1,646,312

Total principal payments

 

 

2,877,789

Deferred financing costs, net and unamortized underwriting fees

 

 

(19,844)

Total mortgages, notes and loans payable

 

$

2,857,945

As of December 31, 2017, we were in compliance with all financial covenants included in the debt agreements governing our indebtedness.

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THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Master Planned Communities

The Woodlands Master Credit Facility was amended and restated on July 31, 2015 to a $200.0 million maximum facility amount consisting of a $100.0 million term loan and a $100.0 million revolver (together, the “TWL Facility”). The TWL Facility bears interest at one-month LIBOR plus 2.75% and had an August 2016 initial maturity date with two,  one–year extension options. In July 2016, we exercised our first one-year extension option, which reduced the total commitment to $175.0 million. Semi-annual principal payments of $25.0 million began on December 31, 2016 and continue through the second, optional one-year extension period. The TWL Facility and The Woodlands Resort & Conference Center loans are recourse to the entities that directly own The Woodlands operations. The TWL Facility also contains certain covenants that, among other things, require the maintenance of specified financial ratios, limit the incurrence of additional recourse indebtedness at The Woodlands, and limit distributions from The Woodlands to us based on a loan‑to‑value test. The amendment also modified certain covenants to allow for more construction loan guarantees by the entities that directly own The Woodlands than would otherwise have been permitted by the prior facility. On April 27, 2017, TWL Facility was refinanced to increase the facility by $30.0 million for a total of $180.0 million, providing the ability to fund the development of Creekside Park Apartments or for other corporate purposes. The new facility bears interest at one-month LIBOR plus 2.75% with an initial maturity date of April 27, 2020 and a one-year extension option.

The Summerlin MPC uses SID bonds to finance certain common infrastructure improvements. These bonds are issued by the municipalities and are secured by the assessments on the land. The majority of proceeds from each bond issued is held in a construction escrow and disbursed to us as infrastructure projects are completed, inspected by the municipalities and approved for reimbursement. Accordingly, the SID bonds have been classified as debt, and the Summerlin MPC pays the debt service on the bonds semi‑annually. As Summerlin sells land, the buyers assume a proportionate share of the bond obligation at closing, and the residential sales contracts provide for the reimbursement of the principal amounts that we previously paid with respect to such proportionate share of the bond. In the years ended December 31, 2017 and 2016, no new SID bonds were issued and $13.9 million and $7.7 million in obligations were assumed by buyers, respectively.

Operating Assets

On January 19, 2018, we paid off the $18.9 million mortgage loan for 110 North Wacker and settled the related swap asset of $0.3 million.

On December 28, 2017, we closed on a $24.2 million non‑recourse financing for Constellation, a multi-family building located in Summerlin. The loan bears interest at 4.07% and matures on January 1, 2033.

On December 5, 2017, we executed a modification of our $65.5 million Three Hughes Landing facility to extend the maturity 30 days to January 5, 2018. On January 5, 2018, we modified and extended the loan which bears interest at one-month LIBOR plus 2.60% with an initial maturity of December 5, 2018, with two,  one-year extension options.

On September 13, 2017, we modified and extended our $311.8 million Downtown Summerlin facility with a $30.0 million paydown. The modified loan has a maximum facility of $275.9 million and bears interest at one-month LIBOR plus 2.15% with a maturity of September 13, 2020, with one,  one-year extension option.

On August 11, 2017, we closed on a construction loan totaling $11.6 million for Kewalo Harbor, located in Honolulu, Hawai‘i, to be used for improvements benefitting our Ward Village development. The loan bears interest at one-month LIBOR plus 2.75% with a maturity of September 1, 2027. As of December 31, 2017, we had not drawn any proceeds under this loan.

On April 6, 2017, we paid off a $4.6 million maturing mortgage loan that we assumed as part of the acquisition of 1701 Lake Robbins in July 2014.

On January 19, 2017, we closed on a non‑recourse financing totaling $25.0 million replacing the $23.0 million construction loan on the Columbia Regional Building, a retail building located in Columbia, Maryland. The loan bears interest at 4.48% and matures on February 11, 2037.

On January 17, 2017, we amended and restated our $80.0 million non-recourse mortgage financing for the 10-60 Columbia Corporate Center office buildings with a $94.5 million loan. Contemporaneously with this amendment, we received $14.5 

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THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

million to purchase One Mall North, a 97,500 square foot office building in Columbia, Maryland. The loan bears interest at LIBOR plus 1.75% and has an initial maturity date of May 6, 2020, with two,  one-year extension options. On June 27, 2017, we modified our $94.5 million non-recourse mortgage financing with a $114.5 million loan. This amendment added 70 Columbia Corporate Center, a 170,741 square foot office building in Columbia, Maryland, to the collateral pool and allowed us to draw $20.0 million and fully repay the outstanding balance of the existing indebtedness on the 70 Columbia Corporate Center note.

On December 30, 2016, we amended and restated our $85.0 million mortgage financing for The Woodlands Resort & Conference Center with a $70.0 million mortgage. Contemporaneously with this amendment, we made a $15.0 million principal reduction payment as required by the loan agreement. The loan bears interest at LIBOR plus 3.25% and has an initial maturity date of December 30, 2018, with two,  one-year extension options.

On December 8, 2016, we modified the $36.6 million financing to $35.0 million for Hughes Landing Retail. The loan bears fixed interest at 3.50% and has an initial maturity date of December 8, 2036.

On November 25, 2016, we amended and extended our $73.5 million construction loan for One Lakes Edge with a $71.9 million mortgage. Contemporaneously with this amendment, we made a $3.0 million principal reduction payment as required by the loan agreement. The loan bears interest at one-month LIBOR plus 3.50%.  On February 23, 2017, we refinanced the One Lakes Edge construction loan with a 12-year Fannie Mae loan. The new loan amount is $69.4 million with a fixed rate of 4.50%. The loan is interest only for four years then begins amortizing on a 30-year basis.

On October 24, 2016, we modified the $64.4 million construction financing to $56.1 million for Outlet Collection at Riverwalk. The loan bears interest at one-month LIBOR plus 2.75% and has an initial maturity date of October 24, 2017 with one,  one–year extension option. On October 24, 2017, we exercised our one-year extension option on our $54.3 million Outlet Collection at Riverwalk facility which extended the maturity date to October 24, 2018. The initial recourse amount of 50.0% will be reduced to 25.0% upon the achievement of an 11.0% debt yield and a minimum level of tenant sales per square foot for 12 months. As of December 31, 2017, 50% of the outstanding loan balance remains recourse to us.

On October 7, 2016, we closed on a $33.2 million non-recourse construction loan for Two Merriweather, bearing interest at one-month LIBOR plus 2.50% with an initial maturity date of October 7, 2020 and a one-year extension option.

On September 12, 2016, we amended and restated the $238.7 million first mortgage secured by Ward Village. The non-recourse term loan bears interest at one-month LIBOR plus 2.50% with an initial maturity date of September 12, 2021, with two,  one year extension options. $119.4 million of the outstanding principal balance is swapped at a 3.64% fixed-rate through maturity. There was no undrawn availability on this loan as of December 31, 2017.

On February 25, 2016, we closed on a $49.9 million non-recourse construction loan for One Merriweather, bearing interest at one-month LIBOR plus 2.15% with an initial maturity date of February 25, 2020, with a one-year extension option.

On January 27, 2016, we closed on a $6.4 million non-recourse construction loan for the HHC 2978 Self-Storage Facility, bearing interest at one-month LIBOR plus 2.60% with an initial maturity date of January 2020, with two,  one-year extension options.

Strategic Developments

On January 25, 2018, we closed on a financing totaling $15.5 million for Lake Woodlands Crossing Retail, a project located in The Woodlands, Texas. The loan bears interest at LIBOR plus 1.80%, matures on January 25, 2023, and has an initial maximum recourse of 50% of the outstanding balance prior to completion of construction, at which point the repayment guarantee will reduce to 15% provided the project is 90% leased.

On October 27, 2017, we repaid the $195.3 million outstanding on our construction loan relating to Waiea and Anaha in conjunction with closing on the sales of units at Anaha.

On October 19, 2017, we closed on a construction loan totaling $64.6 million, of which $31.1 million will be used for development of Aristocrat and $33.5 million will be used for development of Two Summerlin. The loan bears interest at Wall Street Journal Prime plus 0.40% with a maturity of October 19, 2022.

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THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On May 31, 2017, we closed on a $51.4 million construction loan for 100 Fellowship Drive, located in The Woodlands. The loan bears interest at one-month LIBOR plus 1.50% with a maturity of May 31, 2022.

On December 23, 2016, we closed on a $142.7 million partial recourse construction loan for Ke Kilohana, bearing interest at one-month LIBOR plus 3.25% with an initial maturity date of December 23, 2019 and a one-year extension option.

On December 23, 2016, we closed on a $230.0 million non-recourse construction loan for Ae`o, bearing interest at one-month LIBOR plus 4.00% with a 4.50% floor and 2.50% LIBOR cap. The initial maturity date is December 23, 2019 with two,  one-year extension options.

Corporate

On March 16, 2017, we issued $800.0 million in aggregate principal amount of 5.375% senior notes due March 15, 2025 (the “2025 Notes”) and completed a tender offer and consent solicitation for any and all of our $750.0 million existing 6.875% senior notes due October 1, 2021. We recognized a loss on redemption of $46.4 million in conjunction with this transaction. On June 12, 2017, we issued an additional $200.0 million of the 2025 Notes at a premium to par of 2.25%. Interest on the 2025 Notes is paid semi-annually, on March 15th and September 15th of each year, beginning on September 15, 2017. At any time prior to March 15, 2020, we may redeem all or a portion of the 2025 Notes at a redemption price equal to 100% of the principal plus a “make-whole” declining call premium. At any time prior to March 15, 2020, we may also redeem up to 35% of the 2025 Notes at a price of 105.375% with net cash proceeds of certain equity offerings, plus accrued and unpaid interest. The 2025 Notes contain customary terms and covenants and have no financial maintenance covenants.

NOTE 9  INCOME TAXES

On December 22, 2017, President Trump signed into law H.R. 1, known as the “Tax Cuts and Jobs Act” (the “Tax Act”) that significantly changes the United States federal income tax system. The Tax Act includes a number of changes in existing law including a permanent reduction in the federal income tax rate from 35% to 21%. The rate reduction took effect on January 1, 2018. 

Deferred income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities using enacted tax rates currently in effect. Deferred income taxes also reflect the impact of operating loss and tax credit carryforwards. As a result of the reduction in the federal income tax rate to 21% and other changes under the Tax Act that impact timing differences, we recorded a one-time transitional tax benefit of $101.7 million in our consolidated statement of operations related to the remeasurement of our net deferred tax liabilities.

This provisional amount of $101.7 million is based on our current understanding of the impact of the Tax Act, which may change in the near future as notices and regulations regarding the Tax Act are issued. We need more time and further guidance to more accurately account for the tax law changes under ASC 740. While we feel confident we have accounted for the other material changes in the tax law correctly, any future notices or regulations further clarifying the law could alter our analysis.

The provision for (benefit from) income taxes for the years ended December 31, 2017, 2016 and 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

(In thousands)

    

2017

    

2016

    

2015

Current

 

$

(2,338)

 

$

4,752

 

$

2,849

Deferred

 

 

(43,463)

 

 

113,698

 

 

21,152

Total

 

$

(45,801)

 

$

118,450

 

$

24,001

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THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income tax expense is computed by applying the Federal corporate tax rate for the years ended December 31, 2017, 2016 and 2015 and is reconciled to the provision for income taxes as follows:

 

 

 

 

 

 

 

 

 

 

(In thousands)

    

2017

    

2016

    

2015

Tax at statutory rate on earnings from continuing operations before income taxes

 

$

42,911

 

$

112,264

 

$

52,751

(Decrease) increase in valuation allowance, net

 

 

(175)

 

 

(1,326)

 

 

1,742

State income taxes, net of Federal income tax benefit

 

 

1,408

 

 

4,004

 

 

267

Tax benefit from Tax Act

 

 

(101,688)

 

 

 —

 

 

 —

Tax expense (benefit) from other change in rates, prior period adjustments and other permanent differences

 

 

2,941

 

 

(4,591)

 

 

(7,361)

Tax benefit on equity compensation

 

 

(6,403)

 

 

 —

 

 

 —

Non-deductible warrant liability loss (gain)

 

 

15,205

 

 

8,544

 

 

(20,412)

Uncertain tax position benefit excluding interest

 

 

 —

 

 

(407)

 

 

(2,483)

Uncertain tax position interest, net of Federal income tax benefit

 

 

 —

 

 

(38)

 

 

(503)

Income tax (benefit) expense

 

$

(45,801)

 

$

118,450

 

$

24,001

Realization of a deferred tax benefit is dependent upon generating sufficient taxable income in future periods. Our net operating loss carryforwards are currently scheduled to expire in subsequent years through 2037. Some of the net operating loss carryforward amounts are subject to the separate return limitation year rules (“SRLY”). It is possible that in the future we could experience a change in control pursuant to Section 382 that could put limits on the benefit of deferred tax assets. On February 27, 2012, we entered into a Section 382 Rights Agreement, with a three-year term, to protect us from such an event and protect our deferred tax assets. On February 26, 2015, the Board of Directors extended the term of the Section 382 Rights Agreement to March 14, 2018, and our stockholders approved the terms on May 21, 2015. However, on January 2, 2018, the Board of Directors approved, and we entered into, an amendment to the Section 382 Rights Agreement to provide for an amended expiration date of January 2, 2018 and, as a result, the Section 382 Right Agreement was no longer in effect as of such date. Currently, our deferred tax assets are not protected by a Section 382 Rights Plan.

As of December 31, 2017, the amounts and expiration dates of operating loss and tax credit carryforwards for tax purposes are as follows:

 

 

 

 

 

 

 

 

 

 

 

Expiration

(In thousands)

    

Amount

    

Date

Net operating loss carryforwards - Federal

 

$

147,059

 

2024-2037

Net operating loss carryforwards - State

 

 

327,221

 

2018-2037

Capital loss carryforwards

 

 

 —

 

n/a

Tax credit carryforwards - Federal AMT

 

 

3,699

 

n/a

As of December 31, 2017 and 2016, we had gross deferred tax assets totaling $172.4 million and $294.5 million, and gross deferred tax liabilities of $316.0 million and $476.8 million, respectively. We have established a valuation allowance in the amount of $17.3 million and $18.6 million as of December 31, 2017 and 2016, respectively, against certain deferred tax assets for which it is more likely than not that such deferred tax assets will not be realized.

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Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The tax effects of temporary differences and carryforwards included in the net deferred tax liabilities at December 31, 2017 and 2016 are summarized as follows:

 

 

 

 

 

 

 

(In thousands)

    

2017

    

2016

Deferred tax assets:

 

 

 

 

 

 

Operating and Strategic Developments properties, primarily differences in basis of assets and liabilities

 

$

92,210

 

$

208,862

Interest deduction carryforwards

 

 

29,247

 

 

54,759

Operating loss and tax credit carryforwards

 

 

50,914

 

 

30,866

Total deferred tax assets

 

 

172,371

 

 

294,487

Valuation allowance

 

 

(17,271)

 

 

(18,635)

Total net deferred tax assets

 

$

155,100

 

$

275,852

Deferred tax liabilities:

 

 

 

 

 

 

Property associated with MPCs, primarily differences in the tax basis of land assets and treatment  of interest and other costs

 

$

(157,181)

 

$

(262,572)

Operating and Strategic Developments properties, primarily differences in basis of assets and liabilities

 

 

(60,430)

 

 

(40,915)

Deferred income

 

 

(98,339)

 

 

(173,310)

Total deferred tax liabilities

 

 

(315,950)

 

 

(476,797)

Total net deferred tax liabilities

 

$

(160,850)

 

$

(200,945)

The deferred tax liability associated with the MPCs is largely attributable to the difference between the basis and value determined as of the date of the acquisition by our predecessors in 2004 adjusted for sales that have occurred since that time. The cash cost related to this deferred tax liability is dependent upon the sales price of future land sales and the method of accounting used for income tax purposes. The deferred tax liability related to deferred income is the difference between the income tax method of accounting and the financial statement method of accounting for prior sales of land in our MPCs.

Although we believe our tax returns are correct, the final determination of tax examinations and any related litigation could be different from what was reported on the returns. In our opinion, we have made adequate tax provisions for years subject to examination. Generally, we are currently open to audit under the statute of limitations by the Internal Revenue Service as well as state taxing authorities for the years ended December 31, 2014 through 2016.

We apply the generally accepted accounting principle related to accounting for uncertainty in income taxes, which prescribes a recognition threshold that a tax position is required to meet before recognition in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues.

We recognize and report interest and penalties, if applicable, within our provision for income tax expense. We recognized potential interest expense related to the unrecognized tax benefits of $0.1 million for the year ended December 31, 2015. At December 31, 2017 and 2016, we had no unrecognized tax benefits and therefore recognized no interest expense. At December 31 2015, we had total unrecognized tax benefits of $36.5 million, excluding interest, of which none would impact our effective tax rate. A reconciliation of the change in our unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 is as follows:

 

 

 

 

 

 

 

 

 

 

(In thousands)

    

2017

    

2016

    

2015

Unrecognized tax benefits, opening balance

 

$

 —

 

$

36,524

 

$

184,200

Gross increases - tax positions in prior period

 

 

 —

 

 

 —

 

 

 —

Gross decreases - tax positions in prior periods

 

 

 —

 

 

(36,524)

 

 

(147,676)

Unrecognized tax benefits, ending balance

 

$

 —

 

$

 —

 

$

36,524

The reduction in unrecognized tax benefits of $36.5 million between the period December 31, 2015 and December 31, 2016 was the result of our filing a request with the IRS to change our tax accounting method related to a subsidiary from an impermissible accounting method to a permissible accounting method which we expect to be approved.

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Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Periodically we make payments to taxing jurisdictions that reduce our uncertain tax benefits but are not included in the reconciliation above, as the position is not yet settled. We made no such payments in the years ending December 31, 2017, 2016 or 2015. As of December 31, 2017 and 2016, there are no unrecognized tax benefits.

NOTE 10  COMMITMENTS AND CONTINGENCIES

In the normal course of business, from time to time, we are involved in legal proceedings relating to the ownership and operations of our properties. In management’s opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a material effect on our consolidated financial position, results of operations or liquidity.

As of December 31, 2017 and December 31, 2016, we had outstanding letters of credit totaling $13.8 million and $6.5 million, and surety bonds totaling $88.5 million and $112.4 million, respectively. These letters of credit and bonds were issued primarily in connection with insurance requirements, special real estate assessments and construction obligations.

We lease land or buildings at certain properties from third parties. Rental payments are expensed as incurred and have, to the extent applicable, been straight‑lined over the term of the lease. Contractual rental expense, including participation rent, was $8.6 million, $8.4 million and $9.1 million for 2017, 2016 and 2015, respectively. The amortization of above and below‑market ground leases and straight‑line rents included in the contractual rent amount was not significant.

Our obligations for minimum rentals under non-cancelable operating leases are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subsequent/

 

 

 

(In thousands)

    

2018

    

2019

    

2020

    

2021

    

2022

    

Other

    

Total

Ground lease and other leasing commitments

 

$

8,769

 

$

8,119

 

$

8,259

 

$

8,097

 

$

7,430

 

$

314,129

 

$

354,803

Seaport District

On June 27, 2013, the City of New York executed the amended and restated ground lease for Seaport District NYC. The restated lease terms provide for annual fixed base rent of $1.2 million starting July 1, 2013 with an expiration of December 30, 2072, including our options to extend. The rent escalates at 3.0% compounded annually. On July 1, 2048 the base rent will be adjusted to the higher of fair market value or the then base rent. In addition to the annual base rent, we are required to make annual payments of $210,000 toward maintenance of the East River esplanade as additional rent through the term of the lease. The additional rent escalates annually at the Consumer Price Index. Simultaneously with the execution of the lease, we executed a completion guaranty for the redevelopment of Pier 17. On January 11, 2017, we executed an amendment of the lease which, pursuant to our lease option, added an additional premise to the lease and modified other related provisions. The 2017 amendment provides for an appraisal update to be performed on completion of construction for the purposes of determining any additional rent.

In the fourth quarter 2012, the historic area of Seaport District NYC suffered damage due to flooding as a result of Superstorm Sandy. Reconstruction efforts are ongoing and the property is only partially operating. We have received $54.8 million in insurance proceeds, and we recognized Other income of $0.7 million, $6.2 million and $0.3 million for the years ended December 31, 2017, 2016 and 2015, respectively, for the receipt of insurance proceeds related to our claim.

Columbia

In November 2016, the Howard County Council authorized the issuance of up to $90.0 million of TIF bonds for the Downtown Columbia Redevelopment District’s master plan. The Final Limited Offering Memorandum for the first tranche relates to the Merriweather District, and closing on the $48.2 million of Series 2017 A Special Obligation Bonds occurred in October 2017. In the Funding Agreement for the TIF, one of our wholly-owned subsidiaries, The Howard Research and Development Corporation, has agreed to complete certain defined public improvements and to indemnify Howard County, and we have guaranteed these obligations, with a limit of $1.0 million, expiring 36 months after bond issuance.

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Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11  OTHER ASSETS AND LIABILITIES

The following table summarizes the significant components of Prepaid expenses and other assets:

 

 

 

 

 

 

 

 

 

December 31, 

(In thousands)

 

2017

 

2016

Condominium receivables (a)

 

$

158,516

 

$

210,219

Condominium deposits

 

 

82,605

 

 

193,197

Straight-line rent

 

 

39,136

 

 

31,518

Security and escrow deposits

 

 

37,585

 

 

61,304

Intangibles

 

 

34,802

 

 

4,046

Special Improvement District receivable

 

 

26,430

 

 

61,603

Below-market ground leases

 

 

18,647

 

 

18,986

In-place leases

 

 

10,821

 

 

16,015

Above-market tenant leases

 

 

1,648

 

 

2,457

Equipment, net of accumulated depreciation of $6.9 million and $5.3 million, respectively

 

 

16,955

 

 

17,556

Prepaid expenses

 

 

11,731

 

 

11,177

Tenant incentives and other receivables

 

 

8,482

 

 

8,773

Interest rate swap derivative assets

 

 

4,470

 

 

 —

Federal income tax receivable

 

 

2,198

 

 

15,763

Other

 

 

19,242

 

 

13,902

 

 

$

473,268

 

$

666,516

(a)

We expect $4.4 million related to Anaha will be collected in 2018, and $151.5 million and $2.7 million relating to Ae`o and Ke Kilohana, respectively, will be collected in 2019.

The $193.2 million net decrease primarily relates to the following decreases: a  $110.6 million decrease in condominium deposits due to net sales activity primarily at Waiea, Ae’o and Ke Kilohana; a decrease of $51.7 million in Condominium receivables due to closings at our Waiea and Anaha projects; a decrease of $35.2 million in Special Improvement District Receivable used to fund development costs incurred at Summerlin due to collections; a decrease of $23.7 million in security and escrow deposits primarily relating to the utilization of escrowed sales proceeds to fund remaining construction costs at Waiea; a $13.6 million decrease in Federal income tax receivables due to two IRS tax refunds; a $5.2 million decrease in In-place leases; and $2.0 million in other decreases related to above and below-market ground leases, Equipment and Tenant incentives related primarily to normally scheduled amortization.

These decreases were offset by the following: an increase of $30.8 million in Intangible Assets due to our acquisition of our partner’s 50.0% interest in the Las Vegas 51s; an increase of $7.6 million in Straight-line rent due to additional Operating Assets placed in service during the year; a $5.3 million increase in Other assets relating a receivable recorded relating to reimbursable costs by the Howard County TIF District; an increase of $4.5 million in Interest rate swap derivative assets; and a $0.6 million increase in prepaid expenses. 

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Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounts Payable and Accrued Expenses

The following table summarizes the significant components of Accounts payable and accrued expenses:

 

 

 

 

 

 

 

 

 

December 31, 

(In thousands)

 

2017

 

2016

Construction payables

 

$

217,838

 

$

207,917

Condominium deposit liabilities

 

 

55,975

 

 

117,015

Deferred income

 

 

53,337

 

 

85,158

Accounts payable and accrued expenses

 

 

35,887

 

 

33,050

Tenant and other deposits

 

 

18,937

 

 

28,559

Accrued payroll and other employee liabilities

 

 

41,236

 

 

36,937

Accrued interest

 

 

20,322

 

 

16,897

Accrued real estate taxes

 

 

22,289

 

 

16,726

Straight-line ground rent liability

 

 

14,944

 

 

13,126

Interest rate swaps

 

 

5,961

 

 

(149)

Above-market ground leases

 

 

293

 

 

1,762

Other

 

 

34,699

 

 

15,012

 

 

$

521,718

 

$

572,010

The $50.3 million net decrease in total accounts payable and accrued expenses primarily relates to the following decreases: $61.0 million in Condominium deposit liabilities for the towers under construction at Ward Village as the projects move toward completion; a decrease of $31.8 million in deferred income related to recognition of income from previously deferred land sales at our Summerlin and Bridgeland MPCs; a decrease of $9.6 million in tenant and other deposits primarily related to amortization of a tenant’s prepaid rent; and a decrease of $1.5 million related to our Above-Market Ground Leases.

These decreases were partially offset by the following increases: a $19.7 million increase in Other payables which primarily relates to costs of $13.4 million accrued for our Ward Village master plan common costs; an increase of $9.9 million in construction payables primarily due to continued development activities at both Ward Village and the Merriweather District; a $6.1 million increase in Interest rate swaps liability primarily due to a decrease in fair value of the forward-starting swaps; an increase of $1.8 million in Straight-line ground rent liability due to additional Operating Assets placed in service during the year.

F-37

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12  INTANGIBLES

The following table summarizes our intangible assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

As of December 31, 2016

 

 

Gross

 

Accumulated

 

Net

 

Gross

 

Accumulated

 

Net

 

 

Asset

 

(Amortization)

 

Carrying

 

Asset

 

(Amortization)

 

Carrying

(In thousands)

    

(Liability)

    

/ Accretion

    

Amount

 

(Liability)

    

/ Accretion

    

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indefinite lived intangibles

 

$

25,028

 

$

 —

 

$

25,028

 

$

 —

 

$

 —

 

$

 —

Goodwill

 

 

1,307

 

 

 —

 

 

1,307

 

 

1,307

 

 

 —

 

 

1,307

Other intangibles

 

 

10,278

 

 

(1,812)

 

 

8,466

 

 

3,038

 

 

(299)

 

 

2,739

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In-place value

 

 

22,304

 

 

(11,483)

 

 

10,821

 

 

37,567

 

 

(21,552)

 

 

16,015

Above-market

 

 

4,171

 

 

(2,523)

 

 

1,648

 

 

4,879

 

 

(2,422)

 

 

2,457

Below-market

 

 

(6,454)

 

 

2,688

 

 

(3,766)

 

 

(6,618)

 

 

2,065

 

 

(4,553)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ground leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Above-market

 

 

(293)

 

 

 —

 

 

(293)

 

 

(1,955)

 

 

193

 

 

(1,762)

Below-market

 

 

23,096

 

 

(4,449)

 

 

18,647

 

 

23,096

 

 

(4,110)

 

 

18,986

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total indefinite lived intangibles

 

 

 

 

 

 

 

 

26,335

 

 

 

 

 

 

 

 

1,307

Total amortizing intangibles

 

 

 

 

 

 

 

 

35,523

 

 

 

 

 

 

 

 

33,882

The tenant in-place, above-market and below-market lease intangible assets and the above-market and below-market ground lease intangible assets resulted from real estate acquisitions. The in‑place value, above-market value of tenant leases and below-market ground lease are included in Prepaid expenses and other assets in our Consolidated Balance Sheets and are amortized over periods that approximate the related lease terms. The above‑market ground lease and below‑market tenant leases are included in Accounts payable and accrued expenses as detailed in Note 11 – Other Assets and Other Liabilities and are amortized over the remaining non‑cancelable terms of the respective leases.

Amortization/accretion of these intangible assets and liabilities decreased our pre-tax income (excluding the impact of noncontrolling interest and the provision for income taxes) by $8.9 million in 2017, $6.3 million in 2016 and $10.5 million in 2015.

Future amortization/accretion is estimated to decrease pre-tax income (excluding the impact of noncontrolling interest and the provision for income taxes) by $5.0 million in 2018, $3.7 million in 2019, $2.3 million in 2020, $1.7 million in 2021 and $22.9 million thereafter.

F-38

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We are exposed to interest rate risk related to our variable interest rate debt, and we manage this risk by utilizing interest rate derivatives. To add stability to interest costs by reducing our exposure to interest rate movements, we use interest rate swaps and caps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our fixed‑rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up‑front premium. Our interest rate caps are not currently designated as hedges, and therefore, any gain or loss is recognized in current period earnings. These derivatives are recorded on a gross basis at fair value.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income (“AOCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings in Other (loss) income, net. During the year ended December 31, 2017, the ineffective portion is $0.7 million. During the years ended December 31, 2016 and 2015, the ineffective portion recorded in earnings was insignificant.

Assessments of hedge effectiveness are performed quarterly using regression analysis and the measurement of hedge ineffectiveness is based on the hypothetical derivative method. We are exposed to credit risk in the event of non-performance by our derivative counterparties. We evaluate counterparty credit risk through monitoring the creditworthiness of counterparties, which includes review of debt ratings and financial performance. To mitigate its credit risk, we enter into agreements with counterparties we consider credit-worthy, such as large financial institutions with favorable credit ratings. As of December 31, 2017 and 2016, there were no termination events or events of default related to the interest rate swaps.

If the derivative contracts are terminated prior to their maturity, the amounts previously recorded in AOCI are recognized into earnings over the period that the hedged transaction impacts earnings. If the hedging relationship is discontinued because it is probable that the forecasted transaction will not occur according to the original strategy, any related amounts previously recorded in AOCI are recognized in earnings immediately.

The following table summarizes details related to our derivative contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed

 

 

 

 

 

Fair Value Asset (Liability)

 

 

 

 

 

Notional

 

Interest

 

Effective

 

Maturity

 

December 31, 

 

December 31,

(In thousands)

 

    

Balance Sheet Location

    

Amount

    

Rate

    

Date

    

Date

    

2017

    

2016

Currently-paying contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swap

(a)

 

Accounts payable and accrued expenses

 

$

18,926

 

2.96

%

 

5/10/2011

 

10/31/2019

 

$

(286)

 

$

(740)

Interest Rate Swap

(a)

 

Prepaid expenses and other assets, net

 

 

40,000

 

1.66

 

 

5/6/2015

 

5/1/2020

 

 

299

 

 

(143)

Interest Rate Swap

(a)

 

Prepaid expenses and other assets, net

 

 

119,359

 

1.14

 

 

10/3/2016

 

9/12/2021

 

 

4,007

 

 

3,368

Interest Rate Cap

(b)

 

Prepaid expenses and other assets, net

 

 

75,000

 

5.00

 

 

9/1/2017

 

8/31/2019

 

 

 —

 

 

 —

Interest Rate Cap

(c)

 

Prepaid expenses and other assets, net

 

 

230,000

 

2.50

 

 

12/22/2016

 

12/23/2019

 

 

164

 

 

768

Interest Rate Swap

(a) (d)

 

Accounts payable and accrued expenses

 

 

50,000

 

2.65

 

 

12/31/2017

 

12/31/2027

 

 

(1,124)

 

 

(610)

Interest Rate Swap

(a) (d)

 

Accounts payable and accrued expenses

 

 

100,000

 

2.68

 

 

12/31/2017

 

12/31/2027

 

 

(2,509)

 

 

(1,479)

Interest Rate Swap

(a) (d)

 

Accounts payable and accrued expenses

 

 

100,000

 

2.62

 

 

12/31/2017

 

12/31/2027

 

 

(2,042)

 

 

(1,015)

Total fair value derivative assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,470

 

$

4,136

Total fair value derivative liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(5,961)

 

$

(3,987)

(a)

Denotes derivatives designated as hedging instruments.

(b)

As of December 31, 2016, our $100.0 million interest rate cap with a 5.00% interest rate and an August 31, 2017 maturity date was in place and matured as scheduled. A new interest rate cap was entered into as detailed above and is not currently designated as a hedging instrument. Interest (income) expense included in the consolidated statements of operations for the year ended December 31, 2017 related to this contract is not material.

(c)

Denotes derivative contract that is not designated as a hedging instrument as of December 31, 2017. Interest (income) expense of $(0.6) million is included in the consolidated statements of operations for the year ended December 31, 2017, related to this contract.

(d)

Forward starting swaps were entered into in December 2015 and became effective as of December 31, 2017.

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Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The tables below present the effect of our derivative financial instrument on the Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

Amount of Loss Recognized

 

 

in AOCI on Derivative

 

 

(Effective Portion)

 

 

Year Ended December 31, 

Derivatives in Cash Flow Hedging Relationships

 

2017

 

2016

 

2015

Interest rate swaps

 

$

(726)

 

$

831

 

$

(1,705)

 

 

 

 

 

 

 

 

 

 

 

 

Amount of Loss Reclassified from

 

 

AOCI into Operations

 

 

(Effective Portion)

 

 

Year Ended December 31, 

Location of Loss Reclassified from AOCI into Operations

 

2017

 

2016

 

2015

Interest expense

 

$

(905)

 

$

(1,364)

 

$

(1,745)

NOTE 14  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables summarizechanges in Accumulated Other Comprehensive Income (Loss) by component, all of which are presented net of tax:

Balance as of January 1, 2016

$

(7,889)

Other comprehensive income (loss) before reclassifications

(261)

Loss reclassified from accumulated other comprehensive loss to net income

1,364

Net current-period other comprehensive income (loss)

1,103

Balance as of December 31, 2016

(6,786)

Other comprehensive income (loss) before reclassifications

(1,084)

Loss reclassified from accumulated other comprehensive loss to net income

905

Net current-period other comprehensive income (loss)

(179)

Balance as of December 31, 2017

$

(6,965)

The following table summarizes the amounts reclassified out of AOCI:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from Accumulated Other Comprehensive Income (Loss)

Accumulated Other Comprehensive Income (Loss) Components

 

Affected line items in the

 

For the Year Ended 

(In thousands)

 

Statements of Operations

 

December 31, 2017

   

December 31, 2016

Losses on cash flow hedges

 

Interest expense

 

$

1,443

 

$

2,175

 

 

Provision for income taxes

 

 

(538)

 

 

(811)

Total reclassifications for the period

 

Net of tax

 

$

905

 

$

1,364

NOTE 15  STOCK BASED PLANS

On November 9, 2010 (the “Effective Date”), HHC adopted The Howard Hughes Corporation Amended and Restated 2010 Incentive Plan (the “Incentive Plan”). Pursuant to the Incentive Plan,  3,698,050 shares of HHC common stock were reserved for issuance. New shares are issued on exercise of options. The Incentive Plan provides for grants of options, stock appreciation rights, restricted stock, other stock‑based awards and market‑based compensation (collectively, “the Awards”). Directors, employees and consultants of HHC and its subsidiaries and affiliates are eligible for awards. The Incentive Plan is administered by the Compensation Committee of the Board of Directors (“Committee”). Option grant amounts are awarded by the Committee.

Compensation costs for share‑based payment arrangements totaled $8.4 million, $9.4 million and $9.8 million, of which $1.1 million, $2.6 million and $2.5 million were capitalized for 2017, 2016, and 2015, respectively. As of December 31, 2017, there were a maximum of 2,032,473 shares available for future grant under our various stock plans.

F-40

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Options

The following tables summarize stock option activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

Aggregate

 

 

 

 

Weighted Average

 

Remaining

 

Intrinsic

 

    

Shares

    

Exercise Price

    

Contractual Term

    

Value

 

 

 

 

 

 

 

(In years)

 

 

Stock options outstanding at January 1, 2015

 

1,046,490

 

$

72.61

 

 

 

 

Granted

 

117,000

 

 

134.24

 

 

 

 

Exercised

 

 —

 

 

 —

 

 

 

 

Forfeited

 

(77,450)

 

 

103.84

 

 

 

 

Expired

 

 —

 

 

 —

 

 

 

 

Stock options outstanding at December 31, 2015

 

1,086,040

 

$

77.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

162,100

 

$

109.42

 

 

 

 

Exercised

 

(3,000)

 

 

60.33

 

 

 

 

Forfeited

 

(68,500)

 

 

122.93

 

 

 

 

Expired

 

 —

 

 

 —

 

 

 

 

Stock options outstanding at December 31, 2016

 

1,176,640

 

$

78.87

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

58,000

 

$

119.85

 

 

 

 

Exercised

 

(395,482)

 

 

58.81

 

 

 

 

Forfeited

 

(54,976)

 

 

105.17

 

 

 

 

Expired

 

(1,000)

 

 

57.77

 

 

 

 

Stock options outstanding at December 31, 2017

 

783,182

 

$

90.22

 

5.7

 

33,454,510

 

 

 

 

 

 

 

 

 

 

Stock options exercisable at December 31, 2017

 

306,182

 

$

59.96

 

3.6

 

21,833,176

 

 

 

 

 

 

 

 

 

 

Stock options vested and expected to vest at December 31, 2017

 

772,990

 

$

59.96

 

5.7

 

33,302,071

Information related to stock options outstanding as of December 31, 2017 is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

 

 

 

Number

 

Weighted Average

 

Contractual Term

 

Number

Range of Exercise Prices

    

Outstanding

    

Exercise Price

    

(In years)

    

Exercisable

$

46.49

 

$

55.82

 

23,290

 

$

51.39

 

3.7

 

23,290

$

57.77

 

$

60.33

 

242,418

 

 

58.06

 

3.3

 

242,418

$

61.64

 

$

69.75

 

109,550

 

 

65.93

 

4.4

 

29,550

$

81.80

 

$

110.50

 

94,424

 

 

98.13

 

6.1

 

9,024

$

112.64

 

$

151.72

 

313,500

 

 

124.07

 

8.0

 

1,900

 

 

 

 

 

 

783,182

 

$

90.22

 

5.7

 

306,182

The fair value on the grant date and the significant assumptions used in the Black‑Scholes option‑pricing model are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

 

    

2017

 

    

2016

 

    

2015

 

Grant date fair value

 

$

34.51

 

 

$

36.55

 

 

$

44.45

 

Expected life of options (in years)

 

 

8.4

 

 

 

7.4

 

 

 

7.5

 

Risk-free interest rate

 

 

2.2

%

 

 

1.8

%

 

 

2.0

%

Expected volatility

 

 

22.8

%

 

 

33.1

%

 

 

26.1

%

Expected annual dividend per share

 

 

 —

 

 

 

 —

 

 

 

 —

 

The computation of the expected volatility assumption used in the Black‑Scholes calculations is based on the median asset volatility of comparable companies as of each of the grant dates.

F-41

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Generally, options granted vest over requisite service periods or on a graduated scale based on total shareholder returns, expire ten years after the grant date and generally do not become exercisable until their restrictions on exercise lapses after the five –year anniversary of the grant date. For options that vest based on shareholder returns, the grant date fair values are calculated using a Monte-Carlo approach which simulates our stock price on the corresponding vesting dates before applying the Black-Scholes model.

The balance of unamortized stock option expense as of December 31, 2017 is $7.9 million, which is expected to be recognized over a weighted‑average period of 3.0 years. Net of amounts capitalized relating to our developments, $1.6 million, $2.9 million and $2.6 million for the years ended December 31, 2017, 2016 and 2015, respectively, of expense associated with stock options are included in General and administrative expense in the accompanying Consolidated Statements of Operations.

Restricted Stock

Restricted stock awards issued under the Incentive Plan provide that shares awarded may not be sold or otherwise transferred until restrictions have lapsed as established by the Committee. In addition to the granting of restricted stock to certain members of management, we award restricted stock to our non‑employee directors as part of their annual retainer. The management awards vest over five years, and the restriction on the non‑employee director shares lapse on the date of our annual meeting of shareholders, or June 1st of the award year, whichever is earlier.

Generally, upon termination of employment or directorship, restricted stock units and restricted shares which have not vested are forfeited.

The following table summarizes restricted stock activity:

 

 

 

 

 

 

 

 

Weighted Average

 

 

Grant Date

 

    

Shares

    

Fair Value

 

 

 

 

 

 

Restricted stock outstanding at January 1, 2015

 

172,690

 

$

121.81

Granted

 

81,581

 

 

121.81

Vested

 

(7,546)

 

 

147.56

Forfeited

 

(4,169)

 

 

101.33

Restricted stock outstanding at December 31, 2015

 

242,556

 

$

100.15

 

 

 

 

 

 

Granted

 

136,198

 

$

67.80

Vested

 

(37,670)

 

 

83.47

Forfeited

 

(51,972)

 

 

90.14

Restricted stock outstanding at December 31, 2016

 

289,112

 

$

88.88

 

 

 

 

 

 

Granted

 

177,385

 

$

85.81

Vested

 

(68,819)

 

 

88.58

Forfeited

 

(43,482)

 

 

76.10

Restricted stock outstanding at December 31, 2017

 

354,196

 

$

88.97

The grant date fair value of the restricted stock is based on the closing sales price of our common stock on the grant date. For restricted stock awards that vest based on shareholder returns, the grant date fair values are calculated using a Monte-Carlo approach which simulates our stock price on the corresponding vesting dates before applying the Black-Scholes model.

Net of amounts capitalized relating to our developments, we recognized compensation expense of $5.7 million, $4.5 million and $4.7 million for the years ended December 31, 2017, 2016 and 2015, respectively, included in General and Administrative expense related to restricted stock awards in the accompanying Consolidated Statements of Operations. The fair value of restricted stock that vested during 2017 was $8.9 million. The balance of unamortized restricted stock expense as of December 31, 2017 was $20.3 million, which is expected to be recognized over a weighted‑average period of 4.2 years.

F-42

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16  RENTALS UNDER OPERATING LEASES

We receive


HHC receives rental income from the leasing of retail, office, multi-family and other space under operating leases. Such operating leases are with a variety of tenants. The minimum future rentals based on operating leases of ourthe consolidated properties held as of December 31, 20172018 are as follows:

 

 

 

 

 

 

Total

 

 

Minimum

Year

    

Rent

 

 

(In thousands)

2018

 

$

160,878

2019

 

 

173,404

2020

 

 

163,048

2021

 

 

166,703

2022

 

 

165,703

Subsequent

 

 

1,027,115

Total

 

$

1,856,851

 Total
 Minimum
YearRent
 (In thousands)
2019$186,342
2020186,044
2021194,042
2022201,057
2023181,622
Subsequent1,110,260
Total$2,059,367

Minimum future rentals exclude amounts which are payable by certain tenants based upon a percentage of their gross sales or as reimbursement of operating expenses and amortization of above-market and below‑market tenant leases.


Percentage rent in lieu of fixed minimum rent recognized from tenants for the years ended December 31, 2018, 2017 and 2016 and 2015 was $1.2 million, $1.5 million and $2.4 million, and $3.5 million, respectively.


Overage rent of approximately $2.8$2.5 million, $3.6$2.8 million and $3.6 million for the years ended December 31, 2018, 2017 2016 and 2015,2016, respectively, are included in Other rental and property revenues in ourthe Consolidated Statements of Operations.


NOTE 17  SEGMENTS

We have


The Company has three business segments which offer different products and services. OurHHC's three segments are managed separately because each requires different operating strategies or management expertise and are reflective of management’s operating philosophies and methods. In addition, ourAs further discussed in Item 7, one common operating measure used to assess operating results for HHC's business segments is earnings before taxes ("EBT"). HHC's segments or assets within such segments could change in the future as development of certain properties commences or other operational or management changes occur. We doThe Company does not distinguish or group ourthe combined operations on a geographic basis. Furthermore, all operations are within the United States. OurThe Company's reportable segments are as follows:

·

Master Planned Communities – includes the development and sale of land, in large‑scale, long‑term community development projects in and around Las Vegas, Nevada; Houston, Texas; and Columbia, Maryland.

·

Operating Assets – includes retail, office, hospitality and multi-family properties along with other real estate investments. These assets are currently generating revenues, and are comprised of commercial real estate properties recently developed or acquired by us, and properties where we believe there is an opportunity to redevelop, reposition, or sell to improve segment performance or to recycle capital.


·

Strategic Developments – includes our residential condominium and commercial property projects currently under development and all other properties held for development which have no substantial operations.

MPC – consists of the development and sale of land in large‑scale, long‑term community development projects in and around Las Vegas, Nevada; Houston, Texas; and Columbia, Maryland.

Operating Assets – consists of retail, office, hospitality and multi-family properties along with other real estate investments. These assets are currently generating revenues and are comprised of commercial real estate properties recently developed or acquired, and properties with an opportunity to redevelop, reposition or sell to improve segment performance or to recycle capital.
Strategic Developments – consists of residential condominium and commercial property projects currently under development and all other properties held for development which have no substantial operations.

Effective January 1, 2017, wethe Company moved thecertain Seaport District NYC assets under construction and related activities to the Strategic Developments segment from the Operating Assets segment. Seaport District NYC operating properties and related operating results remain presented within the Operating Assets segment. The respective segment earnings and total segment assets presented in ourthe financial statements and elsewhere in this Annual Report have been adjusted in all periods reported to reflect this change.

F-43


F-48

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Segment operating results for the years ended December 31, 2018, 2017 2016 and 20152016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 

(In thousands)

 

2017

    

2016

    

2015

Master Planned Communities

 

 

 

 

 

 

 

 

 

Land sales

 

$

248,595

 

$

215,318

 

$

187,399

Builder price participation

 

 

22,835

 

 

21,386

 

 

26,846

Minimum rents

 

 

(8)

 

 

384

 

 

797

Other land revenues

 

 

28,124

 

 

16,192

 

 

14,778

Other rental and property revenues

 

 

(3)

 

 

24

 

 

45

Total revenues

 

 

299,543

 

 

253,304

 

 

229,865

 

 

 

 

 

 

 

 

 

 

Cost of sales – land

 

 

121,116

 

 

95,727

 

 

88,065

Land sales operations

 

 

38,777

 

 

42,371

 

 

44,907

Provision for doubtful accounts

 

 

 2

 

 

 —

 

 

 —

Depreciation and amortization

 

 

323

 

 

311

 

 

640

Other income, net

 

 

(3,500)

 

 

 —

 

 

 —

Interest income

 

 

(4)

 

 

(59)

 

 

(60)

Interest expense (*)

 

 

(24,288)

 

 

(21,026)

 

 

(18,053)

Equity in (earnings) loss in Real Estate and Other Affiliates

 

 

(23,234)

 

 

(43,501)

 

 

 —

Total expenses

 

 

109,192

 

 

73,823

 

 

115,499

MPC segment EBT

 

 

190,351

 

 

179,481

 

 

114,366

 

 

 

 

 

 

 

 

 

 

Operating Assets

 

 

 

 

 

 

 

 

 

Minimum rents

 

 

182,468

 

 

172,437

 

 

149,064

Tenant recoveries

 

 

45,366

 

 

44,306

 

 

39,415

Hospitality revenues

 

 

76,020

 

 

62,252

 

 

45,374

Other rental and property revenues

 

 

23,701

 

 

16,170

 

 

25,453

Total revenues

 

 

327,555

 

 

295,165

 

 

259,306

 

 

 

 

 

 

 

 

 

 

Other property operating costs

 

 

71,748

 

 

60,506

 

 

68,078

Rental property real estate taxes

 

 

26,523

 

 

24,439

 

 

21,856

Rental property maintenance costs

 

 

12,872

 

 

12,033

 

 

10,236

Hospitality operating costs

 

 

56,362

 

 

49,359

 

 

34,839

Provision for doubtful accounts

 

 

2,710

 

 

5,601

 

 

3,998

Demolition costs

 

 

1,605

 

 

194

 

 

2,412

Provision for impairment

 

 

 —

 

 

35,734

 

 

 —

Development-related marketing costs

 

 

3,346

 

 

947

 

 

7,934

Depreciation and amortization

 

 

122,421

 

 

86,313

 

 

89,075

Other income, net

 

 

315

 

 

(4,601)

 

 

(524)

Interest income

 

 

(22)

 

 

(19)

 

 

(37)

Interest expense (*)

 

 

61,606

 

 

50,446

 

 

32,968

Equity in (earnings) loss in Real Estate and Other Affiliates

 

 

(3,267)

 

 

(2,802)

 

 

(1,883)

Total expenses

 

 

356,219

 

 

318,150

 

 

268,952

Operating Assets segment EBT

 

 

(28,664)

 

 

(22,985)

 

 

(9,646)

 

 

 

 

 

 

 

 

 

 

Strategic Developments

 

 

 

 

 

 

 

 

 

Minimum rents

 

 

565

 

 

447

 

 

899

Tenant recoveries

 

 

448

 

 

24

 

 

127

Condominium rights and unit sales

 

 

464,251

 

 

485,634

 

 

305,284

Other land revenues

 

 

42

 

 

40

 

 

25

Other rental and property revenues

 

 

7,716

 

 

391

 

 

1,582

Total revenues

 

 

473,022

 

 

486,536

 

 

307,917

 

 

 

 

 

 

 

 

 

 

Condominium rights and unit cost of sales

 

 

338,361

 

 

319,325

 

 

191,606

Other property operating costs

 

 

19,981

 

 

5,472

 

 

4,673

Rental property real estate taxes

 

 

2,662

 

 

2,408

 

 

2,282

Rental property maintenance costs

 

 

560

 

 

359

 

 

476

Provision for (recovery of) doubtful accounts

 

 

(2)

 

 

63

 

 

32

Demolition costs

 

 

318

 

 

2,018

 

 

885

Development-related marketing costs

 

 

17,158

 

 

21,237

 

 

17,532

Depreciation and amortization

 

 

1,210

 

 

2,744

 

 

3,240

Other income, net

 

 

(108)

 

 

(611)

 

 

104

Interest income

 

 

(187)

 

 

(500)

 

 

(202)

Interest expense (*)

 

 

(25,280)

 

 

(16,937)

 

 

(8,453)

Equity in (earnings) loss in Real Estate and Other Affiliates

 

 

550

 

 

(10,515)

 

 

(1,838)

Gains on sales of properties

 

 

(51,242)

 

 

(140,549)

 

 

 —

Total expenses

 

 

303,981

 

 

184,514

 

 

210,337

Strategic Developments segment EBT

 

 

169,041

 

 

302,022

 

 

97,580

Total consolidated segment EBT

 

$

330,728

 

$

458,518

 

$

202,300

(*) Negative interest expense amounts are due to interest capitalized in our MPC and Strategic Developments segments related to Operating Assets segment debt and the Senior Notes.

F-44

  Year Ended Year Ended December 31,
(In thousands) 2018 2017 2016
Operating Assets      
Total revenues $379,124
 $327,555
 $295,165
Total operating expenses 200,872
 170,215
 151,938
Segment operating income 178,252
 157,340
 143,227
Depreciation and amortization 113,576
 122,421
 86,313
Provision for impairment —
 —
 35,734
Interest expense (income), net 71,551
 61,584
 50,427
Other loss (income), net 7,005
 315
 (4,601)
Equity in (earnings) loss from Real Estate and Other Affiliates (1,529) (3,267) (2,802)
Operating Assets segment EBT (12,351) (23,713) (21,844)
       
Master Planned Communities      
Total revenues 309,451
 299,543
 253,304
Total operating expenses 169,474
 159,895
 138,098
Segment operating income 139,977
 139,648
 115,206
Depreciation and amortization 243
 323
 311
Interest expense (income), net (26,919) (24,292) (21,085)
Other loss (income), net (18) (3,500) —
Equity in (earnings) loss from Real Estate and Other Affiliates (36,284) (23,234) (43,501)
MPC segment EBT 202,955
 190,351
 179,481
       
Strategic Developments      
Total revenues 375,962
 473,022
 486,536
Total operating expenses 304,775
 361,562
 327,627
Segment operating income 71,187
 111,460
 158,909
Depreciation and amortization 3,307
 1,210
 2,744
Interest expense (income), net (18,767) (25,467) (17,437)
Other loss (income), net (3,015) (108) (611)
Equity in (earnings) loss from Real Estate and Other Affiliates (2,124) 550
 (10,515)
Gains on sales of properties —
 (51,242) (140,549)
Strategic Developments EBT 91,786
 186,517
 325,277
       
Consolidated segment      
Total revenues 1,064,537
 1,100,120
 1,035,005
Total operating expenses 675,121
 691,672
 617,663
Segment operating income 389,416
 408,448
 417,342
Depreciation and amortization 117,126
 123,954
 89,368
Provision for impairment —
 —
 35,734
Interest expense (income), net 25,865
 11,825
 11,905
Other loss (income), net 3,972
 (3,293) (5,212)
Equity in (earnings) loss from Real Estate and Other Affiliates (39,937) (25,951) (56,818)
Gains on sales of properties —
 (51,242) (140,549)
Consolidated segment EBT 282,390
 353,155
 482,914
       
Corporate expenses and other items 224,664
 186,532
 280,588
Net income 57,726
 166,623
 202,326
Net (income) loss attributable to noncontrolling interests (714) 1,781
 (23)
Net income attributable to common stockholders $57,012
 $168,404
 $202,303


F-49

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The following reconciles EBT to GAAP income (loss) before taxes:


 

 

 

 

 

 

 

 

 

 

Reconciliation of  EBT to income before taxes

 

Year Ended December 31, 

(In thousands)

 

2017

    

2016

    

2015

MPC segment EBT

 

$

190,351

 

$

179,481

 

$

114,366

Operating Assets segment EBT

 

 

(28,664)

 

 

(22,985)

 

 

(9,646)

Strategic Developments segment EBT

 

 

169,041

 

 

302,022

 

 

97,580

Total consolidated segment EBT

 

 

330,728

 

 

458,518

 

 

202,300

Corporate and other items:

 

 

 

 

 

 

 

 

 

General and administrative

 

 

(89,882)

 

 

(86,588)

 

 

(81,345)

Corporate interest expense, net

 

 

(48,700)

 

 

(52,460)

 

 

(52,995)

Warrant liability (loss) gain

 

 

(43,443)

 

 

(24,410)

 

 

58,320

Gain on acquisition of joint venture partner's interest

 

 

23,332

 

 

27,088

 

 

 —

Gain (loss) on disposal of operating assets

 

 

3,868

 

 

(1,117)

 

 

29,073

Corporate Gains on sales of properties

 

 

125

 

 

 —

 

 

 —

Equity in earnings in Real Estate and Other Affiliates

 

 

(453)

 

 

 —

 

 

 —

Loss on redemption of senior notes due 2021

 

 

(46,410)

 

 

 —

 

 

 —

Corporate other (expense) income, net

 

 

(45)

 

 

6,241

 

 

1,409

Corporate depreciation and amortization

 

 

(8,298)

 

 

(6,496)

 

 

(6,042)

Total Corporate and other items

 

 

(209,906)

 

 

(137,742)

 

 

(51,580)

Income before taxes

 

$

120,822

 

$

320,776

 

$

150,720

The following reconciles segment revenues to GAAP consolidated revenues:

 

 

 

 

 

 

 

 

 

 

Reconciliation of Segment Basis Revenues to Revenues

 

Year Ended December 31, 

(In thousands)

 

2017

    

2016

    

2015

Master Planned Communities

 

$

299,543

 

$

253,304

 

$

229,865

Operating Assets

 

 

327,555

 

 

295,165

 

 

259,306

Strategic Developments

 

 

473,022

 

 

486,536

 

 

307,917

Total revenues

 

$

1,100,120

 

$

1,035,005

 

$

797,088

The assets by segment and the reconciliation of total segment assets to the total assets in the Consolidated Balance Sheets are summarized as follows:

 

 

 

 

 

 

 

 

 

December 31, 

(In thousands)

 

2017

    

2016

Master Planned Communities

 

$

1,999,090

 

$

1,982,639

Operating Assets

 

 

2,489,177

 

 

2,344,949

Strategic Developments

 

 

1,511,612

 

 

1,451,460

Total segment assets

 

 

5,999,879

 

 

5,779,048

Corporate and other

 

 

729,185

 

 

588,334

Total assets

 

$

6,729,064

 

$

6,367,382

The increase in the Operating Assets segment asset balance as of December 31, 2017 compared to 2016 is primarily due to placing One and Two Merriweather, HHC 242 and HHC 2978 Self-Storage in service as well as the acquisitions of our joint venture partners’ 50% interests in the Las Vegas 51s and Constellation, respectively, partially offset by the transfers of Landmark Mall, a portion of Ward Village Retail and our investment in 33 Peck Slip to Strategic Developments in 2017.

The increase in the Strategic Developments segment asset balance as of December 31, 2017 compared to December 31, 2016 relates to transfers of Landmark Mall and 33 Peck Slip into the segment along with increased development expenditures primarily in the Seaport District and at our Ward condominium projects under construction. Ongoing predevelopment activities at various other projects also contributed to the increase, partially offset by the partial sale of The Elk Grove Collection and placing various assets in service. 

The increase in the Corporate and other asset balance as of December 31, 2017 compared to December 31, 2016 is primarily due to net proceeds received from the issuance of the 2025 Notes in March 2017.

F-45

  December 31,
(In thousands) 2018 2017
Master Planned Communities $2,076,678
 $1,999,090
Operating Assets 3,124,287
 2,489,177
Strategic Developments 1,806,206
 1,511,612
Total segment assets 7,007,171
 5,999,879
Corporate and other 348,628
 729,185
Total assets $7,355,799
 $6,729,064

Table of Contents

THE HOWARD HUGHES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 18  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

  2018
  First Second Third Fourth
(In thousands, except share amounts) Quarter Quarter Quarter Quarter
Total revenues $161,679
 $181,005
 $257,160
 $464,693
Operating income 2,539
 (8,295) 42,312
 70,254
Net income 1,834
 (5,879) 23,847
 37,924
Net income attributable to common stockholders 1,474
 (5,088) 23,365
 37,261
Earnings per share:        
Basic 0.03
 (0.12) 0.54
 0.87
Diluted (a) 0.03
 (0.12) 0.54
 0.86
Weighted average shares outstanding:        
Basic 42,976
 42,573
 43,066
 43,075
Diluted 43,363
 42,942
 43,317
 43,250
  2017
  First Second Third Fourth
(In thousands, except share amounts) Quarter Quarter Quarter Quarter
Total revenues $231,762
 $308,639
 $258,736
 $300,983
Operating income 77,554
 54,133
 24,372
 62,443
Net income 5,659
 3,120
 10,516
 147,328
Net income attributable to common stockholders 5,659
 3,120
 10,504
 149,121
Earnings per share:        
Basic 0.14
 0.08
 0.25
 3.48
Diluted (a) 0.13
 0.07
 0.24
 3.46
Weighted average shares outstanding:        
Basic 39,799
 40,373
 42,845
 42,860
Diluted 42,757
 43,051
 43,267
 43,120

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

First

 

Second

 

Third

 

Fourth

(In thousands, except share amounts)

   

Quarter

    

Quarter

    

Quarter

    

Quarter

Total revenues

 

$

240,680

 

$

273,514

 

$

242,265

 

$

278,546

Operating income

 

 

192,970

 

 

73,636

 

 

784

 

 

59,372

Net income

 

 

143,765

 

 

6,970

 

 

7,996

 

 

43,595

Net income attributable to common stockholders

 

 

143,765

 

 

6,970

 

 

7,973

 

 

43,595

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

3.64

 

 

0.18

 

 

0.20

 

 

1.10

Diluted (a)

 

 

2.69

 

 

0.16

 

 

0.19

 

 

1.02

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

39,473

 

 

39,492

 

 

39,502

 

 

39,502

Diluted

 

 

42,400

 

 

42,664

 

 

42,760

 

 

42,753

a)

(a)

Diluted earnings per share includes the impact of dilutive warrants, in the money options and restricted stock. Net income used in the calculation of EPS was also adjusted for the warrant gain during the period, where applicable.


F-46


Table of Contents

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2017

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial Cost (b)

 

Costs Capitalized Subsequent to Acquisition (c)

 

Gross Amounts at Which Carried at Close of Period (d)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Buildings

 

 

 

 

Buildings

 

 

 

 

Buildings

 

 

 

 

 

 

 

 

 

Date

 

 

 

 

 

 

 

 

 

 

and

 

 

 

 

and

 

 

 

 

and

 

 

 

 

Accumulated

 

Date of

 

Acquired /

Name of Center

    

Location

 

Encumbrances (a)

 

Land

    

Improvements 

    

Land (e)

 

Improvements (e)(f)

 

Land

 

Improvements (f)

 

Total

 

Depreciation (g)

 

Construction

 

Completed

Bridgeland

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridgeland

 

Cypress, TX

 

$

65,000

 

$

260,223

 

$

 —

 

$

198,685

 

$

1,960

 

$

458,908

 

$

1,960

 

$

460,868

 

$

(801)

 

 

 

2004

Lakeland Village Center at Bridgeland

 

Cypress, TX

 

 

11,470

 

 

2,404

 

 

11,135

 

 

 —

 

 

3,038

 

 

2,404

 

 

14,173

 

 

16,577

 

 

(335)

 

 

 

2016

Columbia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

American City Building

 

Columbia, MD    

 

 

 —

 

 

 —

 

 

13,534

 

 

 —

 

 

 —

 

 

 —

 

 

13,534

 

 

13,534

 

 

 —

 

 

 

2016

Aristocrat

 

Columbia, MD    

 

 

 —

 

 

 —

 

 

15,313

 

 

 —

 

 

 —

 

 

 —

 

 

15,313

 

 

15,313

 

 

 —

 

2017

 

 

10 - 70 Columbia Corporate Center

 

Columbia, MD    

 

 

100,000

 

 

24,685

 

 

94,824

 

 

 —

 

 

18,680

 

 

24,685

 

 

113,504

 

 

138,189

 

 

(12,067)

 

 

 

2012/2014

Columbia Office Properties

 

Columbia, MD    

 

 

 —

 

 

1,175

 

 

14,913

 

 

 —

 

 

268

 

 

1,175

 

 

15,181

 

 

16,356

 

 

(4,527)

 

 

 

1969/1972

Columbia Regional Building

 

Columbia, MD    

 

 

25,000

 

 

 —

 

 

28,865

 

 

 —

 

 

2,223

 

 

 —

 

 

31,088

 

 

31,088

 

 

(3,213)

 

 

 

2014

Lakefront

 

Columbia, MD    

 

 

 —

 

 

 —

 

 

1,964

 

 

 —

 

 

 —

 

 

 —

 

 

1,964

 

 

1,964

 

 

 —

 

 

 

2004

Maryland Communities

 

Columbia, MD    

 

 

 —

 

 

457,552

 

 

 —

 

 

(440,924)

 

 

197

 

 

16,628

 

 

197

 

 

16,825

 

 

(150)

 

 

 

2004

Merriweather District Predevelopment

 

Columbia, MD    

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

76,808

 

 

 —

 

 

76,808

 

 

76,808

 

 

 —

 

 

 

2015

One Mall North

 

Columbia, MD

 

 

14,463

 

 

7,822

 

 

10,818

 

 

 —

 

 

 —

 

 

7,822

 

 

10,818

 

 

18,640

 

 

(335)

 

 

 

2016

One Merriweather

 

Columbia, MD    

 

 

42,332

 

 

1,433

 

 

58,936

 

 

 —

 

 

8,065

 

 

1,433

 

 

67,001

 

 

68,434

 

 

(1,396)

 

 

 

2017

Ridgely Building

 

Columbia, MD    

 

 

 —

 

 

400

 

 

58,937

 

 

 —

 

 

(58,937)

 

 

400

 

 

 —

 

 

400

 

 

 —

 

2017

 

 

Two Merriweather

 

Columbia, MD    

 

 

19,429

 

 

1,019

 

 

4,931

 

 

 —

 

 

25,691

 

 

1,019

 

 

30,622

 

 

31,641

 

 

(127)

 

 

 

2017

Seaport District

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seaport Predevelopment

 

New York, NY

 

 

 —

 

 

 —

 

 

7,641

 

 

 —

 

 

581

 

 

 —

 

 

8,222

 

 

8,222

 

 

 —

 

2013

 

 

85 South Street

 

New York, NY

 

 

 —

 

 

15,913

 

 

8,137

 

 

 —

 

 

949

 

 

15,913

 

 

9,086

 

 

24,999

 

 

(1,985)

 

 

 

2014

Seaport District NYC - Tin Building

 

New York, NY

 

 

 —

 

 

 —

 

 

8,290

 

 

 —

 

 

5,022

 

 

 —

 

 

13,312

 

 

13,312

 

 

—

 

 

 

2015

Seaport District NYC - Pier 17

 

New York, NY

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

344,168

 

 

 —

 

 

344,168

 

 

344,168

 

 

 —

 

2017

 

 

Seaport District NYC Historic District / Uplands

 

New York, NY

 

 

 —

 

 

 —

 

 

7,884

 

 

 —

 

 

105,078

 

 

 —

 

 

112,962

 

 

112,962

 

 

(7,252)

 

2013

 

2016

Summerlin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Constellation

 

Las Vegas, NV

 

 

24,200

 

 

3,069

 

 

39,759

 

 

 —

 

 

 —

 

 

3,069

 

 

39,759

 

 

42,828

 

 

 —

 

 

 

2016

Downtown Summerlin (h)

 

Las Vegas, NV

 

 

276,900

 

 

30,855

 

 

364,100

 

 

 —

 

 

25,484

 

 

30,855

 

 

389,584

 

 

420,439

 

 

(42,046)

 

 

 

2014

Downtown Summerlin Apartments

 

Las Vegas, NV

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

12,661

 

 

 —

 

 

12,661

 

 

12,661

 

 

 —

 

2017

 

 

Hockey Ground Lease

 

Las Vegas, NV

 

 

 —

 

 

 —

 

 

 —

 

 

4,710

 

 

2,156

 

 

4,710

 

 

2,156

 

 

6,866

 

 

(33)

 

2017

 

 

Las Vegas 51s

 

Las Vegas, NV

 

 

 —

 

 

 —

 

 

179

 

 

 —

 

 

 —

 

 

 —

 

 

179

 

 

179

 

 

(40)

 

 

 

2017

Las Vegas Ballpark

 

Las Vegas, NV

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,651

 

 

 —

 

 

7,651

 

 

7,651

 

 

 —

 

2017

 

 

Summerlin

 

Las Vegas, NV

 

 

24,764

 

 

990,179

 

 

 —

 

 

(137,946)

 

 

1,186

 

 

852,233

 

 

1,186

 

 

853,419

 

 

(660)

 

 

 

2004

Two Summerlin

 

Las Vegas, NV

 

 

 —

 

 

 —

 

 

18,676

 

 

 —

 

 

 —

 

 

 —

 

 

18,676

 

 

18,676

 

 

 —

 

2017

 

 

The Woodlands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Creekside Park Apartments

 

The Woodlands, TX

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

20,030

 

 

 —

 

 

20,030

 

 

20,030

 

 

 —

 

2017

 

 

Creekside Village Green

 

The Woodlands, TX

 

 

 —

 

 

 —

 

 

 —

 

 

1,323

 

 

16,263

 

 

1,323

 

 

16,263

 

 

17,586

 

 

(1,590)

 

 

 

2015

Embassy Suites at Hughes Landing

 

The Woodlands, TX

 

 

31,245

 

 

 —

 

 

6,752

 

 

1,818

 

 

36,117

 

 

1,818

 

 

42,869

 

 

44,687

 

 

(3,029)

 

 

 

2015

100 Fellowship Drive

 

The Woodlands, TX

 

 

 1

 

 

 —

 

 

 —

 

 

 —

 

 

21,691

 

 

 —

 

 

21,691

 

 

21,691

 

 

 —

 

2017

 

 

HHC 242 Self-Storage

 

The Woodlands, TX

 

 

6,243

 

 

878

 

 

6,802

 

 

 —

 

 

1,090

 

 

878

 

 

7,892

 

 

8,770

 

 

(208)

 

 

 

2017

HHC 2978 Self-Storage

 

The Woodlands, TX

 

 

5,634

 

 

124

 

 

5,498

 

 

 —

 

 

2,015

 

 

124

 

 

7,513

 

 

7,637

 

 

(160)

 

 

 

2017

One Hughes Landing

 

The Woodlands, TX

 

 

52,000

 

 

1,678

 

 

34,761

 

 

 —

 

 

 —

 

 

1,678

 

 

34,761

 

 

36,439

 

 

(6,287)

 

 

 

2013

Two Hughes Landing

 

The Woodlands, TX

 

 

48,000

 

 

1,269

 

 

34,950

 

 

 —

 

 

 —

 

 

1,269

 

 

34,950

 

 

36,219

 

 

(5,693)

 

 

 

2014

Three Hughes Landing

 

The Woodlands, TX

 

 

45,058

 

 

2,626

 

 

46,372

 

 

 —

 

 

21,638

 

 

2,626

 

 

68,010

 

 

70,636

 

 

(1,814)

 

 

 

2016

1725 Hughes Landing Boulevard

 

The Woodlands, TX

 

 

58,815

 

 

1,351

 

 

36,764

 

 

 —

 

 

30,252

 

 

1,351

 

 

67,016

 

 

68,367

 

 

(6,510)

 

 

 

2015

1735 Hughes Landing Boulevard

 

The Woodlands, TX

 

 

58,602

 

 

3,709

 

 

97,651

 

 

 —

 

 

 —

 

 

3,709

 

 

97,651

 

 

101,360

 

 

(9,292)

 

 

 

2015

Hughes Landing Retail

 

The Woodlands, TX

 

 

35,000

 

 

5,184

 

 

 —

 

 

 —

 

 

32,987

 

 

5,184

 

 

32,987

 

 

38,171

 

 

(3,145)

 

 

 

2015

1701 Lake Robbins

 

The Woodlands, TX

 

 

 —

 

 

1,663

 

 

3,725

 

 

 —

 

 

10

 

 

1,663

 

 

3,735

 

 

5,398

 

 

(320)

 

 

 

2014

Lake Woodlands Crossing Retail

 

The Woodlands, TX

 

 

 —

 

 

 —

 

 

6,525

 

 

 —

 

 

 —

 

 

 —

 

 

6,525

 

 

6,525

 

 

 —

 

2017

 

 

2201 Lake Woodlands Drive

 

The Woodlands, TX

 

 

 —

 

 

3,755

 

 

 —

 

 

 —

 

 

47

 

 

3,755

 

 

47

 

 

3,802

 

 

(5)

 

 

 

1994

One Lakes Edge

 

The Woodlands, TX

 

 

69,440

 

 

1,057

 

 

81,768

 

 

 —

 

 

 —

 

 

1,057

 

 

81,768

 

 

82,825

 

 

(5,784)

 

 

 

2015

Millennium Six Pines Apartments

 

The Woodlands, TX

 

 

42,500

 

 

4,000

 

 

54,624

 

 

7,225

 

 

 —

 

 

11,225

 

 

54,624

 

 

65,849

 

 

(2,819)

 

 

 

2014

Millennium Waterway Apartments

 

The Woodlands, TX

 

 

55,095

 

 

15,917

 

 

56,002

 

 

 —

 

 

1,394

 

 

15,917

 

 

57,396

 

 

73,313

 

 

(12,898)

 

 

 

2010

9303 New Trails

 

The Woodlands, TX

 

 

12,003

 

 

1,929

 

 

11,915

 

 

 —

 

 

601

 

 

1,929

 

 

12,516

 

 

14,445

 

 

(2,182)

 

 

 

2008

3831 Technology Forest Drive

 

The Woodlands, TX

 

 

21,954

 

 

514

 

 

14,194

 

 

 —

 

 

1,703

 

 

514

 

 

15,897

 

 

16,411

 

 

(2,435)

 

 

 

2014

The Westin at the Woodlands

 

The Woodlands, TX

 

 

57,946

 

 

22,473

 

 

 —

 

 

(20,520)

 

 

88,892

 

 

1,953

 

 

88,892

 

 

90,845

 

 

(5,229)

 

 

 

2016

The Woodlands

 

The Woodlands, TX

 

 

150,000

 

 

269,411

 

 

9,814

 

 

(63,362)

 

 

6,793

 

 

206,049

 

 

16,607

 

 

222,656

 

 

(3,098)

 

 

 

2011

The Woodlands Parking Garages

 

The Woodlands, TX

 

 

 —

 

 

5,857

 

 

 —

 

 

1,529

 

 

11,837

 

 

7,386

 

 

11,837

 

 

19,223

 

 

(1,126)

 

 

 

2008/2009

The Woodlands Resort & Conference Center

 

The Woodlands, TX

 

 

65,500

 

 

13,258

 

 

37,983

 

 

 —

 

 

76,801

 

 

13,258

 

 

114,784

 

 

128,042

 

 

(15,795)

 

 

 

2014

20/25 Waterway Avenue

 

The Woodlands, TX

 

 

13,646

 

 

2,346

 

 

8,871

 

 

 —

 

 

775

 

 

2,346

 

 

9,646

 

 

11,992

 

 

(2,122)

 

 

 

20072009

Waterway Garage Retail

 

The Woodlands, TX

 

 

 —

 

 

1,341

 

 

4,255

 

 

 —

 

 

1,411

 

 

1,341

 

 

5,666

 

 

7,007

 

 

(1,169)

 

 

 

2011

3 Waterway Square

 

The Woodlands, TX

 

 

50,327

 

 

748

 

 

 —

 

 

 —

 

 

42,329

 

 

748

 

 

42,329

 

 

43,077

 

 

(9,387)

 

 

 

2013

4 Waterway Square

 

The Woodlands, TX

 

 

35,151

 

 

1,430

 

 

51,553

 

 

 —

 

 

4,288

 

 

1,430

 

 

55,841

 

 

57,271

 

 

(10,551)

 

 

 

2010

    Initial Cost (b)Costs Capitalized Subsequent to Acquisition (c)Gross Amounts at Which Carried at Close of Period (d)   
     Buildings Buildings Buildings   Date
(In thousands)    and and and AccumulatedDate ofAcquired /
Name of CenterLocationCenter TypeEncumbrances (a)LandImprovements Land (e)Improvements (e)(f)LandImprovements (f)TotalDepreciation (g)ConstructionCompleted
Bridgeland             
BridgelandCypress, TXMPC$65,000
$260,223
$—
$213,628
$2,217
$473,851
$2,217
$476,068
$(686) 2004
Lakeland Village Center at Bridgeland (h)Cypress, TXRetail14,135
2,404
11,135
—
2,919
2,404
14,054
16,458
(853) 2016
Lakeside RowCypress, TXDevelopment—
—
—
—
14,063
—
14,063
14,063
—
2018 
Columbia             
American City BuildingColumbia, MD    Other—
—
13,534
—
—
—
13,534
13,534
—
 2016
10 - 70 Columbia Corporate Center (h)Columbia, MD    Office99,184
24,685
94,824
—
23,385
24,685
118,209
142,894
(16,471) 2012/2014
Columbia Office PropertiesColumbia, MD    Office—
1,175
14,913
—
264
1,175
15,177
16,352
(5,512) 1969/1972
Columbia Regional BuildingColumbia, MD    Office25,000
—
28,865
—
2,294
—
31,159
31,159
(3,995) 2014
Columbia Multi-familyColumbia, MDDevelopment—
—
—
—
49,189
—
49,189
49,189
—
2018 
LakefrontColumbia, MD    Other—
—
1,964
—
1,258
—
3,222
3,222
—
 2004
ColumbiaColumbia, MD    MPC—
457,552
—
(440,918)137
16,634
137
16,771
(137) 2004
Merriweather DistrictColumbia, MD    Development—
—
—
—
104,126
—
104,126
104,126
—
 2015
6100 MerriweatherColumbia, MDDevelopment—
—
—
—
—
—
—
—
—
2018 
One Mall North (h)Columbia, MDOffice12,425
7,822
10,818
—
247
7,822
11,065
18,887
(644) 2016
One Merriweather (h)Columbia, MD    Office42,008
1,433
58,936
—
13,809
1,433
72,745
74,178
(3,600) 2017
Two MerriweatherColumbia, MDOffice24,000
1,019
4,931
—
28,085
1,019
33,016
34,035
(1,055) 2017
Ridgely BuildingColumbia, MD    Development—
400
58,937
(400)(58,537)—
400
400
—
2017 
Sterrett PlaceColumbia, MDDevelopment—
—
5,618
—
—
—
5,618
5,618
(16) 2018
Seaport District             
85 South StreetNew York, NYMulti-family—
15,913
8,137
—
1,211
15,913
9,348
25,261
(2,629) 2014
Seaport PredevelopmentNew York, NYDevelopment—
—
7,641
—
1,173
—
8,814
8,814
—
2013 
Seaport District NYC - Tin BuildingNew York, NYDevelopment—
—
8,290
—
27,465
—
35,755
35,755
—
 2015
Seaport District NYC - Pier 17New York, NYRetail—
—
—
—
430,756
—
430,756
430,756
(5,081)20172018
Seaport District NYC Historic District / UplandsNew York, NYRetail—
—
7,884
—
108,568
—
116,452
116,452
(8,943)20132016
250 Water StreetNew York, NYDevelopment129,723
—
179,471
—
—
—
179,471
179,471
—
 2018
Summerlin             
Aristocrat (i)Las Vegas, NVOffice21,334
—
—
5,004
31,875
5,004
31,875
36,879
(244)20172018
ConstellationLas Vegas, NVMulti-family24,200
3,069
39,759
—
270
3,069
40,029
43,098
(1,426) 2016
Downtown Summerlin (i) (j)Las Vegas, NVRetail/Office269,407
30,855
364,100
—
33,281
30,855
397,381
428,236
(57,768) 2014
Hockey Ground Lease (i)Las Vegas, NVOther141
—
—
6,705
2,198
6,705
2,198
8,903
(73) 2017
Las Vegas AviatorsLas Vegas, NVOther—
—
179
—
55
—
234
234
(85) 2017
TWO Summerlin (i)Las Vegas, NVOffice14,535
—
—
3,037
46,907
3,037
46,907
49,944
(276)20172018
SummerlinLas Vegas, NVMPC11,608
990,179
—
(160,272)759
829,907
759
830,666
(252) 2004
Summerlin Ballpark (i)Las Vegas, NVDevelopment27,110
—
—
—
61,254
—
61,254
61,254
—
2017 
Tanager Apartments (i)Las Vegas, NVDevelopment281
—
—
—
39,192
—
39,192
39,192
—
2017 
The Woodlands    
 
        
Creekside Park ApartmentsThe Woodlands, TXMulti-family—
—
—
729
39,728
729
39,728
40,457
(292)20172018
Creekside Park WestThe Woodlands, TXDevelopment—
—
—
—
3,408
—
3,408
3,408
—
2018 


F-47

    Initial Cost (b)Costs Capitalized Subsequent to Acquisition (c)Gross Amounts at Which Carried at Close of Period (d)   
     Buildings Buildings Buildings   Date
(In thousands)    and and and AccumulatedDate ofAcquired /
Name of CenterLocationCenter TypeEncumbrances (a)LandImprovements Land (e)Improvements (e)(f)LandImprovements (f)TotalDepreciation (g)ConstructionCompleted
Creekside Village GreenThe Woodlands, TXRetail17,051
—
—
1,323
16,290
1,323
16,290
17,613
(2,248) 2015
Embassy Suites at Hughes Landing (h)The Woodlands, TXHospitality27,970
—
6,752
1,818
36,339
1,818
43,091
44,909
(4,566) 2015
100 Fellowship DriveThe Woodlands, TXDevelopment35,481
—
—
—
56,560
—
56,560
56,560
—
2017 
HHC 242 Self-StorageThe Woodlands, TXOther6,604
878
6,802
—
1,106
878
7,908
8,786
(394) 2017
HHC 2978 Self-StorageThe Woodlands, TXOther6,042
124
5,498
—
2,063
124
7,561
7,685
(343) 2017
One Hughes LandingThe Woodlands, TXOffice52,000
1,678
34,761
—
(121)1,678
34,640
36,318
(8,075) 2013
Two Hughes LandingThe Woodlands, TXOffice48,000
1,269
34,950
—
(323)1,269
34,627
35,896
(7,623) 2014
Three Hughes Landing (h)The Woodlands, TXOffice55,759
2,626
46,372
—
28,403
2,626
74,775
77,401
(4,613) 2016
1725 Hughes Landing Boulevard (h)The Woodlands, TXOffice56,773
1,351
36,764
—
31,618
1,351
68,382
69,733
(10,270) 2015
1735 Hughes Landing Boulevard (h)The Woodlands, TXOffice54,568
3,709
97,651
—
916
3,709
98,567
102,276
(13,531) 2015
Hughes Landing DaycareThe Woodlands, TXDevelopment—
—
—
—
512
—
512
512
—
2018 
Hughes Landing RetailThe Woodlands, TXRetail35,000
5,184
—
—
32,985
5,184
32,985
38,169
(4,595) 2015
1701 Lake RobbinsThe Woodlands, TXOffice3,658
1,663
3,725
—
409
1,663
4,134
5,797
(429) 2014
Lake Woodlands Crossing RetailThe Woodlands, TXRetail9,539
—
—
5,122
8,598
5,122
8,598
13,720
(87)20172018
2201 Lake Woodlands DriveThe Woodlands, TXOffice—
3,755
—
—
1,162
3,755
1,162
4,917
(41) 1994
Lakefront NorthThe Woodlands, TXOffice21,120
10,260
39,357
—
331
10,260
39,688
49,948
(330) 2018
One Lakes EdgeThe Woodlands, TXMulti-family69,440
1,057
81,768
—
(71)1,057
81,697
82,754
(7,887) 2015
Two Lakes EdgeThe Woodlands, TXDevelopment—
—
—
—
18,583
—
18,583
18,583
—
2018 
Millennium Six Pines ApartmentsThe Woodlands, TXMulti-family42,500
4,000
54,624
7,225
102
11,225
54,726
65,951
(4,820) 2014
Millennium Waterway ApartmentsThe Woodlands, TXMulti-family54,083
15,917
56,002
—
2,261
15,917
58,263
74,180
(15,241) 2010
9303 New TrailsThe Woodlands, TXOffice11,610
1,929
11,915
—
422
1,929
12,337
14,266
(2,406) 2008
3831 Technology Forest DriveThe Woodlands, TXOffice21,571
514
14,194
—
1,703
514
15,897
16,411
(3,224) 2014
20/25 Waterway AvenueThe Woodlands, TXRetail13,395
2,346
8,871
—
726
2,346
9,597
11,943
(2,418) 2007/2009
Waterway Garage RetailThe Woodlands, TXRetail—
1,341
4,255
—
1,105
1,341
5,360
6,701
(1,239) 2011
3 Waterway SquareThe Woodlands, TXOffice49,013
748
—
—
42,008
748
42,008
42,756
(10,955) 2013
4 Waterway SquareThe Woodlands, TXOffice33,998
1,430
51,553
—
6,176
1,430
57,729
59,159
(13,231) 2010
The Westin at the Woodlands (h)The Woodlands, TXHospitality41,793
22,473
—
(20,520)92,380
1,953
92,380
94,333
(7,990) 2016
The WoodlandsThe Woodlands, TXMPC150,000
269,411
9,814
(60,419)9,744
208,992
19,558
228,550
(3,507) 2011
The Woodlands Parking GaragesThe Woodlands, TXOther—
5,857
—
1,529
11,837
7,386
11,837
19,223
(1,456) 2008/2009
The Woodlands Resort & Conference CenterThe Woodlands, TXHospitality62,500
13,258
37,983
—
78,555
13,258
116,538
129,796
(20,713) 2014
2000 Woodlands ParkwayThe Woodlands, TXRetail—
—
—
—
506
—
506
506
(16) 1997
1400 Woodloch ForestThe Woodlands, TXOffice—
—
—
1,570
14,519
1,570
14,519
16,089
(4,442) 1981
The Woodlands Hills             
The Woodlands HillsConroe, TXMPC—
99,284
—
18,702
—
117,986
 117,986
—
 2014
Ward Village             
‘A‘ali‘iHonolulu, HIDevelopment—
—
—
—
28,950
—
28,950
28,950
(1,271)2018 
Ae‘oHonolulu, HICondominium—
9,795
85,046
(9,795)(85,046)—
—
—
—
20162018
AnahaHonolulu, HICondominium—
5,546
47,450
(5,546)(46,470)—
980
980
(30)20142017
Ke KilohanaHonolulu, HIDevelopment96,757
2,615
17,784
(2,615)178,679
—
196,463
196,463
—
2016 
Kewalo Basin HarborHonolulu, HIOther3,499
—
—
—
17,752
—
17,752
17,752
(343)2017 
WaieaHonolulu, HICondominium—
—
20,812
—
(15,518)—
5,294
5,294
(63)20142017
Ward PredevelopmentHonolulu, HIDevelopment—
—
24,069
—
59,814
—
83,883
83,883
(493)2013 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial Cost (b)

 

Costs Capitalized Subsequent to Acquisition (c)

 

Gross Amounts at Which Carried at Close of Period (d)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Buildings

 

 

 

 

Buildings

 

 

 

 

Buildings

 

 

 

 

 

 

 

 

 

Date

 

 

 

 

 

 

 

 

 

 

and

 

 

 

 

and

 

 

 

 

and

 

 

 

 

Accumulated

 

Date of

 

Acquired /

Name of Center

    

Location

 

Encumbrances (a)

 

Land

    

Improvements 

    

Land (e)

 

Improvements (e)(f)

 

Land

 

Improvements (f)

 

Total

 

Depreciation (g)

 

Construction

 

Completed

2000 Woodlands Parkway

 

The Woodlands, TX

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

135

 

 

 —

 

 

135

 

 

135

 

 

 —

 

 

 

1997

1400 Woodloch Forest

 

The Woodlands, TX

 

 

 —

 

 

 —

 

 

 —

 

 

1,570

 

 

14,341

 

 

1,570

 

 

14,341

 

 

15,911

 

 

(4,102)

 

 

 

1981

The Woodlands Hills

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands Hills

 

Conroe, TX

 

 

 —

 

 

99,284

 

 

 —

 

 

9,176

 

 

 —

 

 

108,460

 

 

 —

 

 

108,460

 

 

 —

 

 

 

2014

Ward Village

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ae`o

 

Honolulu, HI

 

 

33,603

 

 

9,795

 

 

85,046

 

 

(9,795)

 

 

51,818

 

 

 —

 

 

136,864

 

 

136,864

 

 

 —

 

2016

 

 

Anaha

 

Honolulu, HI

 

 

 —

 

 

5,546

 

 

47,450

 

 

(5,546)

 

 

(8,609)

 

 

 —

 

 

38,841

 

 

38,841

 

 

(2)

 

2014

 

2017

Ke Kilohana

 

Honolulu, HI

 

 

 —

 

 

2,615

 

 

17,784

 

 

(2,615)

 

 

57,233

 

 

 —

 

 

75,017

 

 

75,017

 

 

 —

 

2016

 

 

Kewalo Harbor

 

Honolulu, HI

 

 

 —

 

 

 —

 

 

 

 

 

 —

 

 

7,535

 

 

 —

 

 

7,535

 

 

7,535

 

 

(1)

 

2017

 

 

Waiea

 

Honolulu, HI

 

 

 —

 

 

 —

 

 

20,812

 

 

 —

 

 

39,294

 

 

 —

 

 

60,106

 

 

60,106

 

 

(3)

 

2014

 

2017

Ward Predevelopment

 

Honolulu, HI

 

 

 —

 

 

 —

 

 

24,069

 

 

 —

 

 

72,172

 

 

 —

 

 

96,241

 

 

96,241

 

 

(59)

 

2013

 

2015

Ward Village

 

Honolulu, HI

 

 

238,718

 

 

164,007

 

 

89,321

 

 

(77,860)

 

 

186,930

 

 

86,147

 

 

276,251

 

 

362,398

 

 

(61,380)

 

 

 

2002

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AllenTowne

 

Dallas, TX

 

 

 —

 

 

25,575

 

 

 —

 

 

(25,575)

 

 

25,886

 

 

 —

 

 

25,886

 

 

25,886

 

 

 —

 

 

 

2006

Bridges at Mint Hill

 

Charlotte, NC

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

21,874

 

 

 —

 

 

21,874

 

 

21,874

 

 

 —

 

 

 

2007

Circle T Ranch and Power Center

 

Dallas/Fort Worth, TX

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

229

 

 

 —

 

 

229

 

 

229

 

 

 —

 

 

 

2005

Cottonwood Mall

 

Salt Lake City, UT

 

 

 —

 

 

7,613

 

 

42,987

 

 

(7,613)

 

 

(21,440)

 

 

 —

 

 

21,547

 

 

21,547

 

 

 —

 

 

 

2002

Landmark Mall

 

Alexandria, VA

 

 

 —

 

 

28,396

 

 

67,235

 

 

(28,396)

 

 

(12,652)

 

 

 —

 

 

54,583

 

 

54,583

 

 

(10)

 

 

 

2004

Outlet Collection at Riverwalk

 

New Orleans, LA

 

 

53,841

 

 

 —

 

 

94,513

 

 

 —

 

 

1,161

 

 

 —

 

 

95,674

 

 

95,674

 

 

(16,175)

 

 

 

2014

The Elk Grove Collection

 

Elk Grove, CA

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

10,396

 

 

 —

 

 

10,396

 

 

10,396

 

 

(5)

 

 

 

2003

110 North Wacker

 

Chicago, IL

 

 

18,926

 

 

 —

 

 

29,035

 

 

12,249

 

 

17,983

 

 

12,249

 

 

47,018

 

 

59,267

 

 

(34,165)

 

 

 

1957

West Windsor

 

Princeton, NJ

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

26,158

 

 

 —

 

 

26,158

 

 

26,158

 

 

(100)

 

 

 

2004

Total excluding Corporate, Deferred financing costs and Unamortized bond issuance costs

 

 

1,862,806

 

 

2,502,078

 

 

1,897,867

 

 

(581,867)

 

 

1,492,337

 

 

1,920,211

 

 

3,390,204

 

 

5,310,415

 

 

(303,617)

 

 

 

 

Corporate

 

Various

 

 

1,014,983

 

 

885

 

 

1,027

 

 

(885)

 

 

43,967

 

 

 —

 

 

44,994

 

 

44,994

 

 

(18,265)

 

 

 

 

Unamortized bond issuance costs

 

N/A

 

 

(6,898)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

Deferred financing costs

 

N/A

 

 

(12,946)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

 

Total

 

$

2,857,945

 

$

2,502,963

 

$

1,898,894

 

$

(582,752)

 

$

1,536,304

 

$

1,920,211

 

$

3,435,198

 

$

5,355,409

 

$

(321,882)

 

 

 

 

    Initial Cost (b)Costs Capitalized Subsequent to Acquisition (c)Gross Amounts at Which Carried at Close of Period (d)   
     Buildings Buildings Buildings   Date
(In thousands)    and and and AccumulatedDate ofAcquired /
Name of CenterLocationCenter TypeEncumbrances (a)LandImprovements Land (e)Improvements (e)(f)LandImprovements (f)TotalDepreciation (g)ConstructionCompleted
Ward Village Retail (h)Honolulu, HIRetail245,435
164,007
89,321
(76,405)275,643
87,602
364,964
452,566
(70,610) 2002
Other             
Bridges at Mint HillCharlotte, NCDevelopment—
—
—
—
21,978
—
21,978
21,978
—
 2007
Cottonwood MallSalt Lake City, UTDevelopment—
7,613
42,987
(7,613)(21,429)—
21,558
21,558
—
 2002
Landmark MallAlexandria, VADevelopment—
28,396
67,235
(28,396)(12,041)—
55,194
55,194
(128) 2004
Monarch CityDallas, TXDevelopment—
25,575
—
(25,575)26,918
—
26,918
26,918
—
 2006
110 North WackerChicago, ILDevelopment50,000
—
29,035
—
118,901
—
147,936
147,936
—
 1957
Outlet Collection at RiverwalkNew Orleans, LARetail47,552
—
94,513
—
338
—
94,851
94,851
(15,476) 2014
The Elk Grove CollectionElk Grove, CADevelopment—
—
—
—
10,808
—
10,808
10,808
5
 2003
West WindsorPrinceton, NJDevelopment—
—
—
—
27,144
—
27,144
27,144
(9) 2004
Total excluding Corporate, Deferred financing costs and
Unamortized bond issuance costs		2,202,802
2,512,338
2,081,799
(572,082)2,095,381
1,940,256
4,177,180
6,117,436
(355,146)  
CorporateVarious 1,012,409
885
1,027
(885)44,824
—
45,851
45,851
(25,746)  
Unamortized bond issuance costsN/A (6,096)—
—
—
—
—
—
—
—
  
Deferred financing costsN/A (27,902)—
—
—
—
—
—
—
—
  
  Total$3,181,213
$2,513,223
$2,082,826
$(572,967)$2,140,205
$1,940,256
$4,223,031
$6,163,287
$(380,892)  

(a)

See description of Encumbrances in Note 8 –7 - Mortgages, Notes and Loans Payable, Netof the Consolidated Financial Statements.

(b)

Initial cost for projects undergoing development or redevelopment is cost at end of first complete calendar year subsequent to opening.

(c)

For retail and other properties, costs capitalized subsequent to acquisitions is net of cost of disposals or other property write‑downs. For MPCs, costs capitalized subsequent to acquisitions are net of the cost of land sales.

(d)

The aggregate cost of land, building and improvements for federal income tax purposes is approximately $4.6$5.0 billion.

(e)

Reductions in Land reflect transfers to Buildings and Improvements for projects which we arethe Company is internally developing.

(f)

Includes all amounts related to Developments.

(g)

Depreciation is computed based upon the useful lives below.

in Note 1 - Summary of Significant Accounting Policies.

(h)

Property is collateral for the Senior Secured Credit Facility. See Note 7 - Mortgages, Notes and Loans Payable, Net of the Consolidated Financial Statements for additional information.

(i)
Encumbrances balance either represents or is inclusive of SIDs. See Note 7 - Mortgages, Notes and Loans Payable, Net of the Consolidated Financial Statements for additional information.
(j)Downtown Summerlin includes ONE Summerlin office property, which was placed in service in 2015.

F-48

Reconciliation of Real Estate
(In thousands) 2018 2017 2016
Balance at beginning of year $5,355,409
 $4,979,840
 $4,774,632
Change in land 199,069
 93,833
 122,446
Additions 1,148,826
 790,183
 830,896
Impairments —
 —
 (35,734)
Dispositions and write-offs and land and condominium costs of sales (540,017) (508,447) (712,400)
Balance at end of year $6,163,287
 $5,355,409
 $4,979,840

Table of Contents

Asset Type

Years

Location of Asset

Buildings and improvements

10 - 45

Buildings and Equipment

Equipment and fixtures

  5 - 10

Buildings and Equipment

Computer hardware and software, and vehicles

3 - 5

Prepaid expenses and other assets, net

Tenant improvements

Lesser of lease term or useful life

Prepaid expenses and other assets, net

Leasing costs

Related lease term

Prepaid expenses and other assets, net

 

 

 

 

 

 

 

 

 

 

Reconciliation of Real Estate

(In thousands)

    

2017

    

2016

    

2015

Balance at beginning of year

 

$

4,979,840

 

$

4,774,632

 

$

4,116,556

Change in land

 

 

93,833

 

 

122,446

 

 

95,095

Additions

 

 

790,183

 

 

830,896

 

 

834,346

Impairments

 

 

 —

 

 

(35,734)

 

 

 —

Dispositions and write-offs and land and condominium costs of sales

 

 

(508,447)

 

 

(712,400)

 

 

(271,365)

Balance at end of year

 

$

5,355,409

 

$

4,979,840

 

$

4,774,632

 

 

 

 

 

 

 

 

 

 

Reconciliation of Accumulated Depreciation

(In thousands)

    

2017

    

2016

    

2015

Balance at beginning of year

 

$

245,814

 

$

232,969

 

$

157,182

Depreciation Expense

 

 

116,401

 

 

81,878

 

 

82,275

Dispositions and write-offs

 

 

(40,333)

 

 

(69,033)

 

 

(6,488)

Balance at end of year

 

$

321,882

 

$

245,814

 

$

232,969

Reconciliation of Accumulated Depreciation
(In thousands) 2018 2017 2016
Balance at beginning of year $321,882
 $245,814
 $232,969
Depreciation Expense 113,518
 116,401
 81,878
Dispositions and write-offs (54,508) (40,333) (69,033)
Balance at end of year $380,892
 $321,882
 $245,814


F-49


F-54