UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended SeptemberJune 30, 20192020
or
☐Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number 001-34856
THE HOWARD HUGHES CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware | 36-4673192 |
(State or other jurisdiction of | (I.R.S. employer |
incorporation or organization) | identification number) |
13355 Noel Road, 22nd Floor, Dallas, Texas 75240
(Address of principal executive offices, including zip code)
(214) 741-7744
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒ No
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class: | | Trading Symbol(s) | | Name of each exchange on which registered: |
Common stock, par value $0.01 per share | | HHC | | New York Stock Exchange |
The number of shares of common stock, $0.01 par value, outstanding as of October 31, 2019July 30, 2020 was 43,211,546.54,958,864.
THE HOWARD HUGHES CORPORATION
TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
| | (In thousands, except par values and share amounts) | | September 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
Assets: | | | | | | | | |
Investment in real estate: | | | | | | | | |
Master Planned Communities assets | | $ | 1,683,224 |
| | $ | 1,642,660 |
| | $ | 1,670,375 |
| | $ | 1,655,674 |
|
Buildings and equipment | | 3,268,926 |
| | 2,932,963 |
| | 4,033,449 |
| | 3,813,595 |
|
Less: accumulated depreciation | | (478,185 | ) | | (380,892 | ) | | (571,752 | ) | | (507,933 | ) |
Land | | 315,643 |
| | 297,596 |
| | 361,081 |
| | 353,022 |
|
Developments | | 1,345,807 |
| | 1,290,068 |
| | 1,498,478 |
| | 1,445,997 |
|
Net property and equipment | | 6,135,415 |
| | 5,782,395 |
| | 6,991,631 |
| | 6,760,355 |
|
Investment in real estate and other affiliates | | 121,611 |
| | 102,287 |
| | 119,706 |
| | 121,757 |
|
Net investment in real estate | | 6,257,026 |
| | 5,884,682 |
| | 7,111,337 |
| | 6,882,112 |
|
Net investment in lease receivable | | 78,021 |
| | — |
| | 2,754 |
| | 79,166 |
|
Cash and cash equivalents | | 637,979 |
| | 499,676 |
| | 930,597 |
| | 422,857 |
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Restricted cash | | 204,650 |
| | 224,539 |
| | 257,687 |
| | 197,278 |
|
Accounts receivable, net | | 17,248 |
| | 12,589 |
| | 17,711 |
| | 12,279 |
|
Municipal Utility District receivables, net | | 288,376 |
| | 222,269 |
| | 320,439 |
| | 280,742 |
|
Notes receivable, net | | 36,425 |
| | 4,694 |
| | 56,511 |
| | 36,379 |
|
Deferred expenses, net | | 110,935 |
| | 95,714 |
| | 146,550 |
| | 133,182 |
|
Operating lease right-of-use assets, net | | 70,349 |
| | — |
| | 57,882 |
| | 69,398 |
|
Prepaid expenses and other assets, net | | 246,906 |
| | 411,636 |
| | 343,090 |
| | 300,373 |
|
Total assets | | $ | 7,947,915 |
| | $ | 7,355,799 |
| | $ | 9,244,558 |
| | $ | 8,413,766 |
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| | | | | | | | |
Liabilities: | | | | | | | | |
Mortgages, notes and loans payable, net | | $ | 3,624,684 |
| | $ | 3,181,213 |
| | $ | 4,401,063 |
| | $ | 4,096,470 |
|
Operating lease obligations | | 71,190 |
| | — |
| | 69,607 |
| | 70,413 |
|
Deferred tax liabilities | | 172,476 |
| | 157,188 |
| | 131,691 |
| | 180,748 |
|
Accounts payable and accrued expenses | | 699,509 |
| | 779,272 |
| | 902,494 |
| | 733,147 |
|
Total liabilities | | 4,567,859 |
| | 4,117,673 |
| | 5,504,855 |
| | 5,080,778 |
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Commitments and contingencies (see Note 10) | |
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Commitments and Contingencies (see Note 10) | | |
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Equity: | | | | | | | | |
Preferred stock: $.01 par value; 50,000,000 shares authorized, none issued | | — |
| | — |
| | — |
| | — |
|
Common stock: $.01 par value; 150,000,000 shares authorized, 43,752,777 issued and 43,232,928 outstanding as of September 30, 2019 and 43,511,473 shares issued and 42,991,624 outstanding as of December 31, 2018 | | 438 |
| | 436 |
| |
Common stock: $.01 par value; 150,000,000 shares authorized, 55,981,559 issued and 54,931,299 outstanding as of June 30, 2020, and 150,000,000 shares authorized, 43,635,893 shares issued and 42,585,633 outstanding as of December 31, 2019 | | | 561 |
| | 437 |
|
Additional paid-in capital | | 3,334,101 |
| | 3,322,433 |
| | 3,941,516 |
| | 3,343,983 |
|
Accumulated deficit | | (45,285 | ) | | (120,341 | ) | | (205,621 | ) | | (46,385 | ) |
Accumulated other comprehensive loss | | (35,513 | ) | | (8,126 | ) | | (61,111 | ) | | (29,372 | ) |
Treasury stock, at cost, 519,849 shares as of September 30, 2019 and December 31, 2018 | | (62,190 | ) | | (62,190 | ) | |
Treasury stock, at cost, 1,050,260 shares as of June 30, 2020 and December 31, 2019 | | | (120,530 | ) | | (120,530 | ) |
Total stockholders' equity | | 3,191,551 |
| | 3,132,212 |
| | 3,554,815 |
| | 3,148,133 |
|
Noncontrolling interests | | 188,505 |
| | 105,914 |
| | 184,888 |
| | 184,855 |
|
Total equity | | 3,380,056 |
| | 3,238,126 |
| | 3,739,703 |
| | 3,332,988 |
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Total liabilities and equity | | $ | 7,947,915 |
| | $ | 7,355,799 |
| | $ | 9,244,558 |
| | $ | 8,413,766 |
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See Notes to Condensed Consolidated Financial Statements.
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands, except per share amounts) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Revenues: | | | | | | |
| | |
| | | | | | | | |
Condominium rights and unit sales | | $ | 9,999 |
| | $ | 8,045 |
| | $ | 443,931 |
| | $ | 39,767 |
| | $ | — |
| | $ | 235,622 |
| | $ | 43 |
| | $ | 433,932 |
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Master Planned Communities land sales | | 77,368 |
| | 127,730 |
| | 177,001 |
| | 226,727 |
| | 57,073 |
| | 58,321 |
| | 96,805 |
| | 99,633 |
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Minimum rents | | 55,552 |
| | 53,244 |
| | 164,356 |
| | 153,156 |
| | 61,469 |
| | 54,718 |
| | 132,456 |
| | 108,804 |
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Other land, rental and property revenues | | | 11,447 |
| | 59,774 |
| | 46,344 |
| | 101,253 |
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Tenant recoveries | | 13,704 |
| | 12,806 |
| | 40,724 |
| | 37,808 |
| | 17,202 |
| | 13,512 |
| | 38,077 |
| | 27,020 |
|
Hospitality revenues | | 20,031 |
| | 19,108 |
| | 68,536 |
| | 64,738 |
| |
Builder price participation | | 9,660 |
| | 8,685 |
| | 24,224 |
| | 19,394 |
| | 8,947 |
| | 9,369 |
| | 16,706 |
| | 14,564 |
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Other land revenues | | 5,954 |
| | 7,145 |
| | 16,646 |
| | 15,988 |
| |
Other rental and property revenues | | 37,816 |
| | 20,397 |
| | 79,872 |
| | 42,266 |
| |
Interest income from sales-type leases | | 1,088 |
| | — |
| | 1,088 |
| | — |
| | 35 |
| | — |
| | 917 |
| | — |
|
Total revenues | | 231,172 |
| | 257,160 |
| | 1,016,378 |
| | 599,844 |
| | 156,173 |
| | 431,316 |
| | 331,348 |
| | 785,206 |
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Expenses: | | | | | | | | | | | | | | | | |
Condominium rights and unit cost of sales | | 7,010 |
| | 6,168 |
| | 365,324 |
| | 41,713 |
| | 6,348 |
| | 220,620 |
| | 104,249 |
| | 358,314 |
|
Master Planned Communities cost of sales | | 33,304 |
| | 57,183 |
| | 78,128 |
| | 109,609 |
| | 25,875 |
| | 28,006 |
| | 42,661 |
| | 44,824 |
|
Master Planned Communities operations | | 11,866 |
| | 13,044 |
| | 35,948 |
| | 33,956 |
| |
Other property operating costs | | 53,214 |
| | 42,942 |
| | 131,808 |
| | 91,847 |
| |
Operating costs | | | 45,885 |
| | 72,989 |
| | 110,491 |
| | 140,300 |
|
Rental property real estate taxes | | 9,080 |
| | 8,519 |
| | 28,585 |
| | 24,148 |
| | 15,199 |
| | 9,674 |
| | 28,777 |
| | 19,505 |
|
Rental property maintenance costs | | 3,533 |
| | 4,456 |
| | 11,862 |
| | 11,604 |
| |
Hospitality operating costs | | 14,080 |
| | 14,723 |
| | 46,310 |
| | 45,707 |
| |
(Recovery) provision for doubtful accounts | | (107 | ) | | 2,282 |
| | (195 | ) | | 4,417 |
| |
Provision for (recovery of) doubtful accounts | | | 1,866 |
| | (86 | ) | | 3,567 |
| | (88 | ) |
Demolition costs | | 138 |
| | 2,835 |
| | 737 |
| | 16,166 |
| | — |
| | 550 |
| | — |
| | 599 |
|
Development-related marketing costs | | 5,341 |
| | 7,218 |
| | 16,874 |
| | 20,484 |
| | 1,813 |
| | 5,839 |
| | 4,629 |
| | 11,541 |
|
General and administrative | | 32,519 |
| | 20,645 |
| | 87,923 |
| | 71,795 |
| | 22,233 |
| | 31,551 |
| | 61,314 |
| | 58,331 |
|
Depreciation and amortization | | 40,093 |
| | 31,123 |
| | 115,142 |
| | 88,398 |
| | 46,963 |
| | 38,918 |
| | 108,600 |
| | 75,049 |
|
Total expenses | | 210,071 |
| | 211,138 |
| | 918,446 |
| | 559,844 |
| | 166,182 |
| | 408,061 |
| | 464,288 |
| | 708,375 |
|
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Other: | | | | | | | | | | | | | | | | |
Gain on sale or disposal of real estate, net | | 24,201 |
| | — |
| | 24,051 |
| | — |
| |
Provision for impairment | | | — |
| | — |
| | (48,738 | ) | | — |
|
Gain (loss) on sale or disposal of real estate and other assets, net | | | 8,000 |
| | (144 | ) | | 46,124 |
| | (150 | ) |
Other income (loss), net | | 1,337 |
| | (3,710 | ) | | 11,798 |
| | (3,444 | ) | | 1,607 |
| | 10,288 |
| | (2,077 | ) | | 10,461 |
|
Total other | | 25,538 |
| | (3,710 | ) | | 35,849 |
| | (3,444 | ) | | 9,607 |
| | 10,144 |
| | (4,691 | ) | | 10,311 |
|
| | | | | | | | | | | | | | | | |
Operating income | | 46,639 |
| | 42,312 |
| | 133,781 |
| | 36,556 |
| |
Operating (loss) income | | | (402 | ) | | 33,399 |
| | (137,631 | ) | | 87,142 |
|
| | | | | | | | | | | | | | | | |
Selling profit from sales-type leases | | 13,537 |
| | — |
| | 13,537 |
| | — |
| |
Interest income | | 2,872 |
| | 2,080 |
| | 7,696 |
| | 6,759 |
| | 404 |
| | 2,251 |
| | 1,550 |
| | 4,824 |
|
Interest expense | | (28,829 | ) | | (21,670 | ) | | (76,358 | ) | | (57,182 | ) | | (32,397 | ) | | (24,203 | ) | | (66,845 | ) | | (47,529 | ) |
Equity in earnings from real estate and other affiliates | | 4,542 |
| | 8,612 |
| | 20,847 |
| | 39,297 |
| |
Income before taxes | | 38,761 |
| | 31,334 |
| | 99,503 |
| | 25,430 |
| |
Provision for income taxes | | 8,718 |
| | 7,487 |
| | 24,207 |
| | 5,628 |
| |
Net income | | 30,043 |
| | 23,847 |
| | 75,296 |
| | 19,802 |
| |
Net income attributable to noncontrolling interests | | (285 | ) | | (482 | ) | | (240 | ) | | (51 | ) | |
Net income attributable to common stockholders | | $ | 29,758 |
| | $ | 23,365 |
| | $ | 75,056 |
| | $ | 19,751 |
| |
Equity in (losses) earnings from real estate and other affiliates | | | (8,552 | ) | | 6,354 |
| | 2,797 |
| | 16,305 |
|
(Loss) income before taxes | | | (40,947 | ) | | 17,801 |
| | (200,129 | ) | | 60,742 |
|
(Benefit) provision for income taxes | | | (6,844 | ) | | 4,473 |
| | (40,944 | ) | | 15,489 |
|
Net (loss) income | | | (34,103 | ) | | 13,328 |
| | (159,185 | ) | | 45,253 |
|
Net loss (income) attributable to noncontrolling interests | | | 19 |
| | 149 |
| | (33 | ) | | 45 |
|
Net (loss) income attributable to common stockholders | | | $ | (34,084 | ) | | $ | 13,477 |
| | $ | (159,218 | ) | | $ | 45,298 |
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Basic income per share: | | $ | 0.69 |
| | $ | 0.54 |
| | $ | 1.74 |
| | $ | 0.46 |
| |
Diluted income per share: | | $ | 0.69 |
| | $ | 0.54 |
| | $ | 1.73 |
| | $ | 0.46 |
| |
Basic (loss) income per share: | | | $ | (0.61 | ) | | $ | 0.31 |
| | $ | (3.22 | ) | | $ | 1.05 |
|
Diluted (loss) income per share: | | | $ | (0.61 | ) | | $ | 0.31 |
| | $ | (3.22 | ) | | $ | 1.05 |
|
See Notes to Condensed Consolidated Financial Statements.
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
UNAUDITED
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Net income | | $ | 30,043 |
| | $ | 23,847 |
| | $ | 75,296 |
| | $ | 19,802 |
|
Other comprehensive (loss) income: | | | | | | | | |
Interest rate swaps (a) | | (6,207 | ) | | (367 | ) | | (25,259 | ) | | 13,031 |
|
Capitalized swap interest (expense) income (b) | | — |
| | (25 | ) | | (73 | ) | | 34 |
|
Pension adjustment (c) | | — |
| | 2,566 |
| | — |
| | 556 |
|
Adoption of ASU 2018-02 (d) | | — |
| | — |
| | — |
| | (1,148 | ) |
Adoption of ASU 2017-12 (e) | | — |
| | — |
| | — |
| | (739 | ) |
Terminated swap amortization | | (764 | ) | | (239 | ) | | (2,055 | ) | | (319 | ) |
Other comprehensive (loss) income | | (6,971 | ) | | 1,935 |
| | (27,387 | ) | | 11,415 |
|
Comprehensive income | | 23,072 |
| | 25,782 |
| | 47,909 |
| | 31,217 |
|
Comprehensive income attributable to noncontrolling interests | | (285 | ) | | (482 | ) | | (240 | ) | | (51 | ) |
Comprehensive income attributable to common stockholders | | $ | 22,787 |
| | $ | 25,300 |
| | $ | 47,669 |
| | $ | 31,166 |
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Net (loss) income | | $ | (34,103 | ) | | $ | 13,328 |
| | $ | (159,185 | ) | | $ | 45,253 |
|
Other comprehensive loss: | | | | | | | | |
Interest rate swaps (a) | | (234 | ) | | (13,108 | ) | | (30,481 | ) | | (19,052 | ) |
Capitalized swap interest expense (b) | | — |
| | (22 | ) | | — |
| | (73 | ) |
Terminated swap amortization | | (604 | ) | | (653 | ) | | (1,258 | ) | | (1,291 | ) |
Other comprehensive loss: | | (838 | ) | | (13,783 | ) | | (31,739 | ) | | (20,416 | ) |
Comprehensive (loss) income | | (34,941 | ) | | (455 | ) | | (190,924 | ) | | 24,837 |
|
Comprehensive income (loss) attributable to noncontrolling interests | | 19 |
| | 149 |
| | (33 | ) | | 45 |
|
Comprehensive (loss) income attributable to common stockholders | | $ | (34,922 | ) | | $ | (306 | ) | | $ | (190,957 | ) | | $ | 24,882 |
|
| |
(a) | Amounts are shown net of deferred tax benefit of $1.7$0.1 million and $0.2$3.8 million for the three months ended SeptemberJune 30, 20192020 and 2018,2019, respectively and deferred tax benefit of $7.0 million and deferred tax expense of $3.7$6.0 million for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. |
| |
(b) | The deferred tax impact was 0 for the three and six months ended SeptemberJune 30, 20192020 and not0t meaningful for the nine months ended September 30, 2019 and the three and nine months ended September 30, 2018. |
| |
(c) | Net of deferred tax benefit of 0 and $0.6 million for the three and ninesix months ended SeptemberJune 30, 2018, 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.
|
| |
(e) | The Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, as of January 1, 2018. 2019. |
See Notes to Condensed Consolidated Financial Statements.
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
UNAUDITED
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | | | | | |
| | | | | | Additional | | | | Other | | | | | | Total | | | | |
| | Common Stock | | Paid-In | | Accumulated | | Comprehensive | | Treasury Stock | | Stockholders' | | Noncontrolling | | Total |
(In thousands, except shares) | | Shares | | Amount | | Capital | | Deficit | | (Loss) Income | | Shares | | Amount | | Equity | | Interests | | Equity |
Balance, June 30, 2018 | | 43,545,778 |
| | $ | 436 |
| | $ | 3,314,197 |
| | $ | (180,967 | ) | | $ | 2,515 |
| | (505,293 | ) | | $ | (60,743 | ) | | $ | 3,075,438 |
| | $ | 75,173 |
| | $ | 3,150,611 |
|
Net income | | — |
| | — |
| | — |
| | 23,365 |
| | — |
| | — |
| | — |
| | 23,365 |
| | 482 |
| | 23,847 |
|
Interest rate swaps, net of tax of $223 | | — |
| | — |
| | — |
| | — |
| | (367 | ) | | — |
| | — |
| | (367 | ) | | — |
| | (367 | ) |
Terminated swap amortization | | — |
| | — |
| | — |
| | — |
| | (239 | ) | | — |
| | — |
| | (239 | ) | | — |
| | (239 | ) |
Pension adjustment, net of tax of $21 | | — |
| | — |
| | — |
| | — |
| | 2,566 |
| | — |
| | — |
| | 2,566 |
| | — |
| | 2,566 |
|
Capitalized swap interest, net of tax of $7 | | — |
| | — |
| | — |
| | — |
| | (25 | ) | | — |
| | — |
| | (25 | ) | | — |
| | (25 | ) |
Contributions to joint ventures | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 83 |
| | 83 |
|
Stock plan activity | | (7,358 | ) | | — |
| | 4,550 |
| | — |
| | — |
| | — |
| | — |
| | 4,550 |
| | — |
| | 4,550 |
|
Balance, September 30, 2018 | | 43,538,420 |
| | $ | 436 |
| | $ | 3,318,747 |
| | $ | (157,602 | ) | | $ | 4,450 |
| | (505,293 | ) | | $ | (60,743 | ) | | $ | 3,105,288 |
| | $ | 75,738 |
| | $ | 3,181,026 |
|
| | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2019 | | 43,661,694 |
| | $ | 437 |
| | $ | 3,329,062 |
| | $ | (75,043 | ) | | $ | (28,542 | ) | | (519,849 | ) | | $ | (62,190 | ) | | $ | 3,163,724 |
| | $ | 188,043 |
| | $ | 3,351,767 |
|
Net income | | — |
| | — |
| | — |
| | 29,758 |
| | — |
| | — |
| | — |
| | 29,758 |
| | 285 |
| | 30,043 |
|
Interest rate swaps, net of tax of $1,719 | | — |
| | — |
| | — |
| | — |
| | (6,207 | ) | | — |
| | — |
| | (6,207 | ) | | — |
| | (6,207 | ) |
Terminated swap amortization | | — |
| | — |
| | — |
| | — |
| | (764 | ) | | — |
| | — |
| | (764 | ) | | — |
| | (764 | ) |
Deconsolidation of Associations of Unit Owners | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 177 |
| | 177 |
|
Contributions to joint ventures | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock plan activity | | 91,083 |
| | 1 |
| | 5,039 |
| | — |
| | — |
| | — |
| | — |
| | 5,040 |
| | — |
| | 5,040 |
|
Balance, September 30, 2019 | | 43,752,777 |
| | $ | 438 |
| | $ | 3,334,101 |
| | $ | (45,285 | ) | | $ | (35,513 | ) | | (519,849 | ) | | $ | (62,190 | ) | | $ | 3,191,551 |
| | $ | 188,505 |
| | $ | 3,380,056 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | | | | | |
| | | | | | Additional | | | | Other | | | | | | Total | | | | |
| | Common Stock | | Paid-In | | Accumulated | | Comprehensive | | Treasury Stock | | Stockholders' | | Noncontrolling | | Total |
(In thousands, except shares) | | Shares | | Amount | | Capital | | Deficit | | (Loss) Income | | Shares | | Amount | | Equity | | Interests | | Equity |
Balance, March 31, 2019 | | 43,659,708 |
| | $ | 437 |
| | $ | 3,325,499 |
| | $ | (88,520 | ) | | $ | (14,759 | ) | | (519,849 | ) | | $ | (62,190 | ) | | $ | 3,160,467 |
| | $ | 147,006 |
| | $ | 3,307,473 |
|
Net income (loss) | | — |
| | — |
| | — |
| | 13,477 |
| | — |
| | — |
| | — |
| | 13,477 |
| | (149 | ) | | 13,328 |
|
Interest rate swaps, net of tax of $3,770 | | — |
| | — |
| | — |
| | — |
| | (13,108 | ) | | — |
| | — |
| | (13,108 | ) | | — |
| | (13,108 | ) |
Terminated swap amortization | | — |
| | — |
| | — |
| | — |
| | (653 | ) | | — |
| | — |
| | (653 | ) | | — |
| | (653 | ) |
Capitalized swap interest, net of tax of $6 | | — |
| | — |
| | — |
| | — |
| | (22 | ) | | — |
| | — |
| | (22 | ) | | — |
| | (22 | ) |
Deconsolidation of Associations of Unit Owners | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,715 | ) | | (2,715 | ) |
Contributions to real estate and other affiliates | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 43,901 |
| | 43,901 |
|
Stock plan activity | | 1,986 |
| | — |
| | 3,563 |
| | — |
| | — |
| | — |
| | — |
| | 3,563 |
| | — |
| | 3,563 |
|
Balance, June 30, 2019 | | 43,661,694 |
| | $ | 437 |
| | $ | 3,329,062 |
| | $ | (75,043 | ) | | $ | (28,542 | ) | | (519,849 | ) | | $ | (62,190 | ) | | $ | 3,163,724 |
| | $ | 188,043 |
| | $ | 3,351,767 |
|
| | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2020 | | 55,989,263 |
| | $ | 561 |
| | $ | 3,939,470 |
| | $ | (171,537 | ) | | $ | (60,273 | ) | | (1,050,260 | ) | | $ | (120,530 | ) | | $ | 3,587,691 |
| | $ | 184,907 |
| | $ | 3,772,598 |
|
Net loss | | — |
| | — |
| | — |
| | (34,084 | ) | | — |
| | — |
| | — |
| | (34,084 | ) | | (19 | ) | | (34,103 | ) |
Interest rate swaps, net of tax of $72 | | — |
| | — |
| | — |
| | — |
| | (234 | ) | | — |
| | — |
| | (234 | ) | | — |
| | (234 | ) |
Terminated swap amortization | | — |
| | — |
| | — |
| | — |
| | (604 | ) | | — |
| | — |
| | (604 | ) | | — |
| | (604 | ) |
Common stock offering costs | | — |
| | — |
| | (85 | ) | | — |
| | — |
| | — |
| | — |
| | (85 | ) | | — |
| | (85 | ) |
Stock plan activity | | (7,704 | ) | | — |
| | 2,131 |
| | — |
| | — |
| | — |
| | — |
| | 2,131 |
| | — |
| | 2,131 |
|
Balance, June 30, 2020 | | 55,981,559 |
| | $ | 561 |
| | 3,941,516 |
| | $ | (205,621 | ) | | $ | (61,111 | ) | | (1,050,260 | ) | | $ | (120,530 | ) | | $ | 3,554,815 |
| | $ | 184,888 |
| | $ | 3,739,703 |
|
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
UNAUDITED
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | | | | | |
| | | | | | Additional | | | | Other | | | | | | Total | | | | |
| | Common Stock | | Paid-In | | Accumulated | | Comprehensive | | Treasury Stock | | Stockholders' | | Noncontrolling | | Total |
(In thousands, except shares) | | Shares | | Amount | | Capital | | Deficit | | (Loss) Income | | Shares | | Amount | | Equity | | Interests | | Equity |
Balance, December 31, 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 | | — |
| | — |
| | — |
| | 19,751 |
| | — |
| | — |
| | — |
| | 19,751 |
| | 51 |
| | 19,802 |
|
Interest rate swaps, net of tax of $3,710 | | — |
| | — |
| | — |
| | — |
| | 13,031 |
| | — |
| | — |
| | 13,031 |
| | — |
| | 13,031 |
|
Terminated swap amortization | | — |
| | — |
| | — |
| | — |
| | (319 | ) | | — |
| | — |
| | (319 | ) | | — |
| | (319 | ) |
Pension adjustment, net of tax of $620 | | — |
| | — |
| | — |
| | — |
| | 556 |
| | — |
| | — |
| | 556 |
| | — |
| | 556 |
|
Capitalized swap interest, net of tax of $9 | | — |
| | — |
| | — |
| | — |
| | 34 |
| | — |
| | — |
| | 34 |
| | — |
| | 34 |
|
Adoption of ASU 2014-09 | | — |
| | — |
| | — |
| | (69,732 | ) | | — |
| | — |
| | — |
| | (69,732 | ) | | — |
| | (69,732 | ) |
Adoption of ASU 2017-12 | | — |
| | — |
| | — |
| | 739 |
| | (739 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Adoption of ASU 2018-02 | | — |
| | — |
| | — |
| | 1,148 |
| | (1,148 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Repurchase of common shares | | — |
| | — |
| | — |
| | — |
| | — |
| | (475,920 | ) | | (57,267 | ) | | (57,267 | ) | | — |
| | (57,267 | ) |
Contributions to joint ventures | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 70,122 |
| | 70,122 |
|
Stock plan activity | | 238,167 |
| | 3 |
| | 16,245 |
| | — |
| | — |
| | — |
| | — |
| | 16,248 |
| | — |
| | 16,248 |
|
Balance, September 30, 2018 | | 43,538,420 |
| | $ | 436 |
| | $ | 3,318,747 |
| | $ | (157,602 | ) | | $ | 4,450 |
| | (505,293 | ) | | $ | (60,743 | ) | | $ | 3,105,288 |
| | $ | 75,738 |
| | $ | 3,181,026 |
|
| | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2018 | | 43,511,473 |
| | $ | 436 |
| | $ | 3,322,433 |
| | $ | (120,341 | ) | | $ | (8,126 | ) | | (519,849 | ) | | $ | (62,190 | ) | | $ | 3,132,212 |
| | $ | 105,914 |
| | $ | 3,238,126 |
|
Net income | | — |
| | — |
| | — |
| | 75,056 |
| | — |
| | — |
| | — |
| | 75,056 |
| | 240 |
| | 75,296 |
|
Interest rate swaps, net of tax of $6,968 | | — |
| | — |
| | — |
| | — |
| | (25,259 | ) | | — |
| | — |
| | (25,259 | ) | | — |
| | (25,259 | ) |
Terminated swap amortization | | — |
| | — |
| | — |
| | — |
| | (2,055 | ) | | — |
| | — |
| | (2,055 | ) | | — |
| | (2,055 | ) |
Capitalized swap interest, net of tax of $20 | | — |
| | — |
| | — |
| | — |
| | (73 | ) | | — |
| | — |
| | (73 | ) | | — |
| | (73 | ) |
Deconsolidation of Associations of Unit Owners | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,538 | ) | | (2,538 | ) |
Contributions to joint ventures | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 84,889 |
| | 84,889 |
|
Stock plan activity | | 241,304 |
| | 2 |
| | 11,668 |
| | — |
| | — |
| | — |
| | — |
| | 11,670 |
| | — |
| | 11,670 |
|
Balance, September 30, 2019 | | 43,752,777 |
| | $ | 438 |
| | $ | 3,334,101 |
| | $ | (45,285 | ) | | $ | (35,513 | ) | | (519,849 | ) | | $ | (62,190 | ) | | $ | 3,191,551 |
| | $ | 188,505 |
| | $ | 3,380,056 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | | | | | |
| | | | | | Additional | | | | Other | | | | | | Total | | | | |
| | Common Stock | | Paid-In | | Accumulated | | Comprehensive | | Treasury Stock | | Stockholders' | | Noncontrolling | | Total |
(In thousands, except shares) | | Shares | | Amount | | Capital | | Deficit | | (Loss) Income | | Shares | | Amount | | Equity | | Interests | | Equity |
Balance, December 31, 2018 | | 43,511,473 |
| | $ | 436 |
| | $ | 3,322,433 |
| | $ | (120,341 | ) | | $ | (8,126 | ) | | (519,849 | ) | | $ | (62,190 | ) | | $ | 3,132,212 |
| | $ | 105,914 |
| | $ | 3,238,126 |
|
Net income (loss) | | — |
| | — |
| | — |
| | 45,298 |
| | — |
| | — |
| | — |
| | 45,298 |
| | (45 | ) | | 45,253 |
|
Interest rate swaps, net of tax of $5,957 | | — |
| | — |
| | — |
| | — |
| | (19,052 | ) | | — |
| | — |
| | (19,052 | ) | | — |
| | (19,052 | ) |
Terminated swap amortization | | — |
| | — |
| | — |
| | — |
| | (1,291 | ) | | — |
| | — |
| | (1,291 | ) | | — |
| | (1,291 | ) |
Capitalized swap interest, net of tax of $20 | | — |
| | — |
| | — |
| | — |
| | (73 | ) | | — |
| | — |
| | (73 | ) | | — |
| | (73 | ) |
Deconsolidation of Associations of Unit Owners | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,715 | ) | | (2,715 | ) |
Contributions to real estate and other affiliates | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 84,889 |
| | 84,889 |
|
Stock plan activity | | 150,221 |
| | 1 |
| | 6,629 |
| | — |
| | — |
| | — |
| | — |
| | 6,630 |
| | — |
| | 6,630 |
|
Balance, June 30, 2019 | | 43,661,694 |
| | $ | 437 |
| | $ | 3,329,062 |
| | $ | (75,043 | ) | | $ | (28,542 | ) | | (519,849 | ) | | $ | (62,190 | ) | | $ | 3,163,724 |
| | $ | 188,043 |
| | $ | 3,351,767 |
|
| | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2019 | | 43,635,893 |
| | $ | 437 |
| | $ | 3,343,983 |
| | $ | (46,385 | ) | | $ | (29,372 | ) | | (1,050,260 | ) | | $ | (120,530 | ) | | $ | 3,148,133 |
| | $ | 184,855 |
| | $ | 3,332,988 |
|
Net (loss) income | | — |
| | — |
| | — |
| | (159,218 | ) | | — |
| | — |
| | — |
| | (159,218 | ) | | 33 |
| | (159,185 | ) |
Interest rate swaps, net of tax of $6,960 | | — |
| | — |
| | — |
| | — |
| | (30,481 | ) | | — |
| | — |
| | (30,481 | ) | | — |
| | (30,481 | ) |
Terminated swap amortization | | — |
| | — |
| | — |
| | — |
| | (1,258 | ) | | — |
| | — |
| | (1,258 | ) | | — |
| | (1,258 | ) |
Adoption of ASU 2016-13 | | — |
| | — |
| | — |
| | (18 | ) | | — |
| | — |
| | — |
| | (18 | ) | | — |
| | (18 | ) |
Common stock issued | | 12,270,900 |
| | 123 |
| | 593,490 |
| | — |
| | — |
| | — |
| | — |
| | 593,613 |
| | — |
| | 593,613 |
|
Stock plan activity | | 74,766 |
| | 1 |
| | 4,043 |
| | — |
| | — |
| | — |
| | — |
| | 4,044 |
| | — |
| | 4,044 |
|
Balance, June 30, 2020 | | 55,981,559 |
| | $ | 561 |
| | $ | 3,941,516 |
| | $ | (205,621 | ) | | $ | (61,111 | ) | | (1,050,260 | ) | | $ | (120,530 | ) | | $ | 3,554,815 |
| | $ | 184,888 |
| | $ | 3,739,703 |
|
See Notes to Condensed Consolidated Financial Statements.
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | Nine Months Ended September 30, | | Six Months Ended June 30, |
(In thousands) | | 2019 | | 2018 | | 2020 | | 2019 |
Cash Flows from Operating Activities: | | |
| | | | |
| | |
Net income | | 75,296 |
| | $ | 19,802 |
| |
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | | |
| | |
| |
Net (loss) income | | | $ | (159,185 | ) | | $ | 45,253 |
|
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities: | | | |
| | |
|
Depreciation | | 106,328 |
| | 77,347 |
| | 99,682 |
| | 68,916 |
|
Amortization | | 7,584 |
| | 11,051 |
| | 8,517 |
| | 4,872 |
|
Amortization of deferred financing costs | | 8,126 |
| | 9,424 |
| | 8,312 |
| | 4,669 |
|
Amortization of intangibles other than in-place leases | | 618 |
| | 1,052 |
| | 340 |
| | 448 |
|
Straight-line rent amortization | | (4,833 | ) | | (9,547 | ) | | (6,183 | ) | | (3,188 | ) |
Deferred income taxes | | 23,191 |
| | 4,621 |
| | (41,701 | ) | | 14,823 |
|
Restricted stock and stock option amortization | | 9,902 |
| | 8,833 |
| | 3,346 |
| | 6,230 |
|
Net gain on sales and acquisitions of properties | | (24,201 | ) | | — |
| | (8,000 | ) | | — |
|
Selling profit from sales-type leases | | (13,537 | ) | | — |
| |
Net decrease (increase) in minimum pension liability | | — |
| | (65 | ) | |
Equity in earnings from real estate and other affiliates, net of distributions | | (12,260 | ) | | (30,474 | ) | |
Net gain on sale of lease receivable | | | (38,124 | ) | | — |
|
Proceeds from the sale of lease receivable | | | 64,155 |
| | — |
|
Impairment charges | | | 59,817 |
| | — |
|
Equity in (losses) earnings from real estate and other affiliates, net of distributions | | | (2,057 | ) | | (9,429 | ) |
Provision for doubtful accounts | | 3,698 |
| | 4,417 |
| | 5,443 |
| | 1,518 |
|
Master Planned Communities land acquisitions | | (752 | ) | | (3,565 | ) | | — |
| | (752 | ) |
Master Planned Communities development expenditures | | (180,733 | ) | | (142,000 | ) | | (116,372 | ) | | (119,843 | ) |
Master Planned Communities cost of sales | | 78,040 |
| | 99,062 |
| | 41,883 |
| | 44,740 |
|
Condominium development expenditures | | (165,520 | ) | | (234,563 | ) | | (114,660 | ) | | (97,125 | ) |
Condominium rights and unit cost of sales | | 365,324 |
| | 41,713 |
| | 99,171 |
| | 358,315 |
|
Net changes: | | |
| | |
| | |
| | |
|
Accounts and notes receivable | | (2,544 | ) | | (43,990 | ) | | (14,895 | ) | | (10,269 | ) |
Prepaid expenses and other assets | | (3,827 | ) | | (555 | ) | | (38,214 | ) | | 1,103 |
|
Condominium deposits received | | (93,530 | ) | | 73,082 |
| | 94,644 |
| | (105,472 | ) |
Deferred expenses | | (29,613 | ) | | (11,169 | ) | | (19,530 | ) | | (27,961 | ) |
Accounts payable and accrued expenses | | (9,561 | ) | | (14,294 | ) | | (25,032 | ) | | (16,591 | ) |
Cash provided by (used in) operating activities | | 137,196 |
| | (139,818 | ) | |
Cash (used in) provided by operating activities | | | (98,643 | ) | | 160,257 |
|
| | | | | | | | |
Cash Flows from Investing Activities: | | |
| | |
| | |
| | |
|
Property and equipment expenditures | | (5,395 | ) | | (4,667 | ) | | (598 | ) | | (2,612 | ) |
Operating property improvements | | (44,083 | ) | | (40,414 | ) | | (17,297 | ) | | (36,765 | ) |
Property development and redevelopment | | (492,279 | ) | | (387,625 | ) | | (250,370 | ) | | (311,455 | ) |
Acquisition of assets | | (579 | ) | | (234,541 | ) | |
Proceeds from sales of properties | | 9,460 |
| | — |
| |
Reimbursements under Tax Increment Financings | | 3,224 |
| | 16,848 |
| | 2,671 |
| | 1,880 |
|
Distributions from real estate and other affiliates | | 315 |
| | 1,072 |
| | 1,232 |
| | 315 |
|
Notes issued to real estate and other affiliates | | — |
| | (3,795 | ) | |
Investments in real estate and other affiliates, net | | (6,469 | ) | | (1,027 | ) | | (3,127 | ) | | (5,509 | ) |
Cash used in investing activities | | (535,806 | ) | | (654,149 | ) | | (267,489 | ) | | (354,146 | ) |
| | | | | | | | |
Cash Flows from Financing Activities: | | |
| | |
| | |
| | |
|
Proceeds from mortgages, notes and loans payable | | 638,686 |
| | 1,077,315 |
| | 392,714 |
| | 409,263 |
|
Proceeds from issuance of common stock | | | 593,614 |
| | — |
|
Principal payments on mortgages, notes and loans payable | | (196,081 | ) | | (656,816 | ) | | (51,008 | ) | | (163,555 | ) |
Purchase of treasury stock | | — |
| | (57,267 | ) | |
Special Improvement District bond funds released from (held in) escrow | | 1,777 |
| | 3,052 |
| |
Special Improvement District bond funds released from escrow | | | 2,352 |
| | 936 |
|
Deferred financing costs and bond issuance costs, net | | (14,468 | ) | | (16,585 | ) | | (4,088 | ) | | (13,661 | ) |
Taxes paid on stock options exercised and restricted stock vested | | (987 | ) | | (3,932 | ) | | (668 | ) | | (88 | ) |
Gain on unwinding of swaps | | — |
| | 16,104 |
| |
Stock options exercised | | 3,208 |
| | 11,344 |
| | 1,365 |
| | 490 |
|
Issuance of noncontrolling interests | | 84,889 |
| | 69,000 |
| |
Contributions from noncontrolling interest | | | — |
| | 84,889 |
|
Cash provided by financing activities | | 517,024 |
| | 442,215 |
| | 934,281 |
| | 318,274 |
|
| | | | | | | | |
Net change in cash, cash equivalents and restricted cash | | 118,414 |
| | (351,752 | ) | | 568,149 |
| | 124,385 |
|
Cash, cash equivalents and restricted cash at beginning of period | | 724,215 |
| | 964,300 |
| | 620,135 |
| | 724,215 |
|
Cash, cash equivalents and restricted cash at end of period | | $ | 842,629 |
| | $ | 612,548 |
| | $ | 1,188,284 |
| | $ | 848,600 |
|
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
|
| | | | | | | | |
| | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 |
Supplemental Disclosure of Cash Flow Information: | | |
| | |
|
Interest paid | | $ | 97,015 |
| | $ | 81,697 |
|
Interest capitalized | | 35,949 |
| | 36,981 |
|
Income taxes refunded, net | | (2,408 | ) | | (409 | ) |
| | | | |
Non-Cash Transactions: | | |
| | |
|
Accrued property improvements, developments, and redevelopments | | (35,250 | ) | | 37,461 |
|
Special Improvement District bond transfers associated with land sales | | 779 |
| | 84 |
|
Accrued interest on construction loan borrowing | | 9,586 |
| | 1,973 |
|
Capitalized stock compensation | | 907 |
| | 966 |
|
Initial recognition of ASC 842 Operating lease ROU asset | | 493 |
| | 72,106 |
|
Initial recognition of ASC 842 Operating lease obligation | | 493 |
| | 71,888 |
|
|
| | | | | | | | |
| | Nine Months Ended September 30, |
(In thousands) | | 2019 | | 2018 |
Supplemental Disclosure of Cash Flow Information: | | |
| | |
|
Interest paid | | $ | 137,967 |
| | $ | 122,334 |
|
Interest capitalized | | 55,110 |
| | 58,458 |
|
Income taxes (refunded) paid, net | | (409 | ) | | 70 |
|
| | | | |
Non-Cash Transactions: | | |
| | |
|
Accrued property improvements, developments, and redevelopments | | 33,151 |
| | — |
|
Special Improvement District bond transfers associated with land sales | | 88 |
| | 10,546 |
|
Accrued interest on construction loan borrowing | | 4,627 |
| | 6,175 |
|
Acquisition of below market lease intangible | | — |
| | 1,903 |
|
Capitalized stock compensation | | 1,325 |
| | 1,891 |
|
See Notes to Condensed Consolidated Financial Statements.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 BASIS OF PRESENTATION AND ORGANIZATION
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), with intercompany transactions between consolidated subsidiaries eliminated. In accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as issued by the Securities and Exchange Commission (the “SEC”), these Condensed Consolidated Financial Statements do not include all of the information and disclosures required by GAAP for complete financial statements. Readers of this quarterly report on Form 10-Q (“Quarterly Report”) should refer to The Howard Hughes Corporation’s (“HHC” or the “Company”) audited Consolidated Financial Statements, which are included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2018,2019, filed with the SEC on February 27, 20192020 (the "Annual Report"“Annual Report”). In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows and equity for the interim periods have been included. The results for the three and ninesix months ended SeptemberJune 30, 20192020, are not necessarily indicative of the results that may be expected for the year ending December 31, 20192020, and future fiscal years. Certain amounts in the 2019 results of operations have been reclassified to conform to the 2020 presentation. Specifically, the Company reclassified hospitality revenues, other land revenues, and other rental and property revenues to Other land, rental and property revenues; and master planned communities operations, other property operating costs, rental property maintenance costs, and hospitality operating costs to Operating costs for the three and six months ended June 30, 2020. In addition, labor costs previously presented in the MPC property operating costs were reclassified to corporate General and administrative expense for the three and six months ended June 30, 2019.
Management has evaluated for disclosure or recognition all material events occurring subsequent to the date of the Condensed Consolidated Financial Statements up to the date and time this Quarterly Report was filed.
COVID-19 Pandemic
In December 2019, a novel strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China. COVID-19 has since spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States, have reacted by instituting a wide variety of control measures including states of emergency, mandatory quarantines, required business and school closures, implementing “shelter in place” orders and restricting travel. Many experts predict that the outbreak will trigger a period of material global economic slowdown or a global recession.
The outbreak of COVID-19 has materially negatively impacted, and is expected to continue to materially negatively impact, the Company’s business, financial performance and condition, operating results and cash flows. The significance, extent and duration of such impact remains largely uncertain and dependent on future developments that cannot be accurately predicted. The future developments include, but are not limited to: (1) the continued severity, duration, transmission rate and geographic spread of COVID-19 in the United States and other regions in which the Company operates; (2) the extent and effectiveness of the containment measures taken and development of a vaccine; and (3) the response of the overall economy, the financial markets and the population, particularly in areas in which the Company operates, once the current containment measures are lifted. Material impacts to the Company are noted below.
Accounts Receivable, net
Due to the impacts of COVID-19 on the collectability of the Company’s accounts receivable, the Company completed an analysis of its collections and determined an additional reserve was required related to its Retail accounts receivable. Upon assessment of its uncollectible Accounts receivable, net balances, the Company determined that a reserve for estimated losses under ASC 450 - Contingencies is required, in addition to the specific reserve required under ASC 842, as the amount is probable and can be reasonably estimated. As a result, during the three and six months ended June 30, 2020, the Company recorded a specific reserve as contra revenue under ASC 842 of $5.7 million and $7.2 million, respectively. In addition, during the three and six months ended June 30, 2020, the Company recorded an ASC 450 reserve of $3.0 million and $4.5 million, respectively, in the Provision for (recovery of) doubtful accounts on the Condensed Consolidated Statements of Operations.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Impairment of long-lived assets
During the first quarter 2020, in conjunction with the Company’s quarterly impairment assessment, the Company recorded a $48.7 million impairment charge for Outlet Collection at Riverwalk, due to decreases in estimated future cash flows resulting from the impact of a shorter than anticipated holding term due to management’s plans to divest the non-core operating asset and decreased demand and reduced interest in brick and mortar retail due to the impact of COVID-19, as well as an increase in the capitalization rate used to evaluate future cash flows due to the impact of COVID-19. See Note 5 - Impairment for additional information.
Business closures
In the first quarter of 2020, the Company experienced indefinite closures of its Seaport District retail and food and beverage assets as well as the 3 hotels in The Woodlands, and the Company temporarily laid off the majority of its staff in each impacted location. The Company reopened The Woodlands Resort & Conference Center in May 2020, which was operating at 54% capacity at the end of the second quarter, and Embassy Suites at Hughes Landing in June 2020, which was operating at 100% capacity at the end of the second quarter. The Westin at The Woodlands reopened its primary restaurant, Sorriso, in April 2020, subject to local guidance, and reopened for guest stays on July 1, 2020, operating at 100% capacity. As each property has reopened, the Company has rehired staff necessary to operate at respective capacity and occupancy levels. The Seaport District retail and food and beverage assets remained closed as of June 30, 2020. In the Seaport District, we anticipate a gradual reopening of a few, select businesses, including The Rooftop at Pier 17, beginning in August. The Company has retained key personnel at these locations to facilitate the efficient start-up of operations once restrictions are lifted.
Liquidity
In direct response to the COVID-19 pandemic and the impacts on the Company’s 4 business segments, as well as the economy and capital markets in general, the Company initiated measures to increase its liquidity. During the six months ended June 30, 2020, the Company completed a common stock offering and entered into new financings and extensions of existing loans. See Note 15 - Earnings Per Share and Note 7 - Mortgages, Notes and Loans Payable, Net.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The estimates and assumptions include, but are not limited to, capitalization of development costs, provision for income taxes, recoverable amounts of receivables and deferred tax assets, initial valuations of tangible and intangible assets acquired and the related useful lives of assets upon which depreciation and amortization is based. Estimates and assumptions have also been made with respect to future revenues and costs, debt and options granted. In particular, Master Planned Communities (“MPC”) cost of sales estimates are highly judgmental as they are sensitive to cost escalation, sales price escalation and lot absorption, which are subject to judgment and affected by expectations about future market or economic conditions. Actual results could differ from these and other estimates. It is reasonably possible these estimates will change in the near term due to the rapid development and fluidity of the events and circumstances resulting from the COVID-19 pandemic.
Impact of new accounting standard relatedNew Accounting Standard Related to LeasesFinancial Instruments - Credit Losses
In FebruaryJune 2016, the Financial Accounting Standards Board ("FASB"(“FASB”) issued ASU No. 2016-02,2016-13, LeasesFinancial Instruments - Credit Losses (Topic 326)(Topic 842). The standard modifies the impairment model for most financial assets, including trade accounts receivables and loans, and requires the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities are required to increase transparencyestimate the lifetime expected credit loss on such instruments and comparability among organizations by requiringrecord an allowance to offset the recognitionamortized cost basis of right-of-use assets and lease liabilitiesthe financial asset, resulting in a net presentation of the amount expected to be collected on the balance sheet. financial asset. Subsequently, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which amended the scope of ASU 2016-13 and clarified that receivables arising from operating leases are not within the scope of the standard and should continue to be accounted for in accordance with the leases standard (Topic 842).
The Company adopted Topic 842 (the "New Leases Standard")ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized costs. Results for reporting periods beginning after January 1, 2020, are presented under ASU 2016-13 while prior period amounts
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $18 thousand as of January 1, 2019 (the "Adoption Date") using2020, for the modified retrospective approach that provides a method for applying the guidance to leases that had commenced ascumulative effect of the beginning of the reporting period in which the standard is first applied with a cumulative-effect adjustment as of that date. The Company elected the package of practical expedients permitted under the transition guidance within the New Leases Standard, which allowed the Company to carry forward the historical lease classification for leases that existed at the beginning of the reporting period.
The Company elected the practical expedient to not separate lease components from non-lease components of its lease agreements for all classes of underlying assets including ground leases, office leases and other leases. Certain of the Company’s lease agreements include non-lease components such as fixed common area maintenance charges.
The Company elected the hindsight practical expedient to determine the lease term for existing leases where it is the lessee. The Company’s election of the hindsight practical expedient resulted in the extension of lease terms for certain existing leases. In the application of hindsight, the Company evaluated the performance of the property and associated markets in relation to its overall strategies, which resulted in the determination that most renewal options would not be reasonably certain in determining the expected lease term.
Adoption of the New Leases Standard resulted in the recording of right-of-use assets and lease liabilities of $73.1 million and $72.0 million, respectively, as of the Adoption Date. The standard did not materially impact the Company’s consolidated net income and had no impact on cash flows.adopting ASU 2016-13.
See Note 2 - Accounting Policies and Pronouncements for further discussion of accounting policies impacted by the Company'sCompany’s adoption of the New Leases StandardASU 2016-13 and disclosures required by the New Leases Standard.ASU 2016-13.
Segment Presentation
Corporate Restructuring
StartingDuring the quarter ended December 31, 2019, the Company initiated a plan to strategically realign and streamline certain aspects of its business, including selling approximately $2.0 billion of non-core assets, reducing overhead and relocating its corporate headquarters. The Company will consolidate its Dallas corporate headquarters with its largest regional office in The Woodlands. Charges of $34.3 million associated with retention and severance expenses were recorded in 2019, and $1.6 million was recorded in the first quarter of 2019, the Seaport District has been moved out of the Company's existing segments and into a stand-alone segment for disclosure purposes.six months ended June 30, 2020. The Company believes that by providing thisexpects to incur an additional detail, investors$1.3 million to $2.3 million related to relocation, retention and analysts will be able to better trackseverance expenses in the Company's progress towards stabilization. Seeremainder of 2020. The restructuring costs are included in Corporate income, expenses and other items in Note 1718 - Segments for results. The Company expects to conclude its restructuring activity, excluding the disposition of the new segment. The respective segment earnings and total segmentnon-core assets, presented in these Condensed Consolidated Financial Statements and elsewhere in this Quarterly Report have been adjusted in all periods reported to reflect this change.2020.
The following table summarizes the changes to the restructuring liability included in Accounts payable and accrued expenses on the Condensed Consolidated Balance Sheets:
|
| | | | |
(In thousands) | | Restructuring costs |
Balance at December 31, 2019 | | $ | 9,685 |
|
Charges (a) | | 1,637 |
|
Charges paid/settled | | (6,012 | ) |
Balance at June 30, 2020 | | $ | 5,310 |
|
| |
(a) | Charges relate to relocation, retention and severance expenses and are included in General and administrative expense in the accompanying Condensed Consolidated Statements of Operations. |
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 2 ACCOUNTING POLICIES AND PRONOUNCEMENTS
The following is a summary of recently issued and other notable accounting pronouncements which relate to the Company'sCompany’s business.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform. The amendments in this Update provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform when certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transaction that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has applied certain optional expedients, that are retained through the end of the hedging relationship. The amendments in this Update are effective as of March 12, 2020, through December 31, 2022. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedge transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur. An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this Update simplify the accounting for income taxes by removing certain exceptions from ASC 740. Additionally, the amendments in this Update also simplify the accounting for income taxes by requiring that an entity recognize a franchise tax
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(or similar tax) that is partially based on income as an income-based tax, requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination, and other targeted changes. The effective date of the amendments is for fiscal years, and interim periods within those years, beginning after December 15, 2020. The Company is currently evaluating the impact that the adoption of ASU 2019-12 may have on its Condensed Consolidated Financial Statements.
In November 2019, the FASB issued ASU 2019-08, Compensation-Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606). The amendments in this Update require that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. The amount recorded as a reduction of the transaction price is required to be measured on the basis of the grant-date fair value of the share-based payment award in accordance with Topic 718. The grant date is the date at which a grantor (supplier) and a grantee (customer) reach a mutual understanding of the key terms and conditions of the share-based payment award. The classification and subsequent measurement of the award are subject to the guidance in Topic 718 unless the share-based payment award is subsequently modified, and the grantee is no longer a customer. The effective date of the amendments is for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company adopted ASU 2019-08 as of January 1, 2020, and it did not have a material effect on its Condensed Consolidated Financial Statements.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in this update provide clarification on certain aspects of the amendments in ASU 2016-13, Financial Instruments—Credit Losses, ASU 2017-12, Derivatives and Hedging, and ASU 2016-01, Financial Instruments—Overall. The effective date of the standard is for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company is currently evaluating the impact that theadopted ASU 2019-04 as of January 1, 2020. See further discussion regarding adoption of ASU 2016-13 may have on its consolidated financial statements.for the impact of amendments to Financial Instruments-Credit Losses. The Company doesamendments to Derivatives and Hedging, and Financial Instruments-Overall did not expect the amendments in this ASU to ASU 2017-12 and ASU 2016-01 to have a material impacteffect on its consolidated financial statements.the Company’s Condensed Consolidated Financial Statements.
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. This standard is intended to improve the accounting when considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. The effective date of the standard is for fiscal years, and interim periods within those years, beginning after December 15, 2019. The new standard must be adopted retrospectively with early adoption permitted. The Company is currently evaluating the impact that the adoption ofadopted ASU 2018-17 mayas of January 1, 2020, and it did not have a material effect on its consolidated financial statements.Condensed 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 adoptionadopted ASU 2018-15 prospectively as of this ASU to have aJanuary 1, 2020. There was no material impact on its consolidated financial statements.to the Company’s Condensed Consolidated Financial Statements upon adoption.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement that eliminates, adds and modifies certain disclosure requirements for fair value measurements. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted-average of significant unobservable inputs used to develop Level-3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively. Early adoption is permitted. The Company is currently evaluating the impact that the adoption ofadopted ASU 2018-13 mayas of January 1, 2020. The amended disclosure requirements did not have on its consolidated financial statements.a material impact to the Company’s Condensed Consolidated Financial Statements upon adoption.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
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'sunit’s fair value. An entity will still have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative step one impairment test is necessary. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2019. The new standard must be adopted prospectively with early adoption permitted. The Company does not expect the adoptionadopted ASU 2017-04 as of this ASU to have aJanuary 1, 2020, and will eliminate step two from its goodwill impairment tests. There was no material impact on its consolidated financial statements.to the Condensed Consolidated Financial Statements upon adoption.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. losses and related policy updates
The standard modifiesCompany is exposed to credit losses through the impairment model for most financial assets, includingsale of goods and services to the Company’s customers. Receivables held by the Company primarily relate to short-term trade accounts receivables and loans,financing receivables, which include Municipal Utility District (“MUD”) receivables, Special Improvement District (“SID”) bonds, tax increment financing (“TIF”) receivables, net investments in lease receivables, and will requirenotes receivable. The Company assesses its exposure to credit loss based on historical collection experience and future expectations by portfolio segment. Historical collection experience is evaluated on a quarterly basis by the useCompany.
The following table summarizes the amortized cost basis of an “expected loss” modelfinancing receivables by receivable type as of June 30, 2020:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | MUD receivables | | SID receivables | | TIF receivables | | Net investments in lease receivable | | Notes receivable | | Total |
Ending balance as of June 30, 2020 | | $ | 303,771 |
| | $ | 40,963 |
| | $ | 4,032 |
| | $ | 2,772 |
| | $ | 56,706 |
| | $ | 408,244 |
|
Accrued interest of $16.7 million and $17.3 million are included within municipal utility district receivables on the Company’s Condensed Consolidated Balance Sheets as of June 30, 2020 and 2019, respectively.
The following table presents the activity in the allowance for instruments measured at amortized cost. Under this model, entities will be required to estimatecredit losses for financing receivables by receivable type for the lifetime expected credit loss
six months ended June 30, 2020:
11 |
| | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | MUD receivables | | SID receivables | | TIF receivables | | Net investments in lease receivable | | Notes receivable | | Trade accounts receivable (a) |
Beginning balance as of January 1, 2020 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 17 |
| | $ | 209 |
| | $ | — |
|
Current-period provision for expected credit losses | | — |
| | — |
| | — |
| | — |
| | (13 | ) | | 109 |
|
Write-offs | | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (42 | ) |
Recoveries | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Ending balance as of June 30, 2020 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 17 |
| | $ | 195 |
| | $ | 67 |
|
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
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. Financial assets held by the Company primarily relate to receivables from Special Improvement District ("SID") bonds and Municipal Utility District ("MUD") receivables. These receivables relate to contractually specified reimbursable costs incurred by the Company for infrastructure improvements within the respective district. Reimbursement for these costs is financed through bond offerings of the local municipality. Application of ASU 2016-13 may result in the Company recognizing credit losses at an earlier date than they would otherwise be recognized under current accounting guidance. The Company is currently evaluating the impact that the adoption of ASU 2016-13 may have on its consolidated financial statements.
The New Leases Standard and related policy updates
As discussed in Note 1 - Basis of Presentation and Organization, as of the Adoption Date of the New Leases Standard, the recognition of right-of-use assets and lease liabilities is required on the balance sheet. The Company determines whether an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use assets, net and Operating lease obligations on the Condensed Consolidated Balance Sheets. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of future minimum lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses an estimate of the incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. The Operating lease right-of-use asset also includes any lease payments made, less any lease incentives and initial direct costs incurred. The Company recorded $70.3 million in Operating lease right-of-use assets, net and $71.2 million in Operating lease obligations on its Condensed Consolidated Balance Sheets. The Company does not have any finance leases as of September 30, 2019.
The Company’s lessee agreements consist of operating leases primarily for ground leases and other real estate. The Company’s leases have remaining lease terms of less than one year to 54 years. Most leases include one or more options to renew, with renewal terms that can extend the lease term from two to 40 years, and some of which may include options to terminate the leases within one year. The Company considers its strategic plan and the life of associated agreements in determining when options to extend or terminate lease terms are reasonably certain of being exercised. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Certain of the Company’s lease agreements include variable lease payments based on a percentage of income generated through subleases, changes in price indices and market rates, and other costs arising from operating, maintenance, and taxes. The Company’s lease agreements do not contain residual value guarantees or restrictive covenants. The Company leases certain buildings and office space constructed on its ground leases to third parties.
The components of lease expense are as follows:
|
| | | | | | | | |
(In thousands) | | Three Months Ended | | Nine Months Ended |
Lease Cost | | September 30, 2019 | | September 30, 2019 |
Operating lease cost | | $ | 2,204 |
| | $ | 6,881 |
|
Variable lease costs | | 904 |
| | 1,470 |
|
Sublease income | | — |
| | — |
|
Net lease cost | | $ | 3,108 |
| | $ | 8,351 |
|
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Future minimum lease payments as of September 30, 2019 are as follows:
|
| | | | |
(In thousands) | | Operating |
Year Ended December 31, | | Leases |
2019 (excluding the nine months ended September 30, 2019) | | $ | 1,698 |
|
2020 | | 7,272 |
|
2021 | | 7,111 |
|
2022 | | 6,373 |
|
2023 | | 6,389 |
|
Thereafter | | 273,287 |
|
Total lease payments | | 302,130 |
|
Less: imputed interest | | (230,940 | ) |
Present value of lease liabilities | | $ | 71,190 |
|
Other information related to the Company’s lessee agreements is as follows:
|
| | | | |
(In thousands) | | Nine Months Ended |
Supplemental Condensed Consolidated Statements of Cash Flows Information | | September 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows on operating leases | | $ | 4,971 |
|
|
| | | |
Other Information(a) | | September 30, 2019 |
Weighted-average remainingTrade accounts receivable are presented within accounts receivable, net on the consolidated balance sheet. Accounts receivable, net also includes receivables related to operating leases. Collectability and related allowance for amounts due under operating leases is assessed under the guidance of ASC 842. Reserves related to operating lease term (years) | | |
Operating leases | | 36.9 |
|
Weighted-average discount rate | | |
Operating leases | | 7.7 | %receivables are not included in the above table. |
The Company receives rental income from the leasing of retail, office, multi-family and other space under operating leases, as well as certain variable tenant recoveries. Such operating leases are with a variety of tenants and have a remaining average term of approximately four years. Lease terms generally vary among tenants and may include early termination options, extension options and fixed rental rate increases or rental rate increases based on an index. The minimum rentals based on operating leases of the consolidated properties held as of September 30, 2019 are as follows:
|
| | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In thousands) | | September 30, 2019 | | September 30, 2019 |
Total Minimum Rent Payments | | $ | 55,257 |
| | $ | 161,847 |
|
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Total future minimum rents associated with operating leasesFinancing receivables are as follows:
|
| | | | |
| | Total |
| | Minimum |
Year Ending December 31, | | Rent |
| | (In thousands) |
2019 (excluding the nine months ended September 30, 2019) | | $ | 46,483 |
|
2020 | | 192,170 |
|
2021 | | 204,694 |
|
2022 | | 213,358 |
|
2023 | | 199,725 |
|
Thereafter | | 1,284,965 |
|
Total | | $ | 2,141,395 |
|
Minimum rent revenuesconsidered to be past due once they are recognized on a straight‑line basis over30 days contractually past due under 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 reported on the Condensed Consolidated Statements of Operations also include amortization related to above and below‑market tenant leases on acquired properties.
In the third quarter of 2019, the Company entered into sales-type leases. A sales-type lease is defined as a lease that meets one or more of the following: transfers ownership at the end of the lease term, grants the lessee an option to purchase that is reasonably expected to be exercised, covers the major part of the asset’s economic life, the net present value of the lease payments equals or exceeds the fair value of the asset, or the asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease. As of September 30, 2019, the Company recorded $78.0 million in Net investment in lease receivable on its Condensed Consolidated Balance Sheets, the components of which include a lease receivable of $77.8 million and an unguaranteed residual value of $0.2 million.agreement. The Company derecognized $64.6 million from Developments related to these sales-type leasescurrently does not have significant financing receivables that are past due or on its Condensed Consolidated Balance Sheets.nonaccrual status.
The Company recognized Selling profit from sales-type leases and Interest income from sales-type leases in its Condensed Consolidated StatementsThere have been no significant write-offs or recoveries of Operationsamounts previously written-off during the current period for the three and nine months ended September 30, 2019 as follows:
|
| | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, 2019 | | September 30, 2019 |
Selling profit from sales-type leases | | $ | 13,537 |
| | $ | 13,537 |
|
Interest income from sales-type leases | | $ | 1,088 |
| | $ | 1,088 |
|
Total future minimum rents associated with sales-type leases are as follows:
|
| | | | |
| | Total |
| | Minimum |
Year Ending December 31, | | Rent |
| | (In thousands) |
2019 (excluding the nine months ended September 30, 2019) | | $ | 1,016 |
|
2020 | | 5,427 |
|
2021 | | 5,557 |
|
2022 | | 5,690 |
|
2023 | | 5,827 |
|
Thereafter | | 109,747 |
|
Total | | $ | 133,264 |
|
financing receivables.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 3 REAL ESTATE AND OTHER AFFILIATES
InvestmentsEquity 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 | | Share of Earnings/Dividends | Economic/Legal Ownership | | Carrying Value | | Share of Earnings/Dividends | | Share of Earnings/Dividends |
| | September 30, | | December 31, | | September 30, | | December 31, | | Three Months Ended September 30, | | Nine Months Ended September 30, | June 30, | | December 31, | | June 30, | | December 31, | | Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
Equity Method Investments | | | | | | | | | | | | | | |
| | |
| | | | | | | | | | | | | |
| | |
|
Operating Assets: | | | | | | | | | | | | | | |
| | |
| | | | | | | | | | | | | |
| | |
|
The Metropolitan Downtown Columbia (a) | | 50 | % | | 50 | % | | $ | — |
| | $ | — |
| | $ | 172 |
| | $ | 87 |
| | $ | 478 |
| | $ | 371 |
| 50 | % | | 50 | % | | $ | — |
| | $ | — |
| | $ | 195 |
| | $ | 123 |
| | $ | 422 |
| | $ | 306 |
|
Stewart Title of Montgomery County, TX | | 50 | % | | 50 | % | | 3,899 |
| | 3,920 |
| | 306 |
| | 165 |
| | 579 |
| | 393 |
| 50 | % | | 50 | % | | 3,878 |
| | 4,175 |
| | 160 |
| | 170 |
| | 503 |
| | 272 |
|
Woodlands Sarofim #1 | | 20 | % | | 20 | % | | 2,849 |
| | 2,760 |
| | 38 |
| | 30 |
| | 89 |
| | 66 |
| 20 | % | | 20 | % | | 3,059 |
| | 2,985 |
| | 29 |
| | 31 |
| | 64 |
| | 51 |
|
m.flats/TEN.M | | 50 | % | | 50 | % | | 3,132 |
| | 4,701 |
| | (75 | ) | | (357 | ) | | (1,576 | ) | | (2,661 | ) | 50 | % | | 50 | % | | 1,887 |
| | 2,431 |
| | 91 |
| | (279 | ) | | 156 |
| | (1,500 | ) |
Master Planned Communities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The Summit (b) | | — | % | | — | % | | 86,969 |
| | 72,171 |
| | 4,523 |
| | 9,454 |
| | 18,859 |
| | 34,682 |
| — | % | | — | % | | 88,076 |
| | 84,455 |
| | (2,968 | ) | | 6,499 |
| | 5,966 |
| | 14,336 |
|
Seaport District: | | | | | | | | | | | | | | |
| | |
| | | | | | | | | | | | | |
| | |
|
Mr. C Seaport (c) | | 35 | % | | 35 | % | | 8,002 |
| | 8,721 |
| | (545 | ) | | (452 | ) | | (1,628 | ) | | (452 | ) | 35 | % | | 35 | % | | 750 |
| | 7,650 |
| | (6,249 | ) | | (451 | ) | | (6,900 | ) | | (1,083 | ) |
Bar Wayō (Momofuku) (b) | | — | % | | — | % | | 6,070 |
| | — |
| | (160 | ) | | — |
| | (160 | ) | | — |
| — | % | | — | % | | 7,245 |
| | 7,469 |
| | (384 | ) | | — |
| | (1,776 | ) | | — |
|
Strategic Developments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Circle T Ranch and Power Center | | 50 | % | | 50 | % | | 6,680 |
| | 5,989 |
| | 400 |
| | (318 | ) | | 691 |
| | 3,118 |
| 50 | % | | 50 | % | | 10,469 |
| | 8,207 |
| | 589 |
| | 256 |
| | 675 |
| | 291 |
|
HHMK Development | | 50 | % | | 50 | % | | 10 |
| | 10 |
| | — |
| | — |
| | — |
| | — |
| 50 | % | | 50 | % | | 10 |
| | 10 |
| | — |
| | — |
| | — |
| | — |
|
KR Holdings | | 50 | % | | 50 | % | | 48 |
| | 159 |
| | (117 | ) | | 3 |
| | (110 | ) | | 679 |
| 50 | % | | 50 | % | | 379 |
| | 422 |
| | (15 | ) | | 5 |
| | (37 | ) | | 7 |
|
Mr. C Seaport (c) | | 35 | % | | 35 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | (240 | ) | |
| | | | | | 117,659 |
| | 98,431 |
| | 4,542 |
| | 8,612 |
| | 17,222 |
| | 35,956 |
| | | | | 115,753 |
| | 117,804 |
| | (8,552 | ) | | 6,354 |
| | (927 | ) | | 12,680 |
|
Cost method investments | | | | | | 3,952 |
| | 3,856 |
| | — |
| | — |
| | 3,625 |
| | 3,341 |
| |
Investment in real estate and other affiliates | | | | $ | 121,611 |
| | $ | 102,287 |
| | $ | 4,542 |
| | $ | 8,612 |
| | $ | 20,847 |
| | $ | 39,297 |
| |
Other equity investments (d) | | | | | | 3,953 |
| | 3,953 |
| | — |
| | — |
| | 3,724 |
| | 3,625 |
|
Investments in real estate and other affiliates | | Investments in real estate and other affiliates | | | | $ | 119,706 |
| | $ | 121,757 |
| | $ | (8,552 | ) | | $ | 6,354 |
| | $ | 2,797 |
| | $ | 16,305 |
|
| |
(a) | The Metropolitan Downtown Columbia was in a deficit position of $4.0$4.7 million and $3.8$4.7 million at SeptemberJune 30, 20192020, and December 31, 2018,2019, respectively, due to distributions from operating cash flows in excess of basis. These deficit balances are presented in Accounts payable and accrued expenses at SeptemberJune 30, 20192020, and December 31, 2018.2019. |
| |
(b) | Please refer to the discussion below for a description of the joint venture ownership structure.structure descriptions. |
| |
(c) | Property was transferred from Strategic Developments to Operating Assets duringDuring the three months ended SeptemberJune 30, 2018. The share2020, the Company recognized a $6.0 million impairment of earnings/dividends forits equity investment in Mr. C inSeaport. Refer to Note 5 - Impairment for additional information. |
| |
(d) | Other equity investments represent equity investments not accounted for under the Operating Assets and Strategic Developments sections representsequity method. The Company elected the Company’s share recognized whenmeasurement alternative as these investments do not have readily determinable fair values. There were no impairments, or upward or downward adjustments to the investment was in the respective segment.carrying amounts of these securities either during current year 2020 or cumulatively. |
As of SeptemberJune 30, 2019,2020, the Company is not the primary beneficiary of any of the joint venturesinvestments 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. As of SeptemberJune 30, 20192020, and at December 31, 2018,2019, the Mr. C Seaport variable interest entity ("VIE"(“VIE”) does not have sufficient equity at risk to finance its operations without additional financial support. As of SeptemberJune 30, 20192020, and at December 31, 2018,2019, Bar Wayō is also classified as a VIE because the equity holders, as a group, lack the characteristics of a controlling financial interest. The carrying values of Mr. C Seaport and Bar Wayō as of SeptemberJune 30, 20192020, are $8.0$0.8 million and $6.1$7.2 million, respectively, and are classified as InvestmentInvestments in real estate and other affiliates in the Condensed Consolidated Balance Sheets. The Company'sCompany’s maximum exposure to loss as a result of these investments is limited to the aggregate carrying value of the investments as the Company has not provided any guarantees or otherwise made firm commitments to fund amounts on behalf of these VIEs. As of SeptemberJune 30, 2019, $210.42020, approximately $208.6 million of indebtedness was secured by the properties owned by the Company'sCompany’s real estate and other affiliates, of which the Company'sCompany’s share was $100.8$99.9 million based upon economic ownership. All of this indebtedness is without recourse to the Company.
As of September 30, 2019, the Company is the primary beneficiary of 2 VIEs, Bridges at Mint Hill and 110 North Wacker, which are consolidated in its financial statements. In addition to these 2 entities, as of December 31, 2018, the Company was also the primary beneficiary of the Ke Kilohana, Anaha, Waiea and Ae‘o Associations of Unit Owners ("AOUO"), none of which were related parties, and consolidated these entities in its financial statements. The Company deconsolidated Ke Kilohana's AOUO during the three months ended September 30, 2019, and deconsolidated Anaha, Waiea, and Ae‘o AOUOs during the nine months ended September 30, 2019, as the Company no longer controls these entities. The creditors of the consolidated VIEs do not have recourse to the Company, except for 18%, or $20.6 million, of the 110 North Wacker outstanding loan balance. As of September 30,
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
As of June 30, 2020, the Company is the primary beneficiary of one VIE, 110 North Wacker, which is consolidated in its financial statements. The Company began consolidating 110 North Wacker and its underlying entities in the second quarter of 2018 as further discussed below. 110 North Wacker’s creditors do not have recourse to the Company, except for 18%, or $48.8 million, of its outstanding loan balance. As of June 30, 2020, the carrying values of the assets and liabilities associated with the operations of the consolidated VIE were $493.4 million and $295.6 million, respectively. As of December 31, 2019, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $356.5VIE was $393.3 million and $128.1 million, respectively. 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$186.5 million, respectively. The assets of the VIEsVIE are restricted for use only by the particular VIEsVIE and are not available for the Company'sCompany’s general operations.
Significant activity for real estate and other affiliates and the related accounting considerations are described below.
110 North Wacker
During the second quarter of 2018, the Company'sCompany’s partnership with the local developer (the "Partnership"“Partnership”) executed a joint venturean agreement with USAA related to 110 North Wacker.Wacker (collectively, the local developer and USAA are the “Partners”). At execution, the Company contributed land with a carrying value of $33.6 million and an agreed upon fair value of $85.0 million, and USAA contributed $64.0 million in cash. The Company had subsequent capital obligations of $42.7 million, and USAA was required to fund up to $105.6 million in addition to its initial contribution. The Company and its joint venture partnersPartners have also entered into a construction loan agreement further described in Note 7 - Mortgages, Notes and Loans Payable, Net. On May 23, 2019, the Company and its joint venture partnersPartners increased the construction loan. Concurrently with the increase in the construction loan, the Company and its joint venture partnersPartners agreed to eliminate the Company'sCompany’s subsequent capital obligations. USAA agreed to fund an additional $8.8 million, for a total commitment of $178.4 million. No changes were made to the rights of either the Company or the joint venture partnersPartners under the joint venture agreement. 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. Upon the building'sbuilding’s completion, the Company expects to recognize the joint ventureinvestment under the equity method.
Given the nature of the venture’s capital structure and the provisions for the liquidation of assets, the Company'sCompany’s share of the venture’s income-producing activities iswill be recognized based on the Hypothetical Liquidation at Book Value ("HLBV"(“HLBV”) method, which represents an economic interest of approximately 23% for the Company. Under this method, the Company recognizeswill recognize income or loss in Equity in earnings from real estate and other affiliates based on the change in its underlying share of the venture'sventure’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, the Partnership 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 the Partnership that resulted in a 9.0% return. Thereafter, the Partnership and USAA are entitled to distributions pari passu to their profit ownership interests of 90% and 10%, respectively.
The Summit
During the first quarter of 2015, the Company formed DLV/HHPI Summerlin, LLC (“The Summit”), a joint venture with Discovery Land Company (“Discovery”). The Company contributed land with a carrying value of $13.4 million and transferred SID bonds related to such land with a carrying value of $1.3 million to the joint ventureThe Summit 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 itstheir capital contribution, and the Company has no further capital obligations. The gains on the contributed land are recognized in Equity in earnings from real estate and other affiliates as the joint ventureThe Summit 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 2 times its equity contribution. Any further cash distributions are shared equally. Given the nature of the venture’sThe Summit’s capital structure and the provisions for the liquidation of assets, the Company'sCompany’s share of the venture’sThe Summit’s income-producing activities is recognized based on the HLBV method.
Relevant financial statement information for The Summit is summarized as follows:
|
| | | | | | | | |
| | September 30, | | December 31, |
(In millions) | | 2019 | | 2018 |
Total Assets | | $ | 225.7 |
| | $ | 218.9 |
|
Total Liabilities | | 136.6 |
| | 144.6 |
|
Total Equity | | 89.1 |
| | 74.3 |
|
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Relevant financial statement information for The Summit is summarized as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions) | | 2019 | | 2018 | | 2019 | | 2018 |
Revenues (a) | | $ | 25.9 |
| | $ | 27.7 |
| | $ | 84.1 |
| | $ | 88.6 |
|
Net income | | 4.6 |
| | 9.5 |
| | 18.9 |
| | 34.7 |
|
Gross Margin | | 5.6 |
| | 10.8 |
| | 22.3 |
| | 38.3 |
|
|
| | | | | | | | |
| | June 30, | | December 31, |
(In thousands) | | 2020 | | 2019 |
Total Assets | | $ | 243,112 |
| | $ | 221,277 |
|
Total Liabilities | | 152,904 |
| | 136,314 |
|
Total Equity | | 90,208 |
| | 84,963 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Revenues (a) | | $ | 18,836 |
| | $ | 27,704 |
| | $ | 58,672 |
| | $ | 58,187 |
|
Net income | | (2,968 | ) | | 6,500 |
| | 7,591 |
| | 14,336 |
|
Gross Margin | | (1,448 | ) | | 8,415 |
| | 10,256 |
| | 16,747 |
|
| |
(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 ofadopted ASU 2014-09, Revenues from Contracts with Customers (Topic 606)and will adopt by the end effective in the fourth quarter of 2019.2019 using the modified retrospective transition method. Therefore, for 2020, revenues allocated to each of The Summit’s performance obligations is recognized over time based on an input measure of progress. The three and six months ended June 30, 2019 amounts have not been adjusted and are recognized on a percentage of completion basis. The Summit’s adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements.
|
Bar Wayō
During the first quarter of 2016, the Company formed Pier 17 Restaurant C101, LLC (“Bar Wayō”), a joint venture with MomoPier, LLC (“Momofuku”), an affiliate of the Momofuku restaurant group, to construct and operate a restaurant and bar at Pier 17 in the Seaport District. Under the terms of the joint venture agreement, the Company will fund 89.75% of the costs to construct the restaurant, and Momofuku will contribute the remaining 10.25%.
After each member receives a 10.0% preferred return on its capital contributions, available cash will be allocated 75.0% to the Company and 25.0% to Momofuku, until each member’s unreturned capital account has been reduced to zero. Any remaining cash will be distributed to the members in proportion to their respective percentage interests, or 50% each to the Company and Momofuku. Given the nature of the venture’sBar Wayo’s capital structure and the provisions for the liquidation of assets, the Company’s share of the venture’sBar Wayo’s income-producing activities is recognized based on the HLBV method.
NOTE 4 RECENT AND PENDING TRANSACTIONS
On July 16, 2020, the Company completed the sale of its 35% equity investment in Mr. C Seaport, a 66-room boutique hotel located at 33 Peck Slip, New York, in close proximity to the Seaport District, for $0.8 million. Refer to Note 3 - Real Estate and Other Affiliates and Note 5 - Impairment for additional information.
On June 29, 2020, the Company entered into an agreement terminating a participation right contained in the contract for the sale of West Windsor in October 29, 2019,2019. As consideration, the Company received an $8.0 million termination payment in July, which is included in Gain (loss) on sale or disposal of real estate and other assets, net on the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020, and in Accounts receivable on the Condensed Consolidated Balance Sheets as of June 30, 2020.
On March 13, 2020, the Company closed on the sale of West Windsor,its property at 100 Fellowship Drive, a 658-acre parcel of land located in West Windsor, New Jersey, for $40.0 million. As of September 30, 2019, the property, which is in the Strategic Developments segment, meets the criteria to be classified as held for sale, and includes assets and liabilities of $7.2 million and $0.1 million, respectively. The sale allows the Company to redeploy the net cash proceeds from this unleveraged asset into existing developments.
On September 16, 2019, the Company closed on the sale of Cottonwood Mall, a 196,975 square foot building and 54-acre13.5-acre land parcel and203,257-square-foot build-to-suit medical building with approximately 550 surface parking spaces in Holladay, Utah. The Company sold the assetWoodlands, Texas for a total sales price of $46.0$115.0 million. The Company had previously entered into a lease agreement related to this property in November of 2019, and at lease commencement, the Company derecognized $63.7 million resultingfrom Developments and recorded an initial net investment in lease receivable of $75.9 million on the Condensed Consolidated Balance Sheets, recognizing $13.5 million of Selling profit from the sales-type lease on the Condensed Consolidated Statements of Operations.
The sale of 100 Fellowship Drive resulted in a pre-tax gain of $24.1$38.3 million, which is included in Gain (loss) on sale or disposal of real estate and other assets, net on the Condensed Consolidated Statements of Operations. The valuescarrying value of assets and liabilities assumed by the purchaser total $21.5net investment in lease receivable was approximately $76.1 million at the time of sale. Gain on sale is calculated as the difference between the purchase price of $115.0 million, and $0.3 million, respectively. As consideration,the asset’s carrying value, less related transaction costs of approximately $0.2 million. Contemporaneous with the sale, the Company received a $10.0credited to the buyer approximately $0.6 million down paymentfor operating account funds and the buyer’s assumption of the related liabilities. After the sale, the Company had no continuing involvement in this lease. After repayment of debt associated with the property, the sale generated approximately $64.2 million in net proceeds, which are presented as cash inflows from operating activities in the purchaser and recorded a $36.0 million note receivableCondensed Consolidated Statements of Cash Flows for the remainder. The note is interest free for the first year, then bears interest at 5.00% until it matures on December 31,six months ended June 30, 2020. The sale of Cottonwood Mall, which was in the Strategic Developments segment prior to the sale, allows the Company to redeploy capital from this unleveraged asset to other development activities.
NOTE 5 IMPAIRMENT
The Company reviews its long-lived assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. During the first quarter of 2020, the Company recorded a $48.7 million impairment charge for Outlet Collection at Riverwalk, a 268,556-square-foot urban upscale outlet center located along the Mississippi River in downtown New Orleans, LA. The Company recognized the impairment due to decreases in estimated future cash flows as a result of the impact of a shorter than anticipated holding term due to management’s plans to divest the non-core operating asset, decreased demand and reduced interest in brick and mortar retail due to the impact of COVID-19, as well as an increase in the capitalization rate used to evaluate future cash flows due to the impact of COVID-19. The $46.8 million net carrying value of Outlet Collection at Riverwalk, after the impairment, represents the estimated fair market value at March 31, 2020, at the time of the impairment assessment.The Company used a discounted cash flow analysis using a capitalization rate of 10% to determine fair value.There can be no assurance that the Company will ultimately recover this amount through a sale.
With respect to the InvestmentInvestments in real estate and other affiliates, a series of operating losses of an underlying asset or other factors may indicate that a decrease in value has occurred which is other‑than‑temporary. The investment in each real estate and other affiliate is evaluated periodically and as deemed necessary for recoverability and valuation declines that are other‑than‑temporary. During the three months ended June 30, 2020, the Company recorded a $6.0 million impairment of its equity investment in Mr. C Seaport, a 66-room boutique hotel located at 33 Peck Slip in close proximity to the Seaport District. The Company recognized the impairment due to a change in the anticipated holding period as the Company entered into a plan to sell its 35% equity investment in Mr. C Seaport to its venture partners for $0.8 million. Subsequent to quarter end, the Company completed the sale of its interest in Mr. C Seaport. See Note 4 - Recent Transactions for additional details regarding the sale. The impairment loss is presented in Equity in (losses) earnings from real estate and other affiliates. Refer to Note 3 - Real Estate and Other Affiliates for additional information. NaN impairment charges were recorded duringfor the threeInvestments in real estate and nine months ended September 30, 2019 orother affiliates during the year ended December 31, 2018. 2019.
The Company periodically evaluates its strategic alternatives with respect to each of its properties and may revise its strategy from time to time, including its intent to hold an asset on a long-term basis or the timing of potential asset dispositions. These changes in strategy could result in impairment charges in future periods.
In addition to the impairments discussed above, during the second quarter, the Company reduced the estimated net sales price of certain condominium units, including the remaining penthouse inventory, to better align the expected price with recent final sales prices, resulting in a loss of $5.1 million included in Condominium rights and unit cost of sales for the three months ended June 30, 2020.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
The following table summarizes the pre-tax impacts of the items mentioned above to the Condensed Consolidated Statements of Operations:
|
| | | | | | | | | | | | | | | | | | |
Asset | | Statements of Operations Line Item | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
(In thousands) | | | | | | | | | | |
Operating Assets: | | | | | | | | |
Outlet Collection at Riverwalk | | Provision for impairment | | $ | — |
| | $ | — |
| | $ | 48,738 |
| | $ | — |
|
Equity Investments: | | | | | | | | |
Mr. C Seaport | | Equity in (losses) earnings from real estate and other affiliates | | $ | 6,000 |
| | $ | — |
| | $ | 6,000 |
| | $ | — |
|
Other Assets: | | | | | | | | | | |
Condominium Inventory | | Condominium rights and unit cost of sales | | $ | 5,078 |
| | $ | — |
| | $ | 5,078 |
| | $ | — |
|
NOTE 6 OTHER ASSETS AND LIABILITIES
Prepaid Expenses and Other Assets
The following table summarizes the significant components of Prepaid expenses and other assets:
| | | | September 30, | | December 31, | | June 30, | | December 31, |
(In thousands) | | 2019 | | 2018 | | 2020 | | 2019 |
Straight-line rent | | | $ | 61,060 |
| | $ | 56,223 |
|
Condominium inventory | | $ | 56,547 |
| | $ | 198,352 |
| | 58,151 |
| | 56,421 |
|
Straight-line rent | | 55,342 |
| | 50,493 |
| |
Security, escrow, and other deposits | | | 55,836 |
| | 17,464 |
|
In-place leases | | | 51,723 |
| | 54,471 |
|
Special Improvement District receivable | | | 40,963 |
| | 42,996 |
|
Intangibles | | 33,445 |
| | 33,955 |
| | 32,935 |
| | 33,275 |
|
Prepaid expenses | | 19,918 |
| | 16,981 |
| | 16,683 |
| | 13,263 |
|
Special Improvement District receivables | | 17,352 |
| | 18,838 |
| |
Security and escrow deposits | | 17,291 |
| | 17,670 |
| |
Equipment, net of net of accumulated depreciation of $9.6 million and $8.3 million, respectively | | 14,288 |
| | 15,543 |
| |
Tenant incentives and other receivables | | | 10,145 |
| | 7,556 |
|
Other | | 9,865 |
| | 18,429 |
| | 9,313 |
| | 9,252 |
|
Tenant incentives and other receivables | | 8,154 |
| | 8,745 |
| |
TIF receivable | | 5,792 |
| | 2,470 |
| | 4,032 |
| | 3,931 |
|
In-place leases | | 4,252 |
| | 6,539 |
| |
Food and beverage and lifestyle inventory | | 3,782 |
| | 1,935 |
| | 1,166 |
| | 4,310 |
|
Federal income tax receivable | | | 655 |
| | 655 |
|
Above-market tenant leases | | 678 |
| | 1,044 |
| | 428 |
| | 556 |
|
Federal income tax receivable | | 200 |
| | 2,000 |
| |
Below-market ground leases | | — |
| | 18,296 |
| |
Interest rate swap derivative assets | | — |
| | 346 |
| |
Prepaid expenses and other assets, net | | $ | 246,906 |
| | $ | 411,636 |
| | $ | 343,090 |
| | $ | 300,373 |
|
The $164.7$42.7 million net decreaseincrease primarily relates to $141.8a $38.4 million increase in Security, escrow, and $18.3 million decreases in Condominium inventory and Below-market ground leases, respectively. Condominium inventory represents completed units for which sales have not yet closed. The decrease in Condominium inventory from December 31, 2018 isother deposits, primarily attributable to rate-lock and security deposits for The Woodlands Towers at the contracted unitsWaterway, a $4.8 million increase in Straight-line rent mainly due to the acquisition of The Woodlands Towers at Ae‘othe Waterway and Waiea, which have closedOperating Assets placed in service during the year, as well as a $3.4 million increase in Prepaid expenses. These increases are partially offset by a $3.1 million decrease in Food and beverage and lifestyle inventory predominantly due to the write-off of inventory at 10 Corso Como Retail and Café in the first nine monthsquarter of 2019. The2020 and a $2.7 million decrease in Below-market groundIn-place leases, is attributable to the adoptionpartially as a result of amortization of the New Leases Standard as ofleases at The Woodlands Towers at the Adoption Date. The balance of unamortized Below-market ground leases was reclassified to Operating lease right-of-use assets, net upon adoption.
Waterway.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Accounts Payable and Accrued Expenses
The following table summarizes the significant components of Accounts payable and accrued expenses:
| | | | September 30, | | December 31, | | June 30, | | December 31, |
(In thousands) | | 2019 | | 2018 | | 2020 | | 2019 |
Construction payables | | $ | 276,290 |
| | $ | 258,749 |
| | $ | 327,006 |
| | $ | 261,523 |
|
Condominium deposit liabilities | | 170,105 |
| | 263,636 |
| | 289,438 |
| | 194,794 |
|
Interest rate swap liabilities | | | 77,737 |
| | 40,135 |
|
Deferred income | | 52,235 |
| | 42,734 |
| | 66,142 |
| | 63,483 |
|
Interest rate swap liabilities | | 48,788 |
| | 16,517 |
| |
Tenant and other deposits | | 32,569 |
| | 20,893 |
| |
Accrued real estate taxes | | | 28,647 |
| | 27,559 |
|
Accounts payable and accrued expenses | | 32,299 |
| | 38,748 |
| | 26,655 |
| | 37,480 |
|
Accrued payroll and other employee liabilities | | 31,403 |
| | 42,591 |
| | 26,172 |
| | 44,082 |
|
Accrued real estate taxes | | 28,551 |
| | 26,171 |
| |
Tenant and other deposits | | | 24,555 |
| | 24,080 |
|
Accrued interest | | | 23,120 |
| | 23,838 |
|
Other | | 16,722 |
| | 29,283 |
| | 13,022 |
| | 16,173 |
|
Accrued interest | | 10,547 |
| | 23,080 |
| |
Straight-line ground rent liability | | — |
| | 16,870 |
| |
Accounts payable and accrued expenses | | $ | 699,509 |
| | $ | 779,272 |
| | $ | 902,494 |
| | $ | 733,147 |
|
The $79.8$169.3 million net decrease in total Accounts payable and accrued expensesincrease primarily relates to a $93.5$94.6 million decreaseincrease in Condominium deposit liabilities primarily attributable to sales at Victoria Place, Kō'ula, and ‘A‘ali‘i; a $65.5 million increase in Construction payables primarily attributable to a $97.9 million charge for repairs and remediation on certain alleged construction defects at the contracted unitsWaiea condominium tower (see Note 10 - Commitments and Contingencies for details), partially offset by reduced construction spend at Ae‘oseveral projects approaching completion; and Ke Kilohana, which have closed in the first nine months of 2019; a $32.3$37.6 million increase in Interest rate swap liabilities due to a decrease inof the one-month London Interbank Offered Rate ("LIBOR"(“LIBOR”) forward curve for the periods presented; a $17.5 million increase in Construction payables predominately related to higher construction spend at the Summerlin MPC, ‘A‘ali‘i, 110 North Wacker and Juniper Apartments for projects under construction,presented. These increases are partially offset by lower construction payables at Ae‘o and Ke Kilohana; a $16.9 million decrease in Straight-line ground rent liability attributable to the adoption of the New Leases Standard as of the Adoption Date; a $12.5 million decrease in Accrued interest due to the semi-annual payment of interest on the $1.0 billion Unsecured 5.375% Senior Notes; an $11.7 million increase in Tenant and other deposits related to an increase in land sales deposits for the Summerlin and Bridgeland MPCs; and an $11.2$17.9 million decrease in Accrued payroll and other employee liabilities primarily due to the 2019 annual incentive bonus payment in the first quarter of 2019 of annual incentive bonus for 2018.2020; and a $10.8 million decrease in Accounts payable and accrued expenses.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 7 MORTGAGES, NOTES AND LOANS PAYABLE, NET
Mortgages, notes and loans payable, net are summarized as follows:
| | | | September 30, | | December 31, | | June 30, | | December 31, |
(In thousands) | | 2019 | | 2018 | | 2020 | | 2019 |
Fixed-rate debt: | | | | | | | | |
Unsecured 5.375% Senior Notes | | $ | 1,000,000 |
| | $ | 1,000,000 |
| | $ | 1,000,000 |
| | $ | 1,000,000 |
|
Secured mortgages, notes and loans payable | | 997,243 |
| | 648,707 |
| | 879,773 |
| | 884,935 |
|
Special Improvement District bonds | | 14,382 |
| | 15,168 |
| | 22,402 |
| | 23,725 |
|
Variable-rate debt: | | | | | | | | |
Mortgages, notes and loans payable (a) | | 1,653,637 |
| | 1,551,336 |
| | 2,536,978 |
| | 2,229,958 |
|
Unamortized bond issuance costs | | (5,465 | ) | | (6,096 | ) | | (4,808 | ) | | (5,249 | ) |
Unamortized deferred financing costs(b) | | (35,113 | ) | | (27,902 | ) | | (33,282 | ) | | (36,899 | ) |
Total mortgages, notes and loans payable, net | | $ | 3,624,684 |
| | $ | 3,181,213 |
| | $ | 4,401,063 |
| | $ | 4,096,470 |
|
| |
(a) | As more fully described in Note 9 - Derivative Instruments and Hedging Activities, as of September 30, 2019$705.0 million and December 31, 2018, $616.7$630.1 million of variable‑rate debt has been swapped to a fixed rate for the term of the related debt.debt as of June 30, 2020, and December 31, 2019, respectively. An additional $114.3$270.9 million and $50.0$184.3 million of variable-rate debt was subject to interest rate collars as of SeptemberJune 30, 20192020, and December 31, 2018,2019, respectively, and $75.0 million of variable-rate debt was capped at a maximum interest rate as of Septemberboth June 30, 20192020, and December 31, 2018.2019. |
| |
(b) | Deferred financing costs 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). |
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Certain of the Company'sCompany’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 percentage of the loan balance. As of SeptemberJune 30, 2019,2020, land, buildings and equipment and developments with a net book value of $5.0$6.7 billion have been pledged as collateral for HHC'sHHC’s Mortgages, notes and loans payable, net.
During the second quarter of 2020, the COVID-19 pandemic necessitated temporary closure of some of the Company’s Operating Assets, primarily retail and hospitality properties. As a result of the decline in interim operating results for certain of these properties, as of June 30, 2020, the Company did not meet the debt service coverage ratio required to maintain our outstanding Senior Secured Credit Facility Revolver Loan balance of $61.3 million and a semi-annual operating covenant within our $62.5 million loan for The Woodlands Resort and Conference Center. The Revolver Loan requires a full repayment cure of the outstanding revolver balance for the debt service coverage ratio test. We expect to repay the outstanding balance under the Revolver Loan of $61.3 million during the third quarter of 2020. We remain in full compliance of the $615.0 million Term Loan portion of the Senior Secured Credit Facility. The loan for The Woodlands Resort and Conference Center provides a partial repayment cure for the debt service coverage ratio test. Management plans to negotiate a modification of the existing terms of the Woodlands Resort and Conference Center loan with the lender in the third quarter of 2020 and receive a waiver of the $24.1 million repayment to cure. As of SeptemberJune 30, 2019,2020, the Company did not meet the debt service coverage ratios for two loan agreements related to the Self-Storage Operating Assets. Both loans, which total $10.9 million, provide a partial repayment cure for the debt service coverage ratio test totaling $2.0 million. Management plans to negotiate a modification of the existing terms of the Self-Storage loans or partially repay the loans in the third quarter of 2020.
As of June 30, 2020, apart from the items above, the Company was in compliance with all of itsremaining financial covenants included in the agreements governing its indebtedness.
The Summerlin Master Planned Community ("MPC")MPC uses Special Improvement District (“SID”)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 ninesix months ended SeptemberJune 30, 2019,2020, 0 new SID bonds were issued and $0.1 million inan insignificant amount of obligations were assumed by buyers.
Recent Financing Activity
On During the Six Months Ended June 30, 2020October 24, 2019, the Company modified and extended the $47.9 million loan for Outlet Collection at Riverwalk. The total commitment was reduced to $30.9 million, including the required paydown of $15.0 million. The loan bears interest at one-month LIBOR plus 2.50% and matures October 24, 2021.
On October 17, 2019, a wholly-owned subsidiary ofJune 22, 2020 the Company purchasedmodified the $99.7 million note for 250 Water Street fromexisting Downtown Summerlin loan, extending the previous lenderfinancing by three years to June 22, 2023 at a discountrate of approximately $6.5LIBOR plus 2.15% in exchange for a pay-down of $33.8 million to a total commitment of $221.5 million. The Company expects to obtain third-party financing in the fourth quarter of 2019.
On October 17, 2019,May 20, 2020, the Company extended the remaining $280.3 million of the bridge loan for The Woodlands Towers at the Waterway and The Woodlands Warehouse for six months at LIBOR plus 2.35%, with an option for an additional six-month extension at LIBOR plus 2.90%, extending the final maturity to June 30, 2021.
On March 27, 2020, the Company closed on a $250.0$356.8 million credit facility secured by land and certain other collateral in The Woodlands and Bridgeland MPCs.construction loan for the development of Kō'ula. The loan bears interest at LIBOR plus 2.50%3.00% with an initial maturity date of March 27, 2023, and a final maturityone-year extension option.
On March 26, 2020, the Company closed on a partial refinance of October 17, 2024.the bridge loan for The Woodlands Towers at the Waterway and The Woodlands Warehouse for $137.0 million. In conjunction with the partial refinance, the original loan was paid down by $63.5 million and 9950 Woodloch Forest Drive tower was split into a new loan. The new loan refinanced The Woodlands Master Credit Facility and Bridgeland Credit Facilitybears interest at LIBOR plus 1.95% with a combined principalmaturity date of March 26, 2025.
On March 23, 2020, the Company drew $67.5 million on its Revolver Loan under the Senior Secured Credit Facility. As of June 30, 2020, the outstanding balance was $61.3 million. The Company expects to repay the outstanding balance during the third quarter of $215.0 million and a weighted average interest rate of LIBOR plus 2.87%2020.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Financing Activity DuringOn March 13, 2020, the Nine Months EndedCompany paid off the $50.0 million outstanding loan balance relating to 100 Fellowship Drive in conjunction with the sale of the property. The payment was made using the proceeds from the sale of the property.
On March 5, 2020, the Company modified and extended the $61.2 million loan for Three Hughes Landing. The new $61.0 million loan bears interest at one-month LIBOR plus 2.60%, with a maturity of September 30, 20195, 2020, at which point the Company has the option to extend the Three Hughes Landing loan for an additional 12 months.
On September 13, 2019,January 7, 2020, the Company closed on a $37.7$43.4 million multi-familyconstruction loan and security agreement for the development of Creekside Park Apartments.Apartments Phase II. The loan bears interest at 3.52% with a maturity of October 1, 2029.
On August 6, 2019, the Company closed on a $30.7 million construction loan for Millennium Phase III Apartments. The loan bears interest at one-month LIBOR plus 1.75% with an initial maturity date of August 6, 2023January 7, 2024, and a one-year extension option.
On August 1, 2019, the Company modified its $64.6 million construction loan, of which $31.1 million relates to Aristocrat and $33.5 million relates to Two Summerlin. The original loan bears interest at Wall Street Journal Prime plus 0.40% with a maturity of October 19, 2022. As part of the modification, the $33.5 million Two Summerlin note was amended to bear interest at 4.25% with an initial maturity of October 18, 2022 and 1, 36-month extension option. The Company closed on a new $38.3 million note for Aristocrat which bears interest at 3.67% with an initial maturity of September 1, 2029. A portion of the proceeds for the new Aristocrat note were used to extinguish the original Aristocrat note.
On June 27, 2019, the Company closed on a $35.5 million construction loan for 8770 New Trails. The loan bears interest at one-month LIBOR plus 2.45% with an initial maturity date of June 27, 2021 and a 127-month extension option. The Company entered into a swap agreement to fix the interest rate to 4.89%.
On June 20, 2019, the Company closed on a $250.0 million term loan for the redevelopment of the Seaport District. The loan initially bears interest at 6.10% and matures on June 1, 2024. The loan will begin bearing interest at one-month LIBOR plus 4.10%, subject to a LIBOR cap of 2.30% and LIBOR floor of 0.00%, at the earlier of June 20, 2021 or the date certain debt coverage ratios are met.
On June 6, 2019, the Company closed on a $293.7 million construction loan for ‘A‘ali‘i, bearing interest at one-month LIBOR plus 3.10% with an initial maturity date of June 6, 2022 and a one-year extension option.
On June 5, 2019, the Company paid off the construction loan for Ke Kilohana with a commitment amount of $142.7 million. Total draws were approximately $121.7 million and were paid off from the proceeds of condominium sales.
On June 3, 2019, the Company exercised the second extension option for its 250 Water Street note payable. The extension required a $30.0 million paydown, reducing the outstanding note payable balance to $99.7 million.
On May 23, 2019, the Company and its joint venture partners closed on an amendment to increase the $512.6 million construction loan for 110 North Wacker to $558.9 million, and modify the commitments included in the loan syndication. The amendment also increased the Company's guarantee from $92.3 million to $100.6 million. In addition, the Company also guaranteed an additional $46.3 million, the increase in principal of the construction loan, which will become payable in fiscal year 2020 if a certain leasing threshold is not achieved. The guarantee of $46.3 million will immediately expire on the date the leasing threshold is first achieved.
On May 17, 2019, the Company modified the facility for its Mr. C Seaport joint venture to increase the total commitment to $41.0 million. The loan bears interest at one-month LIBOR plus 4.50%, has an initial maturity of May 16, 2022, and has one, six-month extension option.
On April 9, 2019, the Company modified the HHC 242 Self-Storage and HHC 2978 Self-Storage facilities to reduce the total commitments to $5.5 million and $5.4 million, respectively. The loans have an initial maturity date of December 31, 2021 and a one-year extension option.
On March 12, 2019, the Company closed on an $18.0 million construction loan for Creekside Park West, bearing interest at one-month LIBOR plus 2.25% with an initial maturity date of March 12, 2023 and a one-year extension option.
On February 28, 2019, the Company amended the $62.5 million Woodlands Resort & Conference Center financing to extend the initial maturity date to December 30, 2021. The financing bears interest at one-month LIBOR plus 2.50% and has 2, one-year extension options.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
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 andCompany’s liabilities that are measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | 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: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Interest rate derivative assets | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 346 |
| | $ | — |
| | $ | 346 |
| | $ | — |
|
Liabilities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Interest rate derivative liabilities | | 48,788 |
| | — |
| | 48,788 |
| | — |
| | 16,517 |
| | — |
| | 16,517 |
| | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
| | 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) |
Interest rate derivative liabilities | | $ | 77,737 |
| | $ | — |
| | $ | 77,737 |
| | $ | — |
| | $ | 40,135 |
| | $ | — |
| | $ | 40,135 |
| | $ | — |
|
The fair values of interest rate derivatives 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.
The estimated fair values of the Company'sCompany’s financial instruments that are not measured at fair value on a recurring basis are as follows:
| | | | | | September 30, 2019 | | December 31, 2018 | | | | June 30, 2020 | | December 31, 2019 |
(In thousands) | | Fair Value Hierarchy | | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value | | Fair Value Hierarchy | | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
Assets: | | | | | | | | | | | | | | | | | | | | |
Cash and restricted cash | | Level 1 | | $ | 842,629 |
| | $ | 842,629 |
| | $ | 724,215 |
| | $ | 724,215 |
| |
Cash and Restricted cash | | | Level 1 | | $ | 1,188,284 |
| | $ | 1,188,284 |
| | $ | 620,135 |
| | $ | 620,135 |
|
Accounts receivable, net (a) | | Level 3 | | 17,248 |
| | 17,248 |
| | 12,589 |
| | 12,589 |
| | Level 3 | | 17,711 |
| | 17,711 |
| | 12,279 |
| | 12,279 |
|
Notes receivable, net (b) | | Level 3 | | 36,425 |
| | 36,425 |
| | 4,694 |
| | 4,694 |
| | Level 3 | | 56,511 |
| | 56,511 |
| | 36,379 |
| | 36,379 |
|
| | | | | | | | | | | | | | | | |
Liabilities: | | | | |
| | |
| | |
| | |
| | | | |
| | |
| | |
| | |
|
Fixed-rate debt (c) | | Level 2 | | 2,011,626 |
| | 2,052,785 |
| | 1,663,875 |
| | 1,608,635 |
| | Level 2 | | 1,902,175 |
| | 1,829,057 |
| | 1,908,660 |
| | 1,949,773 |
|
Variable-rate debt (c) | | Level 2 | | 1,653,637 |
| | 1,653,637 |
| | 1,551,336 |
| | 1,551,336 |
| | Level 2 | | 2,536,978 |
| | 2,536,978 |
| | 2,229,958 |
| | 2,229,958 |
|
(a)Accounts receivable, net is shown net of an allowance of $9.7 million and $10.7 million at September 30, 2019 and December 31, 2018, respectively.
(b)Notes receivable, net is shown net of an allowance of $0.2 million and $0.1 million at September 30, 2019 and December 31, 2018, respectively.
(c)Excludes related unamortized financing costs.
The carrying amounts of Cash and restricted cash, Accounts receivable, net and Notes receivable, net approximate fair value because of the short‑term maturity of these instruments.
| |
(a) | Accounts receivable, net is shown net of an allowance of $15.7 million and $15.6 million at June 30, 2020, and December 31, 2019, respectively. |
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
| |
(b) | Notes receivable, net is shown net of an allowance of $0.2 million at June 30, 2020, and December 31, 2019. |
| |
(c) | Excludes related unamortized financing costs. |
The carrying amounts of Cash and Restricted cash, Accounts receivable, net and Notes receivable, net approximate fair value because of the short‑term maturity of these instruments.
The fair value of the Company's $1.0 billion, 5.375% senior notes due 2025,Company’s Senior 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 was estimated based on a discounted future cash payment model, which includes risk premiums and risk-free rates derived from the current LIBOR or U.S. Treasury obligation interest rates. Please refer to Note 7 - Mortgages, Notes and Loans Payable, Net in the Company'sCompany’s Condensed Consolidated Financial Statements. The discount rates reflect the Company'sCompany’s judgment aswith respect to what the approximate current lending rates for loans or groups of loans with similar maturities and credit quality would be if credit markets were operating efficiently and assuming that the debt is outstanding through maturity.
The carrying amounts for the Company'sCompany’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 below table includes a non-financial asset that was measured at fair value on a non-recurring basis resulting in the property being impaired during the six months ended June 30, 2020:
|
| | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
(In thousands) | | Total Fair Value Measurement | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Operating Assets: | | | | | | | | |
Outlet Collection at Riverwalk (a) | | $ | 46,794 |
| | $ | — |
| | $ | — |
| | $ | 46,794 |
|
| |
(a) | The fair value was measured as of the impairment date based on a discounted cash flow analysis using a capitalization rate of 10.0% and is shown net of transaction costs. Refer to Note 5 - Impairment for additional information. |
NOTE 9 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to interest-rate-riskinterest rate risk related to its variable interest rate debt, and it manages this risk by utilizing interest rate derivatives. ToThe Company uses interest rate swaps, collars and caps to add stability to interest costs by reducing the Company'sCompany’s exposure to interest rate movements, the Company uses interest rate swaps, collars and caps as part of its interest rate risk management strategy.movements. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company'sCompany’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'sCompany’s interest rate caps arecap is not currently designated as hedges,a hedge, and therefore, any gain or loss is recognized in current-period earnings. These derivatives areThis derivative is 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. Derivatives accounted for as cash flow hedges are classified in the same category in the Condensed Consolidated Statements of Cash Flows as the items being hedged. Gains and losses from derivative financial instruments are reported in Cash (used in) provided by operating activities within the Condensed Consolidated Statements of Cash Flows.
The Company 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
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
credit-worthy, such as large financial institutions with favorable credit ratings. As of September 30, 2019 and December 31, 2018, there was 1 termination event and 4 termination events, respectively, as discussed below. There were no events of default as of SeptemberJune 30, 20192020, and December 31, 2018.2019.
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. As of June 30, 2020, there were 0 termination events, and as of December 31, 2019, there was 1 termination event, as discussed below. During the three and ninesix months ended SeptemberJune 30, 2019,2020, the Company recorded a $1.0$0.8 million and $3.0$1.7 million reduction in Interest expense, respectively, related to the amortization of terminated swaps.
The Company did 0t settle any derivatives during the six months ended June 30, 2020. During the nine monthsyear ended September 30,December 31, 2019, the Company settled 1 interest rate cap agreement with a notional amount of $230.0 million and received payment of $0.2 million. During the year ended December 31, 2018, the Company settled 4 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 32 previously settled interest rate swap agreements in Accumulated other comprehensive loss on the accompanying Condensed Consolidated Balance Sheets and will recognize the impact as a component of Interest expense net, over the next 8.3, 2.07.5 and 0.61.2 years, which are what remain of the original forecasted periods.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Amounts reported in AOCI related to derivatives will be reclassified to Interest expense as interest payments are made on the Company'sCompany’s variable‑rate debt. Over the next 12 months, HHC estimates that an additional $5.2$15.5 million of net loss will be reclassified to Interest expense.
The following table summarizes certain terms of the Company'sCompany’s derivative contracts:
| | | | | | | | | | Fixed | | | | | | Fair Value Asset (Liability) | | | | | | | Fixed | | | | | | Fair Value Asset (Liability) |
| | | | | | Notional | | Interest | | Effective | | Maturity | | September 30, | | December 31, | | | | | Notional | | Interest | | Effective | | Maturity | | June 30, | | December 31, |
(In thousands) | | | | Balance Sheet Location | | Amount | | Rate (a) | | Date | | Date | | 2019 | | 2018 | | | Balance Sheet Location | | Amount | | Rate (a) | | Date | | Date | | 2020 | | 2019 |
Derivative instruments not designated as hedging instruments: | Derivative instruments not designated as hedging instruments: | | | | | | | | | Derivative instruments not designated as hedging instruments: | | | | | | | | |
Interest rate cap | | (b) (c) | | Prepaid expenses and other assets, net | | $ | 230,000 |
| | 2.50 | % | | 12/22/2016 | | 12/23/2019 | | $ | — |
| | $ | 333 |
| (b) | | Prepaid expenses and other assets, net | | $ | 230,000 |
| | 2.50 | % | | 12/22/2016 | | 12/23/2019 | | $ | — |
| | $ | — |
|
Interest rate cap | | (b) (d) | | Prepaid expenses and other assets, net | | 75,000 |
| | 5.00 | % | | 8/31/2019 | | 8/31/2020 | | — |
| | — |
| (c) | | Prepaid expenses and other assets, net | | 75,000 |
| | 5.00 | % | | 8/31/2019 | | 8/31/2020 | | — |
| | — |
|
Derivative instruments designated as hedging instruments: | Derivative instruments designated as hedging instruments: | | | | | | | | | Derivative instruments designated as hedging instruments: | | | | | | | | |
Interest rate collar | | (e) | | Prepaid expenses and other assets, net | | 51,592 |
| | 1.50% - 2.50% |
| | 7/1/2018 | | 5/1/2019 | | — |
| | 13 |
| (d) (e) | | Accounts payable and accrued expenses | | 193,967 |
| | 2.00% - 3.00% |
| | 5/1/2019 | | 5/1/2020 | | — |
| | (182 | ) |
Interest rate collar | | (e) | | Accounts payable and accrued expenses | | 193,967 |
| | 2.00% - 3.00% |
| | 5/1/2019 | | 5/1/2020 | | (254 | ) | | (37 | ) | (d) | | Accounts payable and accrued expenses | | 354,217 |
| | 2.25% - 3.25% |
| | 5/1/2020 | | 5/1/2021 | | (5,370 | ) | | (2,074 | ) |
Interest rate collar | | (e) | | Accounts payable and accrued expenses | | 354,217 |
| | 2.25% - 3.25% |
| | 5/1/2020 | | 5/1/2021 | | (2,521 | ) | | (730 | ) | (d) | | Accounts payable and accrued expenses | | 381,404 |
| | 2.75% - 3.50% |
| | 5/1/2021 | | 4/30/2022 | | (9,782 | ) | | (4,578 | ) |
Interest rate collar | | (e) | | Accounts payable and accrued expenses | | 381,404 |
| | 2.75% - 3.50% |
| | 5/1/2021 | | 4/30/2022 | | (5,367 | ) | | (1,969 | ) | |
Interest rate swap | | (f) | | Accounts payable and accrued expenses | | 615,000 |
| | 2.96 | % | | 9/21/2018 | | 9/18/2023 | | (37,378 | ) | | (13,781 | ) | (f) | | Accounts payable and accrued expenses | | 615,000 |
| | 2.96 | % | | 9/21/2018 | | 9/18/2023 | | (55,977 | ) | | (31,187 | ) |
Interest rate swap | | (g) | | Accounts payable and accrued expenses | | 1,810 |
| | 4.89 | % | | 11/1/2019 | | 1/1/2032 | | (3,268 | ) | | — |
| (g) | | Accounts payable and accrued expenses | | 1,810 |
| | 4.89 | % | | 11/1/2019 | | 1/1/2032 | | (6,608 | ) | | (2,114 | ) |
Total fair value derivative assets | | | | | | $ | — |
| | $ | 346 |
| |
Total fair value derivative liabilities | Total fair value derivative liabilities | | | | | | $ | (48,788 | ) | | $ | (16,517 | ) | Total fair value derivative liabilities | | | | | | $ | (77,737 | ) | | $ | (40,135 | ) |
| |
(a) | These rates represent the strike rate on HHC'sHHC’s interest swaps, caps and collars. |
| |
(b) | There was 0 interest income included in the Condensed Consolidated Statements of Operations for the three months ended September 30, 2019 related to these contracts.The Company settled this Interest rate cap on February 1, 2019. Interest income of $0.2 million is included in the Condensed Consolidated Statements of Operations for the nine monthsyear ended September 30,December 31, 2019, related to these contracts.this contract. |
| |
(c) | The Company settled this Interest rate cap on February 1, 2019. |
| |
(d) | On August 30, 2019, wethe Company executed an agreement to extend the maturing position of this cap. Interest income included in the Condensed Consolidated Statements of Operations for the six months ended June 30, 2020, and the year ended December 31, 2019, related to this contract was not meaningful. |
| |
(e)(d) | On May 17, 2018, and May 18, 2018, the Company entered into these interest rate collars which are designated as cash flow hedges. |
| |
(e) | On May 1, 2019,2020, the $51.6$194.0 million interest rate collar matured as scheduled. |
| |
(f) | Concurrent with the funding of the $615.0 million term loan on September 21, 2018, the Company entered into this interest rate swap which is designated as a cash flow hedge. |
| |
(g) | Concurrent with the closing of the $35.5 million construction loan for 8770 New Trails on June 27, 2019, the Company entered into this interest rate swap which is designated as a cash flow hedge. |
The tables below present the effect of the Company's derivative financial instruments on the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Amount of (Loss) Gain Recognized | | Amount of (Loss) Gain Recognized |
| | in AOCI on Derivative | | in AOCI on Derivative |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Derivatives in Cash Flow Hedging Relationships | | 2019 | | 2018 | | 2019 | | 2018 |
Interest rate derivatives | | $ | (6,406 | ) | | $ | 28 |
| | $ | (25,238 | ) | | $ | 14,293 |
|
|
| | | | | | | | | | | | | | | | |
| | Amount of (Loss) Gain Reclassified | | Amount of Gain Reclassified |
| | from AOCI into Operations | | from AOCI into Operations |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Location of Gain Reclassified from AOCI into Operations | | 2019 | | 2018 | | 2019 | | 2018 |
Interest expense | | $ | (199 | ) | | $ | 394 |
| | $ | 21 |
| | $ | 1,262 |
|
|
| | | | | | | | | | | | | | | | |
| | Total Interest Expense Presented | | Total Interest Expense Presented |
| | in the Results of Operations in which the | | in the Results of Operations in which the |
| | Effects of Cash Flow Hedges are Recorded | | Effects of Cash Flow Hedges are Recorded |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Interest Expense Presented in Results of Operations | | 2019 | | 2018 | | 2019 | | 2018 |
Interest expense | | $ | 28,829 |
| | $ | 21,670 |
| | $ | 76,358 |
| | $ | 57,182 |
|
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
The tables below present the effect of the Company’s derivative financial instruments on the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020, and 2019 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Amount of Loss Recognized | | Amount of Loss Recognized |
| | in AOCI on Derivative | | in AOCI on Derivative |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
Derivatives in Cash Flow Hedging Relationships | | 2020 | | 2019 | | 2020 | | 2019 |
Interest rate derivatives | | $ | (3,461 | ) | | $ | (13,016 | ) | | $ | (34,801 | ) | | $ | (18,832 | ) |
|
| | | | | | | | | | | | | | | | |
| | Amount of (Loss) Gain Reclassified | | Amount of (Loss) Gain Reclassified |
| | from AOCI into Operations | | from AOCI into Operations |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
Location of (Loss) Gain Reclassified from AOCI into Operations | | 2020 | | 2019 | | 2020 | | 2019 |
Interest expense | | $ | (3,227 | ) | | $ | 92 |
| | $ | (4,320 | ) | | $ | 220 |
|
|
| | | | | | | | | | | | | | | | |
| | Total Interest Expense Presented | | Total Interest Expense Presented |
| | in the Results of Operations in which the | | in the Results of Operations in which the |
| | Effects of Cash Flow Hedges are Recorded | | Effects of Cash Flow Hedges are Recorded |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
Interest Expense Presented in Results of Operations | | 2020 | | 2019 | | 2020 | | 2019 |
Interest expense | | $ | 32,397 |
| | $ | 24,203 |
| | $ | 66,845 |
| | $ | 47,529 |
|
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'sCompany’s default on the indebtedness.
As of SeptemberJune 30, 20192020, and December 31, 2018,2019, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformancenon-performance risk, related to these agreements was $50.5$81.0 million and $18.2$41.6 million, respectively. As of SeptemberJune 30, 2019,2020, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at SeptemberJune 30, 2019,2020, it could have been required to settle its obligations under the agreements at their termination value of $50.5$81.0 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
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 plaintiffs are seeking restitution for damages to their property and diminution of their property values. The Company intends to vigorously defend the matter as it believes that these claims are 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
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
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, andincluding The Woodlands legal proceeding discussed above, are not expected to have a material effect on the Company'sCompany’s consolidated financial position, results of operations or liquidity.
The Company entered into a settlement agreement with the Waiea homeowners association related to certain construction defects at the tower. Pursuant to the settlement agreement, the Company will pay for the repair of the defects. The Company believes that the general contractor is ultimately responsible for the defects and expects to recover all the repair costs from the general contractor, other responsible parties and insurance proceeds. During the first quarter of 2020, the Company recorded a $97.9 million charge for the estimated repair costs related to this matter, which was included in Condominium rights and unit cost of sales in the accompanying Condensed Consolidated Statements of Operations. As of June 30, 2020, the Company has recorded a total of $115.4 million in Construction payables for the estimated repair costs related to this matter, which is included in Accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheet.
The Company purchased its 250 Water Street property in the Seaport District in June 2018. The site is currently used as a parking lot while the Company evaluates redevelopment plans. The Company engaged a third-party specialistPrior to performthe purchase, a Phase I Environmental Site Assessment (“ESA”) ofwas prepared for the property, and the ESA identified, among other findings, the existence of mercury levels above regulatory criteria. The Company entered the site does not require remediation untilinto the Company begins redevelopment activities.New York State Brownfield Cleanup Program to facilitate site investigation and subsequent remediation. The site is currently in the investigation phase of the program. The normal operations of the parking lot do not require the property to be remediated, and it is unlikely that the site will require any remedial measures until site redevelopment occurs. The Company has not started any redevelopment activities as of SeptemberJune 30, 2019.2020. As a result, the potential remediation has no financial impact as of SeptemberJune 30, 2019,2020, and for the three and ninesix months then ended.ended June 30, 2020.
As of SeptemberJune 30, 20192020, and December 31, 2018,2019, the Company had outstanding letters of credit totaling $15.4$11.5 million and $15.3$15.4 million, respectively, and surety bonds totaling $206.4$238.1 million and $101.2$200.1 million, respectively. These letters of credit 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. As discussedparties, the leases for which are recorded in Operating lease right-of-use assets, net and Operating lease obligations on the Condensed Consolidated Balance Sheets. See Note 217 - Accounting Policies and Pronouncements, the Company adopted the New Leases Standard on the Adoption Date and recorded right-of-use assets and lease liabilities on the balance sheet. See Note 2 - Accounting Policies and Pronouncements for further discussion. Prior to the adoption of the New Leases Standard, rental payments were expensed as incurred and, to the extent applicable, straight-lined over the term of the lease. Contractual rental expense, including participation rent, was $2.5$1.6 million and $2.4$2.1 million for the three months ended SeptemberJune 30, 20192020, and 2018,2019, respectively, and $6.7$3.4 million and $7.3$4.2 million for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. The amortization of above and below‑market ground leases and straight‑line rents included in the contractual rent amount was not significant.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Guarantee Agreements
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 -the Tin Building. The Company satisfied its completion guarantee for Pier 17 in the second quarter of 2019. The completion guaranty for the Tin Building is for the core and shell construction, which is nearing completion.
As part of the funding agreement for the Downtown Columbia Redevelopment District TIF bonds, one of the Company's wholly-ownedThe Company’s wholly owned subsidiaries have agreed to complete certain defined public improvements and to indemnify Howard County, Maryland for certain matters.matters as part of the Downtown Columbia Redevelopment District TIF bonds. The Company has guaranteed these obligations, withthe performance of its subsidiaries under the funding agreement for up to a limitmaximum of $1.0 million expiring onuntil October 31, 2020. ToFurthermore, to the extent that increases in taxes do not cover debt service payments on the TIF bonds, the Company’s wholly-ownedwholly owned subsidiary is obligated to pay special taxes. Management has concluded that any obligations under these guarantees are not probable.
As part of the Company'sCompany’s development permits with the HawaiiHawai’i Community Development Authority for the condominium towers at Ward Village, the Company entered into a guarantee whereby it is required to reserve 20% of the residential units for local residents who meet certain maximum income and net worth requirements. This guarantee, which is triggered once the necessary permits are granted and construction commences, was satisfied for the Company'sCompany’s 4 open condominium towers, Waiea, Anaha, Ae‘o and Ke Kilohana, with the opening of Ke Kilohana, which provided 375 reserved housing units, in the fourth quarter of 2016.units. The reserved units for the Company's
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Company’s ‘A‘ali‘i tower are included in the tower, and the units for Kō'ula will either be built off site or fulfilled by paying a cash-in-lieu fee.
The Company evaluates the likelihood of future performance under these guarantees and did not record an obligation as of SeptemberJune 30, 20192020, and December 31, 2018.2019.
NOTE 11 STOCK BASEDSTOCK-BASED PLANS
On May 14, 2020, the Company adopted The Company'sHoward Hughes Corporation 2020 Equity Incentive Plan (the “2020 Equity Plan”). Pursuant to the 2020 Equity Plan, 1,350,000 shares of the Company’s common stock based planswere reserved for issuance. The 2020 Equity Plan provides for grants of options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards (collectively, the “Awards”). Employees, directors and consultants of the Company are eligible for Awards.
Prior to the adoption of the 2020 Equity Plan, equity awards were issued under The Howard Hughes Corporation 2010 Equity Incentive Plan (the "2010 Equity Plan"). The 2010 Equity Plan is described and informational disclosures are provided in the Notes to theConsolidated Financial Statements included in the Annual Report. The adoption of the 2020 Equity Plan did not impact the administration of Awards issued under the 2010 Equity Plan but following adoption of the 2020 Equity Plan, equity awards will no longer be granted under the 2010 Equity Plan.
Stock Options
The following table summarizes the Company'sCompany’s stock option plan activity for the ninesix months ended SeptemberJune 30, 2019:2020:
| | | | Stock Options | | Weighted Average Exercise Price | | Stock Options | | Weighted-average Exercise Price |
Stock Options outstanding at December 31, 2018 | | 817,998 |
| | $ | 105.06 |
| |
Stock Options outstanding at December 31, 2019 | | | 721,496 |
| | $ | 104.55 |
|
Granted | | 21,500 |
| | 105.37 |
| | 2,000 |
| | 83.11 |
|
Exercised | | (35,594 | ) | | 62.47 |
| | (57,058 | ) | | 67.24 |
|
Forfeited | | (23,000 | ) | | 124.02 |
| | (125,500 | ) | | 124.24 |
|
Expired | | (12,400 | ) | | 144.31 |
| | (22,188 | ) | | 100.08 |
|
Stock Options outstanding at September 30, 2019 | | 768,504 |
| | $ | 105.84 |
| |
Stock Options outstanding at June 30, 2020 | | | 518,750 |
| | $ | 104.01 |
|
Compensation costs related to stock options were $0.7$0.2 million for the three months ended June 30, 2020, of which $0.2 million were capitalized to development projects. Compensation costs related to stock options were in a credit position of $0.5 million for the six months ended June 30, 2020 due to significant forfeitures which exceeded the expense. Compensation costs related to stock options were $0.8 million and $2.2$1.5 million for the three and ninesix months ended SeptemberJune 30, 2019, respectively, of which 0$0.2 million and $0.4 million were capitalized to development projects, respectively. Compensation costs related to stock options were $0.9 million and $2.6 million for the three and nine months ended September 30, 2018, respectively,The total number of which $0.3 million and $1.2 million were capitalized to development projects, respectively.
Restricted Stock
The following table summarizes restricted stock activity foroutstanding set forth above reflects any restricted stock subject to performance-based vesting at the nine months ended September 30, 2019:target level.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Restricted Stock
|
| | | | | | | |
| | Restricted Stock | | Weighted Average Grant Date Fair Value |
Restricted stock outstanding at December 31, 2018 | | 406,544 |
| | $ | 82.10 |
|
Granted | | 227,745 |
| | 97.68 |
|
Vested | | (11,217 | ) | | 133.43 |
|
Forfeited | | (22,035 | ) | | 75.26 |
|
Restricted stock outstanding at September 30, 2019 | | 601,037 |
| | $ | 87.30 |
|
The following table summarizes restricted stock activity for the six months ended June 30, 2020:
|
| | | | | | | |
| | Restricted Stock | | Weighted-average Grant Date Fair Value |
Restricted stock outstanding at December 31, 2019 | | 406,802 |
| | $ | 76.27 |
|
Granted | | 70,210 |
| | 84.55 |
|
Vested | | (13,729 | ) | | 101.24 |
|
Forfeited | | (23,000 | ) | | 94.83 |
|
Restricted stock outstanding at June 30, 2020 | | 440,283 |
| | $ | 75.73 |
|
Compensation costs related to restricted stock awards were $3.0$1.8 million and $7.7$3.7 million for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, of which $0.3 million and $0.9$0.7 million were capitalized to development projects, respectively. Compensation costs related to restricted stock awards were $2.2$2.4 million and $6.3$4.7 million for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, of which $0.1$0.3 million and $0.7$0.6 million were capitalized to development projects, respectively.
NOTE 12 INCOME TAXES
The Company hasCompany’s tax provision for interim periods is determined using an estimate of its annual current and deferred effective tax rates, adjusted for discrete items. The effective tax rate, based upon actual operating results, was 16.7% and 20.5% for the three and six months ended June 30, 2020, respectively, compared to 24.9% and 25.5% for the three and six months ended June 30, 2019, respectively. The Company’s effective tax rate is typically impacted by significant permanent differences, primarily from stock compensation deductions and non-deductible executive compensation, which cause the effective tax rate to deviate from statutory rates. TheFor the three and six months ended June 30, 2020, the effective tax rate based upon actual operating results, was 22.7% and 24.4% for the three and nine months ended September 30, 2019, respectively, compared to 24.3% and 22.2% for the three and nine months ended September 30, 2018, respectively.also impacted by valuation allowances.
NOTE 13 WARRANTS
On October 7, 2016, the Company entered into a warrant agreement with its Chief Financial Officer, David R. O’Reilly, (the "O'Reilly Warrant"“O’Reilly Warrant”) prior to his appointment to the position.position of Chief Financial Officer. Upon exercise of his warrant, Mr. O’Reilly may acquire 50,125 shares of common stock at an exercise price of $112.08 per share. The O'ReillyO’Reilly Warrant was issued at fair value in exchange for a $1.0 million payment in cash from Mr. O'Reilly.O’Reilly. The O'ReillyO’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, the Company entered into warrant agreements with its Chief Executive Officer, David R. Weinreb, (the "Weinreb Warrant"“Weinreb Warrant”) and President, Grant Herlitz, (the "Herlitz Warrant"“Herlitz Warrant”) to acquire 1,965,409 shares and 87,951 shares of common stock for the purchase pricesprice of $50.0 million and $2.0 million, respectively. The Weinreb Warrant becomeswould have become exercisable on June 15, 2022, at an exercise price of $124.64 per share, and the Herlitz Warrant becomeswould have become exercisable on October 3, 2022, at an exercise price of $117.01 per share, subject in each case to earlier exercise upon certain change in control, separation and termination provisions.provisions (but such warrants became exercisable in connection with Mr. Weinreb’s and Mr. Herlitz’s terminations of employment, as described below). The purchase prices paid by the respective executives for the O’Reilly Warrant, the Weinreb Warrant and the Herlitz Warrant, which qualify as equity instruments, are included within Additional paid-in capital in the Condensed Consolidated Balance Sheets at SeptemberJune 30, 20192020, and December 31, 2018.2019.
On October 21, 2019, Mr. Weinreb and Mr. Herlitz stepped down from their roles as Chief Executive OfficeOfficer and President of the Company, respectively. The Company and each of Mr. Weinreb and Mr. Herlitz have agreed to treat their terminations of employmentsemployment as terminations without "cause"“cause” under their respective employment and warrant agreements with the Company. Thus, effective October 21, 2019, the Weinreb Warrant and Herlitz Warrant became exercisable by the terms of their respective warrant agreements in connection with their respective terminations of employment.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 14 ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables summarize changes in AOCI by component, all of which are presented net of tax:
|
| | | | |
(In thousands) | | |
Balance as of June 30, 2018 | | $ | 2,515 |
|
Other comprehensive income before reclassifications | | 2 |
|
Gain reclassified from accumulated other comprehensive loss to net income | | (394 | ) |
Pension adjustment | | 2,566 |
|
Terminated swap amortization | | (239 | ) |
Net current-period other comprehensive income | | 1,935 |
|
Balance as of September 30, 2018 | | $ | 4,450 |
|
| | |
Balance as of June 30, 2019 | | $ | (28,542 | ) |
Other comprehensive loss before reclassifications | | (6,406 | ) |
Loss reclassified from accumulated other comprehensive loss to net income | | 199 |
|
Terminated swap amortization | | (764 | ) |
Net current-period other comprehensive loss | | (6,971 | ) |
Balance as of September 30, 2019 | | $ | (35,513 | ) |
|
| | | | |
(In thousands) | | |
Balance as of March 31, 2019 | | $ | (14,759 | ) |
Other comprehensive loss before reclassifications | | (13,038 | ) |
Gain reclassified from accumulated other comprehensive loss to net income | | (92 | ) |
Terminated swap amortization | | (653 | ) |
Net current-period other comprehensive loss | | (13,783 | ) |
Balance as of June 30, 2019 | | $ | (28,542 | ) |
| | |
Balance as of March 31, 2020 | | $ | (60,273 | ) |
Other comprehensive loss before reclassifications | | (3,461 | ) |
Loss reclassified from accumulated other comprehensive loss to net income | | 3,227 |
|
Terminated swap amortization | | (604 | ) |
Net current-period other comprehensive loss | | (838 | ) |
Balance as of June 30, 2020 | | $ | (61,111 | ) |
| | (In thousands) | | | | |
Balance as of December 31, 2017 | | $ | (6,965 | ) | |
Other comprehensive income before reclassifications | | 14,327 |
| |
Gain reclassified from accumulated other comprehensive loss to net income | | (1,262 | ) | |
Adjustment related to adoption of ASU 2018-02 | | (1,148 | ) | |
Adjustment related to adoption of ASU 2017-12 | | (739 | ) | |
Pension adjustment | | 556 |
| |
Terminated swap amortization | | (319 | ) | |
Net current-period other comprehensive income | | 11,415 |
| |
Balance as of September 30, 2018 | | $ | 4,450 |
| |
| | | |
Balance as of December 31, 2018 | | $ | (8,126 | ) | | $ | (8,126 | ) |
Other comprehensive loss before reclassifications | | (25,311 | ) | | (18,905 | ) |
Gain reclassified from accumulated other comprehensive loss to net income | | (21 | ) | | (220 | ) |
Terminated swap amortization | | (2,055 | ) | | (1,291 | ) |
Net current-period other comprehensive loss | | (27,387 | ) | | (20,416 | ) |
Balance as of September 30, 2019 | | $ | (35,513 | ) | |
Balance as of June 30, 2019 | | | $ | (28,542 | ) |
| | | |
Balance as of December 31, 2019 | | | $ | (29,372 | ) |
Other comprehensive loss before reclassifications | | | (34,801 | ) |
Loss reclassified from accumulated other comprehensive loss to net income | | | 4,320 |
|
Terminated swap amortization | | | (1,258 | ) |
Net current-period other comprehensive loss | | | (31,739 | ) |
Balance as of June 30, 2020 | | | $ | (61,111 | ) |
The following table summarizes the amounts reclassified out of AOCI:
|
| | | | | | | | | | | | | | | | | | |
| | Amounts reclassified from Accumulated Other Comprehensive Income (Loss) | | Amounts reclassified from Accumulated Other Comprehensive Income (Loss) | | |
(In thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, | | Affected line items in the |
Accumulated Other Comprehensive Income (Loss) Components | | 2020 | | 2019 | | 2020 | | 2019 | | Statements of Operations |
Losses (gains) on cash flow hedges | | $ | 4,086 |
| | $ | (116 | ) | | $ | 5,469 |
| | $ | (278 | ) | | Interest expense |
Income taxes on losses (gains) on cash flow hedges | | (859 | ) | | 24 |
| | (1,149 | ) | | 58 |
| | Provision for income taxes |
Total reclassifications of loss (income) for the period | | $ | 3,227 |
| | $ | (92 | ) | | $ | 4,320 |
| | $ | (220 | ) | | Net of tax |
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
|
| | | | | | | | | | | | | | | | | | |
| | Amounts reclassified from Accumulated Other Comprehensive Income (Loss) | | Amounts reclassified from Accumulated Other Comprehensive Income (Loss) | | |
(In thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Affected line items in the |
Accumulated Other Comprehensive Income (Loss) Components | | 2019 | | 2018 | | 2019 | | 2018 | | Statements of Operations |
Losses (gains) on cash flow hedges | | $ | 252 |
| | $ | (498 | ) | | $ | (26 | ) | | $ | (1,597 | ) | | Interest expense |
Interest rate swap contracts | | (53 | ) | | 104 |
| | 5 |
| | 335 |
| | Provision for income taxes |
Total reclassifications of loss (income) for the period | | $ | 199 |
| | $ | (394 | ) | | $ | (21 | ) | | $ | (1,262 | ) | | Net of tax |
NOTE 15 EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed by dividing net income 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 non-vested stock issued under stock‑based compensation plans is computed using the treasury stock method. The dilutive effect of the warrants is computed using the if‑converted method.
Information related to the Company'sCompany’s EPS calculations is summarized as follows:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands, except per share amounts) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Basic EPS: | | | | | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | | | | | |
Net income | | $ | 30,043 |
| | $ | 23,847 |
| | $ | 75,296 |
| | $ | 19,802 |
| |
Net income attributable to noncontrolling interests | | (285 | ) | | (482 | ) | | (240 | ) | | (51 | ) | |
Net income attributable to common stockholders | | $ | 29,758 |
| | $ | 23,365 |
| | $ | 75,056 |
| | $ | 19,751 |
| |
Net (loss) income | | | $ | (34,103 | ) | | $ | 13,328 |
| | $ | (159,185 | ) | | $ | 45,253 |
|
Net loss (income) attributable to noncontrolling interests | | | 19 |
| | 149 |
| | (33 | ) | | 45 |
|
Net (loss) income attributable to common stockholders | | | $ | (34,084 | ) | | $ | 13,477 |
| | $ | (159,218 | ) | | $ | 45,298 |
|
| | | | | | | | | | | | | | | | |
Denominator: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Weighted-average basic common shares outstanding | | 43,134 |
| | 43,066 |
| | 43,118 |
| | 43,023 |
| | 55,530 |
| | 43,113 |
| | 49,455 |
| | 43,109 |
|
| | | | | | | | | | | | | | | | |
Diluted EPS: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Numerator: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Net income attributable to common stockholders | | $ | 29,758 |
| | $ | 23,365 |
| | $ | 75,056 |
| | $ | 19,751 |
| |
Net (loss) income attributable to common stockholders | | | $ | (34,084 | ) | | $ | 13,477 |
| | $ | (159,218 | ) | | $ | 45,298 |
|
| | | | | | | | | | | | | | | | |
Denominator: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Weighted-average basic common shares outstanding | | 43,134 |
| | 43,066 |
| | 43,118 |
| | 43,023 |
| | 55,530 |
| | 43,113 |
| | 49,455 |
| | 43,109 |
|
Restricted stock and stock options | | 208 |
| | 204 |
| | 171 |
| | 211 |
| | — |
| | 158 |
| | — |
| | 154 |
|
Warrants | | 86 |
| | 47 |
| | 86 |
| | 47 |
| |
Weighted-average diluted common shares outstanding | | 43,428 |
| | 43,317 |
| | 43,375 |
| | 43,281 |
| |
Weighted-average diluted common shares outstanding (a) | | | 55,530 |
| | 43,271 |
| | 49,455 |
| | 43,263 |
|
| | | | | | | | | | | | | | | | |
Basic income per share: | | $ | 0.69 |
| | $ | 0.54 |
| | $ | 1.74 |
| | $ | 0.46 |
| |
Basic (loss) income per share: | | | $ | (0.61 | ) | | $ | 0.31 |
| | $ | (3.22 | ) | | $ | 1.05 |
|
| | | | | | | | | | | | | | | | |
Diluted income per share: | | $ | 0.69 |
| | $ | 0.54 |
| | $ | 1.73 |
| | $ | 0.46 |
| |
Diluted (loss) income per share: | | | $ | (0.61 | ) | | $ | 0.31 |
| | $ | (3.22 | ) | | $ | 1.05 |
|
The diluted EPS computation for the three and nine months ended September 30, 2019 excludes 351,908 and 418,808 stock options, respectively, because their inclusion would have been anti-dilutive. The diluted EPS computation for the three and nine months ended September 30, 2019 excludes 277,212 | |
(a) | The diluted EPS computation for the three and six months ended June 30, 2020, excludes 513,750 and 386,522 shares of stock awards because their effect is anti-dilutive and 262,369 shares of restricted stock, because performance conditions provided for in the restricted stock awards have not been satisfied. The diluted EPS computation for the three and six months ended June 30, 2019, excludes 569,408 shares of stock options because their inclusion would have been anti-dilutive and 278,379 shares of restricted stock, because performance conditions provided for in the restricted stock awards have not been satisfied. |
On March 27, 2020, the Company offered 2,000,000 shares of common stock to the public at $50.00 per share and granted the underwriters an option to purchase up to an additional 300,000 shares of common stock at the same price. The underwriters exercised most of their option and purchased an additional 270,900 shares. Concurrently, the Company entered into a share purchase agreement with a related party, Pershing Square Capital Management, L.P., acting as investment advisor to funds that it manages, to issue and sell 10,000,000 shares of common stock in a private placement at $50.00 per share. The total issuance of 12,270,900 shares closed on March 31, 2020, and the Company received $593.7 million in net proceeds. The Company intends to use the net proceeds for general corporate purposes including strengthening the Company’s balance sheet and enhancing liquidity.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
The diluted EPS computation for the three and nine months ended September 30, 2018 excludes 375,500 and 398,500 stock options, respectively, because their inclusion would have been anti-dilutive. The diluted EPS computation for the three and nine months ended September 30, 2018 excludes 227,621 shares of restricted stock because performance conditions provided for in the restricted stock awards have not been satisfied.
NOTE 16 REVENUEREVENUES
The core principle of ASC 606, Revenues from Contracts with Customers, is that revenues from contracts with customers (excluding lease-related revenues) are recognized when control of the promised goods or services is transferred to the Company'sCompany’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Condominium rights and unit sales revenues were previously required to be recognized under the percentage of completion method. Under ASC 606, revenue and cost of sales for condominium units sold are not recognized until the construction is complete, the sale closes and the title to the property has transferred to the buyer (point in time). Additionally, certain real estate selling costs, such as the costs related to the Company'sCompany’s condominium model units, are either expensed immediately or capitalized as property and equipment and depreciated over their estimated useful life.
The following table presents the Company’s revenues disaggregated by revenue source: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Revenues | | | | | | | | |
From contracts with customers | | | | | | | | |
Recognized at a point in time: | | | | | | | | |
Condominium rights and unit sales | | $ | — |
| | $ | 235,622 |
| | $ | 43 |
| | $ | 433,932 |
|
Master Planned Communities land sales | | 57,073 |
| | 58,321 |
| | 96,805 |
| | 99,633 |
|
Builder price participation | | 8,947 |
| | 9,369 |
| | 16,706 |
| | 14,564 |
|
Total revenue from contracts with customers | | 66,020 |
| | 303,312 |
| | 113,554 |
| | 548,129 |
|
| | | | | | | | |
Recognized at a point in time and/or over time: | | | | | | | | |
Other land, rental and property revenues | | 11,447 |
| | 59,774 |
| | 46,344 |
| | 101,253 |
|
Total other income | | 11,447 |
| | 59,774 |
| | 46,344 |
| | 101,253 |
|
| | | | | | | | |
Rental and other income (lease-related revenues) | | | | | | | | |
Minimum rents | | 61,469 |
| | 54,718 |
| | 132,456 |
| | 108,804 |
|
Tenant recoveries | | 17,202 |
| | 13,512 |
| | 38,077 |
| | 27,020 |
|
Interest income from sales-type leases | | 35 |
| | — |
| | 917 |
| | — |
|
Total rental income | | 78,706 |
| | 68,230 |
| | 171,450 |
| | 135,824 |
|
| | | | | | | | |
Total revenues | | $ | 156,173 |
| | $ | 431,316 |
| | $ | 331,348 |
| | $ | 785,206 |
|
| | | | | | | | |
Revenues by segment | | | | | | | | |
Operating Assets revenues | | $ | 84,277 |
| | $ | 109,219 |
| | $ | 198,534 |
| | $ | 201,172 |
|
Master Planned Communities revenues | | 68,913 |
| | 72,859 |
| | 119,359 |
| | 123,755 |
|
Seaport District revenues | | 2,272 |
| | 12,891 |
| | 11,966 |
| | 19,921 |
|
Strategic Developments revenues | | 624 |
| | 236,347 |
| | 1,384 |
| | 440,358 |
|
Corporate revenues | | 87 |
| | — |
| | 105 |
| | — |
|
Total revenues | | $ | 156,173 |
| | $ | 431,316 |
| | $ | 331,348 |
| | $ | 785,206 |
|
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
The following table presents the Company's revenues disaggregated by revenue source: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In thousands) | | September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 |
Revenues | | | | | | | | |
From contracts with customers | | | | | | | | |
Recognized at a point in time: | | | | | | | | |
Condominium rights and unit sales | | $ | 9,999 |
| | $ | 8,045 |
| | $ | 443,931 |
| | $ | 39,767 |
|
Master Planned Communities land sales | | 77,368 |
| | 127,730 |
| | 177,001 |
| | 226,727 |
|
Hospitality revenues | | 20,031 |
| | 19,108 |
| | 68,536 |
| | 64,738 |
|
Builder price participation | | 9,660 |
| | 8,685 |
| | 24,224 |
| | 19,394 |
|
Total revenue from contracts with customers | | 117,058 |
| | 163,568 |
| | 713,692 |
| | 350,626 |
|
| | | | | | | | |
Recognized at a point in time and/or over time: | | | | | | | | |
Other land revenues | | 5,954 |
| | 7,145 |
| | 16,646 |
| | 15,988 |
|
Other rental and property revenues | | 37,816 |
| | 20,397 |
| | 79,872 |
| | 42,266 |
|
Total other income | | 43,770 |
| | 27,542 |
| | 96,518 |
| | 58,254 |
|
| | | | | | | | |
Rental and other income (lease-related revenues) | | | | | | | | |
Minimum rents | | 55,552 |
| | 53,244 |
| | 164,356 |
| | 153,156 |
|
Tenant recoveries | | 13,704 |
| | 12,806 |
| | 40,724 |
| | 37,808 |
|
Interest income from sales-type leases | | 1,088 |
| | — |
| | 1,088 |
| | — |
|
Total rental income | | 70,344 |
| | 66,050 |
| | 206,168 |
| | 190,964 |
|
| | | | | | | | |
Total revenues | | $ | 231,172 |
| | $ | 257,160 |
| | $ | 1,016,378 |
| | $ | 599,844 |
|
| | | | | | | | |
Revenues by segment | | | | | | | | |
Operating Assets revenues | | $ | 104,223 |
| | $ | 87,462 |
| | $ | 305,395 |
| | $ | 264,017 |
|
Seaport District revenues | | 23,130 |
| | 14,601 |
| | 43,051 |
| | 22,612 |
|
Master Planned Communities revenues | | 92,287 |
| | 143,135 |
| | 216,042 |
| | 261,665 |
|
Strategic Developments revenues | | 11,515 |
| | 11,962 |
| | 451,873 |
| | 51,550 |
|
Corporate revenues | | 17 |
| | — |
| | 17 |
| | — |
|
Total revenues | | $ | 231,172 |
| | $ | 257,160 |
| | $ | 1,016,378 |
| | $ | 599,844 |
|
Contract Assets and Liabilities
Contract assets are the Company'sCompany’s right to consideration in exchange for goods or services that have been transferred to a customer, excluding any amounts presented as a receivable. Contract liabilities are the Company'sCompany’s obligation to transfer goods or services to a customer for which the Company has received consideration.
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
There were no contract assets for the period. The contract liabilities primarily relate to escrowed condominium deposits, MPC land sales deposits and deferred MPC land sales related to unsatisfied land improvements. The beginning and ending balances of contract assets and liabilities and significant activity during the period isare as follows:
| | | | Contract | | Contract | | Contract |
(In thousands) | | Assets | | Liabilities | | Liabilities |
Balance as of January 1, 2018 | | $ | — |
| | $ | 179,179 |
| |
Balance as of December 31, 2019 | | | $ | 246,010 |
|
Consideration earned during the period | | (35,834 | ) | | (308,898 | ) | | (30,200 | ) |
Consideration received during the period | | 35,834 |
| | 426,215 |
| | 122,526 |
|
Balance as of December 31, 2018 | | — |
| | 296,496 |
| |
Consideration earned during the period | | — |
| | (453,939 | ) | |
Consideration received during the period | | — |
| | 375,624 |
| |
Balance as of September 30, 2019 | | $ | — |
| | $ | 218,181 |
| |
Balance as of June 30, 2020 | | | $ | 338,336 |
|
Remaining Unsatisfied Performance Obligations
The Company’s remaining unsatisfied performance obligations as of SeptemberJune 30, 20192020, represent a measure of the total dollar value of work to be performed on contracts executed and in progress. These performance obligations primarily relate to the completion of condominium construction and transfer of control to a buyer, as well as the completion of contracted MPC land sales and related land improvements. These obligations are associated with contracts that generally are noncancelable by the customer after 30 days; however, purchasers of condominium units have the right to cancel the contract should the Company elect not to construct the condominium unit within a certain period of time or materially change the design of the condominium unit. The aggregate amount of the transaction price allocated to the Company'sCompany’s remaining unsatisfied performance obligations as of SeptemberJune 30, 20192020, is $1.2$1.7 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 | | Less than 1 year | | 1-2 years | | 3 years and thereafter |
Total remaining unsatisfied performance obligations | | $ | 237,256 |
| | $ | 442,123 |
| | $ | 534,567 |
| | $ | 193,994 |
| | $ | 433,966 |
| | $ | 1,048,461 |
|
The Company’s remaining performance obligations are adjusted to reflect any known project cancellations, revisions to project scope and cost, and deferrals, as appropriate. These amounts exclude estimated amounts of variable consideration which are constrained, such as builder price participation.
NOTE 17 LEASES
Leases(Topic 842) increases transparency and comparability among organizations by requiring the recognition of right-of-use assets and lease liabilities on the balance sheet. The Company determines whether an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use assets, net and Operating lease obligations on the Condensed Consolidated Balance Sheets. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of future minimum lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an estimate of the incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. The Operating lease right-of-use asset also includes any lease payments made, less any lease incentives and initial direct costs incurred. The Company does not have any finance leases as of June 30, 2020.
The Company’s lessee agreements consist of operating leases primarily for ground leases and other real estate. The Company’s leases have remaining lease terms of less than one year to 53 years. Most leases include one or more options to renew, with renewal terms that can extend the lease term from two to 40 years, and some of which may include options to terminate the leases within one year. The Company considers its strategic plan and the life of associated agreements in determining when options to extend or terminate lease terms are reasonably certain of being exercised. Leases with an initial term of 12 months or less are not recorded
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Certain of the Company’s lease agreements include variable lease payments based on a percentage of income generated through subleases, changes in price indices and market rates, and other costs arising from operating, maintenance, and taxes. The Company’s lease agreements do not contain residual value guarantees or restrictive covenants. The Company leases certain buildings and office space constructed on its ground leases to third parties.
The Company’s leased assets and liabilities are as follows:
|
| | | | |
(In thousands) | | June 30, 2020 |
Assets | | |
Operating lease right-of-use assets | | $ | 68,117 |
|
Riverwalk impairment | | (10,235 | ) |
Total leased assets | | $ | 57,882 |
|
| | |
Liabilities | | |
Operating lease liabilities | | $ | 69,607 |
|
Total leased liabilities | | $ | 69,607 |
|
The components of lease expense are as follows:
|
| | | | | | | | |
(In thousands) | | Three Months Ended | | Six Months Ended |
Lease cost | | June 30, 2020 | | June 30, 2020 |
Operating lease cost | | $ | 2,179 |
| | $ | 4,358 |
|
Variable lease costs | | 117 |
| | 290 |
|
Net lease cost | | $ | 2,296 |
| | $ | 4,648 |
|
Future minimum lease payments as of June 30, 2020, are as follows:
|
| | | | |
(In thousands) | | Operating |
Year Ended December 31, | | Leases |
2020 (excluding the six months ended June 30, 2020) | | $ | 3,056 |
|
2021 | | 7,184 |
|
2022 | | 6,507 |
|
2023 | | 6,464 |
|
2024 | | 6,432 |
|
Thereafter | | 266,852 |
|
Total lease payments | | 296,495 |
|
Less: imputed interest | | (226,888 | ) |
Present value of lease liabilities | | $ | 69,607 |
|
Other information related to the Company’s lessee agreements is as follows:
|
| | | | |
(In thousands) | | Six Months Ended |
Supplemental Condensed Consolidated Statements of Cash Flows Information | | June 30, 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows on operating leases | | $ | 3,849 |
|
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
|
| | | |
Other Information | | June 30, 2020 |
Weighted-average remaining lease term (years) | | |
Operating leases | | 37.0 |
|
Weighted-average discount rate | | |
Operating leases | | 7.8 | % |
The Company receives rental income from the leasing of retail, office, multi-family and other space under operating leases, as well as certain variable tenant recoveries. Such operating leases are with a variety of tenants and have a remaining average term of approximately five years. Lease terms generally vary among tenants and may include early termination options, extension options and fixed rental rate increases or rental rate increases based on an index. The minimum rentals based on operating leases of the consolidated properties held as of June 30, 2020, are as follows:
|
| | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(In thousands) | | June 30, 2020 | | June 30, 2020 |
Total minimum rent payments | | $ | 54,114 |
| | $ | 113,213 |
|
Total future minimum rents associated with operating leases are as follows:
|
| | | | |
| | Total |
Year Ending December 31, | | Minimum Rent |
(In thousands) | | |
2020 (excluding the six months ended June 30, 2020) | | $ | 110,505 |
|
2021 | | 234,654 |
|
2022 | | 251,870 |
|
2023 | | 242,176 |
|
2024 | | 234,851 |
|
Thereafter | | 1,511,105 |
|
Total | | $ | 2,585,161 |
|
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 reported on the Condensed Consolidated Statements of Operations also include amortization related to above and below‑market tenant leases on acquired properties.
A sales-type lease is defined as a lease that meets one or more of the following: transfers ownership at the end of the lease term, grants the lessee an option to purchase that is reasonably expected to be exercised, covers the major part of the asset’s economic life, the net present value of the lease payments equals or exceeds the fair value of the asset, or the asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease. As of June 30, 2020, the Company sold 100 Fellowship Drive, one of its sales-type leases. The Net investment in lease receivable, interest income and future minimum rents for the remaining sales-type lease are not significant.
NOTE 18 SEGMENTS
The Company has 4 business segments which offer different products and services. HHC'sHHC’s 4 segments are managed separately because each requires different operating strategies or management expertise and are reflective of management’s operating philosophies and methods. As further discussed in Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations, one common operating measure used to assess operating results for the Company'sCompany’s business segments is earnings before taxes ("EBT"(“EBT”). The Company'sCompany’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. All operations are within the United States. The Company'sCompany’s reportable segments are as follows:
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
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.
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.
| |
• | Seaport District -– consists of approximately 450,000453,000 square feet of restaurant, retail and entertainment properties situated in 3 primary locations in New York, New York: Pier 17, Seaport District Historic Area/Uplands and Tin Building. While the latter is still under development and will comprise about 53,000 square feet when completed, the 2 operating locations consist of third-party tenants, tenants either directly or jointly owned and operated by the Company, and businesses owned and operated by the Company under licensing agreements. |
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
of third-party tenants, tenants either directly or jointly owned and operated by the Company, and businesses owned and operated by the Company under licensing agreements.
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, 2019, the Company moved the Seaport District out of its existing segments and into a stand-alone segment for disclosure purposes. The respective segment earnings and total segment assets presented in the Condensed Consolidated Financial Statements and elsewhere in this Quarterly Report have been adjusted in all periods reported to reflect this change. See the Seaport District section of Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.
Segment operating results are as follows:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Operating Assets Segment EBT | | | | | | | | | | | | | | | | |
Total revenues(a) | | $ | 104,223 |
| | $ | 87,462 |
| | $ | 305,395 |
| | $ | 264,017 |
| | $ | 84,277 |
| | $ | 109,219 |
| | $ | 198,534 |
| | $ | 201,172 |
|
Total operating expenses(b) | | (47,950 | ) | | (43,373 | ) | | (139,589 | ) | | (126,372 | ) | | (42,222 | ) | | (48,727 | ) | | (94,462 | ) | | (91,639 | ) |
Segment operating income | | 56,273 |
| | 44,089 |
| | 165,806 |
| | 137,645 |
| | 42,055 |
| | 60,492 |
| | 104,072 |
| | 109,533 |
|
Depreciation and amortization | | (28,844 | ) | | (26,470 | ) | | (84,890 | ) | | (74,028 | ) | | (36,995 | ) | | (28,938 | ) | | (74,084 | ) | | (56,046 | ) |
Interest expense, net | | (21,645 | ) | | (18,891 | ) | | (60,695 | ) | | (52,886 | ) | | (23,103 | ) | | (20,059 | ) | | (49,296 | ) | | (39,050 | ) |
Other (loss) income, net | | 63 |
| | (2,767 | ) | | 1,186 |
| | (2,603 | ) | |
Equity in earnings (losses) from real estate and other affiliates | | 441 |
| | (76 | ) | | 3,195 |
| | 1,507 |
| |
Selling profit from sales-type leases | | 13,537 |
| | — |
| | 13,537 |
| | — |
| |
Other income, net | | | 226 |
| | 1,088 |
| | 167 |
| | 1,123 |
|
Equity in earnings from real estate and other affiliates | | | 475 |
| | 45 |
| | 4,869 |
| | 2,754 |
|
Gain on sale or disposal of real estate | | | — |
| | — |
| | 38,124 |
| | — |
|
Provision for impairment | | | — |
| | — |
| | (48,738 | ) | | — |
|
Segment EBT | | 19,825 |
| | (4,115 | ) | | 38,139 |
| | 9,635 |
| | (17,342 | ) | | 12,628 |
| | (24,886 | ) | | 18,314 |
|
| | | | | | | | | | | | | | | | |
MPC Segment EBT | | | | | | | | | | | | | | | | |
Total revenues | | 92,287 |
| | 143,135 |
| | 216,042 |
| | 261,665 |
| | 68,913 |
| | 72,859 |
| | 119,359 |
| | 123,755 |
|
Total operating expenses | | (45,169 | ) | | (70,237 | ) | | (114,075 | ) | | (143,608 | ) | | (31,970 | ) | | (38,913 | ) | | (55,692 | ) | | (65,979 | ) |
Segment operating income | | 47,118 |
| | 72,898 |
| | 101,967 |
| | 118,057 |
| | 36,943 |
| | 33,946 |
| | 63,667 |
| | 57,776 |
|
Depreciation and amortization | | (88 | ) | | (78 | ) | | (334 | ) | | (245 | ) | | (91 | ) | | (86 | ) | | (182 | ) | | (246 | ) |
Interest income, net | | 8,550 |
| | 6,626 |
| | 24,376 |
| | 19,826 |
| | 8,303 |
| | 8,283 |
| | 16,857 |
| | 15,826 |
|
Other income, net | | 534 |
| | 18 |
| | 601 |
| | 18 |
| | — |
| | 72 |
| | — |
| | 67 |
|
Equity in earnings from real estate and other affiliates | | 4,523 |
| | 9,454 |
| | 18,859 |
| | 34,682 |
| |
Equity in (losses) earnings from real estate and other affiliates | | | (2,968 | ) | | 6,499 |
| | 5,966 |
| | 14,336 |
|
Segment EBT | | 60,637 |
| | 88,918 |
| | 145,469 |
| | 172,338 |
| | 42,187 |
| | 48,714 |
| | 86,308 |
| | 87,759 |
|
| | | | | | | | | | | | | | | | |
Seaport District Segment EBT | | | | | | | | | | | | | | | | |
Total revenues | | 23,130 |
| | 14,601 |
| | 43,051 |
| | 22,612 |
| | 2,272 |
| | 12,891 |
| | 11,966 |
| | 19,921 |
|
Total operating expenses | | (27,330 | ) | | (21,989 | ) | | (59,735 | ) | | (31,965 | ) | | (8,464 | ) | | (17,972 | ) | | (22,775 | ) | | (32,405 | ) |
Segment operating loss | | (4,200 | ) | | (7,388 | ) | | (16,684 | ) | | (9,353 | ) | | (6,192 | ) | | (5,081 | ) | | (10,809 | ) | | (12,484 | ) |
Depreciation and amortization | | (6,767 | ) | | (2,309 | ) | | (19,713 | ) | | (6,506 | ) | | (6,776 | ) | | (6,753 | ) | | (27,651 | ) | | (12,946 | ) |
Interest (expense) income, net | | (4,984 | ) | | 1,471 |
| | (8,440 | ) | | 8,466 |
| |
Interest expense, net | | | (4,626 | ) | | (1,924 | ) | | (9,679 | ) | | (3,456 | ) |
Other loss, net | | — |
| | (120 | ) | | (147 | ) | | (120 | ) | | (409 | ) | | (61 | ) | | (3,777 | ) | | (147 | ) |
Equity in losses from real estate and other affiliates | | (705 | ) | | (452 | ) | | (1,788 | ) | | (692 | ) | | (6,633 | ) | | (451 | ) | | (8,676 | ) | | (1,083 | ) |
Loss on sale or disposal of real estate | | — |
| | — |
| | (6 | ) | | — |
| | — |
| | — |
| | — |
| | (6 | ) |
Segment EBT | | (16,656 | ) | | (8,798 | ) | | (46,778 | ) | | (8,205 | ) | | (24,636 | ) | | (14,270 | ) | | (60,592 | ) | | (30,122 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
THE HOWARD HUGHES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Strategic Developments Segment EBT | | | | | | | | | | | | | | | | |
Total revenues | | 11,515 |
| | 11,962 |
| | 451,873 |
| | 51,550 |
| | 624 |
| | 236,347 |
| | 1,384 |
| | 440,358 |
|
Total operating expenses | | (11,327 | ) | | (13,553 | ) | | (382,341 | ) | | (60,892 | ) | | (12,517 | ) | | (224,711 | ) | | (116,816 | ) | | (371,014 | ) |
Segment operating income | | 188 |
| | (1,591 | ) | | 69,532 |
| | (9,342 | ) | |
Segment operating (loss) income | | | (11,893 | ) | | 11,636 |
| | (115,432 | ) | | 69,344 |
|
Depreciation and amortization | | (2,070 | ) | | (472 | ) | | (4,386 | ) | | (2,650 | ) | | (1,650 | ) | | (1,260 | ) | | (3,411 | ) | | (2,316 | ) |
Interest income, net | | 3,002 |
| | 2,848 |
| | 9,499 |
| | 9,794 |
| | 1,057 |
| | 3,235 |
| | 2,988 |
| | 6,497 |
|
Other income (loss), net | | 354 |
| | (450 | ) | | 664 |
| | (77 | ) | | 1,668 |
| | (383 | ) | | 1,293 |
| | 310 |
|
Equity in earnings (loss) from real estate and other affiliates | | 283 |
| | (315 | ) | | 581 |
| | 3,797 |
| |
Gain on sale or disposal of real estate, net | | 24,201 |
| | — |
| | 24,057 |
| | — |
| |
Equity in earnings from real estate and other affiliates | | | 574 |
| | 261 |
| | 638 |
| | 298 |
|
Gain (loss) on sale or disposal of real estate, net | | | 8,000 |
| | (144 | ) | | 8,000 |
| | (144 | ) |
Segment EBT | | 25,958 |
| | 20 |
| | 99,947 |
| | 1,522 |
| | (2,244 | ) | | 13,345 |
| | (105,924 | ) | | 73,989 |
|
| | | | | | | | | | | | | | | | |
Consolidated Segment EBT | | | | | | | | | | | | | | | | |
Total revenues | | 231,155 |
| | 257,160 |
| | 1,016,361 |
| | 599,844 |
| | 156,086 |
| | 431,316 |
| | 331,243 |
| | 785,206 |
|
Total operating expenses | | (131,776 | ) | | (149,152 | ) | | (695,740 | ) | | (362,837 | ) | | (95,173 | ) | | (330,323 | ) | | (289,745 | ) | | (561,037 | ) |
Segment operating income | | 99,379 |
| | 108,008 |
| | 320,621 |
| | 237,007 |
| | 60,913 |
| | 100,993 |
| | 41,498 |
| | 224,169 |
|
Depreciation and amortization | | (37,769 | ) | | (29,329 | ) | | (109,323 | ) | | (83,429 | ) | | (45,512 | ) | | (37,037 | ) | | (105,328 | ) | | (71,554 | ) |
Interest expense, net | | (15,077 | ) | | (7,946 | ) | | (35,260 | ) | | (14,800 | ) | | (18,369 | ) | | (10,465 | ) | | (39,130 | ) | | (20,183 | ) |
Other income (loss), net | | 951 |
| | (3,319 | ) | | 2,304 |
| | (2,782 | ) | | 1,485 |
| | 716 |
| | (2,317 | ) | | 1,353 |
|
Equity in earnings from real estate and other affiliates | | 4,542 |
| | 8,611 |
| | 20,847 |
| | 39,294 |
| |
Gain on sale or disposal of real estate, net | | 24,201 |
| | — |
| | 24,051 |
| | — |
| |
Selling profit from sales-type leases | | 13,537 |
| | — |
| | 13,537 |
| | — |
| |
Equity in (losses) earnings from real estate and other affiliates | | | (8,552 | ) | | 6,354 |
| | 2,797 |
| | 16,305 |
|
Gain (loss) on sale or disposal of real estate, net | | | 8,000 |
| | (144 | ) | | 46,124 |
| | (150 | ) |
Provision for impairment | | | — |
| | — |
| | (48,738 | ) | | — |
|
Consolidated segment EBT | | 89,764 |
| | 76,025 |
| | 236,777 |
| | 175,290 |
| | (2,035 | ) | | 60,417 |
| | (105,094 | ) | | 149,940 |
|
| | | | | | | |
| | | | | | | |
|
Corporate income, expenses and other items | | (59,721 | ) | | (52,178 | ) | | (161,481 | ) | | (155,488 | ) | | (32,068 | ) | | (47,089 | ) | | (54,091 | ) | | (104,687 | ) |
Net income | | 30,043 |
| | 23,847 |
| | 75,296 |
| | 19,802 |
| |
Net income attributable to noncontrolling interests | | (285 | ) | | (482 | ) | | (240 | ) | | (51 | ) | |
Net income attributable to common stockholders | | $ | 29,758 |
| | $ | 23,365 |
| | $ | 75,056 |
| | $ | 19,751 |
| |
Net (loss) income | | | (34,103 | ) | | 13,328 |
| | (159,185 | ) | | 45,253 |
|
Net income (loss) attributable to noncontrolling interests | | | 19 |
| | 149 |
| | (33 | ) | | 45 |
|
Net (loss) income attributable to common stockholders | | | $ | (34,084 | ) | | $ | 13,477 |
| | $ | (159,218 | ) | | $ | 45,298 |
|
| |
(a) | Includes hospitality revenues for the three and six months ended June 30, 2020, of $2.5 million and $19.8 million, respectively, and $25.6 million and $48.5 million for the three and six months ended June 30, 2019, respectively. |
| |
(b) | Includes hospitality operating costs for the three and six months ended June 30, 2020, of $4.4 million and $17.2 million, respectively, and $16.6 million and $32.2 million for the three and six months ended June 30, 2019, respectively. |
The assets by segment and the reconciliation of total segment assets to the Total assets in the Condensed Consolidated Balance Sheets are summarized as follows:
| | | | September 30, | | December 31, | | June 30, | | December 31, |
(In thousands) | | 2019 | | 2018 | | 2020 | | 2019 |
Operating Assets | | $ | 2,923,083 |
| | $ | 2,562,257 |
| | $ | 3,607,546 |
| | $ | 3,476,718 |
|
Master Planned Communities | | 2,204,507 |
| | 2,076,678 |
| | 2,262,400 |
| | 2,166,472 |
|
Seaport District | | 918,589 |
| | 839,522 |
| | 913,321 |
| | 930,067 |
|
Strategic Developments | | 1,452,738 |
| | 1,538,917 |
| | 1,638,426 |
| | 1,540,161 |
|
Total segment assets | | 7,498,917 |
| | 7,017,374 |
| | 8,421,693 |
| | 8,113,418 |
|
Corporate | | 448,998 |
| | 338,425 |
| | 822,865 |
| | 300,348 |
|
Total assets | | $ | 7,947,915 |
| | $ | 7,355,799 |
| | $ | 9,244,558 |
| | $ | 8,413,766 |
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis by management should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes included in this quarterly report on Form 10-Q (the "Quarterly Report"“Quarterly Report”) and in The Howard Hughes Corporation’s (“HHC” or the “Company”) annual report on Form 10-K for the fiscal year ended December 31, 2018,2019, filed with the Securities and Exchange Commission (“SEC”) on February 27, 20192020 (the “Annual Report”). All references to numbered Notes are to specific notes to our unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.
Forward-looking information
We may make forward-looking statements in this Quarterly Report and in other reports and presentations that we file or furnish with the SEC. In addition, our management may make forward-looking statements orally to analysts, investors, creditors, the media and others.
Forward-looking statements give our current expectations relating to our financial condition, results of operations, plans, objectives, future performance, business and the Transformation Plan (as defineddescribed below). 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,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “likely,” “may,” “plan,” “project,” “realize,” “should,” “transform,” “would,” and other statementswords of similar expression. Forward-looking statements should not be relied upon. They give our expectations about the future and are not guarantees of performance or results. We caution you not to rely on these forward-looking statements.
Currently, one of the most significant factors is the potential adverse effect of the current pandemic of the novel strain of coronavirus (“COVID-19”) on the financial condition, results of operations, cash flows and performance of our Company, our industry, and the global economy and financial markets. The extent to which COVID-19 impacts us will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, you should interpret many of the risks identified in this Quarterly Report, as well as the risks set forth below, as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19.
Forward-looking statements include, among others:
announcementthe impact of certain changes, whichCOVID-19, including the recent surge of COVID-19 cases in regions where we referoperate, on our business and numerous governmental restrictions and other orders instituted in response to asthe COVID-19 pandemic on our "Transformation Plan"business;
our “Transformation Plan”, including new executive leadership, reduction in our overhead expenses, the proposed sale of our non-core assets and accelerated growth in our core MPCMaster Planned Communities (“MPC”) assets;
expected performance of our stabilized, income-producing properties and the performance and stabilization timing of properties that we have recently placed into service or are under construction;
forecasts of our future economic performance;
expected capital required for our operations and development opportunities atfor our properties;
the impact of technology on our operations and business;
expected performance of our Master Planned Communities (“MPC”)MPC segment;
expected commencement and completion for property developments and timing and amount of sales or rentals of certain properties;
estimates of our future liquidity, development opportunities, development spending and management plans; and
descriptions of assumptions underlying or relating to any of the foregoing.
There are several factors, many beyond our control, which could cause results to differ materially from our expectations. These risk factors are described in Item 1A.- Risk Factors of this Quarterly Report as well as our Annual Report and are incorporated herein by reference. Any factor could, by itself, or together with one or more other factors, adversely affect our business, results of operations or financial condition. There may be other factors currently unknown to us that we have not described in this Quarterly Report or in our Annual Report that could cause results to differ from our expectations. These forward-looking statements present our estimates and assumptions as of the date of this Quarterly 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 Quarterly Report.
Executive Overview
Description of Business
We strive to create timeless places and extraordinary experiences that inspire people while driving sustainable, long-term growth and value for our shareholders. We operate in four complementary business segments: Operating Assets, MPC, Seaport District and Strategic Developments. The operational synergies of combining our three main business segments, Operating Assets, MPC and Strategic Developments, create a unique and continuous value-creation cycle. We sell land to residential homebuilders in MPC,our MPCs, and the new homes attract residents to our cities looking for places to live, 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 Strategic Developments when the timing is right using the cash flow harvested from our operating properties NOI and from the sale of land to homebuilders, which helps mitigate development risk.homebuilders. Once these strategic developments are completed and stabilized, they transition to Operating Assets, which are located across the United States and increase recurring Net Operating Income ("NOI"(“NOI”), further funding the equity requirements in Strategic Developments. New office, retail and other commercial amenities make our MPC residential land more appealing to buyers and increase the velocity of land sales at premiums that exceed the broader market. Increased demand for residential land
generates more cash flow from MPC, thus continuing the cycle. Our fourth business segment, the Seaport District, is one of the only privately controlled districts in New York City thatand is being transformed into a culinary, fashion and entertainment destination with a focus on unique offerings not found elsewhere in the city. The Seaport District spans across approximately 450,000453,000 square feet and several city blocks, including Pier 17, the Tin Building, the Historic District as well as the 250 Water Street parking lot and our interest in the 66-room Mr. C Seaport hotel. We completed the sale of our 35% interest in Mr. C Seaport in July 2020. See Note 4 - Recent Transactions for additional information.
Transformation Plan
Following the previously announced review of strategic alternatives, we announced that we will execute a transformation plan, led by new executive leadership, comprised of three pillars: (1) a $45 - $50 million reduction in annual overhead expenses, (2) the sale of approximately $2 billion of non-core assets and (3) accelerated growth in our core MPC assets. Paul Layne, former President of our Central Region, has beenwas named Chief Executive Officer, effective October 21, 2019. Paul Layne will replace David R. WeinrebO'Reilly, Chief Financial Officer, was also named President, effective June 25, 2020.
While we have made significant progress on the Boardexecution of Directors. David R. Weinrebour Transformation Plan commitments with meaningful reductions in overhead and Grant Herlitzthe disposition of some non-core properties, we expect that the COVID-19 pandemic will make additional non-core asset sales more challenging to execute during the remainder of the year. Since the announcement of the Transformation Plan, we have stepped down fromexecuted on the Company. The Company and eachsale of Mr. Weinreb and Mr. Herlitzsix non-core assets generating approximately $132.0 million of net proceeds after debt repayment. Importantly, we have agreedalso restarted horizontal development in our MPCs to treat their terminations of employment as terminations without "cause" under their respective employment and warrant agreementsprepare lots for sale to keep pace with builder demand given the Company.strong underlying home sales in our communities. Finally, we have commenced modest investments in pre-development work for the next potential vertical development opportunities in our core MPCs, for when demand returns. While we do not anticipate any new construction starts in the coming quarter, we want to be prepared to be able to move forward the moment that demand materializes.
Third Quarter 2019 HighlightsCOVID-19 Pandemic
CapitalIn December 2019, COVID-19 was reported to have surfaced in Wuhan, China. COVID-19 has since spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and Financing Activities
On Septemberon March 13, 2019, we closed on2020, the United States declared a $37.7 million multi-family loannational emergency with respect to COVID-19. The outbreak of COVID-19 has severely impacted global economic activity and security agreement for Creekside Park Apartments.caused significant volatility and negative pressure in financial markets. The loan bears interest at 3.52% with a maturity of October 1, 2029.
On August 6, 2019, we closed on a $30.7 million construction loan for Millennium Phase III Apartments. The loan bears interest at one-month London Interbank Offered Rate ("LIBOR") plus 1.75% with an initial maturity date of August 6, 2023 and a one-year extension option.
On August 1, 2019, we modified our $64.6 million construction loan, of which $31.1 million relates to Aristocrat and $33.5 million relates to Two Summerlin. The original loan bears interest at Wall Street Journal Prime plus 0.40% with a maturity of October 19, 2022. As partglobal impact of the modification,outbreak evolved rapidly and countries, including the $33.5 million Two Summerlin note was amended to bear interest at 4.25% with an initial maturityUnited States, reacted by instituting a wide variety of October 18, 2022control measures including states of emergency, mandatory quarantines, required business and one, 36-month extension option. We closed onschool closures, implementing “shelter in place” orders and restricting travel. Many experts predicted that the outbreak would trigger a new $38.3 million note for Aristocrat which bears interest at 3.67% with an initial maturityperiod of September 1, 2029. A portion of the proceeds for the new Aristocrat note were used to extinguish the original Aristocrat note.material global economic slowdown or a global recession.
Operating Assets
NOI increased $13.4 million primarily due to increases of $2.5 million, $7.1 million and $2.3 million in NOI at our other, office and hospitality properties, respectively. The increase in our other category is a result of placing the Las Vegas Ballpark into service in March 2019, and the increases in our office and hospitality properties are mainly the result of continued stabilization of existing assets within these categories, as well as NOI generated from assets placed into service subsequent to the third quarter of 2018.
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• | Celebrated the Las Vegas Ballpark and Las Vegas Aviators being named ballpark and team of the year by Ballpark Digest.
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MPC
Segment earnings before taxes ("EBT") decreased by $28.3 million primarily due to fewer superpad sales, lower recognition of revenue deferred from previous sales, decreased Special Improvement District (“SID”) bond assumptions and reimbursements at Summerlin as well as lower Equity in earnings from real estate at The Summit.
Achieved a $737,000 residential price per acre at The Woodlands, an increase of $195,000, over prior year.
Increased price per acre at Summerlin and Bridgeland by 17.8% and 8.7%, respectively, compared to prior year.
Increased land sales revenues at The Woodlands Hills and The Woodlands by 77.0% and 62.7%, respectively, over the prior year period.
Celebrated the opening of Dragonfly Park, a 25-acre park and 25-acre lake, located in Bridgeland's Parkland Village.
Seaport District
Revenue increased $8.5 million, or 58.4%, primarily due to both our existing businesses including 10 Corso Como Retail and Café, Cobble & Co, Garden Bar and the summer concert series, as well as new business openings such as The Fulton. Additionally, sponsorship revenue increased $0.9 million.
NOICOVID-19 Impacts by Segment
Operating Assets
We experienced significant cancellations and declines in occupancy in our three hotel properties (which accounted for 7% of our revenues for the year ended December 31, 2019), and closed all three of our hotel properties in March 2020 in response to the pandemic. The Woodlands Resort and Embassy Suites reopened in May and June 2020, with 54% and 100% of rooms available for use as of the end of the period, respectively. At The Westin at The Woodlands, we reopened the bar and restaurant in April 2020, subject to local guidance, and reopened 100% of the guest rooms on July 1, 2020. Despite these reopenings, we continue to see declines in occupancy, compared to levels achieved prior to the impact of the pandemic.
Retail locations at our properties have been significantly negatively impacted given the temporary closure of all non-essential retail in Summerlin, Houston and Ward Village, and the complete closure of Riverwalk for approximately two months beginning in April 2020 (revenues from our retail properties accounted for 12% of our revenues for the year ended December 31, 2019). Several of our tenants resumed operations with phased reopenings in May and June 2020.
Further, despite phased reopenings at our properties during the second quarter of 2020, there may be (i) a failure of our tenants in our retail properties as well as in our office and multi-family properties to make timely rental payments (revenues from our office and multi-family properties accounted for 13% of our revenues for the year ended December 31, 2019), (ii) rent reductions, deferrals, downsizing or other concessions, (iii) reductions in demand for leased space and/or (iv) defaults under our leases as a result of downturns in our tenants’ personal financial situations as well as commercial businesses, due in part to containment measures, such as travel restrictions, mandatory government closures, quarantines, “shelter in place” orders and social distancing, as well as the overall impact on the economy and our tenants’ industries (including the energy sector). We cannot predict whether government action will require rent delays or other abatement measures or concessions or prohibit lease terminations or foreclosures for tenants.
As announced in late June, the Minor League Baseball season was canceled for 2020, which impacts the Las Vegas Aviators, our Triple-A professional baseball team (which accounted for 2% of our revenues for the year ended December 31, 2019).
We are closely monitoring our rental revenue, and for the three months ended June 30, 2020, we collected 95.4% of our office portfolio billings, 96.6% of our multi-family portfolio billings, 49.7% of our retail portfolio billings and 84.5% of our other portfolio billings. For collections in July as of July 28, 2020, we collected 96.1% of our office portfolio billings, 98.5% of our multi-family portfolio billings, 64.1% of our retail portfolio billings and 90.2% of our other portfolio billings.
MPC
In response to the COVID-19 pandemic, during the first quarter of 2020, we took steps to reduce expenses and preserve cash, including ceasing development of MPC land that was not under contract for sale or where we did not have a post-closing requirement, and reducing or postponing voluntary capital expenditures. In addition, builders implemented new model home practices by adding 3D virtual tours of interactive floor plans, live chat capabilities with sales staff, and increased photographs on their websites conducive to social distancing and hygiene recommendations.
For our MPC segment, new home sales, a leading indicator of land sales, dropped considerably in April as a result of stay-at-home orders, but experienced a large uptick in May, June and July as local economies began to re-open. In response, we restarted horizontal development to maintain a sufficient supply of lots and superpads to keep up with the strong home sales. During the second quarter of 2020, The Woodlands saw improved land sales revenue due to lot sales mix . In addition, Bridgeland land sales revenue remained flatconsistent with the prior year quarter performance despite the impacts of COVID-19.
We may experience a decrease in land sales in our MPCs as a result of the fluctuations in regional economies. Houston would be adversely affected by negative impacts on the energy sector and the local economy. In particular, The Woodlands, The Woodlands Hills and Bridgeland are correlated with 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. Summerlin is to some degree correlated with the gaming industry, which could be adversely affected by changes in consumer trends and preferences in times of economic uncertainty, and have a negative impact on the local Las Vegas economy.
Seaport District
In response to the pandemic, we completely closed the Seaport District in mid-March. Our Seaport summer concert series originally scheduled for 2020 has been postponed and we are in the process of rescheduling for 2021. The concert revenue and related
sponsorship has historically been a meaningful contribution to our annual revenue. While construction on the Tin Building resumed in May, our assets in the Seaport District remain closed and we anticipate a gradual reopening of a few, select businesses, including The Rooftop at Pier 17, beginning in August.
Further, there may be (i) a failure of our tenants in our retail and office properties to make timely rental payments, (ii) rent reductions, deferrals, downsizing or other concessions, (iii) reductions in demand for leased space and/or (iv) defaults under our leases as a result of downturns in our tenants’ personal financial situations as well as commercial businesses, which include our leased and wholly owned retail stores, our managed businesses, including restaurants and event attractions at the Seaport District, in part due to containment measures, such as travel restrictions, mandatory government closures, quarantines, “shelter in place” orders and social distancing, as well as the overall impact on the economy and our tenants’ industries. We cannot predict whether government action will require rent delays or other abatement measures or concessions or prohibit lease terminations or foreclosures for tenants.
Strategic Developments
We may experience a substantial decrease in condominium sales in Hawai’i, in light of the impact on the overall economy and consumers’ reluctance to make significant capital decisions, and availability of consumer financing, in times of economic uncertainty. However, as further detailed below, overall progress at our condominium projects remains strong as of June 30, 2020, with Victoria Place, our newest project, 67.6% presold.
Given the challenges presented by this new environment, we have launched digital sales efforts, including virtual tours to sell condominiums, which we expect to maintain until social distancing recommendations are lifted. We have also implemented new model home practices by adding 3D virtual tours of interactive floor plans, live chat capabilities with sales staff, and increased photographs on their websites conducive to social distancing recommendations. While we have not seen any delays in our existing construction to date (other than the Tin Building mentioned above), with respect to our future development projects, we have delayed or postponed certain of our projects and will continue to evaluate our other development projects going forward. We have also deferred the non-core asset dispositions expected to occur as part of our Transformation Plan.
Liquidity Outlook
As described above, the pandemic has caused economic problems in most of the regions in which we operate, as well as directly impacted sectors which have historically been meaningful contributors to HHC, such as residential land sales, hospitality, retail and sports venues. In direct response to the unprecedented COVID-19 pandemic and the impacts on our four business segments, as well as the economy and capital markets in general, we initiated measures to increase our liquidity. During the six months ended June 30, 2020, we enhanced our liquidity profile through a successful common stock offering, which generated $593.6 million in proceeds, new financings totaling over $537.2 million, the agreement to extend our bridge loan for The Woodlands Towers at The Waterway, extension of our Downtown Summerlin facility, as well as the sale of 100 Fellowship Drive in The Woodlands, Texas, which generated $64.2 million in net proceeds. As of June 30, 2020, we had $930.6 million of Cash and cash equivalents on our Condensed Consolidated Balance Sheets.
Second Quarter 2020 Highlights
Comparison of the three months ended June 30, 2020, to the three months ended June 30, 2019
Capital and Financing Activities
On June 22, 2020, we modified the existing Downtown Summerlin loan, extending the financing by three years to June 22, 2023 at a net operating lossrate of $2.9LIBOR plus 2.15% in exchange for a pay-down of $33.8 million to a total commitment of $221.5 million.
On May 20, 2020, we extended the remaining $280.3 million of the bridge loan for The Woodlands Towers at the Waterway and The Woodlands Warehouse for six-months at LIBOR plus 2.35%, with an option for an additional six-month extension at LIBOR plus 2.90%, extending the final maturity to June 30, 2021.
Operating Assets
NOI decreased $19.8 million due to decreases in NOIof $11.4 million, $7.5 million and $7.5 million in our landlord operationshospitality, retail and managed businessesother properties, respectively, primarily attributabledue to opening new businesses, suchthe temporary closures of hospitality and retail properties and cancellation of the Las Vegas Aviators 2020 baseball season as Pier 17 and Pier 17 rooftop ina result of the third quarter of 2018.COVID-19 pandemic. These NOI decreases arewere partially offset by higher events, sponsorships and catering NOIa $7.6 million increase in our office properties primarily due to 2018 losses incurredThe Woodlands Towers at the Waterway acquisition.
MPC
Segment earnings before taxes (“EBT”) decreased by $6.5 million primarily due to lower Equity in (losses) earnings from real estate and other affiliates at The Summit as well as lower land sales revenues.
EBT excluding the Food Labeffects of Equity in (losses) earnings from real estate and other affiliates increased by $2.9 million primarily driven by an increase in The Woodlands land sales revenue and Bridgeland land sales revenue remaining consistent with 2019 despite the effects of COVID-19.
Increased The Woodlands price per acre 195.9% from $560,000 to $1,657,000, respectively, due to land sales in a high-end, exclusive section of the community that did not recur in 2019. We expect to incur operating losses until the generates significantly higher value per acre.
Seaport District reaches its critical mass
Segment EBT decreased $10.4 million to a loss of offerings.
Celebrated$24.6 million primarily due to a $6.0 million impairment of the openings of Bar Wayō, Malibu Farm and The Lookout at Pier 17.Company’s equity investment in Mr. C Seaport.
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• | Seaport District NOI remained relatively flat at a net operating loss of $3.4 million primarily due to a $0.4 million decrease in our managed business entities and a $0.3 million decrease in our landlord operations, partially offset by a $0.2 million increase in our events, sponsorships, and catering category. The decreases in NOI were primarily a result of business closures and cancellation of events related to the COVID-19 pandemic. |
Strategic Developments
Recognized Segment EBTsegment loss before taxes of $26.0$2.2 million, an increasea decrease of $25.9$15.6 million primarily due to the $24.2timing of condominium closings and a $5.1 million gain recognized forwrite down of condo inventory, partially offset by the $8.0 million termination payment received related to the sale of Cottonwood Mall.
Commenced constructionWest Windsor in October 2019. The Company closed a portion of Creekside Park Apartments Phase II, a 360-unit multi-family developmentAe‘o in The Woodlands, TX. The project is anticipated to contribute approximately $4.7 million of stabilized NOI.early 2019, with no new condominium towers delivered in 2020.
Continued robust sales at Ward Village by contracting to sell 5513 condominiums in the thirdsecond quarter of 2019.2020. The primary driversdriver of the increase are ‘A‘ali‘i and Kō'ula,is Victoria Place, which contributed 11 and 38 contracted units, respectively. Kō'ula,units.
Victoria Place, our newest building that began public sales in JanuaryDecember 2019, was 71.9%67.6% presold as of October 31, 2019.June 30, 2020.
WeExcluding Victoria Place, we have sold 2,3952,435 residential units at our six under construction towers in Ward Village since inception, bringing the total percentage sold across the communityat these condominium towers to 88.8%90.3%.
Earnings Before Taxes
In addition to the required presentations using GAAP, we use certain non-GAAP performance measures, as we believe these measures improve the understanding of our operational results and make comparisons of operating results among peer companies more meaningful. Management continually evaluates the usefulness, relevance, limitations and calculation of our reported non-GAAP performance measures to determine how best to provide relevant information to the public, and thus such reported measures could change.
Because our four segments, Operating Assets, MPC, Seaport District and Strategic Developments, are managed separately, we use different operating measures to assess operating results and allocate resources among them. The one common operating measure used to assess operating results for our business segments is earnings before taxes (“EBT”). 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 estate and other affiliates. EBT excludes corporate expenses and other items that are not allocable to the segments. See discussion herein at Corporate income, expenses and other items for further details. We present EBT for each segment because we use this measure, among others, internally to assess the core operating performance of our assets.
EBT should not be considered 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;
interest expense on our corporate debt;
income taxes that we may be required to pay;
any cash requirements for replacement of fully depreciated or amortized assets; and
limitations on, or costs related to, the transfer of earnings from our real estate and other affiliates to us.
A reconciliation between EBT and Net income is presented below:
| | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | | 2019 | | 2018 | | $ Change | | 2019 | | 2018 | | $ Change | 2020 | | 2019 | | $ Change | | 2020 | | 2019 | | $ Change |
Operating Assets Segment EBT | | | | | | | | | | | | | | | | | | | | | | | |
Total revenues | | $ | 104,223 |
| | $ | 87,462 |
| | $ | 16,761 |
| | $ | 305,395 |
| | $ | 264,017 |
| | $ | 41,378 |
| |
Total operating expenses | | (47,950 | ) | | (43,373 | ) | | (4,577 | ) | | (139,589 | ) | | (126,372 | ) | | (13,217 | ) | |
Total revenues (a) | | $ | 84,277 |
| | $ | 109,219 |
| | $ | (24,942 | ) | | $ | 198,534 |
| | $ | 201,172 |
| | $ | (2,638 | ) |
Total operating expenses (b) | | (42,222 | ) | | (48,727 | ) | | 6,505 |
| | (94,462 | ) | | (91,639 | ) | | (2,823 | ) |
Segment operating income | | 56,273 |
| | 44,089 |
| | 12,184 |
| | 165,806 |
| | 137,645 |
| | 28,161 |
| 42,055 |
| | 60,492 |
| | (18,437 | ) | | 104,072 |
| | 109,533 |
| | (5,461 | ) |
Depreciation and amortization | | (28,844 | ) | | (26,470 | ) | | (2,374 | ) | | (84,890 | ) | | (74,028 | ) | | (10,862 | ) | (36,995 | ) | | (28,938 | ) | | (8,057 | ) | | (74,084 | ) | | (56,046 | ) | | (18,038 | ) |
Interest expense, net | | (21,645 | ) | | (18,891 | ) | | (2,754 | ) | | (60,695 | ) | | (52,886 | ) | | (7,809 | ) | (23,103 | ) | | (20,059 | ) | | (3,044 | ) | | (49,296 | ) | | (39,050 | ) | | (10,246 | ) |
Other (loss) income, net | | 63 |
| | (2,767 | ) | | 2,830 |
| | 1,186 |
| | (2,603 | ) | | 3,789 |
| |
Equity in earnings (losses) from real estate and other affiliates | | 441 |
| | (76 | ) | | 517 |
| | 3,195 |
| | 1,507 |
| | 1,688 |
| |
Selling profit from sales-type leases | | 13,537 |
| | — |
| | 13,537 |
| | 13,537 |
| | — |
| | 13,537 |
| |
Other income, net | | 226 |
| | 1,088 |
| | (862 | ) | | 167 |
| | 1,123 |
| | (956 | ) |
Equity in earnings from real estate and other affiliates | | 475 |
| | 45 |
| | 430 |
| | 4,869 |
| | 2,754 |
| | 2,115 |
|
Gain on sale or disposal of real estate | | — |
| | — |
| | — |
| | 38,124 |
| | — |
| | 38,124 |
|
Provision for impairment | | — |
| | — |
| | — |
| | (48,738 | ) | | — |
| | (48,738 | ) |
Segment EBT | | 19,825 |
| | (4,115 | ) | | 23,940 |
| | 38,139 |
| | 9,635 |
| | 28,504 |
| (17,342 | ) | | 12,628 |
| | (29,970 | ) | | (24,886 | ) | | 18,314 |
| | (43,200 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
MPC Segment EBT | | | | | | | | | | | | | | | | | | | | | | | |
Total revenues | | 92,287 |
| | 143,135 |
| | (50,848 | ) | | 216,042 |
| | 261,665 |
| | (45,623 | ) | 68,913 |
| | 72,859 |
| | (3,946 | ) | | 119,359 |
| | 123,755 |
| | (4,396 | ) |
Total operating expenses | | (45,169 | ) | | (70,237 | ) | | 25,068 |
| | (114,075 | ) | | (143,608 | ) | | 29,533 |
| (31,970 | ) | | (38,913 | ) | | 6,943 |
| | (55,692 | ) | | (65,979 | ) | | 10,287 |
|
Segment operating income | | 47,118 |
| | 72,898 |
| | (25,780 | ) | | 101,967 |
| | 118,057 |
| | (16,090 | ) | 36,943 |
| | 33,946 |
| | 2,997 |
| | 63,667 |
| | 57,776 |
| | 5,891 |
|
Depreciation and amortization | | (88 | ) | | (78 | ) | | (10 | ) | | (334 | ) | | (245 | ) | | (89 | ) | (91 | ) | | (86 | ) | | (5 | ) | | (182 | ) | | (246 | ) | | 64 |
|
Interest income, net | | 8,550 |
| | 6,626 |
| | 1,924 |
| | 24,376 |
| | 19,826 |
| | 4,550 |
| 8,303 |
| | 8,283 |
| | 20 |
| | 16,857 |
| | 15,826 |
| | 1,031 |
|
Other income, net | | 534 |
| | 18 |
| | 516 |
| | 601 |
| | 18 |
| | 583 |
| — |
| | 72 |
| | (72 | ) | | — |
| | 67 |
| | (67 | ) |
Equity in earnings from real estate and other affiliates | | 4,523 |
| | 9,454 |
| | (4,931 | ) | | 18,859 |
| | 34,682 |
| | (15,823 | ) | |
Equity in (losses) earnings from real estate and other affiliates | | (2,968 | ) | | 6,499 |
| | (9,467 | ) | | 5,966 |
| | 14,336 |
| | (8,370 | ) |
Segment EBT | | 60,637 |
| | 88,918 |
| | (28,281 | ) | | 145,469 |
| | 172,338 |
| | (26,869 | ) | 42,187 |
| | 48,714 |
| | (6,527 | ) | | 86,308 |
| | 87,759 |
| | (1,451 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Seaport District Segment EBT | | | | | | | | | | | | | | | | | | | | | | | |
Total revenues | | 23,130 |
| | 14,601 |
| | 8,529 |
| | 43,051 |
| | 22,612 |
| | 20,439 |
| 2,272 |
| | 12,891 |
| | (10,619 | ) | | 11,966 |
| | 19,921 |
| | (7,955 | ) |
Total operating expenses | | (27,330 | ) | | (21,989 | ) | | (5,341 | ) | | (59,735 | ) | | (31,965 | ) | | (27,770 | ) | (8,464 | ) | | (17,972 | ) | | 9,508 |
| | (22,775 | ) | | (32,405 | ) | | 9,630 |
|
Segment operating income | | (4,200 | ) | | (7,388 | ) | | 3,188 |
| | (16,684 | ) | | (9,353 | ) | | (7,331 | ) | |
Segment operating loss | | (6,192 | ) | | (5,081 | ) | | (1,111 | ) | | (10,809 | ) | | (12,484 | ) | | 1,675 |
|
Depreciation and amortization | | (6,767 | ) | | (2,309 | ) | | (4,458 | ) | | (19,713 | ) | | (6,506 | ) | | (13,207 | ) | (6,776 | ) | | (6,753 | ) | | (23 | ) | | (27,651 | ) | | (12,946 | ) | | (14,705 | ) |
Interest (expense) income, net | | (4,984 | ) | | 1,471 |
| | (6,455 | ) | | (8,440 | ) | | 8,466 |
| | (16,906 | ) | |
Interest expense, net | | (4,626 | ) | | (1,924 | ) | | (2,702 | ) | | (9,679 | ) | | (3,456 | ) | | (6,223 | ) |
Other loss, net | | — |
| | (120 | ) | | 120 |
| | (147 | ) | | (120 | ) | | (27 | ) | (409 | ) | | (61 | ) | | (348 | ) | | (3,777 | ) | | (147 | ) | | (3,630 | ) |
Equity in losses from real estate and other affiliates | | (705 | ) | | (452 | ) | | (253 | ) | | (1,788 | ) | | (692 | ) | | (1,096 | ) | (6,633 | ) | | (451 | ) | | (6,182 | ) | | (8,676 | ) | | (1,083 | ) | | (7,593 | ) |
Loss on sale or disposal of real estate | | — |
| | — |
| | — |
| | (6 | ) | | — |
| | (6 | ) | — |
| | — |
| | — |
| | — |
| | (6 | ) | | 6 |
|
Segment EBT | | (16,656 | ) | | (8,798 | ) | | (7,858 | ) | | (46,778 | ) | | (8,205 | ) | | (38,573 | ) | (24,636 | ) | | (14,270 | ) | | (10,366 | ) | | (60,592 | ) | | (30,122 | ) | | (30,470 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Strategic Developments Segment EBT | | | | | | | | | | | | | | | | | | | | | | | |
Total revenues | | 11,515 |
| | 11,962 |
| | (447 | ) | | 451,873 |
| | 51,550 |
| | 400,323 |
| 624 |
| | 236,347 |
| | (235,723 | ) | | 1,384 |
| | 440,358 |
| | (438,974 | ) |
Total operating expenses | | (11,327 | ) | | (13,553 | ) | | 2,226 |
| | (382,341 | ) | | (60,892 | ) | | (321,449 | ) | (12,517 | ) | | (224,711 | ) | | 212,194 |
| | (116,816 | ) | | (371,014 | ) | | 254,198 |
|
Segment operating income | | 188 |
| | (1,591 | ) | | 1,779 |
| | 69,532 |
| | (9,342 | ) | | 78,874 |
| |
Segment operating (loss) income | | (11,893 | ) | | 11,636 |
| | (23,529 | ) | | (115,432 | ) | | 69,344 |
| | (184,776 | ) |
Depreciation and amortization | | (2,070 | ) | | (472 | ) | | (1,598 | ) | | (4,386 | ) | | (2,650 | ) | | (1,736 | ) | (1,650 | ) | | (1,260 | ) | | (390 | ) | | (3,411 | ) | | (2,316 | ) | | (1,095 | ) |
Interest income, net | | 3,002 |
| | 2,848 |
| | 154 |
| | 9,499 |
| | 9,794 |
| | (295 | ) | 1,057 |
| | 3,235 |
| | (2,178 | ) | | 2,988 |
| | 6,497 |
| | (3,509 | ) |
Other income (loss), net | | 354 |
| | (450 | ) | | 804 |
| | 664 |
| | (77 | ) | | 741 |
| 1,668 |
| | (383 | ) | | 2,051 |
| | 1,293 |
| | 310 |
| | 983 |
|
Equity in earnings (loss) from real estate and other affiliates | | 283 |
| | (315 | ) | | 598 |
| | 581 |
| | 3,797 |
| | (3,216 | ) | |
Gain on sale or disposal of real estate, net | | 24,201 |
| | — |
| | 24,201 |
| | 24,057 |
| | — |
| | 24,057 |
| |
Equity in earnings from real estate and other affiliates | | 574 |
| | 261 |
| | 313 |
| | 638 |
| | 298 |
| | 340 |
|
Gain (loss) on sale or disposal of real estate, net | | 8,000 |
| | (144 | ) | | 8,144 |
| | 8,000 |
| | (144 | ) | | 8,144 |
|
Segment EBT | | 25,958 |
| | 20 |
| | 25,938 |
| | 99,947 |
| | 1,522 |
| | 98,425 |
| (2,244 | ) | | 13,345 |
| | (15,589 | ) | | (105,924 | ) | | 73,989 |
| | (179,913 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | | 2019 | | 2018 | | $ Change | | 2019 | | 2018 | | $ Change | 2020 | | 2019 | | $ Change | | 2020 | | 2019 | | $ Change |
Consolidated Segment EBT | | | | | | | | | | | | | | | | | | | | | | | |
Total revenues | | 231,155 |
| | 257,160 |
| | (26,005 | ) | | 1,016,361 |
| | 599,844 |
| | 416,517 |
| 156,086 |
| | 431,316 |
| | (275,230 | ) | | 331,243 |
| | 785,206 |
| | (453,963 | ) |
Total operating expenses | | (131,776 | ) | | (149,152 | ) | | 17,376 |
| | (695,740 | ) | | (362,837 | ) | | (332,903 | ) | (95,173 | ) | | (330,323 | ) | | 235,150 |
| | (289,745 | ) | | (561,037 | ) | | 271,292 |
|
Segment operating income | | 99,379 |
| | 108,008 |
| | (8,629 | ) | | 320,621 |
| | 237,007 |
| | 83,614 |
| 60,913 |
| | 100,993 |
| | (40,080 | ) | | 41,498 |
| | 224,169 |
| | (182,671 | ) |
Depreciation and amortization | | (37,769 | ) | | (29,329 | ) | | (8,440 | ) | | (109,323 | ) | | (83,429 | ) | | (25,894 | ) | (45,512 | ) | | (37,037 | ) | | (8,475 | ) | | (105,328 | ) | | (71,554 | ) | | (33,774 | ) |
Interest expense, net | | (15,077 | ) | | (7,946 | ) | | (7,131 | ) | | (35,260 | ) | | (14,800 | ) | | (20,460 | ) | (18,369 | ) | | (10,465 | ) | | (7,904 | ) | | (39,130 | ) | | (20,183 | ) | | (18,947 | ) |
Other income (loss), net | | 951 |
| | (3,319 | ) | | 4,270 |
| | 2,304 |
| | (2,782 | ) | | 5,086 |
| 1,485 |
| | 716 |
| | 769 |
| | (2,317 | ) | | 1,353 |
| | (3,670 | ) |
Equity in earnings from real estate and other affiliates | | 4,542 |
| | 8,611 |
| | (4,069 | ) | | 20,847 |
| | 39,294 |
| | (18,447 | ) | |
Gain on sale or disposal of real estate, net | | 24,201 |
| | — |
| | 24,201 |
| | 24,051 |
| | — |
| | 24,051 |
| |
Selling profit from sales-type leases | | 13,537 |
| | — |
| | 13,537 |
| | 13,537 |
| | — |
| | 13,537 |
| |
Equity in (losses) earnings from real estate and other affiliates | | (8,552 | ) | | 6,354 |
| | (14,906 | ) | | 2,797 |
| | 16,305 |
| | (13,508 | ) |
Gain (loss) on sale or disposal of real estate, net | | 8,000 |
| | (144 | ) | | 8,144 |
| | 46,124 |
| | (150 | ) | | 46,274 |
|
Provision for impairment | | — |
| | — |
| | — |
| | (48,738 | ) | | — |
| | (48,738 | ) |
Consolidated segment EBT | | 89,764 |
| | 76,025 |
| | 13,739 |
| | 236,777 |
| | 175,290 |
| | 61,487 |
| (2,035 | ) | | 60,417 |
| | (62,452 | ) | | (105,094 | ) | | 149,940 |
| | (255,034 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Corporate income, expenses and other items | | (59,721 | ) | | (52,178 | ) | | (7,543 | ) | | (161,481 | ) | | (155,488 | ) | | (5,993 | ) | (32,068 | ) | | (47,089 | ) | | 15,021 |
| | (54,091 | ) | | (104,687 | ) | | 50,596 |
|
Net income | | 30,043 |
| | 23,847 |
| | 6,196 |
| | 75,296 |
| | 19,802 |
| | 55,494 |
| |
Net income attributable to noncontrolling interests | | (285 | ) | | (482 | ) | | 197 |
| | (240 | ) | | (51 | ) | | (189 | ) | |
Net income attributable to common stockholders | | $ | 29,758 |
| | $ | 23,365 |
| | $ | 6,393 |
| | $ | 75,056 |
| | $ | 19,751 |
| | $ | 55,305 |
| |
Net (loss) income | | (34,103 | ) | | 13,328 |
| | (47,431 | ) | | (159,185 | ) | | 45,253 |
| | (204,438 | ) |
Net income (loss) attributable to noncontrolling interests | | 19 |
| | 149 |
| | (130 | ) | | (33 | ) | | 45 |
| | (78 | ) |
Net (loss) income attributable to common stockholders | | $ | (34,084 | ) | | $ | 13,477 |
| | $ | (47,561 | ) | | $ | (159,218 | ) | | $ | 45,298 |
| | $ | (204,516 | ) |
| |
(a) | Includes hospitality revenues for the three and six months ended June 30, 2020, of $2.5 million and $19.8 million, respectively, and $25.6 million and $48.5 million for the three and six months ended June 30, 2019, respectively. |
| |
(b) | Includes hospitality operating costs for the three and six months ended June 30, 2020, of $4.4 million and $17.2 million, respectively, and $16.6 million and $32.2 million for the three and six months ended June 30, 2019, respectively. |
Results of Operations
Comparison of the three and ninesix months ended SeptemberJune 30, 20192020 to the three and ninesix months ended SeptemberJune 30, 20182019
Consolidated segment EBT increased $13.7decreased $62.5 million and $61.5$255.0 million for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, compared to the prior year periods. The net increasedecrease in Consolidated segment EBT for the three months ended SeptemberJune 30, 20192020 is primarily attributable to lower Condominium rights and unit sales, net of costs, driven by the timing of condominium closings; a decrease in Other land, rental and property revenues at the Operating Assets segment primarily due to mandatory closures as a result of the COVID-19 pandemic; higher Depreciation and amortization at the Operating Assets segment and lower Equity in (losses) earnings from real estate and other affiliates at The Summit and Mr. C Seaport joint ventures. These decreases are partially offset by lower Total operating expenses at all segments due to mandatory closures as a result of the COVID-19 pandemic, an increase in the Gain (loss) on sale or disposal of real estate, net due to the termination payment received related to the sale of West Windsor in October 2019 and an increase in Minimum rents and Tenant recoveries due to the acquisition of The Woodlands Towers at the Waterway in the fourth quarter of 2019 and placing various office properties into service subsequent to the second quarter of 2019. The net decrease in Consolidated EBT for the six months ended June 30, 2020 is primarily due to a charge related to our expected funding of costs to correct alleged defects at Waiea as well as lower Condominium rights and unit sales, net of costs, driven by the timing of condominium closings; an increase in the Provision for impairment; higher Depreciation and amortization at the Operating Assets and Seaport District segments; and lower Equity in (losses) earnings from real estate and other affiliates at The Summit and Mr. C Seaport joint ventures. These decreases were partially offset by an increase in the Gain on sale or disposal of real estate, net due to the sale of Cottonwood Mall and higher Other rental and property revenues in the Operating Assets and Seaport segments. These increases were partially offset by higher operating expenses at the Seaport District due to start-up costs associated with opening new businesses; fewer superpad sales at Summerlin and a slower pace of land development and fewer custom lot sales at The Summit. The net increase in Consolidated segment EBT for the nine months ended September 30, 2019 is primarily driven by higher Condominium rights and unit sales, net of costs, the increase in the Gain on sale or disposal of real estate, net duetermination payment received related to the sale of Cottonwood MallWest Windsor and higher Minimum rental, Other rental and property and Selling profit from sales-type leases revenuesthe sale of 100 Fellowship Drive in the Operating Assets segment. These increases are partially offset by higher operating expenses at the Seaport District; higher Interest expensefirst quarter of 2020, as well as an increase in Minimum rents and Tenant recoveries due to the Las Vegas Ballparkacquisition of The Woodlands Towers at the Waterway in the fourth quarter of 2019 and placing various office properties being placed into service; higher Depreciation and amortization as a resultservice subsequent to the second quarter of properties being placed into service; fewer superpad sales at Summerlin; and a slower pace of land development and fewer custom lot sales at The Summit. The higher operating expenses at the Seaport District are due to start-up costs associated with opening new businesses.2019. As a result of these factors, Net income attributable to common stockholders increased $6.4decreased $47.6 million to $29.8a loss of $34.1 million and $55.3$204.5 million to $75.1a loss of $159.2 million for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, compared to the prior year periods. These changes are explained in further detail below.
Operating Assets
The Operating Assets segment consists of retail, office, hospitality and multi-family properties along with other real estate investments, excluding the properties located at the Seaport District, which are reported in the Seaport District segment for all periods presented.
Segment EBT for Operating Assets are presented below:
| | Operating Assets Segment EBT | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | | 2019 | | 2018 | | $ Change | | 2019 | | 2018 | | $ Change | | 2020 | | 2019 | | $ Change | | 2020 | | 2019 | | $ Change |
Total revenues | | $ | 104,223 |
| | $ | 87,462 |
| | $ | 16,761 |
| | $ | 305,395 |
| | $ | 264,017 |
| | $ | 41,378 |
| | $ | 84,277 |
| | $ | 109,219 |
| | $ | (24,942 | ) | | $ | 198,534 |
| | $ | 201,172 |
| | $ | (2,638 | ) |
Total operating expenses | | (47,950 | ) | | (43,373 | ) | | (4,577 | ) | | (139,589 | ) | | (126,372 | ) | | (13,217 | ) | | (42,222 | ) | | (48,727 | ) | | 6,505 |
| | (94,462 | ) | | (91,639 | ) | | (2,823 | ) |
Segment operating income | | 56,273 |
| | 44,089 |
| | 12,184 |
| | 165,806 |
| | 137,645 |
| | 28,161 |
| | 42,055 |
| | 60,492 |
| | (18,437 | ) | | 104,072 |
| | 109,533 |
| | (5,461 | ) |
Depreciation and amortization | | (28,844 | ) | | (26,470 | ) | | (2,374 | ) | | (84,890 | ) | | (74,028 | ) | | (10,862 | ) | | (36,995 | ) | | (28,938 | ) | | (8,057 | ) | | (74,084 | ) | | (56,046 | ) | | (18,038 | ) |
Interest expense, net | | (21,645 | ) | | (18,891 | ) | | (2,754 | ) | | (60,695 | ) | | (52,886 | ) | | (7,809 | ) | | (23,103 | ) | | (20,059 | ) | | (3,044 | ) | | (49,296 | ) | | (39,050 | ) | | (10,246 | ) |
Other (loss) income, net | | 63 |
| | (2,767 | ) | | 2,830 |
| | 1,186 |
| | (2,603 | ) | | 3,789 |
| |
Equity in earnings (losses) from real estate and other affiliates | | 441 |
| | (76 | ) | | 517 |
| | 3,195 |
| | 1,507 |
| | 1,688 |
| |
Selling profit from sales-type leases | | 13,537 |
| | — |
| | 13,537 |
| | 13,537 |
| | — |
| | 13,537 |
| |
Other income, net | | | 226 |
| | 1,088 |
| | (862 | ) | | 167 |
| | 1,123 |
| | (956 | ) |
Equity in earnings from real estate and other affiliates | | | 475 |
| | 45 |
| | 430 |
| | 4,869 |
| | 2,754 |
| | 2,115 |
|
Gain on sale or disposal of real estate | | | — |
| | — |
| | — |
| | 38,124 |
| | — |
| | 38,124 |
|
Provision for impairment | | | — |
| | — |
| | — |
| | (48,738 | ) | | — |
| | (48,738 | ) |
Segment EBT | | $ | 19,825 |
| | $ | (4,115 | ) | | $ | 23,940 |
| | $ | 38,139 |
| | $ | 9,635 |
| | $ | 28,504 |
| | $ | (17,342 | ) | | $ | 12,628 |
| | $ | (29,970 | ) | | $ | (24,886 | ) | | $ | 18,314 |
| | $ | (43,200 | ) |
Segment EBT increased $23.9decreased $30.0 million to $19.8a loss of $17.3 million and $28.5$43.2 million to $38.1a loss of $24.9 million for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, compared to the prior year periods. The increase in segment EBTdecreases for the three and ninesix months ended SeptemberJune 30, 20192020, compared to the prior year periods is primarily driven by increasesperiod are attributable to net decreases in Total revenues and Selling profit from sales-type leases. Increases in Total revenues are primarily attributed to an increase inour Other land, rental and property revenues and related Operating expenses due to placingthe temporary closure of hospitality properties and cancellation of the Las Vegas Ballpark into serviceAviators 2020 baseball season as a result of the COVID-19 pandemic, as well as increases in Interest expense and an increaseDepreciation and amortization related to the acquisition of the Woodlands Towers at the Waterway in Minimum rents due tothe fourth quarter of 2019 and placing various office properties into service subsequent to the thirdsecond quarter of 2018, combined with2019. These decreases in EBT were partially offset by increased occupancy at our office, multi-familyMinimum rents and hospitality properties. TheTenant recoveries related to property acquisitions and properties placed into service. In addition, the decrease in Segment EBT for the six months ended June 30, 2020, was impacted by an increase in Selling profit from sales-type leases is attributablethe Provision for impairment of $48.7 million for Outlet Collection at Riverwalk, partially offset by an increase in Gain on sale or disposal of real estate related to the adoptionsale of Topic 842 on January 1, 2019 in conjunction with the commencement of a lease at our 100 Fellowship Drive, property. These increases are partially offset by increases in Interest expense, Total operating expense and Depreciation and amortization. The assets primarily contributing to these increases in expenses are various office properties which were placed in serviceWoodlands, Texas, in the thirdfirst quarter of 2018, increased occupancy at The Westin at2020. Please refer to Note 4 - Recent Transactions and Note 5 - Impairment in the Woodlands, which drove comparable increases in revenues as noted above, as well as the Las Vegas Ballpark, Creekside Park Apartments and Lakefront North which were placed into service subsequent to September 30, 2018. Creekside Park Apartments is expected to stabilize in 2020, and Lakefront North is expected to stabilize in 2021.Company’s Condensed Consolidated Financial Statements for further details.
Net Operating Income
We believe that NOI is a useful supplemental measure of the performance of our Operating Assets and Seaport District segments 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 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, netnet; interest expense, net; ground rent amortization,amortization; demolition costs,costs; other (loss) income, amortization, depreciation,income; amortization; depreciation; development-related marketing costscost; gain on sale or disposal of real estate and Equityother assets, net; provision for impairment 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 and Seaport District segments, 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 segment EBT to Operating Assets NOI is presented in the table below. Refer to the Seaport District section for a reconciliation of Seaport District segment EBT to Seaport District NOI.
| | Reconciliation of Operating Assets Segment EBT to NOI | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | | 2019 | | 2018 | | $ Change | | 2019 | | 2018 | | $ Change | | 2020 | | 2019 | | $ Change | | 2020 | | 2019 | | $ Change |
Total Operating Assets segment EBT | | $ | 19,825 |
| | $ | (4,115 | ) | | $ | 23,940 |
| | $ | 38,139 |
| | $ | 9,635 |
| | $ | 28,504 |
| | $ | (17,342 | ) | | $ | 12,628 |
| | $ | (29,970 | ) | | $ | (24,886 | ) | | $ | 18,314 |
| | $ | (43,200 | ) |
Depreciation and amortization | | 28,844 |
| | 26,470 |
| | 2,374 |
| | 84,890 |
| | 74,028 |
| | 10,862 |
| | 36,995 |
| | 28,938 |
| | 8,057 |
| | 74,084 |
| | 56,046 |
| | 18,038 |
|
Interest expense, net | | 21,645 |
| | 18,891 |
| | 2,754 |
| | 60,695 |
| | 52,886 |
| | 7,809 |
| | 23,103 |
| | 20,059 |
| | 3,044 |
| | 49,296 |
| | 39,050 |
| | 10,246 |
|
Equity in (earnings) loss from real estate and other affiliates | | (441 | ) | | 76 |
| | (517 | ) | | (3,195 | ) | | (1,507 | ) | | (1,688 | ) | |
Selling profit from sales-type leases | | (13,537 | ) | | — |
| | (13,537 | ) | | (13,537 | ) | | — |
| | (13,537 | ) | |
Equity in earnings from real estate and other affiliates | | | (475 | ) | | (45 | ) | | (430 | ) | | (4,869 | ) | | (2,754 | ) | | (2,115 | ) |
Gain on sale or disposal of real estate and other assets, net | | | — |
| | — |
| | — |
| | (38,124 | ) | | — |
| | (38,124 | ) |
Provision for impairment | | | — |
| | — |
| | — |
| | 48,738 |
| | — |
| | 48,738 |
|
Impact of straight-line rent | | (2,529 | ) | | (3,241 | ) | | 712 |
| | (7,911 | ) | | (8,777 | ) | | 866 |
| | (3,248 | ) | | (2,537 | ) | | (711 | ) | | (6,351 | ) | | (5,382 | ) | | (969 | ) |
Other | | 477 |
| | 2,808 |
| | (2,331 | ) | | 259 |
| | $ | 2,701 |
| | (2,442 | ) | | (119 | ) | | (340 | ) | | 221 |
| | 54 |
| | (218 | ) | | 272 |
|
Operating Assets NOI | | $ | 54,284 |
| | $ | 40,889 |
| | $ | 13,395 |
| | $ | 159,340 |
| | $ | 128,966 |
| | $ | 30,374 |
| | $ | 38,914 |
| | $ | 58,703 |
| | $ | (19,789 | ) | | $ | 97,942 |
| | $ | 105,056 |
| | $ | (7,114 | ) |
Operating Assets NOI increased $13.4decreased $19.8 million, or 32.8%33.7%, to $54.3$38.9 million and $30.4$7.1 million, or 23.6%6.8%, to $159.3$97.9 million for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, compared to the prior year periods. These decreases for the three and six months ended June 30, 2020, compared to the prior year period are primarily driven by decreases of $11.4 million and $14.9 million in our hospitality properties, $7.5 million and $6.3 million in our other properties category and $7.5 million and $9.2 million in our retail properties, respectively. These decreases were primarily due to the temporary closure of hospitality and retail properties and cancellation of the Las Vegas Aviators 2020 baseball season as a result of the COVID-19 pandemic. The increasedecrease in NOI for the three and ninesix months ended SeptemberJune 30, 2019 is primarily driven2020, was partially offset by increases of $2.5$7.6 million and $11.9$23.1 million, in our other properties category, $7.1 million and $12.9 millionrespectively, in our office properties, primarily attributable to NOI from the recent acquisition of The Woodlands Towers at the Waterway and $2.3 million and $3.0 million in our hospitalityplacing various office properties respectively. The increase in our other category for the three and nine months ended September 30, 2019 is a result of placing the Las Vegas Ballpark, into service in March 2019. The increases in our office and hospitality properties for the three and nine months ended September 30, 2019 are mainly a result of continued stabilization of existing assets within these categories, increased occupancy, as well as NOI generated from assets placed into service subsequent to the thirdsecond quarter of 2018.
2019. In addition, Operating Assets Retail Leases
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 reimbursementNOI 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 three and ninesix months ended SeptemberJune 30, 2019 may differ significantly2020, includes NOI from those entered into in prior periods.
The following table summarizes8770 New Trails and Juniper Apartments projects that were transferred from Strategic Developments to Operating Assets during the leases we executed at our retail properties duringfirst quarter of 2020. Operating Assets NOI for the three months ended SeptemberJune 30, 2019:2020, also includes NOI from the Two Lakes Edge project that was transferred from Strategic Developments to Operating Assets during the second quarter of 2020.
Master Planned Communities
EBT for Master Planned Communities are presented below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 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 |
| | 125 |
| | 29,558 |
| | 29,558 |
| | 7,778 |
| | $ | 49.81 |
| | $ | 14.85 |
| | $ | 1.88 |
|
Comparable - Renewal (c) | | 8 |
| | 54 |
| | 20,138 |
| | 1,389 |
| | — |
| | 26.98 |
| | 1.2 |
| | — |
|
Comparable - New (d) | | 2 |
| | 121 |
| | 9,619 |
| | 2,000 |
| | — |
| | 29.41 |
| | 9.92 |
| | — |
|
Non-comparable (e) | | 5 |
| | 92 |
| | 15,315 |
| | 4,966 |
| | 4,836 |
| | 31.36 |
| | 5.78 |
| | 3.4 |
|
Total | | | | | | 74,630 |
| | 37,913 |
| | 12,614 |
| | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
MPC Segment EBT | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | | 2020 | | 2019 | | $ Change | | 2020 | | 2019 | | $ Change |
Total revenues | | $ | 68,913 |
| | $ | 72,859 |
| | $ | (3,946 | ) | | $ | 119,359 |
| | $ | 123,755 |
| | $ | (4,396 | ) |
Total operating expenses | | (31,970 | ) | | (38,913 | ) | | 6,943 |
| | (55,692 | ) | | (65,979 | ) | | 10,287 |
|
Segment operating income | | 36,943 |
| | 33,946 |
| | 2,997 |
| | 63,667 |
| | 57,776 |
| | 5,891 |
|
Depreciation and amortization | | (91 | ) | | (86 | ) | | (5 | ) | | (182 | ) | | (246 | ) | | 64 |
|
Interest income, net | | 8,303 |
| | 8,283 |
| | 20 |
| | 16,857 |
| | 15,826 |
| | 1,031 |
|
Other income, net | | — |
| | 72 |
| | (72 | ) | | — |
| | 67 |
| | (67 | ) |
Equity in (losses) earnings from real estate and other affiliates | | (2,968 | ) | | 6,499 |
| | (9,467 | ) | | 5,966 |
| | 14,336 |
| | (8,370 | ) |
Segment EBT | | $ | 42,187 |
| | $ | 48,714 |
| | $ | (6,527 | ) | | $ | 86,308 |
| | $ | 87,759 |
| | $ | (1,451 | ) |
MPC segment EBT decreased $6.5 million to $42.2 million for the three months ended June 30, 2020 and decreased $1.5 million to $86.3 million for the six months ended June 30, 2020, compared to the prior periods. In both periods, performance was negatively impacted by lower Equity in (losses) earnings from real estate and other affiliates at The Summit due to fewer custom lot sales and higher unit completion cost as well as lower land sales revenues. Lower MPC land sales revenues for the three and six months ended June 30, 2020 were primarily driven by reductions in acres sold at Summerlin due to lower superpad sales. These decreases were partially offset by increases in price per acre metrics across all MPCs for both comparison periods presented. For the three and six months ended June 30, 2020 The Woodlands price per acre increased 195.9% and 137.8%, respectively, due to an increase in land sales in a high-end, exclusive section of The Woodlands community that generates significantly higher value per acre in comparison. Bridgeland’s performance was flat for the three months ended June 30, 2020 compared to prior period, however, year-to-date performance, realized an increase of $5.8 million, or 20.6%, driven by a 9.5% and 10.2% increase in acres sold and price per acre, respectively. The Woodlands Hills’ price per acre increased 9.9% and 8.9% for the three and six months ended June 30, | |
(a) | Excludes executed leases with a term of 12 months or less, partnerships, internal leases, and percentage rent leases. |
| |
(b) | Pre-leased information is associated with projects under development at September 30, 2019. |
| |
(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 of 7.0% in cash rents from $25.22 per square foot collected from previous leases to $26.98 per square foot collected from current leases. |
| |
(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 of 52.9% in cash rents from $19.23 per square foot collected from the previous tenant to $29.41 per square foot collected from the current tenant. |
| |
(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 table summarizes the leases we executed at our retail properties during the nine months ended September 30, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 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 |
| | 125 |
| | 29,558 |
| | 29,558 |
| | 7,778 |
| | $ | 49.81 |
| | $ | 14.85 |
| | $ | 1.88 |
|
Comparable - Renewal (c) | | 19 |
| | 50 |
| | 62,474 |
| | 1,389 |
| | — |
| | 24.92 |
| | 1.2 |
| | — |
|
Comparable - New (d) | | 5 |
| | 89 |
| | 20,937 |
| | 2,000 |
| | — |
| | 24.56 |
| | 9.92 |
| | — |
|
Non-comparable (e) | | 13 |
| | 92 |
| | 37,223 |
| | 17,637 |
| | 16,021 |
| | 37.33 |
| | 7.03 |
| | 2.11 |
|
Total | | | | | | 150,192 |
| | 50,584 |
| | 23,799 |
| | | | | | |
| |
(a) | Excludes executed leases with a term of 12 months or less. |
| |
(b) | Pre-leased information is associated with projects under development at September 30, 2019. |
| |
(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 of 6.9% in cash rents from $23.31 per square foot collected from previous leases to $24.92 per square foot collected from current leases. |
| |
(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 of 3.8% in cash rents from $25.52 per square foot collected from previous tenants to $24.56 per square foot collected from current tenants. The decrease is driven by the limited sample size of Comparable - New leases reported this quarter. |
| |
(e) | Non-comparable information is associated with space that was previously vacant for more than 12 months or has never been occupied. The avg. starting rents in this category are higher than in the other categories presented2020, respectively, due to a higher percentage of leases executed at assets with generally higher starting rents. |
| |
(f) | Avg. Starting Rent is based on Base Minimum Rent only. |
The following is a retail property which was completedchange in product type of lots sold. In addition, Summerlin saw modest increases in price per acre of 1.9% and transferred to Operating Assets during the nine months ended September 30, 2019:
Ke Kilohana retail, consisting of approximately 22,000 square feet pre-leased to CVS/Longs Drugs, was transferred from Strategic Developments.
Operating Assets Office Leases
Our office properties are located in Summerlin in Las Vegas, Nevada; Columbia, Maryland; and The Woodlands, Texas. Leases related to our office properties in The Woodlands 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 three months ended September 30, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 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) | | 8 |
| | — |
| | 53,602 |
| | 37,725 |
| | 33,336 |
| | 30.75 |
| | 2.67 |
| | 1.71 |
|
Comparable - New (d) | | 2 |
| | — |
| | 4,125 |
| | 3,676 |
| | 3,676 |
| | 43.25 |
| | 5.45 |
| | 2.66 |
|
Non-comparable (e) | | 9 |
| | — |
| | 30,911 |
| | 22,923 |
| | 28,311 |
| | 35.62 |
| | 3.43 |
| | 1.82 |
|
Total | | | | | | 88,638 |
| | 64,324 |
| | 65,323 |
| | | | | | |
| |
(a) | Excludes executed leases with a term of 12 months or less, subleases, percentage rent leases and intercompany leases. |
| |
(b) | Pre-leased information is associated with projects under development at September 30, 2019. |
| |
(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 of 3.2% in cash rents from $31.77 per square foot collected from previous leases to $30.75 per square foot collected from current leases. The decrease is driven by one lease which accounts for 38% of the square feet in this category. All other leases in this category have increased or flat rent charges. |
| |
(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. The leases represent an increase of 0.6% in cash rents from $42.98 per square foot collected from previous leases to $43.25 per square foot collected from current leases. |
| |
(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 lease value, including recoveries. |
The following table summarizes our executed office property leases during the nine months ended September 30, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 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) | | 6 |
| | 173 |
| | 631,126 |
| | 631,126 |
| | 631,126 |
| | $ | 60.12 |
| | $ | 6.31 |
| | $ | 1.76 |
|
Comparable - Renewal (c) | | 26 |
| | 58 |
| | 229,769 |
| | 116,623 |
| | 116,587 |
| | 30.4 |
| | 2.10 |
| | 1.13 |
|
Comparable - New (d) | | 3 |
| | 55 |
| | 11,096 |
| | 10,647 |
| | 10,647 |
| | 31.61 |
| | 4.09 |
| | 1.52 |
|
Non-comparable (e) | | 34 |
| | 69 |
| | 242,588 |
| | 207,039 |
| | 223,601 |
| | 35.43 |
| | 6.46 |
| | 2.01 |
|
Total | | | | | | 1,114,579 |
| | 965,435 |
| | 981,961 |
| | | | | | |
| |
(a) | Excludes executed leases with a term of 12 months or less, subleases, percentage rent leases and intercompany leases. |
| |
(b) | Pre-leased information is associated with projects under development at September 30, 2019. |
| |
(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 0.3% decrease in cash rents from $30.50 per square foot collected from previous leases to $30.4 per square foot collected from current leases. The decrease is driven by the lower current market rates. |
| |
(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. This lease represents a 1.6% decrease in cash rents from $32.12 per square foot collected from the previous tenant to $31.61 per square foot collected from the current tenant. The decrease is driven by the limited sample size of Comparable - New leases reported this period. |
| |
(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 lease value, including recoveries. |
The following are office, hospitality and other projects which were completed or transferred from Strategic Developments to Operating Assets during the nine months ended September 30, 2019:
Completed the renovation of the restaurant and bar at The Westin at The Woodlands and relaunched The Westin food and beverage outlets as Sorriso, a full service modern Italian kitchen, and Como Social Club, a poolside terrace and bar;
Placed the Las Vegas Ballpark, home of the Las Vegas Aviators, into service; and
Placed 100 Fellowship Drive, 6100 Merriweather, Hughes Landing Daycare and Tanager Apartments into service.
Master Planned Communities
EBT for Master Planned Communities are presented below:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
MPC Segment EBT | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(In thousands) | | 2019 | | 2018 | | $ Change | | 2019 | | 2018 | | $ Change |
Total revenues | | $ | 92,287 |
| | $ | 143,135 |
| | $ | (50,848 | ) | | $ | 216,042 |
| | $ | 261,665 |
| | $ | (45,623 | ) |
Total operating expenses | | (45,169 | ) | | (70,237 | ) | | 25,068 |
| | (114,075 | ) | | (143,608 | ) | | 29,533 |
|
Segment operating income | | 47,118 |
| | 72,898 |
| | (25,780 | ) | | 101,967 |
| | 118,057 |
| | (16,090 | ) |
Depreciation and amortization | | (88 | ) | | (78 | ) | | (10 | ) | | (334 | ) | | (245 | ) | | (89 | ) |
Interest income, net | | 8,550 |
| | 6,626 |
| | 1,924 |
| | 24,376 |
| | 19,826 |
| | 4,550 |
|
Other income, net | | 534 |
| | 18 |
| | 516 |
| | 601 |
| | 18 |
| | 583 |
|
Equity in earnings from real estate and other affiliates | | 4,523 |
| | 9,454 |
| | (4,931 | ) | | 18,859 |
| | 34,682 |
| | (15,823 | ) |
Segment EBT | | $ | 60,637 |
| | $ | 88,918 |
| | $ | (28,281 | ) | | $ | 145,469 |
| | $ | 172,338 |
| | $ | (26,869 | ) |
MPC segment EBT decreased $28.3 million to $60.6 million and $26.9 million to $145.5 million2.9% for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, compared to the prior year periods. The decreases are mainly the result of fewer superpad sales at Summerlin and lower Equity in earnings from real estate and other affiliates due to a slower pace of land development and fewer custom lot sales at The Summit, which offers a mix of custom lots, detached homes sold by the joint venture and multi-family homes sold by the joint venture. Deferred revenues at Summerlin, which result when land sales closedchange in a previous period meet criteria for recognition in the current period, also decreased due to a slower pace of development on superpads sold during the period. Summerlin was also negatively impacted by decreased SID bond assumptions and reimbursements due to fewer sales occurring within SID boundaries and therefore not subject to SID debt assumption or reimbursement. The decrease for the three months ended September 30, 2019 is partially offset by increased land sales revenues at The Woodlands Hills and The Woodlands, which increased 77.0% and 62.7%, respectively, primarily due to the mix and numberproduct type of lots sold. The Woodlands also achieved a $737,000 price per acre, an increase of $195,000, due to the mix of lots sold. Land sales revenue at Bridgeland also increased primarily due to an 8.7% higher price per acre. Similarly, while Summerlin had fewer lot sales, price per acre increased 17.8% for
the superpad and custom lot products. The decrease for the nine months ended September 30, 2019 is partially offset by increased land sales revenues at Bridgeland, The Woodlands and The Woodlands Hills. At Bridgeland, land sales revenues increased $15.3 million, or 50.4%, due to robust sales of single-family lots, resulting in 197 more lot sales in the current period. Land sales revenues at The Woodlands increased $7.7 million due to a 48.3% increase in superpad and single-family sales over the prior period. At The Woodlands Hills, land sales revenues increased 25.7% primarily due to the mix and number of lots sold. Despite fewer lot sales, Summerlin's price per acre increased to $685,000 from $589,000 in the prior period due to the mix of lots sold.
MPC revenues fluctuate each period given the nature of the development and sale of land in these large-scale, long-term projects. However, we continue to have strong demand for our residential land, driven by robust fundamentals in the residential home sales market, and therefore we believe a better measurement of performance is the full year result instead of the quarterly result.
MPC Net Contribution
In addition to MPC segment EBT, 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 defined as MPC segment EBT, plus MPC cost of sales, Depreciation and amortization, and net collections from SID bonds and Municipal Utility District (“MUD”) receivables, reduced by MPC development expenditures, land acquisitions and Equity in earnings from real estate and other affiliates, net of distributions. MPC Net Contribution is not a GAAP-based operational metric and should not be used to measure operating performance of the MPC assets as a substitute for GAAP measures of such performance nor should it be used as a comparison metric with other comparable businesses. A reconciliation of segment EBT to MPC Net Contribution is presented below.
The following table sets forth the MPC Net Contribution for the three and ninesix months ended September 30, 2019:June 30:
| | MPC Net Contribution | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | | 2019 | | 2018 | | $ Change | | 2019 | | 2018 | | $ Change | | 2020 | | 2019 | | $ Change | | 2020 | | 2019 | | $ Change |
MPC Segment EBT (a) | | $ | 60,637 |
| | $ | 88,918 |
| | $ | (28,281 | ) | | $ | 145,469 |
| | $ | 172,338 |
| | $ | (26,869 | ) | | $ | 42,187 |
| | $ | 48,714 |
| | $ | (6,527 | ) | | $ | 86,308 |
| | $ | 87,759 |
| | $ | (1,451 | ) |
Plus: | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of sales - land | | 33,304 |
| | 57,183 |
| | (23,879 | ) | | 78,128 |
| | 109,609 |
| | (31,481 | ) | | 25,875 |
| | 28,006 |
| | (2,131 | ) | | 42,661 |
| | 44,824 |
| | (2,163 | ) |
MUD and SID bonds collections, net (b) | | 10,099 |
| | (347 | ) | | 10,446 |
| | 11,080 |
| | (5,351 | ) | | 16,431 |
| |
Depreciation and amortization | | 88 |
| | 78 |
| | 10 |
| | 334 |
| | 245 |
| | 89 |
| | 91 |
| | 86 |
| | 5 |
| | 182 |
| | 246 |
| | (64 | ) |
Distributions from Real estate and other affiliates | | 1,320 |
| | 925 |
| | 395 |
| | 4,061 |
| | 3,670 |
| | 391 |
| |
MUD and SID bonds collections, net (a) | | | 4,935 |
| | 119 |
| | 4,816 |
| | 6,058 |
| | 981 |
| | 5,077 |
|
Distributions from real estate and other affiliates | | | 1,173 |
| | 1,306 |
| | (133 | ) | | 2,345 |
| | 2,741 |
| | (396 | ) |
Less: | | | | | | | | | | | | | | | | | | | | | | | | |
MPC development expenditures | | (60,890 | ) | | (48,339 | ) | | (12,551 | ) | | (180,733 | ) | | (139,605 | ) | | (41,128 | ) | | (51,488 | ) | | (63,071 | ) | | 11,583 |
| | (116,384 | ) | | (119,843 | ) | | 3,459 |
|
MPC land acquisitions | | — |
| | (1,011 | ) | | 1,011 |
| | (752 | ) | | (3,565 | ) | | 2,813 |
| | — |
| | — |
| | — |
| | — |
| | (752 | ) | | 752 |
|
Equity in (earnings) loss in real estate and other affiliates | | (4,523 | ) | | (9,454 | ) | | 4,931 |
| | (18,859 | ) | | (34,682 | ) | | 15,823 |
| |
Equity in losses (earnings) in real estate and other affiliates | | | 2,968 |
| | (6,499 | ) | | 9,467 |
| | (5,966 | ) | | (14,336 | ) | | 8,370 |
|
MPC Net Contribution | | $ | 40,035 |
| | $ | 87,953 |
| | $ | (47,918 | ) | | $ | 38,728 |
| | $ | 102,659 |
| | $ | (63,931 | ) | | $ | 25,741 |
| | $ | 8,661 |
| | $ | 17,080 |
| | $ | 15,204 |
| | $ | 1,620 |
| | $ | 13,584 |
|
| |
(a) | For a detailed breakdown of our MPC segment EBT, refer to Note 17 - Segments in our Notes to our Condensed Consolidated Financial Statements.
|
| |
(b) | SID collections are shown net of SID transfers to buyers in the respective periods. |
MPC Net Contribution decreased $47.9increased $17.1 million and $63.9$13.6 million for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, compared to the same periods in 2018. In addition2019 due to the land sales changes explainedincrease in the EBT section above, the primary driver of this change is higherMUD and SID bonds collections, net as well as a decrease in MPC development expenditures at Bridgeland and Summerlin to accommodate projected land sales.the remaining items that affect MPC EBT, as discussed above, excluding Equity in losses (earnings) in real estate and other affiliates.
The following table sets forth MPC land inventory activity for the ninesix months ended SeptemberJune 30, 2019:2020:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Bridgeland | | Columbia | | Summerlin | | The Woodlands | | The Woodlands Hills | | Total MPC |
Balance at December 31, 2018 | | $ | 473,851 |
| | $ | 16,634 |
| | $ | 829,907 |
| | $ | 204,282 |
| | $ | 117,986 |
| | $ | 1,642,660 |
|
Acquisitions | | 752 |
| | — |
| | — |
| | — |
| | — |
| | 752 |
|
Development expenditures (a) | | 91,671 |
| | (3 | ) | | 70,679 |
| | 8,088 |
| | 10,298 |
| | 180,733 |
|
MPC Cost of Sales | | (17,588 | ) | | — |
| | (41,098 | ) | | (15,515 | ) | | (3,927 | ) | | (78,128 | ) |
MUD reimbursable costs (b) | | (62,568 | ) | | — |
| | — |
| | (1,651 | ) | | (4,446 | ) | | (68,665 | ) |
Transfer to Strategic Developments | | — |
| | — |
| | — |
| | (4,233 | ) | | — |
| | (4,233 | ) |
Transfer to Operating Assets | | — |
| | — |
| | — |
| | (317 | ) | | — |
| | (317 | ) |
Other | | (201 | ) | | 5 |
| | 10,160 |
| | 200 |
| | 258 |
| | 10,422 |
|
Balance at September 30, 2019 | | $ | 485,917 |
| | $ | 16,636 |
| | $ | 869,648 |
| | $ | 190,854 |
| | $ | 120,169 |
| | $ | 1,683,224 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Bridgeland | | Columbia | | Summerlin | | The Woodlands | | The Woodlands Hills | | Total MPC |
Balance at December 31, 2019 | | $ | 487,314 |
| | $ | 16,643 |
| | $ | 845,440 |
| | $ | 186,773 |
| | $ | 119,504 |
| | $ | 1,655,674 |
|
MPC development expenditures (a) | | 55,162 |
| | (6 | ) | | 50,830 |
| | 3,550 |
| | 6,848 |
| | 116,384 |
|
MPC cost of sales | | (11,669 | ) | | — |
| | (17,336 | ) | | (11,780 | ) | | (1,876 | ) | | (42,661 | ) |
MUD reimbursable costs (b) | | (39,981 | ) | | — |
| | — |
| | (425 | ) | | (4,192 | ) | | (44,598 | ) |
Other (c) | | (8,771 | ) | | (12 | ) | | (5,038 | ) | | (376 | ) | | (227 | ) | | (14,424 | ) |
Balance at June 30, 2020 | | $ | 482,055 |
| | $ | 16,625 |
| | $ | 873,896 |
| | $ | 177,742 |
| | $ | 120,057 |
| | $ | 1,670,375 |
|
| |
(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 changes in accrued development expenditures payable. |
Seaport District
The Seaport District is part non-stabilized operating asset, part development project and part operating business. As such, the Seaport District has a greater range of possible outcomes than our other projects. The greater uncertainty is largely the result of (i) seasonality; (ii) potential sponsorship revenue; (iii) potential event revenue; and (iv) business operating risks (ii) seasonality, (iii) potential sponsorship revenue and (iv) event revenue.from various start-up businesses. We operate and own, either directly, through license agreements or in joint ventures,partnership with third parties, many of the tenants in the Seaport District,, including retail stores such as 10 Corso Como and SJP by Sarah Jessica Parker and restaurants such as The Fulton by Jean-Georges, Bar Wayō, Malibu Farm, two concepts by Andrew Carmellini, R17 and the Jean-Georges food hall.marketplace operated by Jean-Georges. As a result, the revenues and expenses of these businesses, as well as the underlying market conditions affecting these types of businesses, will directly impact the NOI of the Seaport District.District. This is in contrast to our other retail properties where we primarily receive lease payments and are not as directly impacted by the operating performance of the underlying businesses. This causes the quarterlyfinancial results and eventual stabilized yield of the Seaport District to 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,partnership with third parties, 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. We expect the time to stabilize the Seaport District will be primarily driven by the construction, interior finish work and stabilization to occur at the Jean-Georges food hallmarketplace in the Tin Building. Construction is expectedAs a result of impacts related to be substantially complete in early 2021 with an expectedCOVID-19, including the halting of construction on the Tin Building, we are uncertain as to the timing of construction completion and the opening by summer 2021, assuming that we receiveof the necessary approvals timely.Tin Building. We expect stabilization to occur approximately 12 to 18 months after opening. Given the factors and uncertainties listed above combined with potential future impacts related to COVID-19 and our operating experience during this past summer as we opened multiple new venues, we will no longerdo not currently provide guidance on our expected NOI yield and stabilization date for the Seaport District for the next several quarters. We will continue all other aspects of our disclosure for the Seaport District segment including revenues, expenses, NOI and EBITDA.District. As we move closer to opening a critical mass of offerings at the Seaport District, and after a more thorough internal review by our new leadership, we will re-establish goals for yield on costs and stabilization dates when the uncertainties and range of possible outcomes are more clear.clearer.
We primarily categorize the businesses in the Seaport District segment into three groups: landlord operations, managed businesses, and events and sponsorships. Landlord operations representReal Estate Operations (Landlord) represents physical real estate that we have developed and own, either wholly or through joint ventures, and lease to third parties. Recently opened landlord operations included for the nine months ended September 30, 2019 but for which operations did not exist until the third quarteris inclusive of 2018 were Pier 17our office, retail, hotel and Pier 17 Rooftop. Portions of Pier 17 are leased to third parties such as Nike, and ESPN began broadcasting from its studio at Pier 17 during 2018. Our managed businesses representmulti-family properties. Managed Businesses represents retail and food and beverage businesses that we ownHHC owns, either wholly or through partnerships with third parties, and operate.operates, including license and management agreements. For the ninesix months ended SeptemberJune 30, 2019,2020, our managed businesses include, among others, The Fulton, 10 Corso Como Retail and Café, SJP by Sarah Jessica Parker, R17, Cobble & Co. and the recently opened Bar Wayō, Malibu Farm and The Lookout at Pier 17. These businesses are all recently opened and, while some opened in the third quarter of 2018, were not operating for the full prior year periods.Farm. Our eventevents and sponsorship businesses include our concert series, Winterland skating and bar, event catering, private events and sponsorships from approximately 1112 partners. As these businesses were recently placedIn July, 2020, Seaport entered into service,management agreements with Creative Culinary Management Company, LLC (Creative Culinary), a Jean-Georges company, to manage and operate its food and beverage operations did not exist infor the Fulton, R17, Cobble & Co. and Malibu Farm. Creative Culinary will be responsible for employment and supervision of all employees providing services for the food and beverage operations and restaurant as well as day-to-day operations and accounting for food and beverage operations.
Segment EBT for Seaport District are presented below:
|
| | | | | | | | | | | | | | | | | | | | | | | |
Seaport District Segment EBT | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | 2020 | | 2019 | | $ Change | | 2020 | | 2019 | | $ Change |
Total revenues | $ | 2,272 |
| | $ | 12,891 |
| | $ | (10,619 | ) | | $ | 11,966 |
| | $ | 19,921 |
| | $ | (7,955 | ) |
Total operating expenses | (8,464 | ) | | (17,972 | ) | | 9,508 |
| | (22,775 | ) | | (32,405 | ) | | 9,630 |
|
Segment operating loss | (6,192 | ) | | (5,081 | ) | | (1,111 | ) | | (10,809 | ) | | (12,484 | ) | | 1,675 |
|
Depreciation and amortization | (6,776 | ) | | (6,753 | ) | | (23 | ) | | (27,651 | ) | | (12,946 | ) | | (14,705 | ) |
Interest expense, net | (4,626 | ) | | (1,924 | ) | | (2,702 | ) | | (9,679 | ) | | (3,456 | ) | | (6,223 | ) |
Other loss, net | (409 | ) | | (61 | ) | | (348 | ) | | (3,777 | ) | | (147 | ) | | (3,630 | ) |
Equity in losses from real estate and other affiliates | (6,633 | ) | | (451 | ) | | (6,182 | ) | | (8,676 | ) | | (1,083 | ) | | (7,593 | ) |
Loss on sale or disposal of real estate | — |
| | — |
| | — |
| | — |
| | (6 | ) | | 6 |
|
Segment EBT | $ | (24,636 | ) | | $ | (14,270 | ) | | $ | (10,366 | ) | | $ | (60,592 | ) | | $ | (30,122 | ) | | $ | (30,470 | ) |
Segment revenues and operating expenses for the three and six months ended June 30, 2020, decreased primarily as a result of business closures and cancellations of events related to the COVID-19 pandemic. Segment EBT decreased $10.4 million to a loss of $24.6 million and $30.5 million to a loss of $60.6 million for the three and six months ended June 30, 2020, respectively, compared to the prior year periods. The decrease for the three months ended June 30, 2020, is primarily due to a $6.0 million impairment of the Company’s equity investment in Mr. C Seaport. Please refer to Note 5 - Impairment in the Company’s Condensed Consolidated Financial Statements for further details. The decrease for the six months ended June 30, 2020, is primarily due to write-offs of retail inventory recorded within Other loss, net and building improvements recorded within Depreciation and
Segment EBT for Seaport District are presented below:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Seaport District Segment EBT | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(In thousands) | | 2019 | | 2018 | | $ Change | | 2019 | | 2018 | | $ Change |
Total revenues | | $ | 23,130 |
| | $ | 14,601 |
| | $ | 8,529 |
| | $ | 43,051 |
| | $ | 22,612 |
| | $ | 20,439 |
|
Total operating expenses | | (27,330 | ) | | (21,989 | ) | | (5,341 | ) | | (59,735 | ) | | (31,965 | ) | | (27,770 | ) |
Segment operating income | | (4,200 | ) | | (7,388 | ) | | 3,188 |
| | (16,684 | ) | | (9,353 | ) | | (7,331 | ) |
Depreciation and amortization | | (6,767 | ) | | (2,309 | ) | | (4,458 | ) | | (19,713 | ) | | (6,506 | ) | | (13,207 | ) |
Interest (expense) income, net | | (4,984 | ) | | 1,471 |
| | (6,455 | ) | | (8,440 | ) | | 8,466 |
| | (16,906 | ) |
Other loss, net | | — |
| | (120 | ) | | 120 |
| | (147 | ) | | (120 | ) | | (27 | ) |
Equity in losses from real estate and other affiliates | | (705 | ) | | (452 | ) | | (253 | ) | | (1,788 | ) | | (692 | ) | | (1,096 | ) |
Loss on sale or disposal of real estate | | — |
| | — |
| | — |
| | (6 | ) | | — |
| | (6 | ) |
Segment EBT | | $ | (16,656 | ) | | $ | (8,798 | ) | | $ | (7,858 | ) | | $ | (46,778 | ) | | $ | (8,205 | ) | | $ | (38,573 | ) |
Segment revenue increased $8.5 million and $20.4 million for the three and nine months ended September 30, 2019, respectively, comparedamortization due to the prior year periods. These increases are primarily a resultpermanent closure of both our existing businesses including 10 Corso Como Retail and Café, Cobble & Co, Garden Bar during the first quarter and the summer concert series, as well as new business openings such as The Fulton. Additionally, sponsorship revenue increased approximately $0.9 million and $2.5 millionimpairment of our equity investment in Mr. C Seaport in the second quarter. Interest expense, net also contributed to the decrease in EBT for the three and ninesix months ended SeptemberJune 30, 2019, respectively, compared2020, due to the prior year periods.
Segment EBT decreased $7.9 million to a loss of $16.7 million and $38.6 million to a loss of $46.8 million for the three and nine months ended September 30,term loan acquired in June 2019 respectively, compared to the prior year periods. The decreases for the three and nine months ended September 30, 2019, respectively, compared to the prior year periods are primarily driven by increases in operating expenses as a result of opening new businesses and incurring pre-opening expenses and operating losses until those businesses stabilize. Depreciation and amortization expense increased due to assets such as Pier 17 moving out of development and into operations. Interest expense also increased due to debt related to the acquisition of 250 Water Street and a reduction of interest capitalized to assets that were under development during the three and nine months ended September 30, 2018 but have since been placed into operations. Interest expense for the three month period is also impacted by the Seaport District term loan that closed on June 20, 2019. See the discussion below related to Seaport District NOI for further details.District.
A reconciliation of Seaport District segment EBT to Seaport District NOI is presented in the table below.
| | Reconciliation of Seaport District Segment EBT to NOI | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | | 2019 | | 2018 | | $ Change | | 2019 | | 2018 | | $ Change | | 2020 | | 2019 | | $ Change | | 2020 | | 2019 | | $ Change |
Total Seaport District segment EBT | | $ | (16,656 | ) | | $ | (8,798 | ) | | $ | (7,858 | ) | | $ | (46,778 | ) | | $ | (8,205 | ) | | $ | (38,573 | ) | | $ | (24,636 | ) | | $ | (14,270 | ) | | $ | (10,366 | ) | | $ | (60,592 | ) | | $ | (30,122 | ) | | $ | (30,470 | ) |
Depreciation and amortization | | 6,767 |
| | 2,309 |
| | 4,458 |
| | 19,713 |
| | 6,506 |
| | 13,207 |
| | 6,776 |
| | 6,753 |
| | 23 |
| | 27,651 |
| | 12,946 |
| | 14,705 |
|
Interest expense (income), net | | 4,984 |
| | (1,471 | ) | | 6,455 |
| | 8,440 |
| | (8,466 | ) | | 16,906 |
| |
Interest expense, net | | | 4,626 |
| | 1,924 |
| | 2,702 |
| | 9,679 |
| | 3,456 |
| | 6,223 |
|
Equity in losses from real estate and other affiliates | | 705 |
| | 452 |
| | 253 |
| | 1,788 |
| | 692 |
| | 1,096 |
| | 6,633 |
| | 451 |
| | 6,182 |
| | 8,676 |
| | 1,083 |
| | 7,593 |
|
Loss on sale or disposal of real estate | | | — |
| | — |
| | — |
| | — |
| | 6 |
| | (6 | ) |
Impact of straight-line rent | | 412 |
| | (274 | ) | | 686 |
| | 1,658 |
| | (612 | ) | | 2,270 |
| | 1,208 |
| | 491 |
| | 717 |
| | 1,333 |
| | 1,246 |
| | 87 |
|
Loss on sale or disposal of real estate | | — |
| | — |
| | — |
| | 6 |
| | — |
| | 6 |
| |
Other - development-related | | 896 |
| | 4,836 |
| | (3,940 | ) | | 5,405 |
| | 8,122 |
| | (2,717 | ) | |
Other loss, net (a) | | | 1,953 |
| | 1,764 |
| | 189 |
| | 5,923 |
| | 4,513 |
| | 1,410 |
|
Seaport District NOI | | $ | (2,892 | ) | | $ | (2,946 | ) | | $ | 54 |
| | $ | (9,768 | ) | | $ | (1,963 | ) | | $ | (7,805 | ) | | $ | (3,440 | ) | | $ | (2,887 | ) | | $ | (553 | ) | | $ | (7,330 | ) | | $ | (6,872 | ) | | $ | (458 | ) |
| |
(a) | Includes miscellaneous development-related items as well as the loss related to the write-off of inventory due to the permanent closure of 10 Corso Como Retail and Café in the first quarter of 2020. |
Seaport District NOI remained relatively flat at a net operating loss of $2.9$3.4 million and decreased by $7.8 million to a net operating loss of $9.8$7.3 million for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, compared to the prior year periods. The slight decrease in NOI for the three month period remained flat from prior yearand six months ended June 30, 2020, is primarily due to decreases in NOIof $0.3 million and $0.5 million in our landlord operations, respectively; a decrease of $0.4 million and increase of $0.2 million in our managed businesses primarily related to opening new businesses, such as Pier 17business entities, respectively; and Pier 17 rooftop in the third quarter of 2018, offset by an increase in NOIof $0.2 million and decrease of $0.2 million in our events, sponsorships, and catering category, respectively. The decreases in NOI were primarily as a result of 2018 NOI losses incurred by the Food Lab that did not recur in 2019. The decrease in NOI for the nine months ended September 30, 2019 is primarily driven by the openingbusiness closures and cancellations of new businesses as mentioned above and continued investment in the development of the Seaport District, particularly as it relates to funding of the start-up costsevents related to the retail, food and beverage and other operating assets. Decreases in NOI of $2.4 million, $1.4 million and $3.9 million for the nine months ended September 30, 2019 compared to the prior year periods in our landlord operations; events, sponsorships and catering; and managed businesses, respectively, were primary contributors to the overallCOVID-19 pandemic.
decrease in NOI. Including managed businesses, events, sponsorships, catering and the Tin Building, the Seaport District is approximately 61%60% leased. We may continue to incur operating expenses in excess of rental revenues while the remaining available space is in lease-up. Additionally, rental revenue earned from businesses we own and operate is eliminated in consolidation. Our managed businesses include retail and food and beverage entities that we own and operate, and weWe expect to incur operating losses for theseour landlord operations, managed business entities and event and sponsorship until businesses untilin New York are able to safely reopen, the economy recovers from the economic impact of the COVID-19 pandemic and the Seaport District reaches its critical mass of offerings.
Strategic Developments
Our Strategic Developments 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 revenues. Our expenses relating to these assets are primarily related to costs associated with constructing the assets, selling condominiums, marketing costs associated with our Strategic Developments, carrying costs including, 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 into service and NOI would become a meaningful measure of its operating performance. All development costs discussed herein are exclusive of land costs.
Segment EBT for Strategic Developments are summarized as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Strategic Developments Segment EBT | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(In thousands) | | 2019 | | 2018 | | $ Change | | 2019 | | 2018 | | $ Change |
Total revenues | | $ | 11,515 |
| | $ | 11,962 |
| | $ | (447 | ) | | $ | 451,873 |
| | $ | 51,550 |
| | $ | 400,323 |
|
Total operating expenses | | (11,327 | ) | | (13,553 | ) | | 2,226 |
| | (382,341 | ) | | (60,892 | ) | | (321,449 | ) |
Segment operating income | | 188 |
| | (1,591 | ) | | 1,779 |
| | 69,532 |
| | (9,342 | ) | | 78,874 |
|
Depreciation and amortization | | (2,070 | ) | | (472 | ) | | (1,598 | ) | | (4,386 | ) | | (2,650 | ) | | (1,736 | ) |
Interest income, net | | 3,002 |
| | 2,848 |
| | 154 |
| | 9,499 |
| | 9,794 |
| | (295 | ) |
Other (loss) income, net | | 354 |
| | (450 | ) | | 804 |
| | 664 |
| | (77 | ) | | 741 |
|
Equity in earnings (loss) from real estate and other affiliates | | 283 |
| | (315 | ) | | 598 |
| | 581 |
| | 3,797 |
| | (3,216 | ) |
Gain on sale or disposal of real estate, net | | 24,201 |
| | — |
| | 24,201 |
| | 24,057 |
| | — |
| | 24,057 |
|
Segment EBT | | $ | 25,958 |
| | $ | 20 |
| | $ | 25,938 |
| | $ | 99,947 |
| | $ | 1,522 |
| | $ | 98,425 |
|
Segment EBT increased $25.9 million to $26.0 million and $98.4 million to $99.9 million for the three and nine months ended September 30, 2019 compared to the prior year periods. The increase for the three months ended September 30, 2019 compared to the prior year period is primarily due to an increase in the Gain on sale or disposal of real estate driven by the sale of Cottonwood Mall. The increase for the nine months ended September 30, 2019 compared to the prior year period is primarily due to increases in Condominium rights and unit sales, net due to closings at Ae‘o. Condominium revenue is recognized when construction of the condominium tower is complete and unit sales close, leading to greater variability in revenue recognized between periods. The year to date period was also positively impacted the gain recognized for the sale of Cottonwood Mall and the absence of the $13.4 million charge for window repairs at our Waiea condominium tower which was recorded in the second quarter of 2018 but did not recur in 2019. See Note 4 - Recent and Pending Transactions for additional information regarding our sale of Cottonwood Mall. We closed on seven and 594 condominium units during the three and nine months ended September 30, 2019 compared to two and 15 units during the three and nine months ended September 30, 2018, respectively. As highlighted below, the overall pace of sales at Ward Village remains strong, and as of September 30, 2019, we have entered into contracts for 83.1% of the units at ‘A‘ali‘i since launching public sales in January 2018. Kō'ula, which launched sales in January 2019, is already 70.3% presold as of September 30, 2019. At September 30, 2019, our six towers are 88.8% sold with only five units that remain to be sold at Waiea and two at Anaha. Both Ae‘o and Ke Kilohana are completely sold.
The following is a summary of activity during the current period for Ward Village. Ward Village includes six mixed-use residential towers: Waiea, Anaha, Ae‘o, Ke Kilohana, ‘A‘ali‘i and Kō'ula. Activity for these towers is presented below.
Waiea - We have entered into contracts for 172 of the 177 units and closed on 170 units as of September 30, 2019. These units under contract and closed represent 97.2% and 96.0%, respectively, of total units, and 95.2% and 93.4%, respectively, of the total residential square feet available for sale as of September 30, 2019. The retail portion of the project is 100% leased and has been placed into service.
Segment EBT for Strategic Developments are summarized as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
Strategic Developments Segment EBT | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | 2020 | | 2019 | | $ Change | | 2020 | | 2019 | | $ Change |
Total revenues | $ | 624 |
| | $ | 236,347 |
| | $ | (235,723 | ) | | $ | 1,384 |
| | $ | 440,358 |
| | $ | (438,974 | ) |
Total operating expenses | (12,517 | ) | | (224,711 | ) | | 212,194 |
| | (116,816 | ) | | (371,014 | ) | | 254,198 |
|
Segment operating (loss) income | (11,893 | ) | | 11,636 |
| | (23,529 | ) | | (115,432 | ) | | 69,344 |
| | (184,776 | ) |
Depreciation and amortization | (1,650 | ) | | (1,260 | ) | | (390 | ) | | (3,411 | ) | | (2,316 | ) | | (1,095 | ) |
Interest income, net | 1,057 |
| | 3,235 |
| | (2,178 | ) | | 2,988 |
| | 6,497 |
| | (3,509 | ) |
Other income (loss), net | 1,668 |
| | (383 | ) | | 2,051 |
| | 1,293 |
| | 310 |
| | 983 |
|
Equity in earnings from real estate and other affiliates | 574 |
| | 261 |
| | 313 |
| | 638 |
| | 298 |
| | 340 |
|
Gain (loss) on sale or disposal of real estate, net | 8,000 |
| | (144 | ) | | 8,144 |
| | 8,000 |
| | (144 | ) | | 8,144 |
|
Segment EBT | $ | (2,244 | ) | | $ | 13,345 |
| | $ | (15,589 | ) | | $ | (105,924 | ) | | $ | 73,989 |
| | $ | (179,913 | ) |
Segment EBT decreased $15.6 million to a loss of $2.2 million and decreased $179.9 million to a loss of $105.9 million for the three and six months ended June 30, 2020, compared to the prior year periods. The decrease for the three months ended June 30, 2020, is primarily due to a decrease in Condominium rights and unit sales, net driven by the timing of condominium closings. The Company closed a portion of Ae‘o in early 2019, with no new condominium towers delivered in 2020. Additionally, during the second quarter, the Company reduced the estimated net sales price of certain condominium units, including the remaining penthouse inventory, to better align the expected price with recent final sales prices, resulting in a loss of $5.1 million included in Condominium rights and unit cost of sales for the three months ended June 30, 2020. These decreases are partially offset by the $8.0 million termination payment received during the three months ended June 30, 2020, related to the sale of West Windsor in October 2019. The decrease for the six months ended June 30, 2020, is primarily due to a $97.9 million charge in the first quarter of 2020 related to our expected funding of costs to correct alleged construction defects at Waiea and a decrease in Condominium rights and unit sales, net driven by the timing of condominium closings. Please refer to Note 10 - Commitments and Contingencies in our Condensed Consolidated Financial Statements for additional information related to the alleged construction defects at Waiea.
Condominium revenue is recognized when construction of the condominium tower is complete and unit sales close, leading to variability in revenue recognized between periods. As a result of significantly lower available inventory, we closed on zero condominium units during the three and six months ended June 30, 2020, compared to 425 and 587 for the three and six months ended June 30, 2019, respectively. However, as highlighted below, overall progress at our condominium projects remains strong. As of June 30, 2020, we have entered into contracts for 75.9% of the units at Kō'ula since launching public sales in January 2019. At June 30, 2020, our six completed or under construction towers are 90.3% sold with only five units that remain to be sold at Waiea and one at Anaha. Both Ae‘o and Ke Kilohana are completely sold. At Victoria Place, our seventh condominium project which launched public sales in December 2019, we have entered into 236 contracts, or 67.6% of the total units, as of June 30, 2020.
The following provides further detail as of June 30, 2020, for Ward Village.
Waiea - We have entered into contracts for 172 of the 177 units and closed on 170 units as of June 30, 2020. These units under contract or closed represent 97.2% of total units, and 95.2% of the total residential square feet available for sale as of June 30, 2020. The retail portion of the project is 100% leased and has been placed into service.
Anaha - We have entered into contracts for 315 and closed on 314316 of the 317 units and closed on 315 units as of SeptemberJune 30, 2019.2020. These units under contract andor closed represent 99.4% and 99.1%, respectively,99.7% of total units and 97.2% and 96.7%, respectively,98.7% of the total residential square feet available for sale as of SeptemberJune 30, 2019.2020. The retail portion of the project is 100% leased and has been placed into service.
Ae‘o - We have closed on all 465 units, as of September 30, 2019. Theand the retail portion of the project, which is primarily comprised of the 57,000 square foot57,000- square-foot flagship Whole Foods Market, is 95.0%95% leased and has been placed into service.
Ke Kilohana - We have entered into contracts forclosed on all 423 units, and closed on 422 units as of September 30, 2019. The units closed represent 99.8% of total units and 99.8% of the total residential square feet available for sale as of September 30, 2019. We began welcoming residents to Ke Kilohana in May 2019, and as previously announced, we have pre-leased all of the approximately 22,000 square feet of available retail, spacewhich is 100% leased to CVS/Longs Drugs. We expect to open the full-service pharmacyDrugs, was placed into service in the fourth quarter of 2019.
‘A‘ali‘i - We have entered into contracts for 623630 of the 750 units as of SeptemberJune 30, 2019.2020. These units under contract represent 83.1%84.0% of total units and 78.4%79.2% of the total residential square feet available for sale as of SeptemberJune 30, 2019.2020.
Kō'ula - Public sales launched in January 2019 and construction began in July 2019. We have entered into contracts for 397429 of the 565 units as of SeptemberJune 30, 2019. We entered into 9 additional contracts during October 2019.2020. These units under contract represent 70.3% and 71.9%75.9% of total units and 72.1% and 73.4%78.1% of the total residential square feet available for sale as of SeptemberJune 30, 2019 and October 31, 2019, respectively.2020. During the three months ended June 30, 2020, two purchasers defaulted on their obligations to purchase condominiums.
Victoria Place – As a result of strong demand demonstrated by sales at ‘A‘ali‘i and Kō'ula, we launched public sales of our seventh condominium project at Ward Village in December 2019. Victoria Place will be a 40-story, 349-unit condominium project located between Auahi Street and Ala Moana Boulevard, immediately to the west of Waiea and adjacent to Victoria Ward Park. The project will consist of one, two and three-bedroom residences. The units will range from approximately 750 square feet to 1,850 square feet. Additionally, there will be approximately 15,600 square feet of ground level open space, and 64,000 square feet of indoor and outdoor recreational space. We have entered into contracts for 236 units as of June 30, 2020 and 242units as of July 28, 2020. These units under contract represent 67.6% and 69.3% of total units and 70.1% and 71.6% of the total residential square feet available for sale as of June 30, 2020, and July 28, 2020, respectively.
Projects Under Construction
The following table summarizes our projects under construction and related debt held in Operating Assets, the Seaport District and Strategic Developments as of SeptemberJune 30, 2019.2020. Projects that are substantially complete and which have been placed into service in the Operating Assets or the Seaport District segment but have not reached stabilized occupancy status are included in the following table if the project has more than $1.0 million of estimated costs remaining to be incurred. Typically, these amounts represent budgeted tenant allowances necessary to bring the asset to stabilized occupancy. Tenant build-out costs represent a significant portion of the remaining costs for the following properties in the Operating Assets segment:and Seaport District segments:
6100 Merriweather and Garage
Two MerriweatherCreekside Park West
100 Fellowship Drive
1725-1735 Hughes Landing Boulevard
Lake Woodlands Crossing Retail
Three Hughes Landing
Two SummerlinPier 17
The total estimated costs and costs paid are prepared on a cash basis to reflect the total anticipated cash requirements for the projects. This table does not include projects for which construction has not yet started. We expect to be able to meet our cash funding requirements with a combination of existing and anticipated construction loans, condominium buyer deposits, free cash flow from our Operating Assets and MPC segments, net proceeds from condominium sales, and our existing cash balances.balances and as necessary, the postponement of certain projects.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | Total Estimated Costs (a) | | Costs Paid Through September 30, 2019 (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 | | | | | | | | | | | | | | |
6100 Merriweather and Garage | | $ | 138,221 |
| | $ | 74,493 |
| | $ | 63,728 |
| | $ | — |
| | $ | 63,028 |
| | $ | 700 |
| (d) | Open |
Two Merriweather | | 40,941 |
| | 34,096 |
| | 6,845 |
| | — |
| | 5,879 |
| | 966 |
| (d) | Open |
The Woodlands | | | | | | | | | | | | | | |
100 Fellowship Drive | | 63,278 |
| | 56,267 |
| | 7,011 |
| | — |
| | 4,864 |
| | 2,147 |
| | Open |
1725-1735 Hughes Landing Boulevard | | 204,878 |
| | 195,631 |
| | 9,247 |
| | — |
| | — |
| | 9,247 |
| (d)(e) | Open |
Lake Woodlands Crossing Retail | | 12,546 |
| | 11,436 |
| | 1,110 |
| | — |
| | 1,036 |
| | 74 |
| (d) | Open |
Three Hughes Landing | | 90,133 |
| | 80,732 |
| | 9,401 |
| | — |
| | 3,133 |
| | 6,268 |
| (d) | Open |
Summerlin | | | | | | | | | | | | | | |
Aristocrat | | 38,027 |
| | 36,017 |
| | 2,010 |
| | — |
| | 3,009 |
| | (999 | ) | (e) | Open |
Two Summerlin | | 53,238 |
| | 44,399 |
| | 8,839 |
| | — |
| | 5,326 |
| | 3,513 |
| (d)(e) | Open |
Las Vegas Ballpark | | 127,802 |
| | 112,473 |
| | 15,329 |
| | — |
| | — |
| | 15,329 |
| (g) | Open |
Tanager Apartments | | 59,276 |
| | 47,452 |
| | 11,824 |
| | — |
| | 15,402 |
| | (3,578 | ) | (f) | Open |
Other | | | | | | | | | | | | | | |
Kewalo Basin Harbor | | 24,454 |
| | 21,604 |
| | 2,850 |
| | — |
| | 1,908 |
| | 942 |
| | Q4 2019 |
Total Operating Assets | | 852,794 |
| | 714,600 |
| | 138,194 |
| | — |
| | 103,585 |
| | 34,609 |
| | |
| | | | | | | | | | | | | | |
Seaport Assets | | | | | | | | | | | | | | |
Seaport District NYC - Pier 17 and Historic Area / Uplands | | 659,018 |
| | 572,365 |
| | 86,653 |
| | — |
| | — |
| | 86,653 |
| (h)(i) | Open |
Seaport District NYC - Tin Building | | 173,452 |
| | 66,045 |
| | 107,407 |
| | — |
| | — |
| | 107,407 |
| (i) | 2021 |
Total Seaport Assets | | 832,470 |
| | 638,410 |
| | 194,060 |
| | — |
| | — |
| | 194,060 |
| | |
| | | | | | | | | | | | | | |
Strategic Developments | | | | | | | | | | | | | | |
Chicago | | | | | | | | | | | | | | |
110 North Wacker | | 722,643 |
| | 278,039 |
| | 444,604 |
| | — |
| | 444,604 |
| | — |
| (j) | 2020 |
Columbia | | | | | | | | | | | | | | |
Juniper Apartments | | 116,386 |
| | 45,607 |
| | 70,779 |
| | — |
| | 73,147 |
| | (2,368 | ) | (f)(k) | Q4 2019 |
Merriweather District Area 3 Standalone Retail | | 5,624 |
| | 463 |
| | 5,161 |
| | — |
| | — |
| | 5,161 |
|
| 2020 |
The Woodlands | | | | | | | | | | | | | | |
8770 New Trails | | 45,985 |
| | 11,878 |
| | 34,107 |
| | — |
| | 33,805 |
| | 302 |
| | Q1 2020 |
Creekside Park West | | 22,625 |
| | 9,517 |
| | 13,108 |
| | — |
| | 11,952 |
| | 1,156 |
| | Q4 2019 |
Creekside Park Apartments Phase II | | 57,472 |
| | 865 |
| | 56,607 |
| | — |
| | — |
| | 56,607 |
| (l) | 2021 |
Millennium Phase III Apartments | | 45,033 |
| | 1,719 |
| | 43,314 |
| | — |
| | 30,699 |
| | 12,615 |
| | 2020 |
Two Lakes Edge | | 107,706 |
| | 54,391 |
| | 53,315 |
| | — |
| | 51,370 |
| | 1,945 |
| | 2020 |
Bridgeland | | | | | | | | | | | | | | |
Lakeside Row | | 48,412 |
| | 29,900 |
| | 18,512 |
| | — |
| | 15,433 |
| | 3,079 |
| | Q4 2019 |
Ward Village | | | | | | | | | | | | | | |
‘A‘ali‘i | | 411,900 |
| | 82,657 |
| | 329,243 |
| | 80,852 |
| | 265,854 |
| | (17,463 | ) | (f) | 2021 |
Ae‘o | | 429,603 |
| | 417,661 |
| | 11,942 |
| | — |
| | — |
| | 11,942 |
| (m) | Open |
Anaha | | 401,314 |
| | 392,389 |
| | 8,925 |
| | — |
| | — |
| | 8,925 |
| | Open |
Ke Kilohana | | 218,898 |
| | 210,941 |
| | 7,957 |
| | — |
| | — |
| | 7,957 |
| (m) | Open |
Kō'ula | | 485,165 |
| | 36,903 |
| | 448,262 |
| | — |
| | — |
| | 448,262 |
| (l)(n) | 2022 |
Waiea | | 452,602 |
| | 413,877 |
| | 38,725 |
| | — |
| | — |
| | 38,725 |
| (o) | Open |
Total Strategic Developments | | 3,571,368 |
| | 1,986,807 |
| | 1,584,561 |
| | 80,852 |
| | 926,864 |
| | 576,845 |
| | |
Combined Total at September 30, 2019 | | $ | 5,256,632 |
| | $ | 3,339,817 |
| | $ | 1,916,815 |
| | $ | 80,852 |
| | $ | 1,030,449 |
| | $ | 805,514 |
| | |
| | | | Creekside Park Apartments Phase II estimated financing | | | (38,576 | ) | | |
| | | | | | Kō'ula estimated buyer deposits | | | (96,749 | ) | | |
| | | | Kō'ula estimated financing | | | (317,433 | ) | | |
Estimated costs to be funded net of financing, assuming closing on estimated financing | | | $ | 352,756 |
| | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | Total Estimated Costs (a) | | Costs Paid Through June 30, 2020 (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 | | | | | | | | | | | | | | |
6100 Merriweather and Garage | | $ | 138,221 |
| | $ | 99,787 |
| | $ | 38,434 |
| | $ | — |
| | $ | 37,179 |
| | $ | 1,255 |
| (d) | Open |
Juniper Apartments | | 116,386 |
| | 92,312 |
| | 24,074 |
| | — |
| | 23,907 |
| | 167 |
|
| Open |
The Woodlands | | | | | | | | | | | | | | |
Creekside Park West | | 22,625 |
| | 18,095 |
| | 4,530 |
| | — |
| | 3,662 |
| | 868 |
| (d) | Open |
8770 New Trails | | 45,985 |
| | 37,750 |
| | 8,235 |
| | — |
| | 6,797 |
| | 1,438 |
|
| Open |
Two Lakes Edge | | 107,706 |
| | 89,780 |
| | 17,926 |
| | — |
| | 15,206 |
| | 2,720 |
| | Open |
Bridgeland | | | | | | | | | | | | | | |
Lakeside Row | | 48,412 |
| | 41,133 |
| | 7,279 |
| | — |
| | 5,444 |
| | 1,835 |
| | Open |
Summerlin | | | | | | | | | | | | | | |
Tanager Apartments | | 59,276 |
| | 52,266 |
| | 7,010 |
| | — |
| | 4,777 |
| | 2,233 |
|
| Open |
Total Operating Assets | | 538,611 |
| | 431,123 |
| | 107,488 |
| | — |
| | 96,972 |
| | 10,516 |
| | |
| | | | | | | | | | | | | | |
Seaport District | | | | | | | | | | | | | | |
Pier 17 and Seaport District Historic Area / Uplands | | 659,018 |
| | 597,501 |
| | 61,517 |
| | — |
| | — |
| | 61,517 |
| (d)(e)(f) | Open |
Tin Building | | 173,452 |
| | 89,453 |
| | 83,999 |
| | — |
| | — |
| | 83,999 |
| (f) | 2021 |
Total Seaport District | | 832,470 |
| | 686,954 |
| | 145,516 |
| | — |
| | — |
| | 145,516 |
| | |
| | | | | | | | | | | | | | |
Strategic Developments | | | | | | | | | | | | | | |
Chicago | | | | | | | | | | | | | | |
110 North Wacker | | 722,643 |
| | 434,629 |
| | 288,014 |
| | — |
| | 288,014 |
| | — |
| (g) | Q3 2020 |
Columbia | | | | | | | | | | | | | | |
Merriweather District Area 3 Standalone Retail | | 5,680 |
| | 2,622 |
| | 3,058 |
| | — |
| | — |
| | 3,058 |
|
| Q4 2020 |
The Woodlands | | | | | | | | | | | | | | |
Creekside Park Apartments Phase II | | 57,472 |
| | 11,629 |
| | 45,843 |
| | — |
| | 43,386 |
| | 2,457 |
|
| Q2 2021 |
Millennium Phase III Apartments | | 45,033 |
| | 20,433 |
| | 24,600 |
| | — |
| | 24,031 |
| | 569 |
|
| Q4 2020 |
Ward Village | | | | | | | | | | | | | | |
‘A‘ali‘i | | 411,900 |
| | 190,578 |
| | 221,322 |
| | 9,635 |
| | 220,919 |
| | (9,232 | ) | (h) | 2021 |
Anaha | | 401,314 |
| | 398,063 |
| | 3,251 |
| | — |
| | — |
| | 3,251 |
| | Open |
Ke Kilohana | | 218,898 |
| | 213,560 |
| | 5,338 |
| | — |
| | — |
| | 5,338 |
| (i) | Open |
Kō'ula | | 487,039 |
| | 75,100 |
| | 411,939 |
| | 95,905 |
| | 304,223 |
| | 11,811 |
| (j) | 2022 |
Waiea | | 566,084 |
| | 423,909 |
| | 142,175 |
| | — |
| | — |
| | 142,175 |
| (k) | Open |
Total Strategic Developments | | 2,916,063 |
| | 1,770,523 |
| | 1,145,540 |
| | 105,540 |
| | 880,573 |
| | 159,427 |
| | |
Combined Total at June 30, 2020 | | $ | 4,287,144 |
| | $ | 2,888,600 |
| | $ | 1,398,544 |
| | $ | 105,540 |
| | $ | 977,545 |
| | $ | 315,459 |
| | |
| |
(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. Total Estimated Costs for assets at Ward Village and Columbia exclude master plan infrastructure and amenity costs at Ward Village and Merriweather District. |
| |
(b) | Costs included in (a) above which have been paid through SeptemberJune 30, 2019.2020. |
| |
(c) | With respect to our condominium projects, remaining debt to be drawn is reduced by deposits utilized for construction. |
| |
(d) | Final completion is dependent on lease-up and tenant build-out. |
| |
(e) | Constructions loans for 1725-1735 Hughes Landing Boulevard, Aristocrat and Two Summerlin have been repaid in full and any remaining project costs will be funded by us. |
| |
(f) | Negative balances represent cash to be received in excess of Estimated Remaining to be Spent. These items are primarily related to September 2019 costs that were paid by us, but not yet reimbursed by our lenders. We expect to receive funds from our lenders for these costs in the future. |
| |
(g) | Excludes cost to acquire the Las Vegas Aviators. |
| |
(h) | Seaport District NYC - Pier 17 and Seaport District Historic Area / Uplands Total Estimated Costs and Costs Paid Through SeptemberJune 30, 20192020, include costs required for the Pier 17 and Seaport District Historic Area/Area / Uplands and are not reduced by the insurance proceeds received to date. |
| |
(i)(f) | The CompanyWe closed on a $250.0 million loan for the redevelopment of the Seaport District during the three months ended June 30, 2019. All proceeds, less the interest escrow, have been received, and future project costs will be funded with the loan proceeds, which are included in our cash balance. |
| |
(j)(g) | 110 North Wacker is a consolidated joint ventureVIE discussed further in Note 3 - Real Estate and Other Affiliates. Total Estimated Costs exclude $76.0 million of the $86.0 million land value contributed to the joint venture at closing; The Debt to be Drawn includes future draws on the construction 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. In May 2019, we closed on a loan modification which reduced the amount of equity we are required to put into the project by $35.3 million. |
| |
(k)(h) | Formerly known as Columbia Multi-family.Negative balances represent cash to be received in excess of Estimated Remaining to be Spent. These items are primarily related to June 2020 costs that were paid by us, but not yet reimbursed by our lenders. We expect to receive funds from our lenders for these costs in the future. |
| |
(l)(i) | Positive balances represent future spending which we anticipate will be funded through a combination of construction loans which we are currently seeking and equity. |
| |
(m) | The Ae‘o facility was repaid in December 2018 in conjunction with closing on the sales of units at the property. The Ke Kilohana facility was repaid in June 2019 in conjunction with closing on the sales of units at the property. |
| |
(n)(j) | Initial estimated costs to be finalized.We closed on a $356.8 million loan for the development of Kō'ula during the three months ended March 31, 2020. |
| |
(o)(k) | Total estimate includes amounts$115.4 million for necessary for warranty repairs. However, we anticipate recovering a substantial amount of these costs in the future which is not reflected in this schedule. Refer to Note 10 - Commitments and Contingencies for additional information. |
Corporate Income, Expenses and Other Items
Corporate income, expenses and other items increaseddecreased by $7.6$15.0 million to $59.7a $32.1 million net expense and increaseddecreased by $6.0$50.6 million to $161.5a $54.1 million net expense for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, compared to the prior year periods. During
Comparison of the three months ended SeptemberJune 30, 2020, to the three months ended June 30, 2019
Corporate income, expenses and other items was positivelyfavorably impacted by the following:
$11.3 million decrease of $2.7in the Provision for income taxes primarily due to a $58.7 million decrease in demolition costs primarily related to 2018 costs at the Tin Building that did not recurincome before taxes;
$10.2 million decrease in 2019;General and
decrease of $1.9 million in development related marketing costs administrative expenses primarily related to the reduction of labor costs at the Seaport District.
This activity was partially offset by increases of $11.9 million in general and administrative expenses primarily due to consulting fees for technologyworkforce reductions, which are part of an overall plan to reduce recurring overhead costs, and data integration projectslower travel and $1.2 million in the income tax provision for the three months ended September 30, 2019.
The increase in Corporate income, expenses and other items for the nine-month period was mainly caused by the following:
decrease of $15.4 million in demolitionentertainment costs, primarily relatedwhich are attributable to 2018 costs at the Tin Building and 110 North Wacker that did not recur in 2019;
increase of $10.2 million in corporate other income, net primarily due to receipt of insurance proceeds related to our claim for Superstorm Sandy;COVID-19 travel restrictions; and
| |
• | decrease of $3.6$4.0 million decrease in development relatedDevelopment-related marketing costs primarily related to the reduction of costs at parts of Ward Village, including Kō'ula and ‘A‘ali‘i; Las Vegas Ballpark andthe Seaport District.
|
This positive activity
Corporate income, expenses and other items was partially offsetunfavorably impacted by anthe following:
| |
• | $9.5 million decrease in corporate other income (loss), net due to the receipt of Superstorm Sandy insurance proceeds in the second quarter of 2019, which did not recur in 2020; and |
$2.1 million increase of $18.0 millionin general and administrative expensescorporate interest expense, net primarily due to consulting fees for technologya decrease in interest income due to lower interest rates as well as a higher balance on our Revolver Loan, which we drew on at the end of March 2020.
Comparison of the six months ended June 30, 2020, to the six months ended June 30, 2019
Corporate income, expenses and data integration projects and $18.6other items was favorably impacted by the following:
$56.4 million decrease in the income tax(Benefit) provision for income taxes primarily due to a $260.9 million decrease in income before taxes; and
| |
• | $6.9 million decrease in Development-related marketing costs primarily related to the reduction of costs at parts of Ward Village, including Kō'ula and ‘A‘ali‘i; Las Vegas Ballpark andthe Seaport District. |
Corporate income, expenses and other items was unfavorably impacted by the nine months ended September 30, 2019.following:
$8.9 million decrease in corporate other income (loss), net due to the receipt of Superstorm Sandy insurance proceeds in the second quarter of 2019, which did not recur in 2020; and
$3.6 million increase in corporate interest expense, net related to a higher balance on our Revolver Loan, which we drew on at the end of March 2020, as well as a decrease in interest income due to lower interest rates.
Liquidity and Capital Resources
In direct response to the unprecedented COVID-19 pandemic and the impacts on our four business segments, as well as the economy and capital markets in general, we initiated measures to increase our liquidity. In the second quarter 2020, we entered into an agreement to extend the existing Downtown Summerlin loan and the bridge loan for The Woodlands Towers at the Waterway and The Woodlands Warehouse. As previously reported, we also generated $593.7 million in proceeds from the issuance of common stock in the first quarter of 2020. We ended the quarter with $930.6 million of Cash and cash equivalents on our Condensed Consolidated Balance Sheets as of June 30, 2020.
Our primary sources of cash include cash flow from land sales in MPC, cash generated from our operating assets, condominium closings, deposits from condominium sales (which are restricted to funding construction of the related developments), equity offerings, first mortgage financings secured by our assets and the corporate bond markets. Additionally, theThe sale of our non-core assets may also 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. Uses of cash also include one-time charges associated with relocation expenses, retention and severance payments. 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 12 months.months, even after taking into account the consequences of the COVID-19 pandemic discussed above. The development and redevelopment opportunities in Operating Assets and Strategic Developments are capital intensive and will require significant additional 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, andthrough the sale of non-core assets at the appropriate time.time, and lastly future equity raises. We cannot provide assurance that financing arrangements for our properties 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 also provided a completion guaranteeguarantees to the City of New York for the redevelopment of the Seaport District NYC - Pier 17 and the Seaport District NYC - Tin Building.Building, as well as the Hawai’i Community Development Authority for reserve condominium units at Ward Village.
Total outstanding debt was $3.6$4.4 billion as of SeptemberJune 30, 2019.2020. Certain mortgages may require paydowns in order to exercise contractual extension terms. Refer to Note 7 - Mortgages, Notes and Loans Payable, Net in the Condensed Consolidated Financial Statements. Our proportionate share of the debt of our real estate and other affiliates, which is non-recourse to us, totaled $100.8$99.9 million as of SeptemberJune 30, 2019.2020. The following table summarizes our net debt on a segment basis as of SeptemberJune 30, 2019.2020. 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 Cash and cash equivalents and SID, MUD and TIF receivables. Although net debt is a non-GAAP financial measure, we believe that such information is useful to our investors and other users of our financial statements as net debt and its components are important indicators of our overall liquidity, capital structure and financial position. However, it should not be used as an alternative to our debt calculated in accordance with GAAP.
| | (In thousands) Segment Basis (a) | Operating Assets | Master Planned Communities | The Seaport District | Strategic Developments | Segment Totals | Non- Segment Amounts | September 30, 2019 | Operating Assets (b) | | Master Planned Communities (c) | | Seaport District (d) | | Strategic Developments (e) | | Segment Totals | | Non- Segment Amounts | | June 30, 2020 |
Mortgages, notes and loans payable | $ | 1,914,080 |
| (b) | $ | 231,906 |
| (d) | $ | 352,669 |
| (f) | $ | 223,764 |
| (h) | $ | 2,722,419 |
| $ | 1,003,059 |
| $ | 3,725,478 |
| $ | 2,340,663 |
| | $ | 266,988 |
| | $ | 340,125 |
| | $ | 398,784 |
| | $ | 3,346,560 |
| | $ | 1,054,503 |
| | $ | 4,401,063 |
|
Less: Cash and cash equivalents | (76,618 | ) | (c) | (163,091 | ) | (e) | (5,249 | ) | (g) | (54,951 | ) | (i) | (299,909 | ) | (399,090 | ) | (698,999 | ) | |
Mortgages, notes and loans payable of real estate and other affiliates | | 79,331 |
| | 6,205 |
| | 14,350 |
| | — |
| | 99,886 |
| | — |
| | 99,886 |
|
Less: | | | | | | | | | | | | | | |
Cash and cash equivalents | | (42,161 | ) | | (99,211 | ) | | (4,221 | ) | | (7,104 | ) | | (152,697 | ) | | (777,900 | ) | | (930,597 | ) |
Cash and cash equivalents of real estate and other affiliates | | (3,118 | ) | | (47,525 | ) | | (834 | ) | | (1,434 | ) | | (52,911 | ) | | — |
| | (52,911 | ) |
Special Improvement District receivables | — |
| | (17,352 | ) | | — |
| | — |
| | (17,352 | ) | — |
| (17,352 | ) | — |
| | (40,963 | ) | | — |
| | — |
| | (40,963 | ) | | — |
| | (40,963 | ) |
Municipal Utility District receivables, net | — |
| | (288,376 | ) | | — |
| | — |
| | (288,376 | ) | — |
| (288,376 | ) | — |
| | (320,439 | ) | | — |
| | — |
| | (320,439 | ) | | — |
| | (320,439 | ) |
TIF receivable | — |
| | — |
| | — |
| | (5,792 | ) | | (5,792 | ) | — |
| (5,792 | ) | — |
| | — |
| | — |
| | (4,032 | ) | | (4,032 | ) | | — |
| | (4,032 | ) |
Net Debt | $ | 1,837,462 |
| | $ | (236,913 | ) | | $ | 347,420 |
| | $ | 163,021 |
| | $ | 2,110,990 |
| $ | 603,969 |
| $ | 2,714,959 |
| |
Net debt | | $ | 2,374,715 |
| | $ | (234,945 | ) | | $ | 349,420 |
| | $ | 386,214 |
| | $ | 2,875,404 |
| | $ | 276,603 |
| | $ | 3,152,007 |
|
| |
(a) | Please refer to Note 1718 - Segments in our Condensed Consolidated Financial Statements. |
| |
(b) | Includes our $79.5 million share of debtMortgages, notes and loans payable and Cash and cash equivalents of our real estate and other affiliates in the Operating Assets segment (Woodlands Sarofim #1, The Metropolitan Downtown Columbia, Stewart Title of Montgomery County and m.flats/TEN.M). |
| |
(c) | Includes our $1.9 millionshare of Mortgages, notes and loans payable and Cash and cash equivalents of our real estate and other affiliates in the MPC segment (The Summit). |
| |
(d) | Includes our share of Mortgages, notes and loans payable and Cash and cash equivalents of our real estate and other affiliates in the Seaport District segment (Mr. C Seaport and Bar Wayō). |
| |
(e) | Includes our share of Cash and cash equivalents of our real estate and other affiliates in Operating Assets (Woodlands Sarofim #1, The Metropolitan Downtown Columbia, Stewart Title of Montgomery County, TX and m.flats/TEN.M). |
| |
(d) | Includes our $6.5 million share of debt of our real estate and other affiliates in MPC related to The Summit. |
| |
(e) | Includes our $57.9 million share of Cash and cash equivalents of our real estate and other affiliates in MPC related to The Summit. |
| |
(f) | Includes our $14.4 million share of debt of our real estate and other affiliates in the Seaport District related to Mr. C Seaport. |
| |
(g) | Includes our $1.0 million share of Cash and cash equivalents of our real estate and other affiliates in Seaport District (Mr. C Seaport and Bar Wayō). |
| |
(h) | Includes our $0.5 million share of debt of our real estate and other affiliates in Strategic Developments related to KR Holdings. |
| |
(i) | Includes our $0.3 million share of Cash and cash equivalents of our real estate and other affiliates in Strategic Developmentssegment (KR Holdings, HHMK Development and Circle T Ranch and Power Center). |
During the second quarter of 2020, the COVID-19 pandemic necessitated temporary closure of some of the Company’s Operating Assets, primarily retail and hospitality properties. As a result of the decline in interim operating results for certain of these properties, as of June 30, 2020, the Company did not meet the debt service coverage ratio required to maintain our outstanding Senior Secured Credit Facility Revolver Loan balance of $61.3 million and a semi-annual operating covenant within our $62.5 million loan for The Woodlands Resort and Conference Center. The Revolver Loan requires a full repayment cure of the outstanding revolver balance for the debt service coverage ratio test. We expect to repay the outstanding balance under the Revolver Loan of $61.3 million during the third quarter of 2020. We remain in full compliance of the $615.0 million Term Loan portion of the Senior Secured Credit Facility. The loan for The Woodlands Resort and Conference Center provides a partial repayment cure for the debt service coverage ratio test. Management plans to negotiate a modification of the existing terms of the Woodlands Resort and Conference Center loan with the lender in the third quarter of 2020 and receive a waiver of the $24.1 million repayment to cure. As of June 30, 2020, the Company did not meet the debt service coverage ratios for two loan agreements related to the Self-Storage Operating Assets. Both loans, which total $10.9 million, provide a partial repayment cure for the debt service coverage ratio test totaling $2.0 million. Management plans to negotiate a modification of the existing terms of the Self-Storage loans or partially repay the loans in the third quarter of 2020.
As of June 30, 2020, apart from the items above, the Company was in compliance with all remaining financial covenants included in the agreements governing its indebtedness.
Cash Flows
Operating Activities
Each segment'ssegment’s relative contribution to our cash flows from operating activities will likely vary significantly from year to year given the changing nature of our development focus. Other than our condominium properties, most of the properties and projects in our Strategic Developments segment do not generate revenues and the cash flows and earnings may vary. 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 2019.2020. Operating cash continued to be utilized in the first three quartersquarter of 20192020 to fund ongoing development expenditures in our Strategic Developments, Seaport District 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.
the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.
Net cash used in operating activities was $98.6 million for the six months ended June 30, 2020, as compared to net cash provided by operating activities was $137.2of $160.3 million for the ninesix months ended SeptemberJune 30, 2019, as compared to2019. The $258.9 million net increase in cash used in operating activities of $139.8 million forin the ninesix months ended SeptemberJune 30, 2018. The $277.0 million net increase in cash provided by operating activities in the nine months ended September 30, 20192020, compared to the same period in 20182019 was primarily related to the current period net loss, timing of condominium development expenditures and closings.closings, which were partially offset by proceeds received from the sale of lease receivable, and condominium deposits received.
Investing Activities
Net cash used in investing activities was $535.8$267.5 million and $354.1 million for the ninesix months ended SeptemberJune 30, 2020, and 2019, as compared to cash used in investing activities of $654.1respectively. The $86.7 million for the nine months ended September 30, 2018. The decrease in use of cash of $118.3 millionused was primarily the result of the 250 Water Street acquisition that occurreddecrease in 2018 without similar acquisition activity in 2019. This decrease was partially offset by increased property development and redevelopment expenditures, and a decrease in operating property improvements expenditures during the ninesix months ended SeptemberJune 30, 2019,2020, with the most significant expendituresdecrease relating to the Las Vegas Ballpark and 110 North Wacker.Pier 17.
Financing Activities
Net cash provided by financing activities was $517.0$934.3 million for ninesix months ended SeptemberJune 30, 2019,2020, as compared to net cash provided by financing activities of $442.2$318.3 million for ninesix months ended SeptemberJune 30, 2018.2019. The increase of $74.8$616.0 million was mainly causedprimarily due to the proceeds from issuance of common stock, which was partially offset by the repurchase of treasury stock using cash of $57.3 million during the nine months ended September 30, 2018, with no comparable transactionsa decrease in the current year.contributions from noncontrolling interest. Principal payments on mortgages, notes and loans payable decreased by $460.7$112.5 million during ninethe six months ended SeptemberJune 30, 20192020, as compared to the ninesix months ended SeptemberJune 30, 2018. This decrease in principal payments was largely offset by a decrease in proceeds from mortgages, notes and loans payable of $438.6 million for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018.2019.
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 $210.4$208.6 million as of SeptemberJune 30, 2019.2020.
Critical Accounting Policies
Critical accounting policies are those that are both significant to the overall presentation of our financial condition and results of operations and require management to make difficult, complex or subjective judgments. See Note 1 - SummaryBasis of Significant Accounting PoliciesPresentation and Organization in our Annual Report and Note 2 - Accounting Policies and Pronouncements in this Quarterly Report.
ITEM 3. 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 SeptemberJune 30, 2019,2020, of our $1.7$2.5 billion of variable-rate debt outstanding, $616.7$705.0 million is swapped to a fixed rate and $114.3$270.9 million is subject to interest rate collars. We may enter into interest rate cap contracts to mitigate our exposure to rising interest rates. We have a cap contract for our $180.0 million Master Credit Facilitycredit facility for The Woodlands $150.0 millionand Bridgeland, of which $250.0 million is currently outstanding and $75.0 million of which is currently capped. As properties are placed into service and become stabilized, we typically refinance the variable-rate debt with long-term fixed-rate debt.
As of SeptemberJune 30, 2019,2020, annual interest costs would increase approximately $10.4$18.3 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 Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income would be less than the total change, but we would incur higher cash payments and the development costs of our assets would be 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 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations, Note 7 - Mortgages, Notes and Loans Payable, Net and Note 9 - Derivative Instruments and Hedging Activities in our Condensed Consolidated Financial Statements. See also the Liquidity and Capital Resources section of Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations andNote 7 - Mortgages, Notes and Loans Payable, Net for discussion of the impact of COVID-19 on our business, including our success in closing on and extending various debt facilities after the onset of the pandemic.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13(a)-15(e)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.
WeAs 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 SeptemberJune 30, 2019,2020, 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 SeptemberJune 30, 2019.2020.
Changes in Internal Control over Financial Reporting
As of January 1, 2020, we adopted Topic 326. In connection with the adoption, we implemented certain changes to our processes and controls related to accounting for the measurement of credit losses on financial instruments. These changes included the development of new practices based on the guidance outlined in Topic 326, new credit quality review requirements and new processes related to the additional disclosure requirements.
Due to the COVID-19 pandemic, beginning on March 13, 2020, we instituted an ongoing telecommuting arrangement for employees whose job duties are conducive to working from home. Our transition of a large portion of associates working remotely did not have a material effect on our internal controls over financial reporting.
There have beenwere no other changes to our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Please refer to Note 10 - Commitments and Contingencies in the Condensed Consolidated Financial Statements.
ITEM 1A. RISK FACTORS
There are no material changes to the risk factors previously disclosed in our Annual Report, with the exception of the additional risk factors discussed below.
OurCOVID-19 has disrupted our business and has had a material adverse effect on our business, financial performance may be negatively impacted by our recently announced management transitions, and wecondition, operating results and cash flows, and will continue to dependmaterially adversely impact and cause disruption to, our business, financial performance and condition, operating results and cash flows. Factors that would negatively impact our ability to successfully operate during and after COVID-19 or another pandemic include:
our ability to continue to sell land to residential homebuilders and developers in our MPCs at attractive prices, which would lead to lower land sales revenue in our MPC segment, if such homebuilders continue to see a decline in new home sales to their consumers or if there is reduced availability of loans to support such homebuilders;
our ability to continue to collect rents, on the servicesa timely basis or at all, without reductions or other concessions, in multi-family and performanceoffice properties (revenues from which properties accounted for 13% of our other senior management and key employees.revenues for the year ended December 31, 2019);
We recently announced thatwe have reopened all of our Chief Executive Officer, David R. Weinreb,hotels, but capacity and our President, Grant Herlitz,operations have stepped down frombeen substantially reduced for the Company, effective October 21, 2019. We have appointed Paul Layne as Chief Executive Officer. Our future performance will depend, in part, ontime being due to the successful transition of Mr. Layne as our new Chief Executive Officer. If we do not successfully manage our CEO transition, it could be viewed negatively by our customers, employees or investors and could have ansignificant adverse impact on the hospitality industry, which has resulted in dramatically curtailed business and leisure travel, and the recent surge in COVID-19 cases in Texas may force us to close the hotels again (revenues from our business. Our future performance also willhotel properties accounted for 7% of our revenues for the year ended December 31, 2019);
our ability to collect rent from our retail tenants where most retail tenants have closed their businesses (including nearly all of our retail tenants in Summerlin, Ward Village and Riverwalk) (revenues from our retail properties accounted for 12% of our revenues for the year ended December 31, 2019);
reductions in demand for leased space and/or defaults under our leases, as a result of downturns in our tenants’ personal financial situations as well as commercial businesses, which include retail stores, restaurants and event attractions such as those in the Seaport District, in part due to containment measures, such as travel restrictions, mandatory government closures, quarantines, “shelter in place” orders and social distancing, as well as the overall impact on the economy and our tenants' industries (including the energy sector);
lost revenue due to the cancellation of the 2020 season for the Las Vegas Aviators, our Triple-A professional baseball team, (revenues from the Las Vegas Aviators accounted for 2% of our revenues for the year ended December 31, 2019);
fluctuations in regional and local economies, the residential housing and condominium markets, local real estate conditions, and tenant rental rates;
our ability to continue to dependmake condominium sales in Hawai’i and land sales in our MPCs, in light of the impact on the servicesoverall economy and contributionsconsumers’ reluctance to make significant capital decisions in times of economic uncertainty, particularly if there is reduced availability of loans for such consumers;
our ability to reopen the Seaport District in a timely manner, which is now completely closed, and our ability to resume the Seaport District summer concert series which has been postponed until 2021, the revenue and sponsorship of which historically has been a meaningful contribution to our annual revenue;
our and our tenants’ ability to continue or complete construction as planned for their operations, or delays in the supply of materials or labor necessary for construction;
the continued service and availability of personnel, including our executive officers and other leaders that are part of our other senior management team and key employeesour ability to execute onrecruit, attract and retain skilled personnel to the extent our Transformation Plan and to identify and pursue new opportunities. The loss of services of senior management or other key employees could significantly delay or prevent the achievement of our development and strategic objectives and could adversely affect our business, financial condition and operating results.
The proposed sale of our non-core assets is subject to various risks and uncertainties, and may not be completed on the terms or timeline currently contemplated, if at all.
On October 21, 2019, we announced our intention to sell our non-core assets. There can be no assurance of the terms, timing or structure of any transaction involving such assets, whether we will be able to identify buyers for the assets on favorable terms or at all, or whether any such transaction will take place at all. In addition, any such transaction is subject to risks and uncertainties, including unanticipated developments, regulatory approvals or clearances and uncertainty in the financial markets, that could delay or prevent the completion of any such transaction.
The proposed sale of our non-core assets may not achieve some or all of the anticipated benefits.
Executing the proposed sale of our non-core assets will require us to incur costs and will require the time and attention of our senior management and key employees, which could distract them from operating our business, disrupt operations and result in the loss of business opportunities, each of which could adversely affect our business, financial condition and results of operations. We may also experience increased difficulty in attracting, retaining and motivating key employees during the pendency of the salepersonnel
are impacted in significant numbers or in other significant ways by the outbreak of pandemic or epidemic disease and followingare not available or allowed to conduct work;
our ability to ensure business continuity in the event our continuity of operations plan is not effective or improperly implemented or deployed during a disruption;
a complete or partial closure of, or other operational issues at, one or more of our MPCs or our corporate headquarters resulting from government action or otherwise;
delays in, or our ability to complete, our “Transformation Plan” on the expected terms or timing; and
difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our access to capital necessary to fund business operations or address maturing liabilities.
The extent to which the COVID-19 pandemic impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its completion, whichimpact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Although many cities and states have lifted restrictions instituted in response to the COVID-19 pandemic, we cannot predict whether and to what extent the restrictions will be reinstated, whether additional cities and states will implement similar restrictions or when restrictions currently in place will expire.
The effects of restrictions on our operations, including future restrictions and extended periods of remote work arrangements, could harmstrain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business. Even ifThe rapid development and fluidity of this situation precludes any prediction as to the proposed sale is completed, we may not realize some or allfull adverse impact of the anticipated benefits fromCOVID-19 pandemic. The COVID-19 pandemic presents material uncertainty and risk with respect to our financial condition, results of operations, cash flows and performance. Moreover, many risk factors set forth in the sale, andAnnual Report should be interpreted as heightened risks as a result of the sale may in fact adversely affect our business.impact of the COVID-19 pandemic.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following Exhibit Index to this Quarterly Report lists the exhibits furnished as required by Item 601 of Regulation S-K and is incorporated by reference.
EXHIBIT INDEX
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3.1 | | |
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3.2 | | |
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3.3 | | |
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3.4 | | |
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10.14.1 | | |
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4.2 | | |
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4.3 | | |
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4.4 | | |
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4.5 | | |
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4.6* | | Form of Deposit Agreement |
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4.7* | | Form of Warrant Agreement |
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4.8* | | Form of Purchase Contract Agreement |
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4.9* | | Form of Unit Agreement |
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10.1** | | |
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10.210.2** | | |
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10.3 | | |
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31.1+ | | |
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31.2+ | | |
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32.1++ | | |
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101.INS
| | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH+ | | Inline XBRL Taxonomy Extension Schema Document |
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101.CAL+ | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB+ | | Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE+ | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF+ | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* To be filed by amendment to the Form S-3 filed on March 27, 2020 or by a Current Report on Form 8-K.
** Management contract, compensatory plan or arrangement
+ Filed herewith
++ Furnished herewith
Attached as Exhibit 101 to this report are the following documents formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, (ii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, (iii) the Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20192020 and December 31, 2018,2019, (iv) Condensed Consolidated Statements of Equity for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, (v) the Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, and (vi) the Notes to Condensed Consolidated Financial Statements.
SIGNATURE
Pursuant to the requirements 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.
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| | The Howard Hughes Corporation |
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| | By: | /s/ David R. O’Reilly |
| | | David R. O’Reilly |
| | | President and Chief Financial Officer |
| | | November 4, 2019August 3, 2020 |