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 September 30, 20202021
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 incorporation or organization) | (I.R.S. employer identification number) |
9950 Woodloch Forest Drive,, Suite 1100,, The Woodlands,, Texas77380
(Address of principal executive offices, including zip code)
(214)741-7744(281) 719-6100
(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 | | 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 November 2, 2020October 28, 2021 was 54,922,801.55,128,069.
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| TABLE OF CONTENTS | Page |
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| Item 1. | Financial Statements | |
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| Note 5. Impairment | | |
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HHC 20202021 FORM 10-Q | 2
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PART IFINANCIAL STATEMENTS | |
Item 1. Condensed Consolidated Financial Statements (Unaudited)
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | thousands except par values and share amounts | September 30, 2020 | | December 31, 2019 | thousands except par values and share amounts | September 30, 2021 | | December 31, 2020 |
| ASSETS | | | | ASSETS | |
| Investment in real estate: | | | | Investment in real estate: | |
| Master Planned Communities assets | $ | 1,693,478 |
| | $ | 1,655,674 |
| Master Planned Communities assets | $ | 1,790,022 | | | $ | 1,687,519 | |
| Buildings and equipment | 4,069,640 |
| | 3,813,595 |
| Buildings and equipment | 3,958,941 | | | 4,115,493 | |
| Less: accumulated depreciation | (600,211 | ) | | (507,933 | ) | Less: accumulated depreciation | (703,691) | | | (634,064) | |
| Land | 361,418 |
| | 353,022 |
| Land | 348,057 | | | 363,447 | |
| Developments | 1,110,101 |
| | 1,445,997 |
| Developments | 1,472,028 | | | 1,152,674 | |
| Net property and equipment | 6,634,426 |
| | 6,760,355 |
| Net property and equipment | 6,865,357 | | | 6,685,069 | |
| Investment in real estate and other affiliates | 389,882 |
| | 121,757 |
| Investment in real estate and other affiliates | 281,843 | | | 377,145 | |
| Net investment in real estate | 7,024,308 |
| | 6,882,112 |
| Net investment in real estate | 7,147,200 | | | 7,062,214 | |
| Net investment in lease receivable | 2,928 |
| | 79,166 |
| Net investment in lease receivable | 2,915 | | | 2,926 | |
| Cash and cash equivalents | 857,390 |
| | 422,857 |
| Cash and cash equivalents | 1,010,619 | | | 1,014,686 | |
| Restricted cash | 233,111 |
| | 197,278 |
| Restricted cash | 437,950 | | | 228,311 | |
| Accounts receivable, net | 10,087 |
| | 12,279 |
| Accounts receivable, net | 81,935 | | | 66,726 | |
| Municipal Utility District receivables, net | 331,451 |
| | 280,742 |
| Municipal Utility District receivables, net | 383,696 | | | 314,394 | |
| Notes receivable, net | 52,136 |
| | 36,379 |
| Notes receivable, net | 5,536 | | | 622 | |
| Deferred expenses, net | 112,503 |
| | 133,182 |
| Deferred expenses, net | 117,372 | | | 112,097 | |
| Operating lease right-of-use assets, net | 57,087 |
| | 69,398 |
| Operating lease right-of-use assets, net | 53,593 | | | 56,255 | |
| Prepaid expenses and other assets, net | 360,244 |
| | 300,373 |
| Prepaid expenses and other assets, net | 274,097 | | | 282,101 | |
| Total assets | $ | 9,041,245 |
| | $ | 8,413,766 |
| Total assets | $ | 9,514,913 | | | $ | 9,140,332 | |
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| LIABILITIES | | | | LIABILITIES | |
| Mortgages, notes and loans payable, net | $ | 4,219,334 |
| | $ | 4,096,470 |
| Mortgages, notes and loans payable, net | $ | 4,423,635 | | | $ | 4,287,369 | |
| | Operating lease obligations | 69,246 |
| | 70,413 |
| Operating lease obligations | 67,564 | | | 68,929 | |
| Deferred tax liabilities | 178,433 |
| | 180,748 |
| Deferred tax liabilities | 173,969 | | | 187,639 | |
| | Accounts payable and accrued expenses | 830,209 |
| | 733,147 |
| Accounts payable and accrued expenses | 1,141,761 | | | 852,258 | |
| Total liabilities | 5,297,222 |
| | 5,080,778 |
| Total liabilities | 5,806,929 | | | 5,396,195 | |
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| Commitments and Contingencies (see Note 10) |
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| Commitments and Contingencies (see Note 9) | | Commitments and Contingencies (see Note 9) | 0 | | 0 |
| Redeemable noncontrolling interest | 30,361 |
| | 0 |
| Redeemable noncontrolling interest | 25,400 | | | 29,114 | |
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| EQUITY | | | | EQUITY | |
| Preferred stock: $.01 par value; 50,000,000 shares authorized, none issued | 0 |
| | 0 |
| |
| Common stock: $.01 par value; 150,000,000 shares authorized, 55,974,883 issued and 54,921,748 outstanding as of September 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 |
| |
| Preferred stock: $0.01 par value; 50,000,000 shares authorized, NaN issued | | Preferred stock: $0.01 par value; 50,000,000 shares authorized, NaN issued | — | | | — | |
| Common stock: $0.01 par value; 150,000,000 shares authorized, 56,196,818 issued and 55,124,486 outstanding as of September 30, 2021, 56,042,814 shares issued and 54,972,256 outstanding as of December 31, 2020 | | Common stock: $0.01 par value; 150,000,000 shares authorized, 56,196,818 issued and 55,124,486 outstanding as of September 30, 2021, 56,042,814 shares issued and 54,972,256 outstanding as of December 31, 2020 | 563 | | | 562 | |
| Additional paid-in capital | 3,942,173 |
| | 3,343,983 |
| Additional paid-in capital | 3,957,814 | | | 3,947,278 | |
| Accumulated deficit | (65,910 | ) | | (46,385 | ) | Accumulated deficit | (130,256) | | | (72,556) | |
| Accumulated other comprehensive loss | (42,831 | ) | | (29,372 | ) | Accumulated other comprehensive loss | (23,275) | | | (38,590) | |
| Treasury stock, at cost, 1,053,135 shares as of September 30, 2020, and 1,050,260 shares as of December 31, 2019 | (120,706 | ) | | (120,530 | ) | |
| Treasury stock, at cost, 1,072,332 shares as of September 30, 2021, and 1,070,558 shares as of December 31, 2020 | | Treasury stock, at cost, 1,072,332 shares as of September 30, 2021, and 1,070,558 shares as of December 31, 2020 | (122,253) | | | (122,091) | |
| Total stockholders' equity | 3,713,287 |
| | 3,148,133 |
| Total stockholders' equity | 3,682,593 | | | 3,714,603 | |
| Noncontrolling interests | 375 |
| | 184,855 |
| Noncontrolling interests | (9) | | | 420 | |
| Total equity | 3,713,662 |
| | 3,332,988 |
| Total equity | 3,682,584 | | | 3,715,023 | |
| Total liabilities and equity | $ | 9,041,245 |
| | $ | 8,413,766 |
| Total liabilities and equity | $ | 9,514,913 | | | $ | 9,140,332 | |
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See Notes to Condensed Consolidated Financial Statements.
HHC 20202021 FORM 10-Q | 32
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands except per share amounts | 2020 | | 2019 | | 2020 | | 2019 | thousands except per share amounts | 2021 | | 2020 | | 2021 | | 2020 |
| REVENUES | | | | | | | | REVENUES | |
| Condominium rights and unit sales | $ | 142 |
| | $ | 9,999 |
| | $ | 185 |
| | $ | 443,931 |
| Condominium rights and unit sales | $ | 163 | | | $ | 142 | | | $ | 50,191 | | | $ | 185 | |
| Master Planned Communities land sales | 39,248 |
| | 77,368 |
| | 136,053 |
| | 177,001 |
| Master Planned Communities land sales | 56,305 | | | 39,248 | | | 152,124 | | | 136,053 | |
| Rental revenue | 70,072 |
| | 70,344 |
| | 241,522 |
| | 206,168 |
| Rental revenue | 95,215 | | | 70,072 | | | 269,590 | | | 241,522 | |
| Other land, rental and property revenues | 35,748 |
| | 63,801 |
| | 82,092 |
| | 165,054 |
| Other land, rental and property revenues | 56,350 | | | 35,748 | | | 120,982 | | | 82,092 | |
| Builder price participation | 9,230 |
| | 9,660 |
| | 25,936 |
| | 24,224 |
| Builder price participation | 11,155 | | | 9,230 | | | 29,338 | | | 25,936 | |
| Total revenues | 154,440 |
| | 231,172 |
| | 485,788 |
| | 1,016,378 |
| Total revenues | 219,188 | | | 154,440 | | | 622,225 | | | 485,788 | |
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| EXPENSES | | | | | | | | EXPENSES | |
| Condominium rights and unit cost of sales | 1,087 |
| | 7,010 |
| | 105,336 |
| | 365,324 |
| Condominium rights and unit cost of sales | 82 | | | 1,087 | | | 68,485 | | | 105,336 | |
| Master Planned Communities cost of sales | 15,899 |
| | 33,304 |
| | 58,560 |
| | 78,128 |
| Master Planned Communities cost of sales | 23,419 | | | 15,899 | | | 63,928 | | | 58,560 | |
| Operating costs | 58,272 |
| | 81,222 |
| | 168,763 |
| | 221,529 |
| Operating costs | 90,025 | | | 58,272 | | | 219,866 | | | 168,763 | |
| Rental property real estate taxes | 15,448 |
| | 9,080 |
| | 44,225 |
| | 28,585 |
| Rental property real estate taxes | 14,812 | | | 15,448 | | | 42,519 | | | 44,225 | |
| Provision for (recovery of) doubtful accounts | 1,387 |
| | (107 | ) | | 4,954 |
| | (195 | ) | Provision for (recovery of) doubtful accounts | 154 | | | 1,387 | | | (1,944) | | | 4,954 | |
| Demolition costs | 0 |
| | 138 |
| | 0 |
| | 737 |
| Demolition costs | 43 | | | — | | | 192 | | | — | |
| Development-related marketing costs | 1,912 |
| | 5,341 |
| | 6,541 |
| | 16,874 |
| Development-related marketing costs | 4,020 | | | 1,912 | | | 8,061 | | | 6,541 | |
| General and administrative | 23,441 |
| | 33,990 |
| | 84,755 |
| | 92,322 |
| General and administrative | 19,033 | | | 23,441 | | | 61,133 | | | 84,755 | |
| Depreciation and amortization | 52,395 |
| | 40,093 |
| | 160,995 |
| | 115,142 |
| Depreciation and amortization | 56,299 | | | 52,395 | | | 155,395 | | | 160,995 | |
| Total expenses | 169,841 |
| | 210,071 |
| | 634,129 |
| | 918,446 |
| Total expenses | 207,887 | | | 169,841 | | | 617,635 | | | 634,129 | |
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| OTHER | | | | | | | | OTHER | |
| Provision for impairment | 0 |
| | 0 |
| | (48,738 | ) | | 0 |
| Provision for impairment | — | | | — | | | (13,068) | | | (48,738) | |
| Gain (loss) on sale or disposal of real estate and other assets, net | 108 |
| | 24,201 |
| | 46,232 |
| | 24,051 |
| Gain (loss) on sale or disposal of real estate and other assets, net | 39,141 | | | 108 | | | 60,474 | | | 46,232 | |
| Other income (loss), net | 1,284 |
| | 1,337 |
| | (793 | ) | | 11,798 |
| Other income (loss), net | (1,307) | | | 1,284 | | | (12,278) | | | (793) | |
| Total other | 1,392 |
| | 25,538 |
| | (3,299 | ) | | 35,849 |
| Total other | 37,834 | | | 1,392 | | | 35,128 | | | (3,299) | |
| | | | | | | | | |
| Operating income (loss) | (14,009 | ) | | 46,639 |
| | (151,640 | ) | | 133,781 |
| Operating income (loss) | 49,135 | | | (14,009) | | | 39,718 | | | (151,640) | |
| | | | | | | | | |
| Selling profit from sales-type leases | 0 |
| | 13,537 |
| | 0 |
| | 13,537 |
| |
| | Interest income | 358 |
| | 2,872 |
| | 1,908 |
| | 7,696 |
| Interest income | 12 | | | 358 | | | 84 | | | 1,908 | |
| Interest expense | (31,872 | ) | | (28,829 | ) | | (98,717 | ) | | (76,358 | ) | Interest expense | (31,556) | | | (31,872) | | | (97,205) | | | (98,717) | |
| Gain (loss) on extinguishment of debt | (13,166 | ) | | 0 |
| | (13,166 | ) | | 0 |
| Gain (loss) on extinguishment of debt | (1,577) | | | (13,166) | | | (37,543) | | | (13,166) | |
| | Equity in earnings (losses) from real estate and other affiliates | 266,838 |
| | 4,542 |
| | 269,635 |
| | 20,847 |
| Equity in earnings (losses) from real estate and other affiliates | (7,848) | | | 266,838 | | | 15,815 | | | 269,635 | |
| Income (loss) before taxes | 208,149 |
| | 38,761 |
| | 8,020 |
| | 99,503 |
| Income (loss) before taxes | 8,166 | | | 208,149 | | | (79,131) | | | 8,020 | |
| Provision (benefit) for income taxes | 44,147 |
| | 8,718 |
| | 3,203 |
| | 24,207 |
| |
| Income tax expense (benefit) | | Income tax expense (benefit) | 6,049 | | | 44,147 | | | (16,706) | | | 3,203 | |
| Net income (loss) | 164,002 |
| | 30,043 |
| | 4,817 |
| | 75,296 |
| Net income (loss) | 2,117 | | | 164,002 | | | (62,425) | | | 4,817 | |
| Net (income) loss attributable to noncontrolling interests | (24,292 | ) | | (285 | ) | | (24,325 | ) | | (240 | ) | Net (income) loss attributable to noncontrolling interests | 1,936 | | | (24,292) | | | 4,725 | | | (24,325) | |
| Net income (loss) attributable to common stockholders | $ | 139,710 |
| | $ | 29,758 |
| | $ | (19,508 | ) | | $ | 75,056 |
| Net income (loss) attributable to common stockholders | $ | 4,053 | | | $ | 139,710 | | | $ | (57,700) | | | $ | (19,508) | |
| | | | | | | | | |
| Basic income (loss) per share | $ | 2.52 |
| | $ | 0.69 |
| | $ | (0.38 | ) | | $ | 1.74 |
| Basic income (loss) per share | $ | 0.07 | | | $ | 2.52 | | | $ | (1.04) | | | $ | (0.38) | |
| Diluted income (loss) per share | $ | 2.51 |
| | $ | 0.69 |
| | $ | (0.38 | ) | | $ | 1.73 |
| Diluted income (loss) per share | $ | 0.07 | | | $ | 2.51 | | | $ | (1.04) | | | $ | (0.38) | |
See Notes to Condensed Consolidated Financial Statements.
HHC 20202021 FORM 10-Q | 43
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2021 | | 2020 | | 2021 | | 2020 |
| Net income (loss) | $ | 2,117 | | | $ | 164,002 | | | $ | (62,425) | | | $ | 4,817 | |
| Other comprehensive income (loss): | | | | | | | |
| Interest rate swaps (a) | 2,971 | | | 5,346 | | | 11,232 | | | (26,393) | |
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| Share of investee’s other comprehensive income (b) | 1,508 | | | — | | | 4,083 | | | — | |
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| Other comprehensive income (loss) | 4,479 | | | 5,346 | | | 15,315 | | | (26,393) | |
| Comprehensive income (loss) | 6,596 | | | 169,348 | | | (47,110) | | | (21,576) | |
| Comprehensive (income) loss attributable to noncontrolling interests | 1,936 | | | (24,292) | | | 4,725 | | | (24,325) | |
| Comprehensive income (loss) attributable to common stockholders | $ | 8,532 | | | $ | 145,056 | | | $ | (42,385) | | | $ | (45,901) | |
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2020 | | 2019 | | 2020 | | 2019 |
| Net income (loss) | $ | 164,002 |
| | $ | 30,043 |
| | $ | 4,817 |
| | $ | 75,296 |
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| Other comprehensive income (loss): | | | | | | | |
| Interest rate swaps (a) | 5,923 |
| | (6,207 | ) | | (24,558 | ) | | (25,259 | ) |
| Capitalized swap interest expense (b) | 0 |
| | 0 |
| | 0 |
| | (73 | ) |
| Terminated swap amortization | (577 | ) | | (764 | ) | | (1,835 | ) | | (2,055 | ) |
| Other comprehensive income (loss) | 5,346 |
| | (6,971 | ) | | (26,393 | ) | | (27,387 | ) |
| Comprehensive income (loss) | 169,348 |
| | 23,072 |
| | (21,576 | ) | | 47,909 |
|
| Comprehensive income (loss) attributable to noncontrolling interests | (24,292 | ) | | (285 | ) | | (24,325 | ) | | (240 | ) |
| Comprehensive income (loss) attributable to common stockholders | $ | 145,056 |
| | $ | 22,787 |
| | $ | (45,901 | ) | | $ | 47,669 |
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(a) | Amounts are shown net of deferred tax expense of $1.3 million for the three months ended September 30, 2020, and a deferred tax benefit of $1.7 million for the three months ended September 30, 2019. Amounts are shown net of deferred tax benefit of $5.6 million for the nine months ended September 30, 2020, and $7.0 million for the nine months ended September 30, 2019. |
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(b) | The deferred tax impact was 0 for the three and nine months ended September 30, 2020, and the three months ended September 30, 2019, and 0t meaningful for the nine months ended September 30, 2019. |
(b)The amount for 2021 is shown net of deferred tax expense of $0.4 million for the three months ended September 30, 2021, and $1.2 million for the nine months ended September 30, 2021.
See Notes to Condensed Consolidated Financial Statements.
HHC 20202021 FORM 10-Q | 54
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
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| | | | | | | | | Accumulated | | | | | | | | | | |
| | | | | Additional | | | | Other | | | | | | Total | | | | |
| Common Stock | | Paid-In | | Accumulated | | Comprehensive | | Treasury Stock | | Stockholders' | | Noncontrolling | | Total |
| thousands except shares | Shares | | Amount | | Capital | | Deficit | | (Loss) Income | | Shares | | Amount | | Equity | | Interests (a) | | Equity |
| Balance, June 30, 2021 | 56,196,818 | | | $ | 563 | | | $ | 3,955,162 | | | $ | (134,309) | | | $ | (27,754) | | | (1,070,558) | | | $ | (122,091) | | | $ | 3,671,571 | | | $ | 332 | | | $ | 3,671,903 | |
| Net income (loss) excluding a loss of $1,595 attributable to redeemable noncontrolling interest | — | | | — | | | — | | | 4,053 | | | — | | | — | | | — | | | 4,053 | | | (341) | | | 3,712 | |
| | | | | | | | | | | | | | | | | | | |
| Interest rate swaps, net of tax expense (benefit) of $831 | — | | | — | | | — | | | — | | | 2,971 | | | — | | | — | | | 2,971 | | | — | | | 2,971 | |
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| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Share of investee's other comprehensive income, net of tax expense (benefit) of $429 | — | | | — | | | — | | | — | | | 1,508 | | | — | | | — | | | 1,508 | | | — | | | 1,508 | |
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| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Stock plan activity | — | | | — | | | 2,652 | | | — | | | — | | | (1,774) | | | (162) | | | 2,490 | | | — | | | 2,490 | |
| Balance, September 30, 2021 | 56,196,818 | | | $ | 563 | | | $ | 3,957,814 | | | $ | (130,256) | | | $ | (23,275) | | | (1,072,332) | | | $ | (122,253) | | | $ | 3,682,593 | | | $ | (9) | | | $ | 3,682,584 | |
| | | | | | | | | | | | | | | | | | | |
| 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 | |
| Net income (loss) excluding income of $24,270 attributable to redeemable noncontrolling interest | — | | | — | | | — | | | 139,710 | | | — | | | — | | | — | | | 139,710 | | | 22 | | | 139,732 | |
| Interest rate swaps, net of tax expense (benefit) of $1,167 | — | | | — | | | — | | | — | | | 5,346 | | | — | | | — | | | 5,346 | | | — | | | 5,346 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Reclassification of redeemable noncontrolling interest to temporary equity | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6,091) | | | (6,091) | |
| | | | | | | | | | | | | | | | | | | |
| Derecognition of 110 North Wacker (b) | — | | | — | | | — | | | 1 | | | 12,934 | | | — | | | — | | | 12,935 | | | (178,444) | | | (165,509) | |
| Common stock offering costs | — | | | — | | | 3 | | | — | | | — | | | — | | | — | | | 3 | | | — | | | 3 | |
| Stock plan activity | (6,676) | | | — | | | 654 | | | — | | | — | | | (2,875) | | | (176) | | | 478 | | | — | | | 478 | |
| Balance, September 30, 2020 | 55,974,883 | | | $ | 561 | | | $ | 3,942,173 | | | $ | (65,910) | | | $ | (42,831) | | | (1,053,135) | | | $ | (120,706) | | | $ | 3,713,287 | | | $ | 375 | | | $ | 3,713,662 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | | | | | |
| | | | | | Additional | | | | Other | | | | | | Total | | | | |
| | Common Stock | | Paid-In | | Accumulated | | Comprehensive | | Treasury Stock | | Stockholders' | | Noncontrolling | | Total |
| thousands except shares | Shares | | Amount | | Capital | | Deficit | | (Loss) Income | | Shares | | Amount | | Equity | | Interests (a) | | Equity |
| 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 |
|
| Net income (loss), excluding $24,270 attributable to redeemable noncontrolling interest | — |
| | — |
| | — |
| | 139,710 |
| | — |
| | — |
| | — |
| | 139,710 |
| | 22 |
| | 139,732 |
|
| Interest rate swaps, net of tax of $1,349 | — |
| | — |
| | — |
| | — |
| | 5,923 |
| | — |
| | — |
| | 5,923 |
| | — |
| | 5,923 |
|
| Terminated swap amortization | — |
| | — |
| | — |
| | — |
| | (577 | ) | | — |
| | — |
| | (577 | ) | | — |
| | (577 | ) |
| Reclassification of redeemable noncontrolling interest to temporary equity | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6,091 | ) | | (6,091 | ) |
| Derecognition of 110 North Wacker (b) | — |
| | — |
| | — |
| | 1 |
| | 12,934 |
| | | | | | 12,935 |
| | (178,444 | ) | | (165,509 | ) |
| Common stock offering costs | — |
| | — |
| | 3 |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
| Stock plan activity | (6,676 | ) | | 0 |
| | 654 |
| | — |
| | — |
| | (2,875 | ) | | (176 | ) | | 478 |
| | — |
| | 478 |
|
| Balance, September 30, 2020 | 55,974,883 |
| | $ | 561 |
| | 3,942,173 |
| | $ | (65,910 | ) | | $ | (42,831 | ) | | (1,053,135 | ) | | $ | (120,706 | ) | | $ | 3,713,287 |
| | $ | 375 |
| | $ | 3,713,662 |
|
(a) Excludes redeemable noncontrolling interest, which is reflected in temporary equity. See Note 3 - Real Estate and Other Affiliates. |
(b) Related to deconsolidation of 110 North Wacker. Refer to Note 3 - Real Estate and Other Affiliates for additional information. |
| | | | | | | | | | | | | | | | | | | | |
| 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 (loss) | — |
| | — |
| | — |
| | 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 real estate and other affiliates | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| 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 |
|
(b) Related to deconsolidation of 110 North Wacker. See Note 2 - Real Estate and Other Affiliates for additional information.
See Notes to Condensed Consolidated Financial Statements.
HHC 20202021 FORM 10-Q | 65
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 |
| thousands except shares | Shares | | Amount | | Capital | | Deficit | | (Loss) Income | | Shares | | Amount | | Equity | | Interests (a) | | Equity |
| Balance, December 31, 2020 | 56,042,814 | | | $ | 562 | | | $ | 3,947,278 | | | $ | (72,556) | | | $ | (38,590) | | | (1,070,558) | | | $ | (122,091) | | | $ | 3,714,603 | | | $ | 420 | | | $ | 3,715,023 | |
| Net income (loss) excluding a loss of $4,296 attributable to redeemable noncontrolling interest | — | | — | | | — | | | (57,700) | | | — | | | — | | | — | | | (57,700) | | | (429) | | | (58,129) | |
| Interest rate swaps, net of tax expense (benefit) of $3,145 | — | | — | | | — | | | — | | | 11,232 | | | — | | | — | | | 11,232 | | | — | | | 11,232 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Share of investee's other comprehensive income, net of tax expense (benefit) of $1,161 | — | | — | | | — | | | — | | | 4,083 | | | — | | | — | | | 4,083 | | | — | | | 4,083 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Issuance of common shares | — | | | — | | | (5) | | | — | | | — | | | — | | | — | | | (5) | | | — | | | (5) | |
| Stock plan activity | 154,004 | | | 1 | | | 10,541 | | | — | | | — | | | (1,774) | | | (162) | | | 10,380 | | | — | | | 10,380 | |
| Balance, September 30, 2021 | 56,196,818 | | | $ | 563 | | | $ | 3,957,814 | | | $ | (130,256) | | | $ | (23,275) | | | (1,072,332) | | | $ | (122,253) | | | $ | 3,682,593 | | | $ | (9) | | | $ | 3,682,584 | |
| | | | | | | | | | | | | | | | | | | |
| 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 income (loss) excluding income of $24,270 attributable to redeemable noncontrolling interest | — | | | — | | | — | | | (19,508) | | | — | | | — | | | — | | | (19,508) | | | 55 | | | (19,453) | |
| Interest rate swaps, net of tax expense (benefit) of $(6,188) | — | | | — | | | — | | | — | | | (26,393) | | | — | | | — | | | (26,393) | | | — | | | (26,393) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Reclassification of redeemable noncontrolling interest to temporary equity | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6,091) | | | (6,091) | |
| | | | | | | | | | | | | | | | | | | |
| Derecognition of 110 North Wacker(b) | — | | | — | | | — | | | 1 | | | 12,934 | | | — | | | — | | | 12,935 | | | (178,444) | | | (165,509) | |
| Adoption of ASU 2016-13 | — | | | — | | | — | | | (18) | | | — | | | — | | | — | | | (18) | | | — | | | (18) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Issuance of common shares | 12,270,900 | | | 123 | | | 593,493 | | | — | | | — | | | — | | | — | | | 593,616 | | | — | | | 593,616 | |
| Stock plan activity | 68,090 | | | 1 | | | 4,697 | | | — | | | — | | | (2,875) | | | (176) | | | 4,522 | | | — | | | 4,522 | |
| Balance, September 30, 2020 | 55,974,883 | | | $ | 561 | | | $ | 3,942,173 | | | $ | (65,910) | | | $ | (42,831) | | | (1,053,135) | | | $ | (120,706) | | | $ | 3,713,287 | | | $ | 375 | | | $ | 3,713,662 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | | | | | |
| | | | | | Additional | | | | Other | | | | | | Total | | | | |
| | Common Stock | | Paid-In | | Accumulated | | Comprehensive | | Treasury Stock | | Stockholders' | | Noncontrolling | | Total |
| thousands except shares | Shares | | Amount | | Capital | | Deficit | | (Loss) Income | | Shares | | Amount | | Equity | | Interests (a) | | Equity |
| 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 income (loss), excluding $24,270 attributable to redeemable noncontrolling interest | — |
| | — |
| | — |
| | (19,508 | ) | | — |
| | — |
| | — |
| | (19,508 | ) | | 55 |
| | (19,453 | ) |
| Interest rate swaps, net of tax of $5,611 | — |
| | — |
| | — |
| | — |
| | (24,558 | ) | | — |
| | — |
| | (24,558 | ) | | — |
| | (24,558 | ) |
| Terminated swap amortization | — |
| | — |
| | — |
| | — |
| | (1,835 | ) | | — |
| | — |
| | (1,835 | ) | | — |
| | (1,835 | ) |
| Reclassification of redeemable noncontrolling interest to temporary equity | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6,091 | ) | | (6,091 | ) |
| Derecognition of 110 North Wacker (b) | | | | | — |
| | 1 |
| | 12,934 |
| | | | | | 12,935 |
| | (178,444 | ) | | (165,509 | ) |
| Adoption of ASU 2016-13 | — |
| | — |
| | — |
| | (18 | ) | | — |
| | — |
| | — |
| | (18 | ) | | — |
| | (18 | ) |
| Common stock issued | 12,270,900 |
| | 123 |
| | 593,493 |
| | — |
| | — |
| | — |
| | — |
| | 593,616 |
| | — |
| | 593,616 |
|
| Stock plan activity | 68,090 |
| | 1 |
| | 4,697 |
| | — |
| | — |
| | (2,875 | ) | | (176 | ) | | 4,522 |
| | — |
| | 4,522 |
|
| Balance, September 30, 2020 | 55,974,883 |
| | $ | 561 |
| | $ | 3,942,173 |
| | $ | (65,910 | ) | | $ | (42,831 | ) | | (1,053,135 | ) | | $ | (120,706 | ) | | $ | 3,713,287 |
| | $ | 375 |
| | $ | 3,713,662 |
|
(a) Excludes redeemable noncontrolling interest, which is reflected in temporary equity. See Note 3 - Real Estate and Other Affiliates. |
(b) Related to deconsolidation of 110 North Wacker. Refer to Note 3 - Real Estate and Other Affiliates for additional information. |
| | | | | | | | | | | | | | | | | | | | |
| 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) | — |
| | — |
| | — |
| | 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 real estate and other affiliates | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 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 |
|
(b) Related to deconsolidation of 110 North Wacker. See Note 2 - Real Estate and Other Affiliates for additional information.
See Notes to Condensed Consolidated Financial Statements.
HHC 20202021 FORM 10-Q | 76
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | | | | | | | | | | | |
| Nine Months Ended September 30, |
| thousands | 2021 | | 2020 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | |
| Net income (loss) | $ | (62,425) | | | $ | 4,817 | |
| Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | | | |
| Depreciation | 140,867 | | | 146,345 | |
| Amortization | 12,408 | | | 14,082 | |
| Amortization of deferred financing costs | 7,676 | | | 10,392 | |
| Amortization of intangibles other than in-place leases | 2,024 | | | 510 | |
| Straight-line rent amortization | (6,547) | | | (10,277) | |
| Deferred income taxes | (17,975) | | | 1,186 | |
| Restricted stock and stock option amortization | 7,432 | | | 4,000 | |
| Net gain on sale of properties | (60,479) | | | — | |
| | | |
| Net gain on sale of lease receivable | — | | | (38,124) | |
| Proceeds from the sale of lease receivable | — | | | 64,155 | |
| | | |
| (Gain) loss on extinguishment of debt | 37,543 | | | 9,604 | |
| Impairment charges | 13,799 | | | 60,762 | |
| | | |
| | | |
| Equity in (earnings) losses from real estate and other affiliates, net of distributions | 23,000 | | | (267,168) | |
| Provision for doubtful accounts | (1,175) | | | 16,835 | |
| | | |
| Master Planned Community development expenditures | (215,559) | | | (160,217) | |
| Master Planned Community cost of sales | 55,445 | | | 55,470 | |
| Condominium development expenditures | (240,228) | | | (175,536) | |
| Condominium rights and units cost of sales | 66,033 | | | 99,314 | |
| Net Changes: | | | |
| Accounts and notes receivable | (17,737) | | | (17,514) | |
| Prepaid expenses and other assets | (15,008) | | | (37,345) | |
| | | |
| Condominium deposits received | 240,730 | | | 102,606 | |
| Deferred expenses | (14,115) | | | (20,716) | |
| Accounts payable and accrued expenses | 3,891 | | | (32,979) | |
| | | |
| | | |
| Cash provided by (used in) operating activities | (40,400) | | | (169,798) | |
| | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | |
| Property and equipment expenditures | (1,223) | | | (830) | |
| Operating property improvements | (27,064) | | | (28,490) | |
| Property development and redevelopment | (178,734) | | | (379,219) | |
| | | |
| | | |
| Proceeds from sales of properties | 299,085 | | | — | |
| Reimbursements under tax increment financings | 667 | | | 4,887 | |
| | | |
| Distributions from real estate and other affiliates | 85,008 | | | 2,049 | |
| Investments in real estate and other affiliates, net | (837) | | | (2,919) | |
| | | |
| Cash provided by (used in) investing activities | 176,902 | | | (404,522) | |
| | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | |
| Proceeds from mortgages, notes and loans payable | 1,870,378 | | | 1,324,360 | |
| Principal payments on mortgages, notes and loans payable | (1,758,772) | | | (861,975) | |
| Proceeds from issuance of common stock | — | | | 593,617 | |
| | | |
| Debt extinguishment costs | (29,793) | | | — | |
| Special Improvement District bond funds released from (held in) escrow | 7,939 | | | 4,562 | |
| Deferred financing costs and bond issuance costs, net | (22,240) | | | (16,399) | |
| Taxes paid on stock options exercised and restricted stock vested | (2,344) | | | (844) | |
| | | |
| Stock options exercised | 3,902 | | | 1,365 | |
| | | |
| Cash provided by (used in) financing activities | 69,070 | | | 1,044,686 | |
| | | |
| Net change in cash, cash equivalents and restricted cash | 205,572 | | | 470,366 | |
| Cash, cash equivalents and restricted cash at beginning of period | 1,242,997 | | | 620,135 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 1,448,569 | | | $ | 1,090,501 | |
|
| | | | | | | |
| | Nine Months Ended September 30, |
| thousands | 2020 | | 2019 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | |
| Net income (loss) | $ | 4,817 |
| | $ | 75,296 |
|
| Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities: | |
| | |
|
| Depreciation | 146,345 |
| | 106,328 |
|
| Amortization | 14,082 |
| | 7,584 |
|
| Amortization of deferred financing costs | 10,392 |
| | 8,126 |
|
| Amortization of intangibles other than in-place leases | 510 |
| | 618 |
|
| Straight-line rent amortization | (10,277 | ) | | (4,833 | ) |
| Deferred income taxes | 1,186 |
| | 23,191 |
|
| Restricted stock and stock option amortization | 4,000 |
| | 9,902 |
|
| Net gain on sales and acquisitions of properties | 0 |
| | (24,201 | ) |
| Net gain on sale of lease receivable | (38,124 | ) | | 0 |
|
| Proceeds from the sale of lease receivable | 64,155 |
| | 0 |
|
| Loss on extinguishment of debt | 9,604 |
| | 0 |
|
| Selling profit from sales-type leases | 0 |
| | (13,537 | ) |
| Impairment charges | 60,762 |
| | 0 |
|
| Equity in (earnings) losses from real estate and other affiliates, net of distributions | (267,168 | ) | | (12,260 | ) |
| Provision for doubtful accounts | 16,835 |
| | 3,698 |
|
| Master Planned Communities land acquisitions | 0 |
| | (752 | ) |
| Master Planned Communities development expenditures | (160,217 | ) | | (180,733 | ) |
| Master Planned Communities cost of sales | 55,470 |
| | 78,040 |
|
| Condominium development expenditures | (175,536 | ) | | (165,520 | ) |
| Condominium rights and unit cost of sales | 99,314 |
| | 365,324 |
|
| Net changes: | |
| | |
|
| Accounts and notes receivable | (17,514 | ) | | (2,544 | ) |
| Prepaid expenses and other assets | (37,345 | ) | | (3,827 | ) |
| Condominium deposits received | 102,606 |
| | (93,530 | ) |
| Deferred expenses | (20,716 | ) | | (29,613 | ) |
| Accounts payable and accrued expenses | (32,979 | ) | | (9,561 | ) |
| Cash (used in) provided by operating activities | (169,798 | ) | | 137,196 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES | |
| | |
|
| Property and equipment expenditures | (830 | ) | | (5,395 | ) |
| Operating property improvements | (28,490 | ) | | (44,083 | ) |
| Property development and redevelopment | (379,219 | ) | | (492,279 | ) |
| Acquisition of assets | 0 |
| | (579 | ) |
| Proceeds from sales of properties | 0 |
| | 9,460 |
|
| Proceeds from (reimbursements under) Tax Increment Financings | 4,887 |
| | 3,224 |
|
| Distributions from real estate and other affiliates | 2,049 |
| | 315 |
|
| Investments in real estate and other affiliates, net | (2,919 | ) | | (6,469 | ) |
| Cash used in investing activities | (404,522 | ) | | (535,806 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES | |
| | |
|
| Proceeds from mortgages, notes and loans payable | 1,324,360 |
| | 638,686 |
|
| Proceeds from issuance of common stock | 593,617 |
| | 0 |
|
| Principal payments on mortgages, notes and loans payable | (861,975 | ) | | (196,081 | ) |
| Special Improvement District bond funds released from (held in) escrow | 4,562 |
| | 1,777 |
|
| Deferred financing costs and bond issuance costs, net | (16,399 | ) | | (14,468 | ) |
| Taxes paid on stock options exercised and restricted stock vested | (844 | ) | | (987 | ) |
| Stock options exercised | 1,365 |
| | 3,208 |
|
| Contribution from (issuance of) noncontrolling interest | 0 |
| | 84,889 |
|
| Cash provided by financing activities | 1,044,686 |
| | 517,024 |
|
| Net change in cash, cash equivalents and restricted cash | 470,366 |
| | 118,414 |
|
| Cash, cash equivalents and restricted cash at beginning of period | 620,135 |
| | 724,215 |
|
| Cash, cash equivalents and restricted cash at end of period | $ | 1,090,501 |
| | $ | 842,629 |
|
HHC 20202021 FORM 10-Q | 78
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | Nine Months Ended September 30, |
| thousands | | thousands | 2021 | | 2020 |
| | | | Nine Months Ended September 30, | |
| thousands | 2020 | | 2019 | |
| | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |
| | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | |
| Interest paid | $ | 154,448 |
| | $ | 137,967 |
| Interest paid | $ | 159,583 | | | $ | 154,448 | |
| Interest capitalized | 53,699 |
| | 55,110 |
| Interest capitalized | 54,287 | | | 53,699 | |
| Income taxes paid (refunded), net | 312 |
| | (409 | ) | Income taxes paid (refunded), net | 1,789 | | | 312 | |
| | | | | |
| NON-CASH TRANSACTIONS | |
| | |
| NON-CASH TRANSACTIONS | | | |
| Accrued property improvements, developments, and redevelopments | (88,867 | ) | | 33,151 |
| |
| Initial recognition of ASC 842 operating leases ROU asset | | Initial recognition of ASC 842 operating leases ROU asset | — | | | 493 | |
| Initial recognition of ASC 842 operating lease obligation | | Initial recognition of ASC 842 operating lease obligation | — | | | 493 | |
| Accrued property improvements, developments and redevelopments | | Accrued property improvements, developments and redevelopments | 21,973 | | | (88,867) | |
| Special Improvement District bond transfers associated with land sales | 3,090 |
| | 88 |
| Special Improvement District bond transfers associated with land sales | 8,484 | | | 3,090 | |
| Special Improvement District bonds held in third party escrow | 22,750 |
| | 0 |
| |
| Special Improvement District bonds held in third-party escrow | | Special Improvement District bonds held in third-party escrow | 45,425 | | | 22,750 | |
| Accrued interest on construction loan borrowing | 9,743 |
| | 4,627 |
| Accrued interest on construction loan borrowing | — | | | 9,743 | |
| | Capitalized stock compensation | 1,107 |
| | 1,325 |
| Capitalized stock compensation | 1,538 | | | 1,107 | |
| Initial recognition of ASC 842 Operating lease ROU asset | 493 |
| | 72,106 |
| |
| Initial recognition of ASC 842 Operating lease obligation | 493 |
| | 71,888 |
| |
See Notes to Condensed Consolidated Financial Statements.
HHC 20202021 FORM 10-Q | 89
|
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FINANCIAL STATEMENTS |
|
FOOTNOTES | |
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES |
|
| | |
1. BasisSummary of Presentation and OrganizationSignificant Accounting Policies |
General The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)(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”)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”)(Quarterly Report) should refer to The Howard Hughes Corporation’s (“HHC”Corporation (HHC or the “Company”)Company) audited Consolidated Financial Statements, which are included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2019,2020, filed with the SEC on February 27, 202025, 2021 (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 nine months ended September 30, 2020,2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020,2021, and future fiscal years.
Certain amounts in the 2020 and 2019 results of operationsCondensed Consolidated Balance Sheet have been reclassified to conform to the current presentation. Specifically, the Company reclassified minimum rents, tenant recoveries, and interest incomestraight-line rent from sales-type leases to Rental revenue; hospitality revenues, other land revenues,Prepaid expenses and other rental and property revenuesassets, net to Other land, rental and property revenues; and master planned communities operations, and other property operating costs, rental property maintenance costs, and hospitality operating costs to Operating costs. In addition, certain labor costs previously presented in the Master Planned Communities (“MPC”) property operating costs were reclassified to corporate General and administrative expense.Accounts Receivable, net.
Management has evaluated for disclosure or recognition all material events occurring subsequent to the date of the Condensed Consolidated Financial Statements up to the date and time this Quarterly Report was filed.
Douglas Ranch Acquisition In October 2021, HHC announced the launch of Douglas Ranch, a new large-scale master planned community in the city of Buckeye in the West Valley of Phoenix, Arizona. The Company closed on the all-cash purchase of approximately 33,810 acres for a purchase price of $541.0 million. The purchase price includes an option for the seller to re-acquire a 50% interest in the property, with $33.8 million of the purchase price being credited to the Seller upon exercise of the option. If the option is not exercised by the seller, the $33.8 million will be returned to the Company. Simultaneous with the land acquisition, the Company closed on the acquisition of a 50% interest in Trillium Development Holding Company, LLC, for $59.0 million. Trillium Development Holding Company, LLC owns approximately 3,029 acres of land in Buckeye, Arizona.
Share Repurchase Program In October 2021, the board of directors of The Howard Hughes Corporation, authorized a share repurchase program, pursuant to which the Company may, from time to time, purchase up to $250.0 million of its common stock through open market transactions. The date and time of such repurchases will depend upon market conditions. All repurchases will be made in compliance with, and at such times as permitted by, federal securities laws and may be suspended or discontinued at any time. The new program replaces the Company’s prior share repurchase program adopted in October 2019, which authorized the repurchase of up to $100.0 million of its common stock. Under this program, the Company had repurchased an aggregate value of $53.9 million of its common stock as of September 30, 2021.
COVID-19 Pandemic In December 2019, aThe 2020 outbreak of the novel strain of the coronavirus (“COVID-19”) was reported(COVID-19) resulted in a global slowdown of economic activity including worldwide travel restrictions, prohibitions of non-essential work activities, and the disruption and shutdown of businesses, all of which resulted in significant uncertainty in global financial markets and a material adverse impact on the Company’s financial performance in fiscal 2020, particularly in the Operating Asset and Seaport segments. Many states began easing quarantine protocols near the end of the second quarter of 2020, which allowed most of the Company’s retail and hospitality properties to have surfaced in Wuhan, China.resume operations on a limited basis. While COVID-19 has since spread globally, including to every state inadversely impacted all business segments during 2020 and 2021, the United States. On March 11, 2020,Company’s performance notably improved during the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020,second half of 2020. This improvement has continued through the United States declared a national emergency with respect to COVID-19. The outbreakthird quarter 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.2021.
The outbreak ofextent to which COVID-19 has materially negatively impacted, and is expectedcontinues 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 dependentCompany will depend on future developments, thatwhich are highly uncertain and cannot be accurately predicted. The future developments include, but are not limited to: (1)predicted with confidence, including the continued severity, duration, transmission rate and geographic spread of COVID-19 inactions taken to contain the United States and other regions in whichpandemic or mitigate its impact, such as the Company operates; (2) the extentspeed and effectiveness of vaccine and treatment developments and their deployment, potential mutations of COVID-19, and the containment measures takendirect and development of a vaccine; and (3) the responseindirect economic effects of the overall economy,pandemic and containment measures.
Restricted Cash Restricted cash reflects amounts segregated in escrow accounts in the financial markets and the population, particularly in areas in whichname of the Company, operates, once the current containment measures are lifted. Material impactsprimarily related to the Company are noted below.escrowed condominium deposits by buyers and other amounts related to taxes, insurance and legally restricted security deposits and leasing costs.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES |
|
Accounts Receivable, net On a quarterly basis, management reviews tenant rents, tenant recoveries and straight-line rent assets for collectability. As required under Accounting Standards Codification (ASC) 842 - Leases, this analysis includes a review of past due accounts and considers factors such as the credit quality of tenants, current economic conditions and changes in customer payment trends. When full collection of a lease receivable or future lease payment is not probable, a reserve for the receivable balance is charged against rental revenue and future rental revenue is recognized on a cash basis. Due to the continued impacts of COVID-19 on the collectability of the Company’s accounts receivable,tenant receivables, the Company completed an analysisdetermined full collection of its collectionsoutstanding tenant rents and determined an additional reserverecoveries was required related to its Retail accounts receivable. Upon assessment of its uncollectible Accounts receivable, net balances,not probable for some retail tenants. In addition, 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 - Leases, as the amount is probable and can be reasonably estimated.
The following table represents the components of Accounts Receivable, net of amounts considered uncollectible, in the accompanying Condensed Consolidated Balance Sheets:
| | | | | | | | | | | |
| thousands | September 30, 2021 | | December 31, 2020 |
| Tenant receivables | $ | 9,150 | | | $ | 4,339 | |
| Straight-line rent receivables | 68,709 | | | 59,288 | |
| Other receivables | 4,076 | | | 3,099 | |
| Accounts receivable, net (a) | $ | 81,935 | | | $ | 66,726 | |
(a)As a result,of September 30, 2021, the Company recorded a specifictotal reserve as contra revenue underbalance for amounts considered uncollectible was $29.9 million, comprised of $26.4 million related to ASC 842 and $3.6 million related to ASC 450. As of $9.7December 31, 2020, the total reserve balance was $33.0 million, forcomprised of $27.3 million related to ASC 842 and $5.7 million related to ASC 450.
The following table summarizes the three months ended September 30, 2020,impacts of the ASC 842 and $16.9 million for the nine months ended September 30, 2020. In addition the Company recorded an ASC 450 reserve of $1.7 million for the three months ended September 30, 2020, and $5.9 million for the nine months ended September 30, 2020,reserves in the Provision for (recovery of) doubtful accounts on theaccompanying Condensed Consolidated Statements of Operations.Operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| thousands | Income Statement Location | 2021 | | 2020 | | 2021 | | 2020 |
| ASC 842 reserve | Rental revenue | $ | (610) | | | $ | 9,718 | | | $ | 751 | | | $ | 16,937 | |
| ASC 450 reserve | Provision for (recovery of) doubtful accounts | (10) | | | 1,673 | | | (2,249) | | | 6,069 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total impact | | $ | (620) | | | $ | 11,391 | | | $ | (1,498) | | | $ | 23,006 | |
Impairment of Long-lived AssetsTemporary Business Closures During the first quarter of 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.
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FINANCIAL STATEMENTS |
|
FOOTNOTES | |
Business ClosuresIn the first quarterhalf of 2020, the Company experienced closures of its Seaport District retail and food and beverage assets as well as theits 3 hotels in The Woodlands, and the Company temporarily laid off the majority of its staff in each impacted location.Woodlands.
The Company reopened The Woodlands Resort & Conference Center in May 2020, with 54% of rooms available for use at the end of the third quarter. The Embassy Suites at Hughes Landing reopened in June 2020 with 100% of rooms available for use.and The Westin at The Woodlands reopened its primary restaurant, Sorriso, in April 2020, subject to local guidance, and reopened 100% ofJuly 2020. As a result, occupancy levels rose throughout the guest rooms on July 1, 2020. Despite these reopenings, the Company continues to see significant declines in occupancy through the third quartersecond half of 2020 compared toand into 2021 but remained lower than levels achieved prior to the impactpandemic. On September 16, 2021, the Company completed the sale of the pandemic.all 3 hospitality assets for $252.0 million, resulting in a gain on sale of $39.1 million. Refer to Note 3 - Dispositions for additional information.
Many of the Seaport District retail and food and beverage assets resumed operations in the third quarter of 2020, on a limited basis, including The Fulton, Cobble & Co. and Malibu Farm. The Company retained key personnel at these locations to facilitate the efficient start-up of operations asbasis. Most remaining restrictions were lifted.lifted in June of 2021; however, many businesses at the Seaport continue to operate at less than full capacity primarily due to labor shortages. The 2020 Seaport summer concert series was cancelled for the 2020 season and the Company is in the process of rescheduling for 2021. In August, inits place of the concert series, a new concept at the Pier 17 rooftop was launched called The Greens, which allows groupscontinued through the end of up to eight people to reserve their own 14-foot by 14-foot green space.first quarter of 2021. The Greens generatedconcept returned in May 2021 to complement the summer concert series, which began in July 2021, and ran through mid-October 2021. The Greens concept and 2021 concert series continue to generate high customer demand for the outdoor venuevenue. Additionally, in April 2021, Momofuku reopened the Ssäm Bar in the space previously occupied by its former concept, Bar Wayō and helped to fulfill obligations under the Company’s sponsorship agreements, which would have been drastically reduced without the summer concert series.
LiquidityIn 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 nine months ended September 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.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES |
|
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, MPCMaster 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 possibleIn addition, these estimates willmay change in the near term due to the rapid developmentcontinued demands and fluidity ofconstraints on the events and circumstancesCompany’s supply chain resulting from the COVID-19 pandemic.
Noncontrolling interestInterests As of September 30, 2021 and December 31, 2020, Noncontrollingnoncontrolling interests isare related to the Ward Village Homeowners’ Associations (“HOAs”)(HOAs). All revenues and expenses related to the HOAs are attributable to noncontrolling interests and do not impact net income attributable to common stockholders. As of December 31, 2019, Noncontrolling interests is related to the HOAs, as well asFor additional information on redeemable noncontrolling interest in the 110 North Wacker venture. Seerefer to Note 32 - Real Estate and Other Affiliates for details on the 110 North Wacker ownership structure..
Impact of New Accounting Standard Related to Financial Instruments - Credit Losses In June 2016,The Company is exposed to credit losses through the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The standard modifiessale of goods and services to the impairment model for most financial assets, includingCompany’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, TIF receivables, net investments in lease receivables, and requires the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities are requirednotes receivable. The Company assesses its exposure to estimate the lifetime expected credit loss based on such instrumentshistorical collection experience and record an allowance to offsetfuture expectations by portfolio segment. Historical collection experience is evaluated on a quarterly basis by the Company.
The amortized cost basis of the financial asset, resulting in a net presentationfinancing receivables, consisting primarily of the amount expected to be collected on the financial asset. Subsequently, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which amended the scope of ASU 2016-13 and clarified thatMUD receivables, arising from operating leases are not within the scope of the standard and should continue to be accounted for in accordance with the leases standard (Topic 842).
The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized costs. Results for reporting periods beginning after January 1, 2020, are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $18 thousandtotaled $482.6 million as of January 1, 2020,September 30, 2021, including accrued interest of $21.0 million. There has been no material activity in the allowance for the cumulative effect of adopting ASU 2016-13.
See Note 2 - Accounting Policies and Pronouncementscredit losses for further discussion of accounting policies impacted by the Company’s adoption of ASU 2016-13 and disclosures required by ASU 2016-13.
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FINANCIAL STATEMENTS |
|
FOOTNOTES | |
Corporate Restructuring During 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. In the third quarter of 2020, the Company consolidated 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 $2.1 million was recorded infinancing receivables for the nine months ended September 30, 2020.2021.
Financing receivables are considered to be past due once they are 30 days contractually past due under the terms of the agreement. The Company expects to incur an additional $0.2 million to $0.7 million related to relocation, retention and severance expenses indoes not have significant receivables that are past due or on nonaccrual status. There have been no significant write-offs or recoveries of amounts previously written off during the remainder of 2020. The restructuring costs are included in Corporate income, expenses and other items in Note 18 - Segments. The Company expects to conclude its restructuring activity, excluding the disposition of non-core assets, in 2020.
The following table summarizes the changes to the restructuring liability included in Accounts payable and accrued expenses on the Condensed Consolidated Balance Sheets:
|
| | | |
| thousands | Restructuring costs |
| Balance at December 31, 2019 | $ | 9,685 |
|
| Charges (a) | 2,058 |
|
| Charges paid/settled | (11,015 | ) |
| Balance at September 30, 2020 | $ | 728 |
|
| |
(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. |
CEO Transition
On September 17, 2020, Paul Layne retired as our Chief Executive Officer and simultaneously agreed to step down from the Company’s Board of Directors. David O’Reilly, our President and Chief Financial Officer, agreed to additionally serve as our interim Chief Executive Officer until a permanent Chief Executive Officer is appointed. The Company has commenced a search for a permanent Chief Executive Officer and will consider both internal and external candidates. Pursuant to a Separation and Release Agreement between Mr. Layne and the Company, the Company agreed to continue to pay Mr. Layne his base salary, and permit him to continue participating in Company benefit programs, through November 16, 2020, and to credit Mr. Layne through that date for purposes of calculating the prorated target bonus included in his severance package. In September 2020, the Company recognized $1.4 million in expense related to Mr. Layne’s salary and benefits through November 16, 2020, cash severance, restricted stock acceleration, prorated bonus, and forfeited options.
|
|
2. Accounting Policies and Pronouncements |
Recently Issued Accounting Standards The following is a summary of recently issued and other notable accounting pronouncements whichthat relate to the Company’s business.
ASU 2020-04, Reference Rate Reform The amendments in this Update provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform when certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBORLondon Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has applied certain optional expedients that are retained through the end of the hedging relationship. The amendments in this Update are effective as of March 12, 2020, through December 31, 2022. The guidance in ASUAccounting Standards Update (ASU) 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company 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.
HHC 20202021 FORM 10-Q | 1112
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FINANCIAL STATEMENTS |
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FOOTNOTES | |
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes The amendments in this Update simplify the accounting for income taxes by removing certain exceptions from ASC 740. Additionally, the amendments in this Update also simplify the accounting for income taxes by requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax, requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination, and other targeted changes. The effective date of the amendments is for fiscal years, and interim periods within those years, beginning after December 15, 2020. The Company is currently evaluating the impact that the adoption of ASU 2019-12 may have on its Condensed Consolidated Financial Statements.
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.
ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments The amendments in this update provide clarification on certain aspects of the amendments in ASU 2016-13, Financial Instruments—Credit Losses, ASU 2017-12, Derivatives and Hedging, and ASU 2016-01, Financial Instruments—Overall. The effective date of the standard is for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company adopted ASU 2019-04 as of January 1, 2020. See further discussion regarding adoption of ASU 2016-13 for the impact of amendments to Financial Instruments-Credit Losses. The amendments to Derivatives and Hedging, and Financial Instruments-Overall did not have a material effect on the Company’s Condensed Consolidated Financial Statements.
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 adopted ASU 2018-17 as of January 1, 2020, and it did not have a material effect on its Condensed Consolidated Financial Statements.
ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract This standard is intended to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal use software license). The standard requires an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. This standard also requires the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2019. The new standard may be adopted prospectively or retrospectively with early adoption permitted. The Company adopted ASU 2018-15 prospectively as of January 1, 2020. There was no material impact to the Company’s Condensed Consolidated Financial Statements upon adoption.
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted-average of significant unobservable inputs used to develop Level-3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively. Early adoption is permitted. The Company adopted ASU 2018-13 as of January 1, 2020. The amended disclosure requirements did not have a material impact to the Company’s Condensed Consolidated Financial Statements upon adoption.
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FINANCIAL STATEMENTS |
|
FOOTNOTES | |
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350)This standard is intended to simplify the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. In computing the implied fair value of goodwill under step two, an entity determined the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, an entity will perform only step one of its quantitative goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and then recognizing the impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity will still have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative step one impairment test is necessary. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2019. The new standard must be adopted prospectively with early adoption permitted. The Company adopted ASU 2017-04 as of January 1, 2020, and will eliminate step two from its goodwill impairment tests. There was no material impact to the Condensed Consolidated Financial Statements upon adoption.
Financial Instruments - Credit Losses and Related Policy UpdatesThe Company is exposed to credit losses through the sale of goods and services to the Company’s customers. Receivables held by the Company primarily relate to short-term trade receivables and financing receivables, which include Municipal Utility District (“MUD”) receivables, Special Improvement District (“SID”) bonds, tax increment financing (“TIF”) receivables, net investments in lease receivables, and notes receivable. The Company assesses its exposure to credit loss based on historical collection experience and future expectations by portfolio segment. Historical collection experience is evaluated on a quarterly basis by the Company.
The following table summarizes the amortized cost basis of financing receivables by receivable type as of September 30, 2020:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| thousands | MUD Receivables | | SID Receivables | | TIF Receivables | | Net Investments in Lease Receivable | | Notes Receivable | | Total |
| Ending balance as of September 30, 2020 | $ | 331,451 |
| | $ | 60,198 |
| | $ | 1,980 |
| | $ | 2,946 |
| | $ | 52,312 |
| | $ | 448,887 |
|
Accrued interest of $17.7 million as of September 30, 2020, and $19.7 million as of September 30, 2019, are included within Municipal Utility District receivables on the Company’s Condensed Consolidated Balance Sheets.
The following table presents the activity in the allowance for credit losses for financing receivables by receivable type for the nine months ended September 30, 2020:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 17 |
| | $ | 209 |
| | $ | 0 |
|
| Current-period provision for expected credit losses | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (32 | ) | | 109 |
|
| Write-offs | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (1 | ) | | (44 | ) |
| Recoveries | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Ending balance as of September 30, 2020 | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 17 |
| | $ | 176 |
| | $ | 65 |
|
| |
(a) | Trade accounts receivable are presented within accounts receivable, net on the consolidated balance sheet. Accounts receivable, net also includes receivables related to operating leases. Collectability and related allowance for amounts due under operating leases is assessed under the guidance of ASC 842. Reserves related to operating lease receivables are not included in the above table. |
Financing receivables are considered to be past due once they are 30 days contractually past due under the terms of the agreement. The Company currently does not have significant financing receivables that are past due or on nonaccrual status.
There have been no significant write-offs or recoveries of amounts previously written-off during the current period for financing receivables.
|
| |
FINANCIAL STATEMENTS |
|
FOOTNOTES | |
|
| | | | |
3.FINANCIAL STATEMENTS FOOTNOTES |
|
| | |
| 2. Real Estate and Other Affiliates |
As of September 30, 2020,2021, the Company isdoes not the primary beneficiary of any ofconsolidate the investments listed below as it does not have the power to direct the activities that most significantly impact the economic performance of the ventures.ventures and does not have controlling interests in these investments. As a result, the Company reports its interests in accordance with the equity method. As of September 30, 2020,2021, approximately $491.4$634.5 million of indebtedness was secured by the properties owned by the Company’s real estate and other affiliates, of which the Company’s share was $252.5$292.8 million based uponon economic ownership. All of this indebtedness is without recourse to the Company, with the exception of $100.6 million related to 110 North Wacker.
Equity investments in real estate and other affiliates are reported as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Economic/Legal Ownership | | Carrying Value | | Share of Earnings/Dividends |
| | September 30, | December 31, | | September 30, | December 31, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| thousands except percentages | 2021 | 2020 | | 2021 | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| Equity Method Investments | | | | | | | | | | | | | |
| Operating Assets: | | | | | | | | | | | | | |
| 110 North Wacker (a) | see below | see below | | $ | 224,004 | | $ | 261,143 | | | $ | (15,954) | | | — | | | $ | (42,966) | | | $ | — | |
| The Metropolitan Downtown Columbia (b) | 50 | % | 50 | % | | — | | — | | | (233) | | | 215 | | | (122) | | | 637 | |
| Stewart Title of Montgomery County, TX | 50 | % | 50 | % | | 4,424 | | 3,924 | | | 715 | | | 375 | | | 1,349 | | | 878 | |
| Woodlands Sarofim #1 | 20 | % | 20 | % | | 3,207 | | 3,120 | | | 34 | | | 32 | | | 87 | | | 96 | |
| m.flats/TEN.M | 50 | % | 50 | % | | 563 | | 1,247 | | | 330 | | | 340 | | | 966 | | | 496 | |
| Master Planned Communities: | | | | | | | | | | | | | |
| The Summit (c) | see below | see below | | 39,196 | | 96,300 | | | 8,277 | | | (1,563) | | | 54,568 | | | 4,403 | |
| Seaport | | | | | | | | | | | | | |
| Mr. C Seaport (d) | — | % | — | % | | — | | — | | | — | | | — | | | — | | | (6,900) | |
| The Lawn Club (e) | see below | see below | | 123 | | — | | | — | | | — | | | — | | | — | |
| Ssäm Bar (Momofuku) (f) | see below | see below | | 6,142 | | 7,101 | | | (1,009) | | | (288) | | | (1,697) | | | (2,064) | |
| Strategic Developments: | | | | | | | | | | | | | |
| Circle T Ranch and Power Center (g) | — | % | — | % | | — | | — | | | — | | | 216 | | | — | | | 891 | |
| HHMK Development | 50 | % | 50 | % | | 10 | | 10 | | | — | | | — | | | — | | | — | |
| KR Holdings | 50 | % | 50 | % | | 222 | | 347 | | | (8) | | | (7) | | | (125) | | | (44) | |
| | | | | | | | | | | | | |
| 110 North Wacker (a) | see below | see below | | — | | — | | | — | | | 267,518 | | | — | | | 267,518 | |
| | | | 277,891 | | 373,192 | | | (7,848) | | | 266,838 | | | 12,060 | | | 265,911 | |
| Other equity investments (h) | | | | 3,952 | | 3,953 | | | — | | | — | | | 3,755 | | | 3,724 | |
| Investments in real estate and other affiliates | | | | $ | 281,843 | | $ | 377,145 | | | $ | (7,848) | | | $ | 266,838 | | | $ | 15,815 | | | $ | 269,635 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Economic/Legal Ownership | | Carrying Value | | Share of Earnings/Dividends |
| | September 30, | December 31, | | September 30, | December 31, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| thousands except percentages | 2020 | 2019 | | 2020 | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| Equity Method Investments | | | | | | | | | | | |
| | |
|
| Operating Assets: | | | | | | | | | | | |
| | |
|
| 110 North Wacker (a) | 0 | % | 0 | % | | $ | 273,608 |
| n/a |
| | $ | 267,518 |
| | n/a |
| | $ | 267,518 |
| | n/a |
|
| The Metropolitan Downtown Columbia (b) | 50 | % | 50 | % | | 0 |
| 0 |
| | 215 |
| | 172 |
| | 637 |
| | 478 |
|
| Stewart Title of Montgomery County, TX | 50 | % | 50 | % | | 4,052 |
| 4,175 |
| | 375 |
| | 306 |
| | 878 |
| | 579 |
|
| Woodlands Sarofim #1 | 20 | % | 20 | % | | 3,091 |
| 2,985 |
| | 32 |
| | 38 |
| | 96 |
| | 89 |
|
| m.flats/TEN.M | 50 | % | 50 | % | | 1,820 |
| 2,431 |
| | 340 |
| | (75 | ) | | 496 |
| | (1,576 | ) |
| Master Planned Communities: | | | | | | | | | | | | |
| The Summit (c) | 0 | % | 0 | % | | 85,327 |
| 84,455 |
| | (1,563 | ) | | 4,523 |
| | 4,403 |
| | 18,859 |
|
| Seaport District: | | | | | | | | | | | |
| | |
|
| Mr. C Seaport | 0 | % | 35 | % | | 0 |
| 7,650 |
| | 0 |
| | (545 | ) | | (6,900 | ) | | (1,628 | ) |
| Bar Wayō (Momofuku) (c) | 0 | % | 0 | % | | 6,963 |
| 7,469 |
| | (288 | ) | | (160 | ) | | (2,064 | ) | | (160 | ) |
| Strategic Developments: | | | | | | | | | | | | | |
| Circle T Ranch and Power Center | 50 | % | 50 | % | | 10,686 |
| 8,207 |
| | 216 |
| | 400 |
| | 891 |
| | 691 |
|
| HHMK Development | 50 | % | 50 | % | | 10 |
| 10 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| KR Holdings | 50 | % | 50 | % | | 372 |
| 422 |
| | (7 | ) | | (117 | ) | | (44 | ) | | (110 | ) |
| | | | | 385,929 |
| 117,804 |
| | 266,838 |
| | 4,542 |
| | 265,911 |
| | 17,222 |
|
| Other equity investments (d) | | | | 3,953 |
| 3,953 |
| | 0 |
| | 0 |
| | 3,724 |
| | 3,625 |
|
| Investments in real estate and other affiliates | | | $ | 389,882 |
| $ | 121,757 |
| | $ | 266,838 |
| | $ | 4,542 |
| | $ | 269,635 |
| | $ | 20,847 |
|
| |
(a) | (b)The Metropolitan Downtown Columbia was in a deficit position of $11.0 million at September 30, 2021, and $5.0 million at December 31, 2020, due to distributions from operating cash flows in excess of basis. These deficit balances are presented in Accounts payable and accrued expenses at September 30, 2021, and December 31, 2020. The increase in the deficit balance is primarily due to a $5.0 million distribution in the third quarter of 2021. (c)The decrease in investment balance is primarily due to distributions of $100.5 million received during the second quarter of 2021 and $10.0 million received during the third quarter of 2021 partially offset by an increase in income. Refer to discussion below for details on the ownership structure. (d)During the third quarter of 2020, 110 North Wacker was completed and placed in service. This triggered a reconsideration event that resulted in the deconsolidation of 110 North Wacker and the recognition of the retained equity method investment at fair market value. The gain on deconsolidation was recorded in the Strategic Developments segment. The equity method investment was transferred from the Strategic Development segment to the Operating Asset segment. Refer to the discussion below for additional details. |
| |
(b) | The Metropolitan Downtown Columbia was in a deficit position of $4.5 million at September 30, 2020, and $4.7 million at December 31, 2019, due to distributions from operating cash flows in excess of basis. These deficit balances are presented in Accounts payable and accrued expenses at September 30, 2020, and December 31, 2019. |
| |
(c) | Refer to the discussion below for details on the ownership structure. |
| |
(d) | Other equity investments represent equity investments not accounted for under the equity method. The Company elected the measurement alternative as these investments do not have readily determinable fair values. There were no impairments, or upward or downward adjustments to the carrying amounts of these securities either during current year 2020, or cumulatively. |
Significant activity for real estate and other affiliates and the related accounting considerations are described below.
Mr. C Seaport As of December 31, 2019 and June 30, 2020, the Mr. C Seaport variable interest entity (“VIE”) did not have sufficient equity at risk to finance its operations without additional financial support and the carrying value of the Company’s investment was classified as Investments in real estate and other affiliates in the Condensed Consolidated Balance Sheets. During the three months ended June 30, 2020, the Company recognized a $6.0 million impairment of its equity investment in Mr. C Seaport. During the three months ended September 30, 2020, the Company completed the sale of its 35% equity investment in Mr. C Seaport.
(e)Refer to Note 4 - Recent Transactions and Note 5 - Impairmentthe discussion below for additional information.details on the ownership structure.
(f)During the first quarter of 2021, Bar Wayō was rebranded as Ssäm Bar. Refer to the discussion below for details on the ownership structure.
(g)During the fourth quarter of 2020, the Company completed the sale of its 50% equity investment in Circle T Ranch and Power Center.
(h)Other equity investments represent equity investments not accounted for under the equity method. The Company elected the measurement alternative as these investments do not have readily determinable fair values. There were no impairments, or upward or downward adjustments to the carrying amounts of these securities either during current year or cumulatively.
Significant activity for investments in real estate and other affiliates and the related accounting considerations are described below.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES |
|
110 North Wacker The Company formed a partnership with a local developer (the “Partnership”)Partnership) during the second quarter of 2017. During the second quarter of 2018, the Partnership executed an agreement with USAA related to 110 North Wacker
|
| |
FINANCIAL STATEMENTS |
|
FOOTNOTES | |
(collectively, (collectively, the local developer and USAA are the “Partners”)Partners) to construct and operate the building at 110 North Wacker (the “Venture”)Venture).
The Partnership was determined to be a VIE,variable interest entity (VIE), and as the Company has the power to direct the activities of the Partnership that most significantly impact its economic performance, the Company is considered the primary beneficiary and consolidates the Partnership. Additionally, the noncontrolling interest holder has the right to require the Company to purchase its interest in the Partnership if the Venture has not been sold or refinanced (with distributions made to the local developer and Company sufficient to repay all capital contributions), at the later of (1) the third anniversary of the issuance of the certificate of occupancy for the project or (2) the fifth anniversary of the effective date of the Partnership's LLC agreement. Therefore, the local developer’s redeemable noncontrolling interest in the Partnership is presented as temporary equity on the Condensed Consolidated Balance Sheets. As of September 30, 2020,2021, the time restriction has not been met, and the Company believes it is not probable that the put will be redeemed. As such, the redeemable noncontrolling interest is measured at the initial carrying value plus net income (loss) attributable to the noncontrolling interest and is not adjusted to fair value. The following table presents changes in Redeemable noncontrolling interest:
|
| | | | |
| thousands | Redeemable Noncontrolling Interest |
| Balance as of December 31, 2019 | | $ | 0 |
|
| Reclassification of redeemable noncontrolling interest from permanent equity | | 6,091 |
|
| Net income (loss) attributable to noncontrolling interest | | 24,270 |
|
| Balance as of September 30, 2020 | | $ | 30,361 |
|
| | | | | | | | |
| thousands | Redeemable Noncontrolling Interest |
| Balance as of December 31, 2020 | | $ | 29,114 | |
| | |
| Net income (loss) attributable to noncontrolling interest | | (4,296) | |
| Share of investee’s other comprehensive income | | 582 | |
| Balance as of September 30, 2021 | | $ | 25,400 | |
| | |
| Balance as of December 31, 2019 | | $ | — | |
| Reclassification of redeemable noncontrolling interest from permanent equity | | 6,091 | |
| Net income (loss) attributable to noncontrolling interest | | 24,270 | |
| | |
| Balance as of September 30, 2020 | | $ | 30,361 | |
| | |
| | |
Upon execution of the Venture in the second quarter of 2018, the Company contributed land with a carrying value of $33.6 million and an agreed upon fair value of $85.0 million, the local developer contributed $5.0 million in cash and USAA contributed $64.0 million in cash. USAA was required to fund up to $105.6 million in addition to its initial contribution. HHC and the local developer also had additional cash funding requirements and contributed $9.8 million and $1.1 million, respectively, during 2018. The Company and its Partners entered into a construction loan agreement further described in Note 76 - Mortgages, Notes and Loans Payable, Net. Any further cash funding requirements by the Partnership were eliminated when the construction loan was increased on May 23, 2019. Concurrently with the increase in the construction loan, 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 Partners under the construction loan agreement.
The Company concluded that the Venture was within the scope of the VIE model, and that it was the primary beneficiary of the Venture during the development phase of the project because it had the power to direct activities that most significantly impact the Venture’s economic performance,performance; however, upon the building’s completion, the Company expected to recognize the investment under the equity method. As the primary beneficiary of the VIE during the development phase, the Company hashad consolidated 110 North Wacker and its underlying entities since the second quarter of 2018. During the third quarter of 2020, 110 North Wacker was completed and placed in service, triggering a reconsideration event. Upon development completion, the Company concluded it is no longer the primary beneficiary and as such, should no longer consolidate the Venture. As there have been no changes to the structure and control of the Partnership with the local developer, the Company will continue to consolidate the Partnership.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES |
|
As of September 30, 2020, the Company derecognized all assets, liabilities and noncontrolling interest related to the Venture that were previously consolidated and recognized an equity method investment of $273.6 million based on the fair value of its interest in 110 North Wacker. The Company recognized a gain of $267.5 million attributable to the initial fair value step-up at the time of deconsolidation, which is included in Equity in earnings (losses) from real estate and other affiliates on the Condensed Consolidated Statements of Operations and reported in the Strategic Developments segment for the three and nine months ended September 30, 2020. The Company utilized a third-party appraiser to measure the fair value of 110 North Wacker on an as-is basis at September 30, 2020, using the discounted cash flow approach and sales comparison approach, based on current market assumptions. Also as a result of the deconsolidation, the Company recognized an additional $15.4 million attributable to the recognition of previously eliminated development management fees, which is included in Other land, rental and property revenues on the Condensed Consolidated Statements of Operations and reported in the Strategic Developments segment for the three and nine months ended September 30, 2020. As 110 North Wacker has now beenwas placed in service, the equity method investment was transferred from the Strategic Development segment to the Operating Asset segment.
Given the nature of the Venture’s capital structure and the provisions for the liquidation of assets, the Company’s share of the Venture’s income-producing activities will be recognized based on the Hypothetical Liquidation at Book Value (“HLBV”) method, which represents an economic interest of approximately 23% for the Company.(HLBV) method. Under this method, the Company will recognize income or loss in Equity in earnings from real estate and other affiliates based on the change in its underlying
|
| |
FINANCIAL STATEMENTS |
|
FOOTNOTES | |
share of the Venture’s net assets on a hypothetical liquidation basis as of the reporting date. After USAA receives a 9.0% preferred return on its capital contribution, the Partnership is entitled to cash distributions from the venture until it receives a 9.0% return on its capital account, calculated as the initial land contribution of $85.0 million and cash contribution of $5$5.0 million, plus subsequent cash contributions and less subsequent cash distributions. 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.
AsThe Lawn Club On January 19, 2021, the Company formed HHC Lawn Games, LLC with The Lawn Club NYC, LLC (Endorphin Ventures), to construct and operate an immersive indoor and outdoor restaurant that includes an extensive area of December 31, 2019, whenindoor grass, a stylish clubhouse bar and a wide variety of lawn games. This concept is expected to open in early 2022. Under the Venture was a consolidated VIE, the carrying valueterms of the assets associatedagreement, the Company will fund 80.0% of the cost to construct the restaurant, and Endorphin Ventures will contribute the remaining 20.0%. The Company also entered into a lease agreement with HHC Lawn Games, LLC (Lease Agreement) to lease 20,000 square feet of the Fulton Market Building for this venture. The Company will report its ownership interest in accordance with the operationsequity method.
Available cash will be distributed 80.0% to the Company and 20.0% to Endorphin Ventures until each member’s unreturned capital account has been reduced to zero. Distributions will then be allocated 60.0% to the Company and 40.0% to Endorphin Ventures until the amounts paid to the Company under the Lease Agreement and the aggregate amounts distributed to the Company equal $100 per square foot of the Venture was $393.3 millionproperty on an annual basis. Any remaining cash will be distributed equally between both members. Given the nature of The Lawn Club’s capital structure and the carrying value of the related liabilities was $186.5 million. The assets of the Venture were restricted for use only by the Venture and were not availableprovisions for the liquidation of assets, the Company’s general operations.
Ssäm Bar (formerly Bar Wayō) During the first quarter of 2016, the Company formed Pier 17 Restaurant C101, LLC (“Bar(Bar Wayō”) with MomoPier, LLC (“Momofuku”)(Momofuku), an affiliate of the Momofuku restaurant group, to construct and operate a restaurant and bar at Pier 17 in the Seaport District.Seaport. Under the terms of the agreement, the Company will fundfunded 89.75% of the costs to construct the restaurant, and Momofuku will contributecontributed the remaining 10.25%. In 2021, Bar Wayō was rebranded as the Ssäm Bar.
As of September 30, 2020,2021, and December 31, 2019,2020, Ssäm Bar Wayō is classified as a VIE because the equity holders, as a group, lack the characteristics of a controlling financial interest. The carrying value of Ssäm Bar Wayō as of September 30, 2020,2021, is $7.0$6.1 million and is classified as Investments in real estate and other affiliates in the Condensed Consolidated Balance Sheets. The Company’s maximum exposure to loss as a result of this investment is limited to the aggregate carrying value of the investment as the Company has not provided any guarantees or otherwise made firm commitments to fund amounts on behalf of this VIE.
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%50.0% each to the Company and Momofuku. Given the nature of Bar Wayo’sSsäm Bar’s capital structure and the provisions for the liquidation of assets, the Company’s share of Bar Wayo’sSsäm Bar’s income-producing activities is recognized based on the HLBV method.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES |
|
The Summit During the first quarter of 2015, the Company formed DLV/HHPI Summerlin, LLC (“The Summit”)(The Summit) with Discovery Land Company (“Discovery”)(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 Summit at the agreed upon capital contribution value of $125.4 million, or $226,000 per acre.acre and has no further capital obligations. Discovery is required to fund up to a maximum of $30.0 million of cash as their capital contribution, and the Companyof which $3.75 million has no further capital obligations.been contributed. The gains on the contributed land are recognized in Equity in earnings from real estate and other affiliates as The Summit sells lots.
AfterAs of September 30, 2021, the Company receiveshad received cash distributions equal to its capital contribution of $125.4 million and a 5.0% preferred return on such capital contribution, and Discovery is entitled tohad received cash distributions until it has receivedequal to 2 times its equity contribution. Any further cash distributions are shared equally. Given the nature of The Summit’s capital structure and the provisions for the liquidation of assets, the Company’s share of The Summit’s income-producing activities iswill be recognized based on the HLBV method. according to equity ownership, with HHC receiving 50.0% and Discovery receiving 50.0%.
Summarized Financial Information Relevant financial statement information for The Summitsignificant equity method investments is summarized as follows:
| | | | | | | | | | | |
| thousands | The Summit (a)(b) | | 110 North Wacker (c)(d) |
| Balance Sheet | | | |
| September 30, 2021 | | | |
| Total assets | $ | 226,600 | | | $ | 677,419 | |
| Total liabilities | 175,960 | | | 484,721 | |
| Total equity | 50,640 | | | 192,698 | |
| | | |
| December 31, 2020 | | | |
| Total assets | $ | 310,855 | | | $ | 634,274 | |
| Total liabilities | 209,968 | | | 415,452 | |
| Total equity | 100,887 | | | 218,822 | |
| | | |
| Income Statement | | | |
| Nine Months Ended September 30, 2021 | | | |
| Revenues | $ | 260,398 | | | $ | 22,279 | |
| Gross margin | 87,837 | | | — | |
| Operating income (loss) | — | | | 13,811 | |
| Net income (loss) | 85,925 | | | (32,597) | |
| | | |
| Nine Months Ended September 30, 2020 | | | |
| Revenues | $ | 96,022 | | | $ | — | |
| Gross margin | 10,501 | | | — | |
| | | |
| Net income (loss) | 6,028 | | | — | |
|
| | | | | | | |
| | September 30, | | December 31, |
| thousands | 2020 | | 2019 |
| Total Assets | $ | 274,835 |
| | $ | 221,277 |
|
| Total Liabilities | 187,375 |
| | 136,314 |
|
| Total Equity | 87,460 |
| | 84,963 |
|
(b)The increase in Revenues for The Summit is due to an increase in units closed, with 43 units closing during the nine months ended September 30, 2021 compared to 19 units closing during the nine months ended September 30, 2020.
(c)The income statement amounts for 110 North Wacker do not include activity for the nine months ended September 30, 2020, as it was not accounted for under the equity method during this period. |
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2020 | | 2019 | | 2020 | | 2019 |
| Revenues (a) | $ | 37,350 |
| | $ | 25,931 |
| | $ | 96,022 |
| | $ | 84,118 |
|
| Net income | (1,563 | ) | | 4,523 |
| | 6,028 |
| | 18,859 |
|
| Gross Margin | 245 |
| | 5,587 |
| | 10,501 |
| | 22,334 |
|
| |
(a) |
The Summit adopted ASU 2014-09, Revenues from Contracts with Customers (Topic 606) effective in the fourth quarter of 2019, using the modified retrospective transition method. Therefore, for 2020, revenues allocated to each of The Summit’s
|
HHC 20202021 FORM 10-Q | 1715
|
| | | | |
FINANCIAL STATEMENTS FOOTNOTES |
|
FOOTNOTES | |
performance obligations
On September 16, 2021, the Company completed the sale of The Woodlands Resort, The Westin at The Woodlands and Embassy Suites at Hughes Landing for $252.0 million. These hospitality properties, located in The Woodlands, contained a total of 909 rooms. The carrying value of the properties was approximately $210.0 million at the time of sale. Gain on sale of $39.1 million is recognized over time basedcalculated as the difference between the sale price and the asset’s carrying value, less related transaction costs of approximately $2.9 million. The gain on an input measuresale is included in Gain (loss) on sale or disposal of progress. Thereal estate and other assets, net in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 amounts have not been adjusted2021. Additionally, as part of the sale, the Company repaid $132.3 million of debt directly associated with the properties sold. Income (loss) before taxes for these properties consisted of losses of $1.2 million for the three months ended September 30, 2021, $3.1 million for the three months ended September 30, 2020, $6.3 million for the nine months ended September 30, 2021, and are recognized$8.4 million for the nine months ended September 30, 2020.
On May 7, 2021, the Company completed the sale of Monarch City, a property comprised of approximately 229 acres of undeveloped land in Collin County, Texas, for $51.4 million. The carrying value of the property was approximately $28.7 million at the time of sale. Gain on a percentagesale of completion basis.$21.3 million is calculated as the difference between the sale price and the asset’s carrying value, less related transaction costs of approximately $1.5 million. The Summit’s adoptiongain on sale is included in Gain (loss) on sale or disposal of ASU 2014-09 did not have a material impact onreal estate and other assets, net in the Company’s consolidated financial statements.Condensed Consolidated Statements of Operations for the nine months ended September 30, 2021.
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 32 - Real Estate and Other Affiliatesand Note 54 - 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 a 659-acre parcel of land located in West Windsor, New Jersey, that occurred in October 2019. As consideration, the Company received an $8.0 million termination payment in July of 2020, which iswas included in Gain (loss) on sale or disposal of real estate and other assets, net on the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2020, and in Accounts receivable on the Condensed Consolidated Balance Sheets as of September 30, 2020.
OnIn March 13, 2020, the Company closed on the sale of its property at 100 Fellowship Drive, a 13.5-acre land parcel and 203,257-square-foot build-to-suit medical building with approximately 550 surface parking spaces in The Woodlands, Texas, for a total sales price of $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 from 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 an additional gain of $38.3 million in the first quarter of 2020, which iswas included in Gain (loss) on sale or disposal of real estate and other assets, net on the Condensed Consolidated Statements of Operations. The carrying value of the net investment in lease receivable was approximately $76.1 million at the time of sale. Gain on sale is calculated as the difference between the purchasesale price of $115.0 million, and the asset’s carrying value, less related transaction costs of approximately $0.2 million. Contemporaneous with the sale, the Company credited to the buyer approximately $0.6 million for 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 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020.
HHC 20202021 FORM 10-Q | 1618
|
| |
FINANCIAL STATEMENTS |
|
FOOTNOTES | |
|
| | | | |
5.FINANCIAL STATEMENTS FOOTNOTES |
|
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 second quarter of 2021, the Company recorded a $13.1 million impairment charge for Century Park, which is included in Provision for impairment on the Condensed Consolidated Statements of Operations. The Century Park asset includes both building and land components. The impairment relates to the building component, while the land component was not impaired. Century Park is a 63-acre, 1.3 million square foot campus with 17 office buildings in the West Houston Energy Corridor, a non-core asset acquired as part of the acquisition of The Woodlands Towers at The Waterway. The Company recognized an impairment due to decreases in estimated future cash flows and as a result of the impact of a shorter than anticipated holding term. The Company used weighted market and income valuation techniques to estimate the fair value of Century Park. Market valuation was based on recent sales of similar commercial properties in and around Houston, Texas. For the income approach, the Company utilized a capitalization rate of 8.75%, and probability weighted scenarios assuming lease-up periods ranging from 24 months to 48 months, and management’s estimate of future lease income and carry costs.
During the first quarter of 2020, the Company recorded a $48.7 million impairment charge for Outlet Collection at Riverwalk, which is included in Provision for impairment on the Condensed Consolidated Statements of Operations. The Outlet Collection at Riverwalk is a 273,270-square-foot urban upscale outlet center located along the Mississippi River in downtown New Orleans, LA.Louisiana. 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 amountthe fair value amounts of Century Park or Outlet Collection at Riverwalk through a sale.
With respect to the Investments
Each investment in real estate and other affiliates a series of operating losses of an underlying asset or other factors may indicate that a decreasediscussed in value has occurred which is other‑than‑temporary. The investment in each real estateNote 2 - Real Estate and other affiliateOther Affiliates is evaluated periodically and as deemed necessary for recoverability and valuation declines that are other‑than‑temporary.other-than-temporary. If the decrease in value of an investment in a real estate and other affiliate is deemed to be other-than-temporary, the investment in such real estate and other affiliates is reduced to its estimated fair value. No impairment charges were recorded for Investment in real estate and other affiliates during the three and nine months ended September 30, 2021. 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. In July 2020, theThe Company completed the sale of its interest in Mr. C Seaport. See Note 4 - Recent Transactions for additional details regarding the sale.Seaport in July 2020. The impairment loss is presented in Equity in (losses) earnings (losses) from real estate and other affiliates. Refer to Note 32 - Real Estate and Other Affiliates for additional information. NaN impairment charges were recorded for the Investments in real estate and other affiliates during the year ended December 31, 2019.
The Company periodically evaluates its strategic alternatives with respect to each of its propertiesproperty and may revise itsthe strategy from time to time, including itsthe intent to hold anthe asset on a long-term basis or the timing of potential asset dispositions. TheseFor example, the Company may decide to sell property that is held for use, which may result in impairment charges if the current fair value of the property does not support the carrying amount. As a result, changes in strategy could result in impairment charges in future periods.
In addition to the impairments discussed above, during 2020, 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 $6.0 million included in Condominium rights and unit cost of sales during the nine months ended September 30, 2020.sales.
The following table summarizes the pre-tax impacts of the items mentioned above to the Condensed Consolidated Statements of Operations:
|
| | | | | | | | | | | | | | | | |
| | Statements of Operations Line Item | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| thousands | 2020 | | 2019 | | 2020 | | 2019 |
| Operating Assets: | | | | | | | |
| Outlet Collection at Riverwalk | Provision for impairment | $ | 0 |
| | $ | 0 |
| | $ | 48,738 |
| | $ | 0 |
|
| Equity Investments: | | | | | | | |
| Mr. C Seaport | Equity in (losses) earnings from real estate and other affiliates | $ | 0 |
| | $ | 0 |
| | $ | 6,000 |
| | $ | 0 |
|
| Other Assets: | | | | | | | |
| Condominium Inventory | Condominium rights and unit cost of sales | $ | 944 |
| | $ | 0 |
| | $ | 6,022 |
| | $ | 0 |
|
HHC 20202021 FORM 10-Q | 1719
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FINANCIAL STATEMENTS |
|
FOOTNOTES | |
|
| | | | |
6.FINANCIAL STATEMENTS FOOTNOTES |
|
| | |
| 5. Other Assets and Liabilities |
Prepaid Expenses and Other Assets The following table summarizes the significant components of Prepaid expenses and other assets:
| | | | | | | | | | | | | | | | | |
| thousands | September 30, 2021 | | December 31, 2020 | | $ Change |
| Special Improvement District receivable (a) | $ | 89,677 | | | $ | 54,770 | | | $ | 34,907 | |
| Security, escrow and other deposits (b) | 45,425 | | | 48,576 | | | (3,151) | |
| In-place leases | 45,400 | | | 49,161 | | | (3,761) | |
| Intangibles | 30,571 | | | 32,595 | | | (2,024) | |
| Prepaid expenses (c) | 28,597 | | | 17,455 | | | 11,142 | |
| | | | | |
| Condominium inventory (d) | 18,473 | | | 55,883 | | | (37,410) | |
| Tenant incentives and other receivables | 7,115 | | | 9,612 | | | (2,497) | |
| Other | 7,053 | | | 12,096 | | | (5,043) | |
| Food and beverage and lifestyle inventory | 1,035 | | | 1,060 | | | (25) | |
| TIF receivable | 751 | | | 893 | | | (142) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Prepaid expenses and other assets, net | $ | 274,097 | | | $ | 282,101 | | | $ | (8,004) | |
|
| | | | | | | | | | | |
| thousands | September 30, 2020 | | December 31, 2019 | | $ Change |
| Special Improvement District receivable (a) | $ | 60,198 |
| | $ | 42,996 |
| | $ | 17,202 |
|
| Straight-line rent | 59,354 |
| | 56,223 |
| | 3,131 |
|
| Condominium inventory | 57,481 |
| | 56,421 |
| | 1,060 |
|
| Security, escrow, and other deposits (b) | 48,975 |
| | 17,464 |
| | 31,511 |
|
| In-place leases | 50,434 |
| | 54,471 |
| | (4,037 | ) |
| Intangibles | 32,765 |
| | 33,275 |
| | (510 | ) |
| Prepaid expenses (c) | 24,029 |
| | 13,263 |
| | 10,766 |
|
| Other | 11,155 |
| | 9,252 |
| | 1,903 |
|
| Tenant incentives and other receivables | 10,000 |
| | 7,556 |
| | 2,444 |
|
| Federal income tax receivable | 2,389 |
| | 655 |
| | 1,734 |
|
| TIF receivable | 1,980 |
| | 3,931 |
| | (1,951 | ) |
| Food and beverage and lifestyle inventory (d) | 1,117 |
| | 4,310 |
| | (3,193 | ) |
| Above-market tenant leases | 367 |
| | 556 |
| | (189 | ) |
| Prepaid expenses and other assets, net | $ | 360,244 |
| | $ | 300,373 |
| | $ | 59,871 |
|
(b)The decrease in Security, escrow and other deposits is primarily attributable to a $29.5 million settlement of the rate-lock agreement associated with the loans for 1201 Lake Robbins and The Woodlands Warehouse upon repayment in February 2021, partially offset by a $27.5 million deposit related to the loan for Bridgeland entered into in September 2021.
(c)The increase in Prepaid expenses is mainly due to the timing of insurance and property tax prepayments.
(d)The decrease in Condominium inventory is attributable to closing on inventory units at Waiea and Anaha.
| |
(a) | The increase in Special Improvement District receivable is primarily attributable to a new SID Bond issuance in Summerlin. |
| |
(b) | The increase in Security, escrow, and other deposits is primarily attributable to rate-lock and security deposits for The Woodlands Towers at the Waterway. |
| |
(c) | The increase in Prepaid expenses is mainly due to the timing of insurance and property tax prepayments, as well as assets being placed into service. |
| |
(d) | The decrease in Food and beverage and lifestyle inventory is predominantly due to the write-off of inventory at 10 Corso Como Retail and Café in the first quarter of 2020. |
Accounts Payable and Accrued Expenses The following table summarizes the significant components of Accounts payable and accrued expenses:
| | | | | | | | | | | | | | | | | |
| thousands | September 30, 2021 | | December 31, 2020 | | $ Change |
| Condominium deposit liabilities (a) | $ | 550,619 | | | $ | 309,884 | | | $ | 240,735 | |
| Construction payables (b) | 312,767 | | | 253,626 | | | 59,141 | |
| Deferred income | 63,157 | | | 66,656 | | | (3,499) | |
| Tenant and other deposits (c) | 38,016 | | | 25,801 | | | 12,215 | |
| Accounts payable and accrued expenses | 36,961 | | | 28,589 | | | 8,372 | |
| Accrued real estate taxes | 35,748 | | | 38,863 | | | (3,115) | |
| Interest rate swap liabilities (d) | 35,367 | | | 51,920 | | | (16,553) | |
| Accrued payroll and other employee liabilities | 25,794 | | | 27,419 | | | (1,625) | |
| Accrued interest (e) | 22,972 | | | 37,007 | | | (14,035) | |
| Other | 20,360 | | | 12,493 | | | 7,867 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Accounts payable and accrued expenses | $ | 1,141,761 | | | $ | 852,258 | | | $ | 289,503 | |
|
| | | | | | | | | | | |
| thousands | September 30, 2020 | | December 31, 2019 | | $ Change |
| Condominium deposit liabilities (a) | $ | 297,400 |
| | $ | 194,794 |
| | $ | 102,606 |
|
| Construction payables (b) | 268,145 |
| | 261,523 |
| | 6,622 |
|
| Deferred income | 58,131 |
| | 63,483 |
| | (5,352 | ) |
| Interest rate swap liabilities (c) | 56,931 |
| | 40,135 |
| | 16,796 |
|
| Accrued real estate taxes | 40,797 |
| | 27,559 |
| | 13,238 |
|
| Tenant and other deposits | 29,883 |
| | 24,080 |
| | 5,803 |
|
| Accrued payroll and other employee liabilities (d) | 26,230 |
| | 44,082 |
| | (17,852 | ) |
| Accounts payable and accrued expenses | 26,540 |
| | 37,480 |
| | (10,940 | ) |
| Accrued interest | 13,204 |
| | 23,838 |
| | (10,634 | ) |
| Other | 12,948 |
| | 16,173 |
| | (3,225 | ) |
| Accounts payable and accrued expenses | $ | 830,209 |
| | $ | 733,147 |
| | $ | 97,062 |
|
(b)The increase in Construction payables is attributable to an increase of $119.4 million primarily related to increased construction spend at Ward Village, the Summerlin and Bridgeland MPC developments and the Tin Building, as well as a $21.0 million charge for additional remediation costs at Waiea. These increases are partially offset by decreases of $60.3 million related to a reduction of construction spend for projects placed in service in 2020 or approaching completion, as well as costs incurred and paid for Waiea remediation activities during 2021.
(c)The increase in Tenant and other deposits is primarily due to a $13.5 million deposit received in the second quarter of 2021 related to a 216-acre superpad sale in Summerlin. The sale is expected to close in the fourth quarter of 2021.
(d)The decrease in Interest rate swap liabilities is due to an increase of the one-month London Interbank Offered Rate (LIBOR) forward curve for the periods presented.
(e)The decrease in Accrued interest is primarily due to the repurchase of the $1.0 billion 5.375% Senior Notes due 2025, partially offset by the issuance of $650 million in 4.125% Senior Notes due 2029 and $650 million in 4.375% Senior Notes due 2031, in the first quarter of 2021. See Note 6 - Mortgages, Notes and Loans Payable, Net for additional detail.
| |
(a) | The increase in Condominium deposit liabilities is attributable to contracted sales at Victoria Place, Kô'ula, and ‘A‘ali‘i. |
| |
(b) | The increase in Construction payables is primarily attributable to a $97.9 million charge for repairs and remediation on certain alleged construction defects at the Waiea condominium tower (see Note 10 - Commitments and Contingencies for details), partially offset by a decrease of $39.3 million related to the deconsolidation of 110 North Wacker (see Note 3 - Real Estate and Other Affiliates for details), as well as a reduction in construction spend of $51.8 million primarily related to several projects approaching completion.
|
HHC 20202021 FORM 10-Q | 1820
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FINANCIAL STATEMENTS |
|
FOOTNOTES | |
| |
(c) | The increase in Interest rate swap liabilities is due to a decrease of the one-month London Interbank Offered Rate (“LIBOR”) forward curve for the periods presented, partially offset by a decrease of $15.2 million related to the deconsolidation of 110 North Wacker. |
| |
(d) | The decrease in Accrued payroll and other employee liabilities is primarily due to the payment of the 2019 annual incentive bonus payment in the first quarter of 2020, as well as the payment of relocation, retention and severance expenses in 2020, related to the corporate restructuring. |
|
| | | | |
7.FINANCIAL STATEMENTS FOOTNOTES |
|
| | |
| 6. Mortgages, Notes and Loans Payable, Net |
Mortgages, notes and loans payable, net are summarized as follows:
| | | | | | | | | | | |
| thousands | September 30, 2021 | | December 31, 2020 |
| Fixed-rate debt | | | |
| Unsecured 5.375% Senior Notes due 2025 | $ | — | | | $ | 1,000,000 | |
| Unsecured 5.375% Senior Notes due 2028 | 750,000 | | | 750,000 | |
| Unsecured 4.125% Senior Notes due 2029 | 650,000 | | | — | |
| Unsecured 4.375% Senior Notes due 2031 | 650,000 | | | — | |
| Secured mortgages, notes and loans payable | 676,210 | | | 590,517 | |
| Special Improvement District bonds | 69,622 | | | 34,305 | |
| Variable-rate debt (a) | | | |
| Mortgages, notes and loans payable | 1,397,881 | | | 1,945,344 | |
| Secured Bridgeland Notes due 2026 | 275,000 | | | — | |
| Unamortized bond discounts | — | | | (4,355) | |
| Unamortized deferred financing costs (b) | (45,078) | | | (28,442) | |
| Total mortgages, notes and loans payable, net | $ | 4,423,635 | | | $ | 4,287,369 | |
|
| | | | | | | |
| | September 30, | | December 31, |
| thousands | 2020 | | 2019 |
| Fixed-rate debt: | | | |
| Unsecured 5.375% Senior Notes due 2025 | $ | 1,000,000 |
| | $ | 1,000,000 |
|
| Unsecured 5.375% Senior Notes due 2028 | 750,000 |
| | 0 |
|
| Secured mortgages, notes and loans payable | 594,920 |
| | 884,935 |
|
| Special Improvement District bonds | 42,269 |
| | 23,725 |
|
| Variable-rate debt: | | | |
| Mortgages, notes and loans payable (a) | 1,866,406 |
| | 2,229,958 |
|
| Unamortized bond discounts | (4,583 | ) | | (5,249 | ) |
| Unamortized deferred financing costs (b) | (29,678 | ) | | (36,899 | ) |
| Total mortgages, notes and loans payable, net | $ | 4,219,334 |
| | $ | 4,096,470 |
|
| |
(a) | (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).
Debt CollateralAs of September 30, 2020, $644.6 million of variable‑rate debt has been swapped to a fixed rate for the term of the related debt. As of December 31, 2019, $630.1 million of variable‑rate debt has been swapped to a fixed rate for the term of the related debt and an additional $184.3 million of variable-rate debt was subject to interest rate collars. As of both September 30, 2020, and December 31, 2019, $75.0 million of variable-rate debt was capped at a maximum interest rate. See Note 9 - Derivative Instruments and Hedging Activities for additional information. |
| |
(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). |
Certain of the Company’s loans contain provisions which grant the lender a security interest in the operating cash flow of the property that represents the collateral for the loan. Certain mortgage notes may be prepaid subject to a prepayment penalty equal to a yield maintenance premium, defeasance or percentage of the loan balance. As of September 30, 2020,2021, land, buildings and equipment and developments with a net book value of $4.5$4.2 billion have been pledged as collateral for HHC’s Mortgages,mortgages, notes and loans payable, net. payable.
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,Credit Facilities In 2018, the Company did not meetentered into a $700.0 million loan agreement, which provided for a $615.0 million term loan (the Term Loan) and an $85.0 million revolver loan (the Revolver Loan and together with the debt service coverage ratio required to maintainTerm Loan, the outstanding Senior Secured Credit Facility RevolverFacility). Concurrent with the sale of The Westin at The Woodlands and Embassy Suites at Hughes Landing in September 2021, $181.8 million was repaid on the Term Loan, balance of $61.3 million.which $69.8 million was directly associated with the properties sold. Refer to Note 3 - Dispositions for additional information. As of September 30, 2021, the Company had $433.2 million of outstanding borrowings on the Term Loan. The Company cured this failure withhas a one-time right to request an increase of $50.0 million in the repaymentaggregate amount of the Revolver Loan in August 2020.commitment. As of September 30, 2020,2021, the Company did not meethad no outstanding borrowings under the debt service coverage ratioRevolver Loan.
In 2019, the Company closed on a $250.0 million credit facility secured by MUD receivables, land and certain other collateral in both The Woodlands and Bridgeland MPCs. The loan provided for a $100.0 million term loan and a $150.0 million revolver loan. In September 2021, the $615.0Company repaid the $100.0 million Term Loanterm loan and the $50.0 million outstanding borrowings under the revolver portion of the Senior Secured Credit Facility and asloan. As a result, the excess net cash flow after debt service from the underlying properties became restricted. The restricted cash cannot be used for general corporate purposes but can continue to be used to fund operations of the underlying assets. The Company is negotiating an amendment with the lender. As of June 30, 2020, the Company did not meet the debt service coverage ratios for two loan agreements relatedno longer has access to the Self-Storage Operating Assets. Both loans, which totaled $10.9$150.0 million revolver loan. These borrowings were fully repaid in August 2020. As of June 30, 2020, the Company did not meetreplaced by a semi-annual operating covenant within the $62.5$275.0 million loan for The Woodlands Resort and Conference Center. The loanBridgeland. See the table below for The Woodlands Resort and Conference Center provides a partial repayment cure for the debt service coverage ratio test. Management is documenting a modification of the existing terms of the Woodlands Resort and Conference Center loan with the lender to receive a waiver of the $24.1 million repayment to cure.additional detail.
As of September 30, 2020, apart from the Term Loan portion of the Senior Secured Credit Facility and the Woodlands Resort and Conference Center described above, the Company was in compliance with all remaining financial covenants included in the agreements governing its indebtedness.
HHC Special Improvement District Bonds2020 FORM 10-Q | 21
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FINANCIAL STATEMENTS |
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FOOTNOTES | |
The Summerlin MPC uses SID bonds to finance certain common infrastructure improvements. These bonds are issued by the municipalities and are secured by the assessments on the land. The majority of proceeds from each bond issued is held in a construction escrow and disbursed to the Company as infrastructure projects are completed, inspected by the municipalities and approved for reimbursement. Accordingly, the SID bonds have been classified as debt, and the Summerlin MPC pays the debt service on the bonds semi‑annually. As Summerlin sells land, the buyers assume a proportionate share of the bond obligation at closing, and the residential sales contracts provide for the reimbursement of the principal amounts that the Company previously paid with respect to such proportionate share of the bond. In the nine months ended September 30, 2020, 1 new2021, $45.4 million in SID bond wasbonds were issued and obligations of $3.1$8.5 million were assumed by buyers.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES |
|
Debt ComplianceDue to the COVID-19 pandemic, the Company experienced a decline in operating results for certain retail and hospitality properties. As a result, as of December 31, 2020, the Company did not meet the debt service coverage ratio for the $615.0 million Term Loan portion of the Senior Secured Credit Facility and as a result, the excess net cash flow after debt service from the underlying properties became restricted. As a result of the $181.8 million payment on the Term Loan in the third quarter, the Company met the debt service coverage ratio as of September 30, 2021. However, two consecutive quarters of compliance are required to release the restricted cash requirement, and $58.8 million of cash was restricted as of September 30, 2021. While the restricted cash cannot be used for general corporate purposes, it can continue to be used to fund operations of the underlying assets, and during the third quarter of 2021, the Company submitted reimbursement for $33.1 million related to operating expenses. This does not have a material impact on the Company’s liquidity.
As of September 30, 2021, the Company was in compliance with all financial covenants included in the agreements governing its indebtedness.
Financing Activity During the Nine Months Ended September 30, 20202021
The Company’s borrowing activity is summarized as follows:
| | | | | | | | | | | | | | | | | |
| thousands | Initial / Extended
Maturity (a) | Interest Rate | | | Carrying Value |
| Balance at December 31, 2020 | | | | | $ | 4,287,369 | |
| Issuances: | | | | | |
| Senior Notes due 2029 | February 2029 | 4.13 | % | | (c) | 650,000 | |
| Senior Notes due 2031 | February 2031 | 4.38 | % | | (c) | 650,000 | |
| Bridgeland Notes due 2026 | September 2026 | 2.40 | % | | (d) | 275,000 | |
| Special Improvement District bonds | April 2051 | 4.13 | % | | | 45,425 | |
| Borrowings: | | | | | |
| Victoria Place | September 2024/September 2026 | 5.25 | % | | (b),(e) | 42,718 | |
| | | | | |
| Tanager Apartments | May 2031 | 3.13 | % | | (f) | 58,500 | |
| Lakeside Row | September 2031 | 3.15 | % | | (g) | 35,500 | |
| Draws on existing mortgages, notes and loans payable | | | | | 158,661 | |
| Repayments: | | | | | |
| | | | | |
| 1201 Lake Robbins | June 2021 | 2.49 | % | | (b),(h) | (273,070) | |
| The Woodlands Warehouse | June 2021 | 2.49 | % | | (b),(h) | (7,230) | |
| Tanager Apartments | October 2021 / October 2024 | 2.50 | % | | (b),(e) | (39,992) | |
| Lakeside Row | July 2022 / July 2023 | 2.39 | % | | (b),(g) | (31,940) | |
| Senior Secured Credit Facility | September 2023 | 4.61 | % | | (i) | (181,817) | |
| The Woodlands Resort | December 2021 / December 2023 | 3.00 | % | | (b),(i) | (62,500) | |
| The Woodlands Master Credit Facility | October 2022 / October 2024 | 2.64 | % | | (b),(d) | (75,000) | |
| Bridgeland Credit Facility | October 2022 / October 2024 | 2.64 | % | | (b),(d) | (75,000) | |
| Repayments on existing mortgages, notes and loans payable | | | | | (12,223) | |
| Redemptions | | | | | |
| Senior Notes due 2025 | March 2025 | 5.38 | % | | (h) | (1,000,000) | |
| Other: | | | | | |
| Special Improvement District bond assumptions | April 2049 | 4.00 | % | | | (8,484) | |
| Deferred financing costs, net | | | | | (12,282) | |
| Balance at September 30, 2021 | | | | | $ | 4,423,635 | |
|
| | | | | | | | |
| thousands | Initial / Extended Maturity (a) | Interest Rate | | | Carrying Value |
| Balance at December 31, 2019 | | | | | $ | 4,096,470 |
|
| Issuances: | | | | | |
| Senior Notes due 2028 | August 2028 | 5.38 | % | | (c) | 750,000 |
|
| Special Improvement District bonds | October 2049 | 6.00 | % | | (d) | 22,750 |
|
| Borrowings: | | | | | |
| Revolver Loan | September 2023 | 1.80 | % | | (b),(e) | 67,500 |
|
| 9950 Woodloch Forest Drive | March 2025 | 2.10 | % | | (b),(f) | 63,500 |
|
| A'eo Retail | October 2025 | 2.80 | % | | (b),(g) | 30,640 |
|
| Ke Kilohana Retail | October 2025 | 2.80 | % | | (b),(g) | 9,360 |
|
| Draws on existing mortgages, notes and loans payable |
|
|
| | | 476,604 |
|
| Repayments: | | | | | |
| Revolver Loan | September 2023 | 1.80 | % | | (b),(c) | (67,500 | ) |
| The Woodlands Towers at the Waterway | June 2020 / June 2021 | 2.50 | % | | (b),(f) | (63,500 | ) |
| Three Hughes Landing | September 2020 | 4.33 | % | | (b),(c) | (60,766 | ) |
| Two Merriweather | October 2020 / October 2021 | 4.23 | % | | (b),(c) | (30,557 | ) |
| 100 Fellowship Drive | May 2022 | 3.23 | % | | (b),(h) | (49,978 | ) |
| HHC 242 Self-Storage | December 2021 / December 2022 | 4.33 | % | | (b),(c) | (5,499 | ) |
| HHC 2978 Self-Storage | December 2021 / December 2022 | 4.33 | % | | (b),(c) | (5,395 | ) |
| Downtown Summerlin | June 2023 | 3.88 | % | | (b),(c),(i) | (255,297 | ) |
| Lakefront North | December 2022 / December 2023 | 3.73 | % | | (b),(c) | (40,062 | ) |
| Seaport District | June 2024 | 6.10 | % | | (c) | (250,000 | ) |
| Bridgeland Credit Facility | October 2022 / October 2024 | 4.23 | % | | (b),(c) | (50,000 | ) |
| The Woodlands Master Credit Facility | October 2022 / October 2024 | 4.23 | % | | (b),(c) | (50,000 | ) |
| Two Summerlin | October 2022 / October 2025 | 4.25 | % | | (b),(c) | (32,803 | ) |
| Repayments on existing mortgages, notes and loans payable | | | | | (14,095 | ) |
| Other: | | | | | |
| Special Improvement District bond assumptions | December 2020 / October 2049 | 5.00% - 6.00% |
| | | (3,090 | ) |
| Deconsolidation of 110 North Wacker | April 2022 / April 2024 | 4.73 | % | | (b),(j) | (326,835 | ) |
| Deferred financing costs, net | | | | | 7,887 |
|
| Balance at September 30, 2020 | | | | | $ | 4,219,334 |
|
| |
(a) | Maturity dates presented represent initial maturity dates and the extended or final maturity dates as contractually stated. HHC has the option to exercise extension periods at the initial maturity date, subject to extension terms that are based on current property performance projections. Extension terms may include minimum debt service coverage, minimum occupancy levels or condominium sales levels, as applicable and other performance criteria. In certain cases, due to property performance not meeting covenants, HHC may have to pay down a portion of the loan to obtain the extension. |
| |
(b) | The interest rate presented is based on the one-month LIBOR, three-month LIBOR or Prime rate, as applicable, which was 0.15%, 0.23% and 3.25%, respectively, at September 30, 2020. Interest rates associated with loans which have been paid off reflect the interest rate at December 31, 2019. |
HHC 20202021 FORM 10-Q | 2022
|
| | | | |
FINANCIAL STATEMENTS FOOTNOTES |
|
FOOTNOTES | |
| |
(c) | On August 18, 2020, the Company issued $750 million in senior(c)In February 2021, the Company issued $650 million in 4.125% Senior Notes due 2029 and $650 million in 4.375% Senior Notes due 2031. These notes will pay interest semi-annually in February and August of each year, beginning in August 2021. These notes due August 2028 (the “Senior Notes due 2028”), which will pay interest semi-annually at a rate of 5.375% per annum payable on August 1st and February 1st of each year, beginning on February 1, 2021. The Senior Notes due 2028 will be unsecured senior obligations of the Company and will be guaranteed by certain subsidiaries of the Company. The Company used the net proceeds from this issuance, together with cash on hand, for the repayment of existing indebtedness of approximately $807.9 million and recorded a loss on extinguishment of debt of approximately $13.2 million. |
| |
(d) | On July 9, 2020, a new SID bond was issued. The $22.8 million SID bears interest at 6.0% and matures October 2049. |
| |
(e) | On March 23, 2020, the Company drew $67.5 million on its Revolver Loan under the Senior Secured Credit Facility. As of September 30, 2020, the outstanding balance was 0. |
| |
(f) | On March 26, 2020, the Company closed on a partial refinance of 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 bears interest at LIBOR plus 1.95% with a maturity date of March 26, 2025. |
| |
(g) | On September 30, 2020, the Company closed on a $40.0 million loan secured by Ae'o Retail and Ke Kilohana Retail. The loan bears interest at LIBOR, with a floor of 0.25%, plus 2.65% with a maturity date of October 1, 2025. |
| |
(h) | On March 13, 2020, the Company 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. |
| |
(i) | On June 22, 2020, the Company modified the existing Downtown Summerlin loan, extending the financing by three years to June 22, 2023 at a rate of LIBOR plus 2.15% in exchange for a pay-down of $33.8 million to a total commitment of $221.5 million. |
| |
(j) | As of September 30, 2020, the Company derecognized a $326.8 million balance on 110 North Wacker’s variable-rate debt that was subject to interest rate collars. Refer to Note 3 - Real Estate and Other Affiliates for additional information.
|
Additional Debt Activity (d)On January 7, 2020,In September 2021, the Company closed on a $43.4$275.0 million financing secured by MUD receivables and land in Bridgeland, retiring an existing $250.0 million credit facility secured by MUD receivables, land and certain other collateral in both The Woodlands and Bridgeland MPCs. The loan required a $27.5 million fully refundable deposit and has a net effective interest rate of Secured Overnight Financing Rate (SOFR) plus 2.30%, subject to a SOFR floor of 0.10%, with maturity in September 2026.
(e)In March 2021, the Company closed on a $368.2 million construction loan for the development of Creekside ParkVictoria Place in Ward Village. The loan bears interest at one-month LIBOR plus 5.00%, subject to a LIBOR floor of 0.25%, with an initial maturity of September 2024 and 2 one-year extension options. Concurrent with the funding of the loan, the Company entered into interest rate cap agreements with a total notional amount of $368.2 million and interest rate of 2.00%.
(f)In April 2021, the Company closed on a $58.5 million loan to replace the existing construction loan for Tanager Apartments Phase II.in Downtown Summerlin. The loan bears interest at 3.13% fixed with a maturity of May 2031.
(g)In July 2021, the Company closed on a $35.5 million loan to replace the existing construction loan for Lakeside Row in Bridgeland. The loan bears interest at 3.15% fixed with a maturity date of September 2031.
(h)The Company used the net proceeds from the February 2021 issuance of Senior Notes due 2029 and 2031, as well as available cash on hand, as follows: (1) repurchased its $1.0 billion 5.375% Senior Notes due 2025; resulting in a $35.1 million loss on extinguishment of debt and (2) repaid $280.3 million outstanding under its loans for 1201 Lake Robbins and The Woodlands Warehouse maturing June 2021, resulting in a $10.0 million loss on the settlement of the rate-lock agreement associated with these loans.
(i)Concurrent with the sale of the Company’s Hospitality properties in September 2021, the entire $62.5 million loan on The Woodlands Resort was repaid and $69.8 million of debt associated with The Westin at The Woodlands and Embassy Suites at Hughes Landing was repaid on the Senior Secured Credit Facility. See Note 3 - Dispositions for additional detail.
Additional Financing Activity In April 2021, the Company closed on an $82.6 million construction loan for the development of Marlow, a multi-family development in Columbia. The loan bears interest at LIBOR plus 1.75%2.95% with an initial maturity date of January 7, 2024,April 2025 and a one-year extension option.
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%,option, with a maturityno amounts drawn as of September 5, 2020, at which point the Company has the option to extend the Three Hughes Landing loan for an additional 12 months.30, 2021.
On March 27, 2020,In April 2021, the Company closed on a $356.8$42.7 million construction loan for the development of Kō'ula.Starling at Bridgeland. The loan bears interest at LIBOR plus 3.00% with2.75%, subject to an overall interest rate floor of 3.75%, and an initial maturity date of March 27, 2023,May 2026, and a one-year extension option.option, with no amounts drawn as of September 30, 2021.
On May 20, 2020,In June 2021, the Company extended the remaining $280.3 millionclosed on an extension of the bridge$35.5 million 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%,8770 New Trails, extending the final maturity date to JuneJanuary 2032.
In September 2021, the Company closed on a $59.5 million construction loan for the development of Tanager Echo, a multi-family development in Summerlin. The loan bears interest at LIBOR, with a floor of 0.10%, plus 2.90% with an initial maturity of September 2025 and 2 one-year extension options and an immaterial amount drawn as of September 30, 2021. In October 2021, the Company entered into an interest rate cap agreement with a notional amount equal to the loan amount and an interest rate of 2.50%.
In September 2021, the Company closed on a $75.0 million construction loan for the development of 1700 Pavilion, an office development in Summerlin. The loan bears interest at LIBOR, with a floor of 0.10%, plus 3.80% with an initial maturity of September 2025 and 2 one-year extension options and an immaterial amount drawn as of September 30, 2021. In October 2021, the Company entered into an interest rate cap agreement with a notional amount equal to the loan amount and an interest rate of 2.50%.
In October 2021, the Company closed on an extension of the $27.2 million loan for Outlet Collection at Riverwalk, extending the initial maturity date to October 2022 with a one-year extension option and modifying the interest rate to SOFR plus 3.00%.
In October 2021, the Company closed on a $250.0 million loan for 1201 Lake Robbins. The non-recourse, interest-only loan bears interest at 3.83% with a maturity date of October 2031.
The outstanding balance on the construction loan for ‘A‘ali‘i was $229.6 million as of September 30, 2021. Subsequent to quarter end, the total outstanding balance was repaid in conjunction with closing on the sales of units at the property.
|
| | | | |
8.FINANCIAL STATEMENTS FOOTNOTES |
|
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 hierarchalhierarchical disclosure framework whichthat 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 the Company’s liabilities that are measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 |
| | Fair Value Measurements Using | | Fair Value Measurements Using |
| 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 | $ | 114 | | | $ | — | | | $ | 114 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | |
| Interest rate derivative liabilities | $ | 35,367 | | | $ | — | | | $ | 35,367 | | | $ | — | | | $ | 51,920 | | | $ | — | | | $ | 51,920 | | | $ | — | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| | Fair Value Measurements Using | | Fair Value Measurements Using |
| 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 | $ | 56,931 |
| | $ | 0 |
| | $ | 56,931 |
| | $ | 0 |
| | $ | 40,135 |
| | $ | 0 |
| | $ | 40,135 |
| | $ | 0 |
|
|
| |
FINANCIAL STATEMENTS |
|
FOOTNOTES | |
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’s financial instruments that are not measured at fair value on a recurring basis are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2021 | | December 31, 2020 |
| thousands | Fair Value Hierarchy | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
| Assets: | | | | | | | | |
| Cash and Restricted cash | Level 1 | $ | 1,448,569 | | | $ | 1,448,569 | | | $ | 1,242,997 | | | $ | 1,242,997 | |
| Accounts receivable, net (a) | Level 3 | 81,935 | | | 81,935 | | | 66,726 | | | 66,726 | |
| Notes receivable, net (b) | Level 3 | 5,536 | | | 5,536 | | | 622 | | | 622 | |
| | | | | | | | |
| Liabilities: | | | | | | | | |
| Fixed-rate debt (c) | Level 2 | 2,795,832 | | | 2,838,696 | | | 2,374,822 | | | 2,461,155 | |
| Variable-rate debt (c) | Level 2 | 1,672,881 | | | 1,672,881 | | | 1,945,344 | | | 1,945,344 | |
(a)Accounts receivable, net is shown net of an allowance of $29.9 million at September 30, 2021, and $33.0 million at December 31, 2020. Refer to Note 1 - Summary of Significant Accounting Policies for additional information on the allowance.
(b)Notes receivable, net is shown net of an allowance of $0.2 million at September 30, 2021, and $0.2 million at December 31, 2020. Refer to Note 1 - Summary of Significant Accounting Policies for additional information on the allowance.
(c)Excludes related unamortized deferred financing costs of $45.1 million as of September 30, 2021, and unamortized bond discounts and deferred financing costs of $32.8 million as of December 31, 2020.
|
| | | | | | | | | | | | | | | | |
| | | September 30, 2020 | | December 31, 2019 |
| thousands | Fair Value
Hierarchy | Carrying
Amount | | Estimated
Fair Value | | Carrying
Amount | | Estimated
Fair Value |
| Assets: | | | | | | | | |
| Cash and Restricted cash | Level 1 | $ | 1,090,501 |
| | $ | 1,090,501 |
| | $ | 620,135 |
| | $ | 620,135 |
|
| Accounts receivable, net (a) | Level 3 | 10,087 |
| | 10,087 |
| | 12,279 |
| | 12,279 |
|
| Notes receivable, net (b) | Level 3 | 52,136 |
| | 52,136 |
| | 36,379 |
| | 36,379 |
|
| | | | | | | | | |
| Liabilities: | | |
| | |
| | |
| | |
|
| Fixed-rate debt (c) | Level 2 | 2,387,189 |
| | 2,395,405 |
| | 1,908,660 |
| | 1,949,773 |
|
| Variable-rate debt (c) | Level 2 | 1,866,406 |
| | 1,866,406 |
| | 2,229,958 |
| | 2,229,958 |
|
| | | | | |
(a)FINANCIAL STATEMENTS FOOTNOTES | Accounts receivable, net is shown net
|
| |
(b) | Notes receivable, net is shown net of an allowance of $0.2 million at both September 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 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 76 - Mortgages, Notes and Loans Payable, Net in the Company’s Condensed Consolidated Financial Statements.for additional information. The discount rates reflect the Company’s judgment as to what the approximate current lending rates for loans or groups of loans with similar maturities and credit quality would be if credit markets were operating efficiently and assuming that the debt is outstanding through maturity.
The carrying amounts for the Company’s variable-rate debt approximate fair value given that the interest rates are variable and adjust with current market rates for instruments with similar risks and maturities.
The below table includes a non-financial assetassets that waswere measured at fair value on a non-recurring basis resulting in the propertyproperties being impaired duringimpaired:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using | | |
| thousands | Segment | 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) | | |
| 2021 | | | | | | | | | | |
| Century Park (a) | Strategic Developments | $ | 32,000 | | | $ | — | | | $ | — | | | $ | 32,000 | | | |
| 2020 | | | | | | | | | | |
| Outlet Collection at Riverwalk (b) | Operating Assets | 46,794 | | | — | | | — | | | 46,794 | | | |
(a)The fair value was measured using weighted income and market valuation techniques as of the nine months ended September 30, 2020:impairment date in the second quarter of 2021. Refer to Note 4 - Impairment for additional information.
(b)The fair value was measured as of the impairment date in 2020 based on a discounted cash flow analysis using a capitalization rate of 10.0% and is shown net of transaction costs. Refer to Note 4 - Impairment for additional information. |
| | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
| 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 |
| | $ | 0 |
| | $ | 0 |
| | $ | 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.
|
HHC 20202021 FORM 10-Q | 2324
|
| |
FINANCIAL STATEMENTS |
|
FOOTNOTES | |
|
| | | | |
9.FINANCIAL STATEMENTS FOOTNOTES |
|
| | |
| 8. Derivative Instruments and Hedging Activities |
The Company is exposed to interest rate risk related to its variable interest rate debt, and it manages this risk by utilizing interest rate derivatives. The Company uses interest rate swaps collars and caps to add stability to interest costs by reducing the Company’s exposure to interest rate movements. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company’s fixed‑rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate collars designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above an established ceiling rate and payment of variable amounts to a counterparty if interest rates fall below an established floor rate, in exchange for an up-front premium. No payments or receipts are exchanged on interest rate collar contracts unless interest rates rise above or fall below the established ceiling and floor rates. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up‑front premium. The Company’s interest rate cap iscaps are not currently designated as a hedge,hedges, and therefore, any gaingains or loss islosses are recognized in current-period earnings. This derivative isThese derivatives are recorded on a gross basis at fair value on the balance sheet.
Assessments of hedge effectiveness are performed quarterly using regression analysis. The change in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in Accumulated Other Comprehensive Income (“AOCI”)(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 credit-worthy,creditworthy, such as large financial institutions with favorable credit ratings. There were no events of default as of September 30, 2020, and2021, or as of December 31, 2019.2020.
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 ofDuring the nine months ended September 30, 2021, and the year ended December 31, 2020, there were 0no termination events, and as of December 31, 2019, there was 1 termination event, as discussed below.events. The Company recorded a $0.8$0.7 million reduction in Interest expense during the three months ended September 30, 2020,2021, and a $2.4$2.2 million reduction in Interest expense during the nine months ended September 30, 2020,2021, related to the amortization of terminated swaps.
The Company did 0tnot settle any derivatives during the nine months ended September 30, 2020. During2021, or the year ended 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. The Company has deferred the effective portion of the fair value changes of 2 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 over the next 7.3 and 1.0 years, which are what remain of the original forecasted periods.2020.
Amounts reported in AOCI related to derivatives will be reclassified to Interest expense as interest payments are made on the Company’s variable‑rate debt. Over the next 12 months, the Company estimates that an additional $23.6$17.3 million of net loss will be reclassified to Interest expense.
HHC 20202021 FORM 10-Q | 2425
|
| | | | |
FINANCIAL STATEMENTS FOOTNOTES |
|
FOOTNOTES | |
The following table summarizes certain terms of the Company’s derivative contracts:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Fair Value Asset (Liability) |
| thousands | | Balance Sheet Location | Notional Amount | Fixed Interest Rate (a) | Effective Date | Maturity Date | | September 30, 2021 | | December 31, 2020 |
| Derivative instruments not designated as hedging instruments: | | | | | | | | |
| Interest rate cap | (b) | Prepaid expenses and other assets, net | $ | 285,000 | | 2.00 | % | 3/12/2021 | 9/15/2023 | | $ | 88 | | | $ | — | |
| Interest rate cap | (b) | Prepaid expenses and other assets, net | 83,200 | | 2.00 | % | 3/12/2021 | 9/15/2023 | | 26 | | | — | |
| Interest rate cap | (c) | Prepaid expenses and other assets, net | 75,000 | | 5.00 | % | 8/31/2020 | 10/17/2022 | | — | | | — | |
| Total fair value derivative assets | | | | | | $ | 114 | | | $ | — | |
| | | | | | | | | | |
| Derivative instruments designated as hedging instruments: | | | | | | | | |
| Interest rate swap | (d) | Accounts payable and accrued expenses | $ | 615,000 | | 2.96 | % | 9/21/2018 | 9/18/2023 | | $ | (32,110) | | | $ | (46,613) | |
| Interest rate swap | (e) | Accounts payable and accrued expenses | 35,485 | | 4.89 | % | 11/1/2019 | 1/1/2032 | | (3,257) | | | (5,307) | |
| Total fair value derivative liabilities | | | | | | (35,367) | | | (51,920) | |
| Total fair value derivatives, net | | | | | | $ | (35,253) | | | $ | (51,920) | |
|
| | | | | | | | | | | | | | | | | |
| | | | | Fixed | | | | Fair Value Asset (Liability) |
| | | | Notional | Interest | Effective | Maturity | | September 30, | | December 31, |
| thousands | | Balance Sheet Location | Amount | Rate (a) | Date | Date | | 2020 | | 2019 |
| Derivative instruments not designated as hedging instruments: | | | | | | | | |
| Interest rate cap | (b) | Prepaid expenses and other assets, net | $ | 230,000 |
| 2.50 | % | 12/22/2016 | 12/23/2019 | | $ | 0 |
| | $ | 0 |
|
| Interest rate cap | (c) | Prepaid expenses and other assets, net | 75,000 |
| 5.00 | % | 8/31/2020 | 10/17/2022 | | 1 |
| | 0 |
|
| Total fair value derivative assets | | | | | | $ | 1 |
| | $ | 0 |
|
| | | | | | | | | | | |
| Derivative instruments designated as hedging instruments: | | | | | | | | |
| Interest rate collar | (d) (e) | Accounts payable and accrued expenses | 193,967 |
| 2.00% - 3.00% |
| 5/1/2019 | 5/1/2020 | | 0 |
| | (182 | ) |
| Interest rate collar | (d) (f) | Prepaid expenses and other assets, net | 354,217 |
| 2.25% - 3.25% |
| 5/1/2020 | 5/1/2021 | | 0 |
| | (2,074 | ) |
| Interest rate collar | (d) (f) | Prepaid expenses and other assets, net | 381,404 |
| 2.75% - 3.50% |
| 5/1/2021 | 4/30/2022 | | 0 |
| | (4,578 | ) |
| Interest rate swap | (g) | Accounts payable and accrued expenses | 615,000 |
| 2.96 | % | 9/21/2018 | 9/18/2023 | | (50,918 | ) | | (31,187 | ) |
| Interest rate swap | (h) | Accounts payable and accrued expenses | 1,810 |
| 4.89 | % | 11/1/2019 | 1/1/2032 | | (6,013 | ) | | (2,114 | ) |
| Total fair value derivative liabilities | | | | | | $ | (56,931 | ) | | $ | (40,135 | ) |
| Total fair value derivatives, net | | | | | | $ | (56,930 | ) | | $ | (40,135 | ) |
| |
(a) | These rates represent the strike rate on HHC’s interest swaps, caps and collars. |
| |
(b) | 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 year ended December 31, 2019, related to this contract. |
| |
(c) | In the third quarter of 2020, the Company executed an agreement to extend the maturing position of this cap. Interest income included in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2020, and the year ended December 31, 2019, related to this contract was not meaningful. |
| |
(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, 2020, the $194.0 million interest rate collar matured as scheduled. |
| |
(f) | As of September 30, 2020, the Company deconsolidated 110 North Wacker including the associated liabilities related to its interest rate collars. Refer to Note 3 - (b)In March 2021, the Company entered into 2 new LIBOR interest rate caps, which are not designated as hedging instruments. Interest expense included in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021, related to these contracts was not material. (c)In the third quarter of 2020, the Company executed an agreement to extend the maturing position of this LIBOR cap. Interest expense included in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021, and the year ended December 31, 2020, related to this contract was not material. (d)Concurrent with the funding of the $615.0 million Term Loan in September 2018, the Company entered into this interest rate swap which is designated as a cash flow hedge. In conjunction with the sale of The Westin at The Woodlands and Embassy Suites at Hughes Landing in September 2021, $181.8 million was repaid on the Term Loan. This swap covers the outstanding balance on the Term Loan in addition to other LIBOR-based debt held by the Company. (e)Concurrent with the closing of the $35.5 million construction loan for 8770 New Trailsin June 2019, the Company entered into this interest rate swap, which is designated as a cash flow hedge.
Real Estate and Other Affiliates for additional information.
|
| |
(g) | Concurrent with the funding of the $615.0 million term loanon September 21, 2018, the Company entered into this interest rate swap which is designated as a cash flow hedge.
|
| |
(h) | Concurrent with the closing of the $35.5 million construction loan for 8770 New Trailson 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, 2020,2021, and 2019:2020:
| | | thousands | Amount of Loss Recognized in AOCI on Derivative | |
| Derivatives in Cash Flow Hedging Relationships | Three Months Ended September 30, | | Nine Months Ended September 30, | Derivatives in Cash Flow Hedging Relationships | Amount of Gain (Loss) Recognized in AOCI on Derivatives |
| 2020 | | 2019 | | 2020 | | 2019 | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | | thousands | 2021 | | 2020 | | 2021 | | 2020 |
| Interest rate derivatives | $ | 1,802 |
| | $ | (6,406 | ) | | $ | (32,999 | ) | | $ | (25,238 | ) | Interest rate derivatives | $ | (201) | | | $ | 1,037 | | | $ | 2,046 | | | $ | (35,211) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Location of Gain (Loss) Reclassified from AOCI into Operations | Amount of Gain (Loss) Reclassified from AOCI into Operations |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2021 | | 2020 | | 2021 | | 2020 |
| Interest expense | $ | (3,172) | | | $ | (4,309) | | | $ | (9,186) | | | $ | (8,818) | |
|
| | | | | | | | | | | | | | | |
| thousands | Amount of (Loss) Gain Reclassified from AOCI into Operations |
| Location of (Loss) Gain Reclassified from AOCI into Operations | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Interest expense | $ | (4,121 | ) | | $ | (199 | ) | | $ | (8,441 | ) | | $ | 21 |
|
|
| | | | | | | | | | | | | | | |
| | Total Interest Expense Presented in the Results of Operations |
| thousands | in which the Effects of Cash Flow Hedges are Recorded |
| Interest Expense Presented in Results of Operations | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Interest expense | $ | 31,872 |
| | $ | 28,829 |
| | $ | 98,717 |
| | $ | 76,358 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Interest Expense Presented in Results of Operations | Total Interest Expense Presented in the Results of Operations in which the Effects of Cash Flow Hedges are Recorded |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2021 | | 2020 | | 2021 | | 2020 |
| Interest expense | $ | 31,556 | | | $ | 31,872 | | | $ | 97,205 | | | $ | 98,717 | |
|
| |
FINANCIAL STATEMENTS |
|
FOOTNOTES | |
Credit-risk-related Contingent Features The Company has agreements with certain derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has agreements with certain derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES |
|
The fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for non-performancenonperformance risk, related to these agreements was $60.3$37.4 million as of September 30, 2020,2021, and $41.6$54.6 million as of December 31, 2019. As of September 30, 2020, the Company has not posted any collateral related to these agreements.2020. If the Company had breached any of these provisions at September 30, 2020,2021, it could have been required to settle its obligations under the agreements at their termination value of $60.3$37.4 million.
|
| |
10.9. 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 management’s opinion, the liabilities, if any, that may ultimately result from normal course of business legal actions, including The Woodlands legal proceeding discussed below, are not expected to have a material effect on the Company’s consolidated financial position, results of operations or liquidity.
LitigationOn 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 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, including The Woodlands legal proceeding
discussed above, are not expected to have a material effect on the Company’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,proceeds; however, the Company can provide no assurances that all or any portion of these costs will be recovered. The Company recorded a $97.9total expenses of $99.2 million charge for the estimated repair costs related to this matter whichduring 2020. An additional $21.0 million was charged during the nine months ended September 30, 2021, related to additional anticipated costs. These amounts were included in Condominium rights and unit cost of sales in the accompanying Condensed Consolidated Statements of Operations. As of September 30, 2020, the Company has recorded2021, a total of $114.5$101.9 million remains 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.
Environmental MattersThe 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 evaluatescontinues to move forward with redevelopment plans. Priorplanning. The Company engaged a third-party specialist to the purchase,perform a Phase I Environmental Site Assessment (“ESA”) was prepared for the property,(ESA), and the ESA identified, among other findings, the existence of mercury in the soil at levels above New York State regulatory criteria. The Company enteredsite is in the site into the New York State Brownfield Cleanup Program and is proposed to facilitate site investigation and subsequent remediation. The site is currently in the investigation phase of thebe remediated under this 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 September 30, 2020.2021. As a result, the potential remediation has no financial impact as of September 30, 2020, and for the three and nine months ended September 30, 2020.2021.
Letters of Credit and Surety BondsAs of September 30, 2021, the Company had outstanding letters of credit totaling $5.1 million and surety bonds totaling $357.3 million. As of December 31, 2020, the Company had outstanding letters of credit totaling $11.5$5.2 million and surety bonds totaling $275.3 million. As of December 31, 2019, the Company had outstanding letters of credit totaling $15.4 million and surety bonds totaling $200.1$272.4 million. These letters of credit and surety bonds were issued primarily in connection with insurance requirements, special real estate assessments and construction obligations.
HHCOperating Leases 2020 FORM 10-Q | 27
|
| |
FINANCIAL STATEMENTS |
|
FOOTNOTES | |
The Company leases land or buildings at certain properties from third parties, which are recorded in Operating lease right-of-use assets, net and Operating lease obligations on the Condensed Consolidated Balance Sheets. See Note 1715 - Leases for further discussion. Contractual rental expense, including participation rent, was $1.9 million for the three months ended September 30, 2021, and $5.5 million for the nine months ended September 30, 2021, compared to $2.0 million for the three months ended September 30, 2020, and $5.3 million for the nine months ended September 30, 2020, compared to $2.5 million for the three months ended September 30, 2019, and $6.7 million for the nine months ended September 30, 2019.2020. The amortization of above and below‑market ground leases and straight‑line rents included in the contractual rent amount was not significant.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES |
|
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, the Company executed a completion guarantee for the redevelopment of Pier 17 and 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.
The Company’s wholly owned subsidiaries agreed to complete defined public improvements and to indemnify Howard County, Maryland, for certain matters as part of the Downtown Columbia Redevelopment District TIF bonds. The Company guaranteed the performance of its subsidiaries under the funding agreement for up to a maximum of $1.0 million until October 31, 2020. Furthermore, toTo the extent that increases in taxes do not cover debt service payments on the TIF bonds, the Company’s wholly owned subsidiary is obligated to pay special taxes. Management has concluded that as of September 30, 2020,2021, any obligations to pay special taxes are not probable.
As part of the Company’s development permits with the Hawai’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,requirement, which is triggered once the necessary permits are granted and construction commences, was satisfied for the Company’s 3 condominium towers, Waiea, Anaha and Ae‘o, with the opening of the Company’s fourth tower, Ke Kilohana, which is a workforce tower fully earmarked to fulfill this obligation. For the 23 towers under construction, the reserved units for the ‘A‘ali‘i tower are included in the tower, and the units for Kō'ula and Victoria Place will either be built off site or fulfilled by paying a cash-in-lieu fee. As a result of this guarantee, the Company expects that future reserved housing towers will be delivered on a break-even basis.
The Company evaluates the likelihood of future performance under these guarantees and did not record an obligation as of September 30, 2020,2021, and December 31, 2019.2020.
On May 14, 2020, the Company adopted The Howard 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 were 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 Consolidated 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 stock option activity for the nine months ended September 30, 2020:
|
| | | | | | |
| | Stock
Options | | Weighted-average
Exercise Price |
| Stock Options outstanding at December 31, 2019 | 721,496 |
| | $ | 104.55 |
|
| Granted | 3,000 |
| | 75.82 |
|
| Exercised | (57,058 | ) | | 67.24 |
|
| Forfeited | (245,100 | ) | | 122.31 |
|
| Expired | (23,688 | ) | | 100.24 |
|
| Stock Options outstanding at September 30, 2020 | 398,650 |
| | $ | 99.02 |
|
|
| |
FINANCIAL STATEMENTS |
|
FOOTNOTES | |
Compensation costs related to stock options were in a credit position of $1.5 million for the three months ended September 30, 2020. Compensation costs related to stock options were in a credit position of $2.1 million for the nine months ended September 30, 2020, of which $0.2 million were capitalized to development projects. These credit positions were due to significant forfeitures which exceeded the expense. Compensation costs related to stock options were $0.7 million for the three months ended September 30, 2019, of which 0 was capitalized to development projects, and $2.2 million for the nine months ended September 30, 2019, of which $0.4 million was capitalized to development projects.
Restricted Stock The following table summarizes restricted stock activity for the nine months ended September 30, 2020:
|
| | | | | | |
| | Restricted
Stock | | Weighted-average Grant
Date Fair Value |
| Restricted stock outstanding at December 31, 2019 | 406,802 |
| | $ | 76.27 |
|
| Granted | 97,775 |
| | 74.93 |
|
| Vested | (22,039 | ) | | 107.75 |
|
| Forfeited | (54,366 | ) | | 96.90 |
|
| Restricted stock outstanding at September 30, 2020 | 428,172 |
| | $ | 71.61 |
|
Compensation costs related to restricted stock awards were $2.2 million for the three months ended September 30, 2020, of which $0.2 million was capitalized to development projects, and $5.9 million for the nine months ended September 30, 2020, of which $0.9 million was capitalized to development projects. Compensation costs related to restricted stock awards were $3.0 million for the three months ended September 30, 2019, of which $0.3 million was capitalized to development projects, and $7.7 million for the nine months ended September 30, 2019, of which $0.9 million was capitalized to development projects. The total number of restricted stock outstanding set forth above reflects any restricted stock subject to performance-based vesting at the target level.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands except percentages | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
| Income tax expense (benefit) | $ | 6,049 | | | $ | 44,147 | | | $ | (38,098) | | | $ | (16,706) | | | $ | 3,203 | | | $ | (19,909) | |
| Income (loss) before income taxes | 8,166 | | | 208,149 | | | (199,983) | | | (79,131) | | | 8,020 | | | (87,151) | |
| Effective tax rate | NM | | 21.2 | % | | NM | | 21.1 | % | | 39.9 | % | | (18.8) | % |
NM—Not Meaningful
The Company’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 21.2% for the three months ended September 30, 2020, and 39.9% for the nine months ended September 30, 2020, compared to 22.5% for the three months ended September 30, 2019, and 24.3% for the nine months ended September 30, 2019.
The Company’s effective tax rate is typically impacted by non-deductible executive compensation and other permanent differences as well as state income taxes, which cause the Company’s effective tax rate to deviate from the federal statutory rate. In addition,For the three and nine months ended September 30, 2021, the effective tax rate forwas also impacted by the release of a valuation allowance on the Company’s capital loss carryover. For the three and nine months ended September 30, 2020, the effective rate was also impacted by the gain on the deconsolidation of 110 North Wacker (refer to Note 32 - Real Estate and Other Affiliates for additional details), a tax expense related to the recapture of federal and state historic preservation credits due to the sale of ourHHC’s interest in Mr. C Seaport (refer to Note 43 - Recent TransactionsDispositions for additional details) and a valuation allowance on ourthe Company’s carryover for charitable contributions.
|
| | | | |
13.FINANCIAL STATEMENTS FOOTNOTES |
|
On October 7, 2016, the Company entered into a warrant agreement with David R. O’Reilly, (the “O’Reilly Warrant”)O’Reilly Warrant) prior to his appointment to the 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’Reilly Warrant was issued at fair value in exchange for a $1.0 million payment in cash from Mr. O’Reilly. The O’Reilly Warrant becomes exercisable on April 6, 2022, subject to earlier exercise upon certain change in control, separation and termination provisions. provisions, and will expire on October 2, 2022.
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 price of $50.0 million and $2.0 million, respectively. The Weinreb Warrant would have become exercisable on June 15, 2022, at an exercise price of $124.64 per share, and the Herlitz Warrant would 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 (but such warrants became exercisable in connection with Mr. Weinreb’sprovisions. The Weinreb Warrant expires June 15, 2023, and Mr. Herlitz’s terminations of employment, as described below).the Herlitz Warrant expires October 3, 2023. 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 September 30, 2020,2021, and December 31, 2019.2020.
|
| |
FINANCIAL STATEMENTS |
|
FOOTNOTES | |
On October 21, 2019, Mr. Weinreb and Mr. Herlitz stepped down from their roles as Chief Executive Officer and President of the Company, respectively. The Company and each of Mr. Weinreb and Mr. Herlitz have agreed to treat their terminations of employment as terminations without “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 warrant expiration dates remain unchanged. Neither of these warrants have been exercised as of September 30, 2021.
|
| | | | |
14.FINANCIAL STATEMENTS FOOTNOTES |
|
| | |
12. Accumulated Other Comprehensive LossIncome |
The following tables summarize changes in AOCIaccumulated other comprehensive income (AOCI) by component, all of which are presented net of tax:
|
| | | |
| thousands | |
| Balance as of June 30, 2020 | $ | (61,111 | ) |
| Other comprehensive income (loss) before reclassifications | 1,802 |
|
| (Gain) loss reclassified from accumulated other comprehensive loss to net income | 4,121 |
|
| Terminated swap amortization | (577 | ) |
| Derecognition of interest rate swap | 12,934 |
|
| Net current-period other comprehensive income | 18,280 |
|
| Balance as of September 30, 2020 | $ | (42,831 | ) |
| | |
| Balance as of June 30, 2019 | $ | (28,542 | ) |
| Other comprehensive income (loss) before reclassifications | (6,406 | ) |
| (Gain) 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 | ) |
|
| | | |
| thousands | |
| Balance as of December 31, 2019 | $ | (29,372 | ) |
| Other comprehensive income (loss) before reclassifications | (32,999 | ) |
| (Gain) loss reclassified from accumulated other comprehensive loss to net income | 8,441 |
|
| Terminated swap amortization | (1,835 | ) |
| Derecognition of interest rate swap | 12,934 |
|
| Net current-period other comprehensive loss | (13,459 | ) |
| Balance as of September 30, 2020 | $ | (42,831 | ) |
| | |
| Balance as of December 31, 2018 | $ | (8,126 | ) |
| Other comprehensive income (loss) before reclassifications | (25,311 | ) |
| (Gain) loss reclassified from accumulated other comprehensive loss to net income | (21 | ) |
| Terminated swap amortization | (2,055 | ) |
| Net current-period other comprehensive loss | (27,387 | ) |
| Balance as of September 30, 2019 | $ | (35,513 | ) |
| | | | | |
| thousands | |
| Balance as of June 30, 2021 | $ | (27,754) | |
| Other comprehensive income (loss) before reclassifications | (201) | |
| (Gain) loss reclassified from accumulated other comprehensive loss to net income | 3,172 | |
| Share of investee's other comprehensive income | 1,508 | |
| |
FINANCIAL STATEMENTSNet current-period other comprehensive income |
| |
FOOTNOTESBalance as of September 30, 2021 | $ | (23,275) | |
| |
| Balance as of June 30, 2020 | $ | (61,111) | |
| Other comprehensive income (loss) before reclassifications | 1,037 | |
| (Gain) loss reclassified from accumulated other comprehensive loss to net income | 4,309 | |
| Derecognition of interest rate swap | 12,934 | |
| Net current-period other comprehensive loss | 18,280 | |
| Balance as of September 30, 2020 | $ | (42,831) | |
| |
| |
| thousands | |
| Balance as of December 31, 2020 | $ | (38,590) | |
| Other comprehensive income (loss) before reclassifications | 2,046 | |
| (Gain) loss reclassified from accumulated other comprehensive loss to net income | 9,186 | |
| Share of investee's other comprehensive income | 4,083 | |
| Net current-period other comprehensive loss | 15,315 | |
| Balance as of September 30, 2021 | $ | (23,275) | |
| |
| Balance as of December 31, 2019 | $ | (29,372) | |
| Other comprehensive income (loss) before reclassifications | (35,211) | |
| (Gain) loss reclassified from accumulated other comprehensive loss to net income | 8,818 | |
| Derecognition of interest rate swap | 12,934 | |
| Net current-period other comprehensive loss | (13,459) | |
| Balance as of September 30, 2020 | $ | (42,831) | |
The following table summarizes the amounts reclassified out of AOCI:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Accumulated Other Comprehensive
Income (Loss) Components | Amounts reclassified from Accumulated Other Comprehensive Income (Loss) | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | Affected line items in the
Statements of Operations |
| thousands | 2021 | | 2020 | | 2021 | | 2020 |
| (Gains) losses on cash flow hedges | $ | 4,060 | | | $ | 5,233 | | | $ | 11,749 | | | $ | 10,743 | | Interest expense |
| Income tax expense (benefit) | (888) | | | (924) | | | (2,563) | | | (1,925) | | Income tax expense (benefit) |
| Total reclassifications of (income) loss, net of tax | $ | 3,172 | | | $ | 4,309 | | | $ | 9,186 | | | $ | 8,818 | | |
|
| | | | | | | | | | | | | | | | |
| thousands | Amounts reclassified from Accumulated Other Comprehensive Income (Loss) | |
Accumulated Other Comprehensive Income (Loss) Components | Three Months Ended September 30, | | Nine Months Ended September 30, | Affected line items in the Statements of Operations |
| 2020 | | 2019 | | 2020 | | 2019 |
| (Gains) losses on cash flow hedges | $ | 5,216 |
| | $ | 252 |
| | $ | 10,685 |
| | $ | (26 | ) | Interest expense |
| Income taxes on (gains) losses on cash flow hedges | (1,095 | ) | | (53 | ) | | (2,244 | ) | | 5 |
| Provision for income taxes |
| Total reclassifications of (income) loss, net of tax for the period | $ | 4,121 |
| | $ | 199 |
| | $ | 8,441 |
| | $ | (21 | ) |
|
|
| | | | |
15.FINANCIAL STATEMENTS FOOTNOTES |
|
Basic earnings per share (“EPS”)(EPS) is computed by dividing net income available to common stockholders by the weighted‑averageweighted-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‑basedstock-based compensation plans is computed using the treasury stock method. The dilutive effect of the warrants is computed using the if‑convertedif-converted method.
Information related to the Company’s EPS calculations is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| thousands except per share amounts | 2021 | | 2020 | | 2021 | | 2020 |
| Net income (loss) | | | | | | | |
| Net income (loss) | $ | 2,117 | | | $ | 164,002 | | | $ | (62,425) | | | $ | 4,817 | |
| Net (income) loss attributable to noncontrolling interests | 1,936 | | | (24,292) | | | 4,725 | | | (24,325) | |
| Net income (loss) attributable to common stockholders | $ | 4,053 | | | $ | 139,710 | | | $ | (57,700) | | | $ | (19,508) | |
| | | | | | | |
| Shares | | | | | | | |
| Weighted-average common shares outstanding - basic | 55,727 | | | 55,542 | | | 55,703 | | | 51,493 | |
| Restricted stock and stock options | 29 | | | 43 | | | — | | | — | |
| | | | | | | |
| Weighted-average common shares outstanding - diluted | 55,756 | | | 55,585 | | | 55,703 | | | 51,493 | |
| | | | | | | |
| Net income (loss) per common share | | | | | | | |
| Basic income (loss) per share | $ | 0.07 | | | $ | 2.52 | | | $ | (1.04) | | | $ | (0.38) | |
| Diluted income (loss) per share | $ | 0.07 | | | $ | 2.51 | | | $ | (1.04) | | | $ | (0.38) | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands except per share amounts | 2020 | | 2019 | | 2020 | | 2019 |
| Net income (loss) | | | | | | | |
| Net income (loss) | $ | 164,002 |
| | $ | 30,043 |
| | $ | 4,817 |
| | $ | 75,296 |
|
| Net (income) loss attributable to noncontrolling interests | (24,292 | ) | | (285 | ) | | (24,325 | ) | | (240 | ) |
| Net income (loss) attributable to common stockholders | $ | 139,710 |
| | $ | 29,758 |
| | $ | (19,508 | ) | | $ | 75,056 |
|
| | | | | | | | |
| Shares | |
| | |
| | |
| | |
|
| Weighted-average common shares outstanding - basic | 55,542 |
| | 43,134 |
| | 51,493 |
| | 43,118 |
|
| Restricted stock and stock options | 43 |
| | 208 |
| | 0 |
| | 171 |
|
| Warrants | 0 |
| | 86 |
| | 0 |
| | 86 |
|
| Weighted-average common shares outstanding - diluted | 55,585 |
| | 43,428 |
| | 51,493 |
| | 43,375 |
|
| | | | | | | | |
| Net income (loss) per common share | | | | | | | |
| Basic income (loss) per share | $ | 2.52 |
| | $ | 0.69 |
| | $ | (0.38 | ) | | $ | 1.74 |
|
| Diluted income (loss) per share | $ | 2.51 |
| | $ | 0.69 |
| | $ | (0.38 | ) | | $ | 1.73 |
|
The
For the three months ended September 30, 2020, the diluted EPS computation excludes 391,875 shares of stock awards for the three months ended September 30, 2020,options and excludes 266,422363,683 shares of restricted stock awards forbecause their effect is anti-dilutive. For the nine months ended September 30, 2020, the diluted EPS computation excludes 398,650 shares of stock options and 428,172 shares of restricted stock because their effect is anti-dilutive. In addition, for both periods, 252,037 shares of restricted stock were excluded because performance conditions provided for in the restricted stock awards have not been satisfied.
The diluted EPS computation excludes 351,908 shares of stock options for the three months ended September 30, 2019, and excludes 418,808 shares of stock options for the nine months ended September 30, 2019, because their effect is anti-dilutive. In addition, for both periods, 277,212 shares of restricted stock were excluded because performance conditions provided for in the restricted stock awards have not been satisfied.
Common Stock Offering 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
|
| |
FINANCIAL STATEMENTS |
|
FOOTNOTES | |
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$593.6 million in net proceeds. The Company used the net proceeds for general corporate purposes including strengthening the Company’s balance sheet and enhancing liquidity.
|
| | | | |
16.FINANCIAL STATEMENTS FOOTNOTES |
|
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’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, revenueRevenue and cost of sales for condominium units sold are not recognized until the construction is complete, the sale closes and the title to the property has transferred to the buyer (point in time). Additionally, certain real estate selling costs, such as the costs related to the Company’s condominium model units, are either expensed immediately or capitalized as property and equipment and depreciated over their estimated useful life.
The following table presents the Company’s revenues disaggregated by revenue source:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2020 | | 2019 | | 2020 | | 2019 | thousands | 2021 | | 2020 | | 2021 | | 2020 |
| Revenues | | | | | | | | |
| From contracts with customers | | | | | | | | |
| Revenues from contracts with customers | | Revenues from contracts with customers | |
| Recognized at a point in time: | | | | | | | | Recognized at a point in time: | |
| Condominium rights and unit sales | $ | 142 |
| | $ | 9,999 |
| | $ | 185 |
| | $ | 443,931 |
| Condominium rights and unit sales | $ | 163 | | | $ | 142 | | | $ | 50,191 | | | $ | 185 | |
| Master Planned Communities land sales | 39,248 |
| | 77,368 |
| | 136,053 |
| | 177,001 |
| Master Planned Communities land sales | 56,305 | | | 39,248 | | | 152,124 | | | 136,053 | |
| Builder price participation | 9,230 |
| | 9,660 |
| | 25,936 |
| | 24,224 |
| Builder price participation | 11,155 | | | 9,230 | | | 29,338 | | | 25,936 | |
| Total revenue from contracts with customers | 48,620 |
| | 97,027 |
| | 162,174 |
| | 645,156 |
| |
| Total | | Total | 67,623 | | | 48,620 | | | 231,653 | | | 162,174 | |
| | | | | | | | | |
| Recognized at a point in time and/or over time: | | | | | | | | |
| Recognized at a point in time or over time: | | Recognized at a point in time or over time: | |
| Other land, rental and property revenues | 35,748 |
| | 63,801 |
| | 82,092 |
| | 165,054 |
| Other land, rental and property revenues | 56,350 | | | 35,748 | | | 120,982 | | | 82,092 | |
| Total other income | 35,748 |
| | 63,801 |
| | 82,092 |
| | 165,054 |
| |
| | | | | | | | | | |
| Rental and lease-related revenues | | | | | | | | Rental and lease-related revenues | |
| Rental revenue | 70,072 |
| | 70,344 |
| | 241,522 |
| | 206,168 |
| Rental revenue | 95,215 | | | 70,072 | | | 269,590 | | | 241,522 | |
| | Total revenues | $ | 154,440 |
| | $ | 231,172 |
| | $ | 485,788 |
| | $ | 1,016,378 |
| Total revenues | $ | 219,188 | | | $ | 154,440 | | | $ | 622,225 | | | $ | 485,788 | |
| | | | | | | | | |
| Revenues by segment | | | | | | | | Revenues by segment | |
| Operating Assets revenues | $ | 81,667 |
| | $ | 104,223 |
| | $ | 280,201 |
| | $ | 305,395 |
| Operating Assets revenues | $ | 125,072 | | | $ | 81,667 | | | $ | 334,933 | | | $ | 280,201 | |
| Master Planned Communities revenues | 52,158 |
| | 92,287 |
| | 171,517 |
| | 216,042 |
| Master Planned Communities revenues | 72,061 | | | 52,158 | | | 194,926 | | | 171,517 | |
| Seaport District revenues | 4,204 |
| | 23,130 |
| | 16,170 |
| | 43,051 |
| |
| Seaport revenues | | Seaport revenues | 21,143 | | | 4,204 | | | 39,494 | | | 16,170 | |
| Strategic Developments revenues | 16,365 |
| | 11,515 |
| | 17,749 |
| | 451,873 |
| Strategic Developments revenues | 809 | | | 16,365 | | | 52,575 | | | 17,749 | |
| Corporate revenues | 46 |
| | 17 |
| | 151 |
| | 17 |
| Corporate revenues | 103 | | | 46 | | | 297 | | | 151 | |
| Total revenues | $ | 154,440 |
| | $ | 231,172 |
| | $ | 485,788 |
| | $ | 1,016,378 |
| Total revenues | $ | 219,188 | | | $ | 154,440 | | | $ | 622,225 | | | $ | 485,788 | |
HHC 20202021 FORM 10-Q | 3132
|
| | | | |
FINANCIAL STATEMENTS FOOTNOTES |
|
FOOTNOTES | |
Contract Assets and Liabilities Contract assets are the Company’s right to consideration in exchange for goods or services that have been transferred to a customer, excluding any amounts presented as a receivable. Contract liabilities are the Company’s obligation to transfer goods or services to a customer for which the Company has received consideration.
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 liabilities and significant activity during the period are as follows:
| | | | | | | | | | |
| thousands | | | | Contract Liabilities |
| Balance as of December 31, 2020 | | | | $ | 360,416 | |
| Consideration earned during the period | | | | (95,847) | |
| Consideration received during the period | | | | 351,677 | |
| Balance as of September 30, 2021 | | | | $ | 616,246 | |
| | | | |
| Balance as of December 31, 2019 | | | | $ | 246,010 | |
| Consideration earned during the period | | | | (38,960) | |
| Consideration received during the period | | | | 138,291 | |
| Balance as of September 30, 2020 | | | | $ | 345,341 | |
| | | | |
|
| | | | | |
| thousands | | Contract Liabilities | |
| Balance as of December 31, 2019 | | | $ | 246,010 |
|
| Consideration earned during the period | | | (38,960 | ) |
| Consideration received during the period | | | 138,291 |
|
| Balance as of September 30, 2020 | | | $ | 345,341 |
|
Remaining Unsatisfied Performance Obligations The Company’s remaining unsatisfied performance obligations as of September 30, 2020,2021, 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’s remaining unsatisfied performance obligations as of September 30, 2020,2021, is $1.7$2.4 billion. The Company expects to recognize this amount as revenue over the following periods:
|
| | | | | | | | | | | | |
| thousands | Less than 1 year | | | 1-2 years |
| 3 years and thereafter | |
| Total remaining unsatisfied performance obligations | | $ | 220,354 |
| | $ | 437,371 |
| | $ | 1,081,751 |
|
| | | | | | | | | | | | | | | | | | | | |
| thousands | Less than 1 year | | 1-2 years | 3 years and thereafter |
| Total remaining unsatisfied performance obligations | | $ | 1,314,945 | | | $ | 21,221 | | | $ | 1,093,345 | |
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 whichthat are constrained, such as builder price participation.
LeasesLessee Arrangements (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 September 30, 2020.2021.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES |
|
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 5352 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.
|
| |
FINANCIAL STATEMENTS |
|
FOOTNOTES | |
The Company’s leased assets and liabilities are as follows:
| | | | | | | | | | | | | | |
| thousands | | September 30, 2021 | | December 31, 2020 |
| Assets | | | | |
| Operating lease right-of-use assets, net | | $ | 53,593 | | | $ | 56,255 | |
| Liabilities | | | | |
| Operating lease obligations | | 67,564 | | | 68,929 | |
|
| | | | |
| thousands | September 30, 2020 |
| Assets | | |
| Operating lease right-of-use assets | | $ | 67,322 |
|
| Riverwalk impairment | | (10,235 | ) |
| Total leased assets | | $ | 57,087 |
|
| | | |
| Liabilities | | |
| Operating lease liabilities | | $ | 69,246 |
|
| Total leased liabilities | | $ | 69,246 |
|
The components of lease expense are as follows:
|
| | | | | | | | |
| thousands | Three Months Ended | Nine Months Ended |
| Lease cost | September 30, 2020 | September 30, 2020 |
| Operating lease cost | | $ | 2,181 |
| | $ | 6,539 |
|
| Variable lease costs | | 382 |
| | 672 |
|
| Net lease cost | | $ | 2,563 |
| | $ | 7,211 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2021 | | 2020 | | 2021 | | 2020 |
| Operating lease cost | $ | 2,179 | | | $ | 2,181 | | | $ | 6,491 | | | $ | 6,539 | |
| Variable lease costs | 270 | | | 382 | | | 760 | | | 672 | |
| | | | | | | |
| Net lease cost | $ | 2,449 | | | $ | 2,563 | | | $ | 7,251 | | | $ | 7,211 | |
Future minimum lease payments as of September 30, 2020,2021, are as follows:
| | | | | |
| thousands | Operating Leases |
| Remainder of 2021 | $ | 1,595 | |
| 2022 | 6,500 | |
| 2023 | 6,456 | |
| 2024 | 6,425 | |
| 2025 | 5,039 | |
| Thereafter | 261,666 | |
| Total lease payments | 287,681 | |
| Less: imputed interest | (220,117) | |
| Present value of lease liabilities | $ | 67,564 | |
|
| | | |
| | Operating |
| thousands | Leases |
| 2020 (excluding the nine months ended September 30, 2020) | $ | 1,339 |
|
| 2021 | 7,184 |
|
| 2022 | 6,507 |
|
| 2023 | 6,464 |
|
| 2024 | 6,432 |
|
| Thereafter | 266,852 |
|
| Total lease payments | 294,778 |
|
| Less: imputed interest | (225,532 | ) |
| Present value of lease liabilities | $ | 69,246 |
|
Other information related to the Company’s lessee agreements is as follows:
| | | | | | | | | | | |
| Supplemental Condensed Consolidated Statements of Cash Flows Information | Nine Months Ended September 30, |
| thousands | 2021 | | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows on operating leases | $ | 5,225 | | | $ | 5,566 | |
|
| | | | |
| thousands | Nine Months Ended |
| Supplemental Condensed Consolidated Statements of Cash Flows Information | September 30, 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | |
| Operating cash flows on operating leases | | $ | 5,566 |
|
|
| | | | |
Other InformationFINANCIAL STATEMENTS FOOTNOTES | September 30, 2020 |
Weighted-average remaining lease term (years) | |
Operating leases | 37.1 |
|
Weighted-average discount rate | |
Operating leases | 7.8 | % |
| | | | | | | | | | | |
| Other Information | September 30, 2021 | | September 30, 2020 |
| Weighted-average remaining lease term (years) | | | |
| Operating leases | 37.4 | | 37.1 |
| Weighted-average discount rate | | | |
| Operating leases | 7.9 | % | | 7.8 | % |
Lessor ArrangementsThe 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
|
| |
FINANCIAL STATEMENTS |
|
FOOTNOTES | |
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, 2020,2021, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2021 | | 2020 | | 2021 | | 2020 |
| Total minimum rent payments | $ | 57,466 | | | $ | 51,104 | | | $ | 165,466 | | | $ | 164,317 | |
|
| | | | | | | | |
| | Three Months Ended | Nine Months Ended |
| thousands | September 30, 2020 | September 30, 2020 |
| Total minimum rent payments | | $ | 51,104 |
| | $ | 164,317 |
|
Total future minimum rents associated with operating leases are as follows as of September 30, 2020:2021:
|
| | | |
| | Total |
| thousands | Minimum Rent |
| Remainder of 2020 | $ | 56,261 |
|
| 2021 | 230,029 |
|
| 2022 | 243,260 |
|
| 2023 | 233,321 |
|
| 2024 | 228,531 |
|
| Thereafter | 1,459,096 |
|
| Total | $ | 2,450,498 |
|
| | | | | |
| thousands | Total
Minimum Rent |
| Remainder of 2021 | $ | 62,547 | |
| 2022 | 245,678 | |
| 2023 | 242,321 | |
| 2024 | 237,460 | |
| 2025 | 210,045 | |
| Thereafter | 1,293,573 | |
| Total | $ | 2,291,624 | |
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-typeIn response to the COVID-19 pandemic, the Company granted rent deferrals to certain tenants. Under the accounting elections provided by the Financial Accounting Standards Board (FASB) in response to the COVID-19 pandemic, the Company has elected to not assess whether COVID-19 related deferrals are lease is definedmodifications and will account for the deferrals as a lease that meets one or more ofif contemplated in 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 theoriginal lease. Rent deferrals are treated as variable lease payments equals or exceedsresulting in a decrease in straight-line rent revenue during the fair valuedeferral period and additional revenue upon payment in subsequent periods. COVID-19 related rent deferrals, net of the asset, or the asset issubsequent collections was $4.8 million as of such a specialized nature that it is expected to have no alternative use to the lessor at the endDecember 31, 2020 and $2.4 million as of the lease. During the nine months ended September 30, 2021.
In 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.
|
| | | | |
18.FINANCIAL STATEMENTS FOOTNOTES |
|
The Company has 4 business segments whichthat offer different products and services. HHC’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’s business segments is earnings before taxes (“EBT”)(EBT). The Company’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’s reportable segments are as follows:
| |
– | –Operating Assets – consists of developed or acquired retail, office and multi-family properties along with other real estate investments. These properties are currently generating revenues and may be redeveloped, repositioned, or sold to improve segment performance or to recycle capital. This segment also included hospitality properties prior to the sale of The Woodlands Resort, The Westin at The Woodlands and Embassy Suites at Hughes Landing in the third quarter of 2021. Refer to Note 3 - Dispositions for additional information. – 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 453,000 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.
|
| |
– | 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.
|
–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 – consists of approximately 453,000 square feet of restaurant, retail and entertainment properties situated in 3 primary locations in New York, New York: Pier 17, Historic Area/Uplands and Tin Building as well as the 250 Water Street parking lot. While the Tin Building 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.
–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.
HHC 20202021 FORM 10-Q | 35
|
| | | | |
FINANCIAL STATEMENTS FOOTNOTES |
|
FOOTNOTES | |
Segment operating results are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| thousands | Operating Assets Segment (a) | | MPC Segment | | Seaport Segment | | Strategic Developments Segment | | Total |
| Three Months Ended September 30, 2021 | | | | | | | | | |
| Total revenues | $ | 125,072 | | | $ | 72,061 | | | $ | 21,143 | | | $ | 809 | | | $ | 219,085 | |
| Total operating expenses | (61,091) | | | (35,474) | | | (25,219) | | | (6,708) | | | (128,492) | |
| Segment operating income (loss) | 63,981 | | | 36,587 | | | (4,076) | | | (5,899) | | | 90,593 | |
| Depreciation and amortization | (44,224) | | | (102) | | | (9,087) | | | (1,741) | | | (55,154) | |
| Interest income (expense), net | (18,027) | | | 10,362 | | | 377 | | | 850 | | | (6,438) | |
| Other income (loss), net | (285) | | | — | | | (1,134) | | | 5 | | | (1,414) | |
| Equity in earnings (losses) from real estate and other affiliates | (15,108) | | | 8,277 | | | (1,009) | | | (8) | | | (7,848) | |
| Gain (loss) on sale or disposal of real estate and other assets, net | 39,141 | | | — | | | — | | | — | | | 39,141 | |
| | | | | | | | | |
| Gain (loss) on extinguishment of debt | (573) | | | (1,004) | | | — | | | — | | | (1,577) | |
| | | | | | | | | |
| Segment EBT | $ | 24,905 | | | $ | 54,120 | | | $ | (14,929) | | | $ | (6,793) | | | $ | 57,303 | |
| Corporate income, expenses and other items | | | | | | | | | (55,186) | |
| Net income (loss) | | | | | | | | | 2,117 | |
| Net (income) loss attributable to noncontrolling interests | | | | | | | | | 1,936 | |
| Net income (loss) attributable to common stockholders | | | | | | | | | $ | 4,053 | |
| | | | | | | | | |
| Three Months Ended September 30, 2020 | | | | | | | | | |
| Total revenues | $ | 81,667 | | | $ | 52,158 | | | $ | 4,204 | | | $ | 16,365 | | | $ | 154,394 | |
| Total operating expenses | (47,590) | | | (23,059) | | | (11,522) | | | (9,922) | | | (92,093) | |
| Segment operating income (loss) | 34,077 | | | 29,099 | | | (7,318) | | | 6,443 | | | 62,301 | |
| Depreciation and amortization | (41,395) | | | (91) | | | (7,174) | | | (1,643) | | | (50,303) | |
| Interest income (expense), net | (21,045) | | | 9,176 | | | (2,811) | | | 1,921 | | | (12,759) | |
| Other income (loss), net | (17) | | | — | | | 1,590 | | | 134 | | | 1,707 | |
| Equity in earnings (losses) from real estate and other affiliates | 962 | | | (1,563) | | | (288) | | | 267,727 | | | 266,838 | |
| Gain (loss) on sale or disposal of real estate and other assets, net | 108 | | | — | | | — | | | — | | | 108 | |
| Selling profit from sales-type leases | — | | | — | | | — | | | — | | | — | |
| Gain (loss) on extinguishment of debt | (1,521) | | | — | | | (11,645) | | | — | | | (13,166) | |
| Provision for impairment | — | | | — | | | — | | | — | | | — | |
| Segment EBT | $ | (28,831) | | | $ | 36,621 | | | $ | (27,646) | | | $ | 274,582 | | | $ | 254,726 | |
| Corporate income, expenses and other items | | | | | | | | | (90,724) | |
| Net income (loss) | | | | | | | | | 164,002 | |
| Net (income) loss attributable to noncontrolling interests | | | | | | | | | (24,292) | |
| Net income (loss) attributable to common stockholders | | | | | | | | | $ | 139,710 | |
|
| | | | | | | | | | | | | | | | | |
| thousands | Operating Assets
Segment (a) | MPC
Segment | Seaport
Segment | | Strategic Developments
Segment | | Total |
| Three Months Ended September 30, 2020 | | | | | | | |
| Total revenues | $ | 81,667 |
| $ | 52,158 |
| $ | 4,204 |
| | $ | 16,365 |
| | $ | 154,394 |
|
| Total operating expenses | (47,590 | ) | (23,059 | ) | (11,522 | ) | | (9,922 | ) | | (92,093 | ) |
| Segment operating income (loss) | 34,077 |
| 29,099 |
| (7,318 | ) | | 6,443 |
| | 62,301 |
|
| Depreciation and amortization | (41,395 | ) | (91 | ) | (7,174 | ) | | (1,643 | ) | | (50,303 | ) |
| Interest expense, net | (21,045 | ) | 9,176 |
| (2,811 | ) | | 1,921 |
| | (12,759 | ) |
| Other income (loss), net | (17 | ) | 0 |
| 1,590 |
| | 134 |
| | 1,707 |
|
| Equity in earnings (losses) from real estate and other affiliates | 962 |
| (1,563 | ) | (288 | ) | | 267,727 |
| | 266,838 |
|
| Gain (loss) on sale or disposal of real estate, net | 108 |
| 0 |
| 0 |
| | 0 |
| | 108 |
|
| Gain (loss) on extinguishment of debt | (1,521 | ) | 0 |
| (11,645 | ) | | 0 |
| | (13,166 | ) |
| Segment EBT | $ | (28,831 | ) | $ | 36,621 |
| $ | (27,646 | ) | | $ | 274,582 |
| | $ | 254,726 |
|
| Corporate income, expenses and other items | | | | | | | (90,724 | ) |
| Net income (loss) | | | | | | | 164,002 |
|
| Net (income) loss attributable to noncontrolling interests | | | | | | | (24,292 | ) |
| Net income (loss) attributable to common stockholders | | | | | | | $ | 139,710 |
|
| | | | | | | | |
| Three Months Ended September 30, 2019 | | | | | | | |
| Total revenues | $ | 104,223 |
| $ | 92,287 |
| $ | 23,130 |
| | $ | 11,515 |
| | $ | 231,155 |
|
| Total operating expenses | (47,950 | ) | (43,697 | ) | (27,330 | ) | | (11,327 | ) | | (130,304 | ) |
| Segment operating income (loss) | 56,273 |
| 48,590 |
| (4,200 | ) | | 188 |
| | 100,851 |
|
| Depreciation and amortization | (28,844 | ) | (88 | ) | (6,767 | ) | | (2,070 | ) | | (37,769 | ) |
| Interest expense, net | (21,645 | ) | 8,550 |
| (4,984 | ) | | 3,002 |
| | (15,077 | ) |
| Other income (loss), net | 63 |
| 534 |
| 0 |
| | 354 |
| | 951 |
|
| Equity in earnings (losses) from real estate and other affiliates | 441 |
| 4,523 |
| (705 | ) | | 283 |
| | 4,542 |
|
| Gain (loss) on sale or disposal of real estate, net | 0 |
| 0 |
| 0 |
| | 24,201 |
| | 24,201 |
|
| Selling profit from sales-type leases | 13,537 |
| | | | | | 13,537 |
|
| Segment EBT | $ | 19,825 |
| $ | 62,109 |
| $ | (16,656 | ) | | $ | 25,958 |
| | $ | 91,236 |
|
| Corporate income, expenses and other items | | | | | | | (61,193 | ) |
| Net income (loss) | | | | | | | 30,043 |
|
| Net (income) loss attributable to noncontrolling interests | | | | | | | (285 | ) |
| Net income (loss) attributable to common stockholders | | | | | | | $ | 29,758 |
|
| |
(a) | Total revenues includes hospitality revenues of $8.1 million for the three months ended September 30, 2020, and $20.0 million for the three months ended September 30, 2019. Total operating expenses includes hospitality operating costs of $7.6 million for the three months ended September 30, 2020, and $14.1 million for the three months ended September 30, 2019. |
HHC 20202021 FORM 10-Q | 36
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| | | | |
FINANCIAL STATEMENTS FOOTNOTES |
|
FOOTNOTES | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| thousands | Operating Assets Segment (a) | | MPC Segment | | Seaport Segment | | Strategic Developments Segment | | Total |
| Nine Months Ended September 30, 2021 | | | | | | | | | |
| Total revenues | $ | 334,933 | | | $ | 194,926 | | | $ | 39,494 | | | $ | 52,575 | | | $ | 621,928 | |
| Total operating expenses | (161,516) | | | (92,646) | | | (53,721) | | | (84,971) | | | (392,854) | |
| Segment operating income (loss) | 173,417 | | | 102,280 | | | (14,227) | | | (32,396) | | | 229,074 | |
| Depreciation and amortization | (123,850) | | | (272) | | | (22,926) | | | (4,936) | | | (151,984) | |
| Interest income (expense), net | (55,179) | | | 31,734 | | | 666 | | | 2,610 | | | (20,169) | |
| Other income (loss), net | (10,539) | | | — | | | (2,088) | | | 19 | | | (12,608) | |
| Equity in earnings (losses) from real estate and other affiliates | (36,931) | | | 54,568 | | | (1,697) | | | (125) | | | 15,815 | |
| Gain (loss) on sale or disposal of real estate and other assets, net | 39,141 | | | — | | | — | | | 21,333 | | | 60,474 | |
| | | | | | | | | |
| | | | | | | | | |
| Gain (loss) on extinguishment of debt | (1,455) | | | (1,004) | | | — | | | — | | | (2,459) | |
| Provision for impairment | — | | | — | | | — | | | (13,068) | | | (13,068) | |
| Segment EBT | $ | (15,396) | | | $ | 187,306 | | | $ | (40,272) | | | $ | (26,563) | | | $ | 105,075 | |
| Corporate income, expenses and other items | | | | | | | | | (167,500) | |
| Net income (loss) | | | | | | | | | (62,425) | |
| Net (income) loss attributable to noncontrolling interests | | | | | | | | | 4,725 | |
| Net income (loss) attributable to common stockholders | | | | | | | | | $ | (57,700) | |
| | | | | | | | | |
| Nine Months Ended September 30, 2020 | | | | | | | | | |
| Total revenues | $ | 280,201 | | | $ | 171,517 | | | $ | 16,170 | | | $ | 17,749 | | | $ | 485,637 | |
| Total operating expenses | (142,052) | | | (78,751) | | | (34,297) | | | (126,738) | | | (381,838) | |
| Segment operating income (loss) | 138,149 | | | 92,766 | | | (18,127) | | | (108,989) | | | 103,799 | |
| Depreciation and amortization | (115,479) | | | (273) | | | (34,825) | | | (5,054) | | | (155,631) | |
| Interest income (expense), net | (70,341) | | | 26,033 | | | (12,490) | | | 4,909 | | | (51,889) | |
| Other income (loss), net | 150 | | | — | | | (2,187) | | | 1,427 | | | (610) | |
| Equity in earnings (losses) from real estate and other affiliates | 5,831 | | | 4,403 | | | (8,964) | | | 268,365 | | | 269,635 | |
| Gain (loss) on sale or disposal of real estate and other assets, net | 38,232 | | | — | | | — | | | 8,000 | | | 46,232 | |
| | | | | | | | | |
| | | | | | | | | |
| Gain (loss) on extinguishment of debt | (1,521) | | | — | | | (11,645) | | | — | | | (13,166) | |
| Provision for impairment | (48,738) | | | — | | | — | | | — | | | (48,738) | |
| Segment EBT | $ | (53,717) | | | $ | 122,929 | | | $ | (88,238) | | | $ | 168,658 | | | $ | 149,632 | |
| Corporate income, expenses and other items | | | | | | | | | (144,815) | |
| Net income (loss) | | | | | | | | | 4,817 | |
| Net (income) loss attributable to noncontrolling interests | | | | | | | | | (24,325) | |
| Net income (loss) attributable to common stockholders | | | | | | | | | $ | (19,508) | |
(a)Total revenues includes hospitality revenues of $35.6 million for the nine months ended September 30, 2021, and $27.9 million for the nine months ended September 30, 2020. Total operating expenses includes hospitality operating costs of $30.5 million for the nine months ended September 30, 2021, and $24.8 million for the nine months ended September 30, 2020. In September 2021, the Company completed the sale of its 3 hospitality properties. |
| | | | | | | | | | | | | | | | | |
| thousands | Operating Assets
Segment (a) | MPC
Segment | Seaport
Segment | | Strategic Developments
Segment | | Total |
| Nine Months Ended September 30, 2020 | | | | | | | |
| Total revenues | $ | 280,201 |
| $ | 171,517 |
| $ | 16,170 |
| | $ | 17,749 |
| | $ | 485,637 |
|
| Total operating expenses | (142,052 | ) | (78,751 | ) | (34,297 | ) | | (126,738 | ) | | (381,838 | ) |
| Segment operating income (loss) | 138,149 |
| 92,766 |
| (18,127 | ) | | (108,989 | ) | | 103,799 |
|
| Depreciation and amortization | (115,479 | ) | (273 | ) | (34,825 | ) | | (5,054 | ) | | (155,631 | ) |
| Interest expense, net | (70,341 | ) | 26,033 |
| (12,490 | ) | | 4,909 |
| | (51,889 | ) |
| Other income (loss), net | 150 |
| 0 |
| (2,187 | ) | | 1,427 |
| | (610 | ) |
| Equity in earnings (losses) from real estate and other affiliates | 5,831 |
| 4,403 |
| (8,964 | ) | | 268,365 |
| | 269,635 |
|
| Gain (loss) on sale or disposal of real estate, net | 38,232 |
| 0 |
| 0 |
| | 8,000 |
| | 46,232 |
|
| Gain (loss) on extinguishment of debt | (1,521 | ) | 0 |
| (11,645 | ) | | 0 |
| | (13,166 | ) |
| Provision for impairment | (48,738 | ) | 0 |
| 0 |
| | 0 |
| | (48,738 | ) |
| Segment EBT | $ | (53,717 | ) | $ | 122,929 |
| $ | (88,238 | ) | | $ | 168,658 |
| | $ | 149,632 |
|
| Corporate income, expenses and other items | | | | | | | (144,815 | ) |
| Net income (loss) | | | | | | | 4,817 |
|
| Net (income) loss attributable to noncontrolling interests | | | | | | | (24,325 | ) |
| Net income (loss) attributable to common stockholders | | | | | | | $ | (19,508 | ) |
| | | | | | | | |
| Nine Months Ended September 30, 2019 | | | | | | | |
| Total revenues | $ | 305,395 |
| $ | 216,042 |
| $ | 43,051 |
| | $ | 451,873 |
| | $ | 1,016,361 |
|
| Total operating expenses | (139,589 | ) | (109,676 | ) | (59,735 | ) | | (382,341 | ) | | (691,341 | ) |
| Segment operating income (loss) | 165,806 |
| 106,366 |
| (16,684 | ) | | 69,532 |
| | 325,020 |
|
| Depreciation and amortization | (84,890 | ) | (334 | ) | (19,713 | ) | | (4,386 | ) | | (109,323 | ) |
| Interest expense, net | (60,695 | ) | 24,376 |
| (8,440 | ) | | 9,499 |
| | (35,260 | ) |
| Other income (loss), net | 1,186 |
| 601 |
| (147 | ) | | 664 |
| | 2,304 |
|
| Equity in earnings (losses) from real estate and other affiliates | 3,195 |
| 18,859 |
| (1,788 | ) | | 581 |
| | 20,847 |
|
| Gain (loss) on sale or disposal of real estate, net | 0 |
| 0 |
| (6 | ) | | 24,057 |
| | 24,051 |
|
| Selling profit from sales-type leases | 13,537 |
| 0 |
| 0 |
| | 0 |
| | 13,537 |
|
| Segment EBT | $ | 38,139 |
| $ | 149,868 |
| $ | (46,778 | ) | | $ | 99,947 |
| | $ | 241,176 |
|
| Corporate income, expenses and other items | | | | | | | (165,880 | ) |
| Net income (loss) | | | | | | | 75,296 |
|
| Net (income) loss attributable to noncontrolling interests | | | | | | | (240 | ) |
| Net income (loss) attributable to common stockholders | | | | | | | $ | 75,056 |
|
| |
(a) | Total revenues includes hospitality revenues of $27.9 million for the nine months ended September 30, 2020, and $68.5 million for the nine months ended September 30, 2019. Total operating expenses includes hospitality operating costs of $24.8 million for the nine months ended September 30, 2020, and $46.3 million for the nine months ended September 30, 2019. |
HHC 20202021 FORM 10-Q | 37
|
| | | | |
FINANCIAL STATEMENTS FOOTNOTES |
|
FOOTNOTES | |
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, |
| thousands | 2020 | | 2019 |
| Operating Assets | $ | 3,911,853 |
| | $ | 3,476,718 |
|
| Master Planned Communities | 2,310,333 |
| | 2,166,472 |
|
| Seaport District | 912,191 |
| | 930,067 |
|
| Strategic Developments | 1,164,749 |
| | 1,540,161 |
|
| Total segment assets | 8,299,126 |
| | 8,113,418 |
|
| Corporate | 742,119 |
| | 300,348 |
|
| Total assets | $ | 9,041,245 |
| | $ | 8,413,766 |
|
| | | | | | | | | | | |
| thousands | September 30, 2021 | | December 31, 2020 |
| Operating Assets | $ | 3,758,022 | | | $ | 3,936,119 | |
| Master Planned Communities | 2,487,183 | | | 2,285,896 | |
| Seaport | 985,069 | | | 924,245 | |
| Strategic Developments | 1,526,824 | | | 1,132,231 | |
| Total segment assets | 8,757,098 | | | 8,278,491 | |
| Corporate | 757,815 | | | 861,841 | |
| Total assets | $ | 9,514,913 | | | $ | 9,140,332 | |
HHC 20202021 FORM 10-Q | 38
|
| | | | |
| MANAGEMENT’S DISCUSSION AND ANALYSIS | |
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”(HHC or the “Company”)Company) annual report on Form 10-K for the fiscal year ended December 31, 2019,2020, filed with the Securities and Exchange Commission (“SEC”)(SEC) on February 27, 202025, 2021 (the “Annual Report”)Annual Report). All references to numbered Notes are to specific notes to our unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.
HHC 20202021 FORM 10-Q | 39
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MANAGEMENT’S DISCUSSION AND ANALYSIS | |
|
| | | | |
FORWARD-LOOKING INFORMATIONMANAGEMENT’S DISCUSSION AND ANALYSIS | |
| | |
| FORWARD-LOOKING INFORMATION |
We may make forward-looking
Certain statements contained in or incorporated by reference into this Quarterly Report, including, without limitation, those related to our future operations and those related to our expectations concerning the impact of the ongoing coronavirus pandemic (COVID-19) on our future operations and balance sheet, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical fact included in this Quarterly Report and in other reports and presentations that we file or furnish with the SEC. In addition, our management may makeare 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 described 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 wordsstatements of similar expression. Forward-looking
These forward-looking statements giveinvolve known and unknown risks, uncertainties and other important factors that could cause our expectations about the future and are not guarantees ofactual results, performance or results. We caution you notachievements, or industry results, to rely on these forward-looking statements.
differ materially from any predictions of future results, performance or achievements that we express or imply in this Quarterly Report or in the information incorporated herein by reference. Currently, one of the most significant factors is the potentialunknown future adverse effectimpact of the current pandemic of the novel strain of coronavirus (“COVID-19”)COVID-19 on theour financial condition, results of operations, cash flows and performance, of our Company,on our industry, and on the global economy and financial markets. The extent to which COVID-19 impactswill continue to impact us will dependdepends on future developments which are highlythat remain uncertain and cannot be predicted with confidence, including the scope severity and duration of the pandemic, the actions taken by governments and authorities to contain the pandemic or mitigate itsthe impact of the virus, the speed of distribution and effectiveness of vaccines, the impact of ongoing and future mutations of the virus, and the directshort and indirectlong-term economic effects ofand consumer behavior impact caused by the pandemic and containment measures, among others. Moreover,pandemic. In addition, you should interpret many of the risks identified in this Quarterly Report, as well as the risksbelow and set forth below,in our 2020 Annual Report on Form 10-K (2020 Annual Report), as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19.
Forward-looking statements include, among others:
| |
– | the impact of COVID-19, including the recent surge of COVID-19 cases in regions where we operate, on our business and numerous governmental restrictions and other orders instituted in response to the COVID-19 pandemic on our 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 Master 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 for our properties |
| |
– | the impact of technology on our operations and business |
| |
– | expected performance of all of our segments |
| |
– | 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 |
| |
– | descriptions of assumptions underlying or relating to any of the foregoing |
There are severalSome of the risks, uncertainties and other important factors many beyond our control, which couldthat may affect future results or cause actual results to differ materially from those expressed or implied by forward-looking statements include:
–the impact of COVID-19 on our expectations. These riskbusiness, our tenants and the economy in general, including as described above;
–a prolonged recession in the national economy, including any adverse business or economic conditions in the homebuilding, condominium development, retail and office sectors;
–potential changes in the financial markets and interest rates;
–our continuing ability to obtain operating and development capital on favorable terms, or at all;
–our ability to compete effectively, including the potential impact of heightened competition for tenants and potential decreases in occupancy at our properties;
–our ability to successfully dispose of non-core assets on terms favorable to us;
–our ability to lease new or redeveloped space;
–our ability to successfully identify, acquire, develop and/or manage properties on terms that are favorable to us;
–our ability to obtain the necessary governmental permits for the development of our properties and necessary regulatory approvals pursuant to an extensive entitlement process involving multiple and overlapping regulatory jurisdictions, which often require discretionary action by local governments;
–potential increases in real estate construction costs, including construction cost increases as the result of trade disputes and tariffs on goods imported in the United States;
–impact of construction costs exceeding our original estimates, delays or overruns, claims for construction defects, or other factors affecting our ability to develop, redevelop or construct our properties;
–regulation of the portion of our business that is dedicated to the formation and sale of condominiums, including regulatory filings to state agencies, additional entitlement processes and requirements to transfer control to a condominium association’s board of directors in certain situations;
–potential defaults by purchasers on their obligations to purchase our condominiums;
–fluctuations in regional and local economies, the residential housing and condominium markets, local real estate conditions, and competition from competing retail properties and the internet;
–natural disasters, terrorist activity, acts of violence, contamination of our properties by hazardous or toxic substances, or other similar disruptions, as well as losses that are not insured or exceed the applicable insurance limits;
–our inability to control certain of our properties due to the joint ownership of such property and our inability to successfully attract desirable strategic partners;
–catastrophic events or geo-political conditions, such as the COVID-19 pandemic, that may disrupt our business;
–inherent risks related to disruption of information technology networks and related systems, including cyber security attacks;
–our ability to attract and retain key personnel; and
–other risks and uncertainties described herein, as well as those risks and uncertainties discussed from time to time in Item 1A.-our other reports and other public filings with the SEC.
HHC Risk Factors2021 FORM 10-Q | 40
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| MANAGEMENT’S DISCUSSION AND ANALYSIS | |
Although we presently believe that the plans, expectations and anticipated results expressed in or suggested by the forward-looking statements contained in or incorporated by reference into 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, plans, objectives, future performance 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. Thesereasonable, all forward-looking statements presentare inherently subjective, uncertain and subject to change, as they involve substantial risks and uncertainties, including those beyond our estimatescontrol. New factors emerge from time to time, and assumptionsit is not possible for us to predict the nature, or assess the potential impact, of each new factor on our business. Given these uncertainties, we caution you not to place undue reliance on these forward-looking statements. We undertake no obligation to update or revise any of our forward-looking statements for events or circumstances that arise after the statement is made, except as of the date of this Quarterly Report. Except asotherwise may be required by law,law.
The above list of risks and uncertainties is only a summary of some of the most important factors and is not intended to be exhaustive. Additional information regarding risk factors that may affect us is included in our 2020 Annual Report. The risk factors contained in our 2020 Annual Report are updated by us from time to time in Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings that we undertake no obligation to modify or revise any forward-looking statements to reflect events or circumstances occurring aftermake with the date of this Quarterly Report.SEC.
HHC 20202021 FORM 10-Q | 4140
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MANAGEMENT’S DISCUSSION AND ANALYSIS | |
EXECUTIVE OVERVIEW | |
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MANAGEMENT’S DISCUSSION AND ANALYSIS EXECUTIVE OVERVIEW |
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We striveare one of the nation’s leading developers of large-scale master planned communities with a portfolio that spans over 100,000 acres across six states. We create some of the most sought-after communities in the country by curating an environment tailored to create timeless placesmeet the needs of our residents and extraordinary experiences that inspire peopletenants. Our unique business model allows us to drive outsized risk-adjusted returns while driving sustainable, long-term growth and value formaintaining a sharp focus on sustainability to ensure our shareholders. communities are equipped with the resources to last several decades.
We operate in four 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 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 hospitalitymulti-family offerings. We build these commercial properties through Strategic Developments when the timing is right using the cash flow harvested from our operating properties NOINet Operating Income (NOI) and from the sale of land to 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 and is being transformed into a culinary and entertainment destination. The Seaport District spans across approximately 453,000 square feet and several city blocks, including Pier 17, the Tin Building, the Historic District as well as the 250 Water Street parking lot.
In addition to the required presentations using GAAP, we use certain non-GAAP performance measures, such as earnings before taxes (EBT) and NOI. See the Earnings Before Taxes, Operating Assets and Seaport sections below for the reconciliation of GAAP to non-GAAP financial measures and a statement indicating why management believes the non-GAAP financial measure provides useful information for investors.
Douglas Ranch Acquisition In October 2021, HHC announced the launch of Douglas Ranch, a new large-scale master planned community in the city of Buckeye in the West Valley of Phoenix, Arizona. The Company closed on the all-cash purchase of approximately 33,810 acres for a purchase price of $541.0 million. The purchase price includes an option for the seller to re-acquire a 50% interest in the property, with $33.8 million of the purchase price being credited to the Seller upon exercise of the option. If the option is not exercised by the seller, the $33.8 million will be returned to the Company. Simultaneous with the land acquisition, the Company closed on the acquisition of a 50% interest in Trillium Development Holding Company, LLC, for $59.0 million. Trillium Development Holding Company, LLC owns approximately 3,029 acres of land in Buckeye, Arizona. These acquired properties include nearly 37,000 acres of developable land, which is anticipated to include approximately 100,000 homes, 300,000 residents and 55 million square feet of commercial development. Residential lot sales are expected to begin in the first half of 2022.
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CEO TransitionMANAGEMENT’S DISCUSSION AND ANALYSIS EXECUTIVE OVERVIEW |
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As previously disclosed on a Current Report on Form 8-K filed withExecutive Transition In December 2020, the SEC on September 21, 2020, Mr. Paul Layne retiredCompany announced the appointment of David R. O’Reilly as ourthe Company’s Chief Executive Officer and stepped down fromthe appointment of L. Jay Cross as the Company’s Board of Directors effective September 17, 2020. AtPresident. On April 8, 2021, the same time, Mr. David O’Reilly, our President and Chief Financial Officer, wasCompany announced that Correne Loeffler had been appointed to serve as ourthe Company's Chief Financial Officer (CFO), effective April 19, 2021. Ms. Loeffler succeeded David O'Reilly as the Company's CFO, a position that he had held since joining HHC in 2016 and had continued to hold on an interim Chief Executive Officer. The Board has commenced a search for a permanentbasis since being appointed Chief Executive Officer in December 2020. Ms. Loeffler joined HHC following her role as Chief Financial Officer of Whiting Petroleum, where she managed the company’s Finance, Accounting, and plans to consider both internalCorporate Planning organizations. She also previously served as Vice President of Finance and external candidates.
Following our previously announced review of strategic alternatives, we announced our intent to execute a transformation plan, 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.
We have made significant progress on the execution of our Transformation Plan commitments with meaningful reductions in overhead and the disposition of several non-core properties. Since the announcement of the Transformation Plan, we have executed on the sale of six non-core assets generating approximately $132 million of net proceeds after debt repayment. The COVID-19 pandemic has made additional non-core asset sales more challenging to execute and we expect this to continue during the remainder of the year. We have continued horizontal development in our MPCs to keep pace with builder demand given the strong underlying home sales in our communities. Additionally, we have commenced modest investments in pre-development workTreasurer for the next vertical development opportunities in our core MPCsCallon Petroleum Company. In addition, she served as Callon's Interim Chief Financial Officer. Prior to ensure that we are ready to move forwardshe spent over a decade at JPMorgan Securities before leaving as soon as demand warrants.
In December 2019, COVID-19 was reported to have surfaced in Wuhan, China. COVID-19 has since spread globally, including to every statean Executive Director in the United States. On March 11, 2020, the World Health Organization declared Corporate Client Banking group.
COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. Pandemic The outbreak of COVID-19 has severely impacted global economic activity in early 2020 and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak evolved rapidlyCOVID-19 and countries, including the United States, reacted by instituting a wide variety of government-issued control measures, including states of emergency, mandatory quarantines, required business and school closures, implementing “shelter in place”shelter-in-place orders and restricting travel.travel restrictions, resulted in a negative impact on our financial performance in 2020, particularly in our Operating Asset and Seaport segments. Many states have since easedbegan easing quarantine protocols near the end of the second quarter of 2020, which has allowed most of our retail and hospitality properties to resume operations specificallyon a limited basis. The extent to which COVID-19 continues to impact us will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the actions taken to contain the pandemic or mitigate its impact, such as the speed and effectiveness of vaccine and treatment developments and their deployment, potential mutations of COVID-19, and the direct and indirect economic effects of the pandemic and containment measures.
While the impact of COVID-19 affected all of our business segments throughout 2020 and continued to impact the Company into 2021, we saw significant performance improvement during the second half of the 2020 that has continued through the third quarter of 2021. Notably, during the third quarter of 2021, we achieved Operating Asset NOI of $63.0 million, MPC EBT of $54.1 million and contracted to sell 61 condominium units at our under-construction towers in retailWard Village. This represents a $27.1 million increase in Operating Asset NOI, a $17.5 million increase in MPC EBT and hospitality.a 154% increase in under-construction condominium units sold at Ward Village, as compared to the third quarter of 2020. Additionally, in the third quarter of 2021, we began public sales at The Park Ward Village, our eighth condominium projects at Ward Village and completed the sale of our three hospitality properties in The Woodlands for $252.0 million, resulting in a gain on sale of $39.1 million.
HHC 20202021 FORM 10-Q | 4143
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MANAGEMENT’S DISCUSSION AND ANALYSIS EXECUTIVE OVERVIEW | |
EXECUTIVE OVERVIEW |
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COVID-19 Impacts by Segment
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| Third Quarter 2021 Highlights |
Operating Assets
Comparison of the three months ended September 30, 2021, to the three months ended September 30, 2020
Total Company
–ThroughoutNet income attributable to common stockholders decreased to $4.1 million, or $0.07 per diluted share, for the pandemic, we have seen continued strength in our office and multifamily assets. We are closely monitoring our rental revenue, andthree months ended September 30, 2021, compared to income of $139.7 million, or $2.51 per diluted share, for the three months ended September 30, 2020, we collected 97.3% of our office portfolio billings, 98.5% of our multi-family portfolio billings, and 96.2% of our other portfolio billings.
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 have resumed operations with phased reopenings beginning in May and June 2020, and continuing through September 2020. As a result of these phased reopenings and rent deferrals, collections of our retail portfolio billings have increased from 49.7% for the three months ended June 2020, to 65.7% for three months ended September 30, 2020. In addition, occupancy rates remained above 90% for the majority of our stabilized retail assets.
At the onset of the pandemic, 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. The Woodlands Resort reopened in May 2020, with 54% of the rooms available and the Embassy Suites reopened in June 2020, with 100% of the rooms available. Both hotels continued to operate with this initial percentage of available rooms through the third quarter of 2020. 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. As a result of these reopenings, occupancy levels have risen since the second quarter of 2020, however, we continue to see declines in occupancy through the third quarter of 2020, compared to levels achieved priordue to the impactrecognition of the pandemic.
As announced in late June, the Minor League Baseball season was canceled for 2020, which impacted the Las Vegas Aviators, our Triple-A professional baseball team (which accounted for 2% of our revenues for the year ended December 31, 2019).
Further, despite the continued phased reopenings at our properties during the third 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 total 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$267.5 million gain 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 evictionsdeconsolidation for tenants.
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 large upticks in May through October 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 third quarter of 2020, The Woodlands Hills saw improved land sales revenue due to higher volume of acres sold and lot sales mix. In addition, Bridgeland land sales revenue remained consistent with the prior year quarter performance despite the impacts of COVID-19. Land sales revenues at Summerlin decreased compared to the prior period, however this was due to timing of superpad closings and not a decrease in homebuilder demand for our land.
We may experience a decrease in land sales in our MPCs as a result of the fluctuations in regional economies. Houston has been 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 and halted construction on the Tin Building in mid-March. Social distancing restrictions resulted in cancellation of our Seaport summer concert series, and, although the city gradually eased restriction in July, dining was limited to only outdoor spaces, with indoor dining resuming
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MANAGEMENT’S DISCUSSION AND ANALYSIS | |
EXECUTIVE OVERVIEW | |
at minimum capacities in late September. As a result, many of the businesses within the Seaport District resumed operations, on a limited basis,110 North Wacker in the third quarter of 2020 including The Fulton, Cobble & Co.that did not reoccur during the current period.
–We continue to maintain a strong liquidity position with $1.0 billion of cash and Malibu Farm. Constructioncash equivalents and available capacity of $85 million on the Tin Building resumed in May and is on track for completion in the fourth quarter of 2021, with an expanded focus on experiences including in-person dining, retail shopping, mobile ordering and delivery.
In August, in place of the summer concert series, we launched a new concept at the Pier 17 rooftop called The Greens, which allows groups of up to eight people to reserve their own socially distanced, mini-lawn space. We served over 42,000 guests, had an average wait list of over 20,000 people and generated $1.0 million in revenue for the three months ended September 30, 2020. This concept meaningfully increased the Seaport District’s exposure across social and media platforms with an increase of 253% in new social followers and over 378 million media impressions earned. This concept also helped us fulfill obligations under our sponsorship agreements which might have been drastically reduced without the summer concert series.
There may be (i) a failurerevolver portion 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 evictions for tenants.
Strategic Developments Given the challenges presented by this new environment, we have launched digital sales efforts, including virtual tours to sell condominiums in Hawai’i, 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. As a result, overall progress at our condominium projects remains strongcredit facilities as of September 30, 2020,2021, with Victoria Place, our newest project, 71.3% presold.limited near-term debt maturities.
We may experience a decrease in condominium sales in Hawai’i, in light–In September 2021, we completed the sale 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.
We have not experienced any delays in our existing construction as a result of COVID-19, other than the brief delay of construction on the Tin Building discussed above. As mentioned in our Transformation Plan update, we have commenced modest investments in pre-development work to ensure we are ready to move forward the moment we see demand.
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 that 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 nine months ended September 30, 2020, we enhanced our liquidity profile through a successful common stock offering, which generated $593.6 million in proceeds, and the issuance of $750 million in senior notes due August 2028. The Company used the net proceeds from the debt issuance, together with cash on hand, for the repayment of existing indebtedness of approximately $807.9 million. We also extended our bridge loan for The Woodlands TowersResort, The Westin at The WaterwayWoodlands and sold 100 Fellowship DriveEmbassy Suites at Hughes Landing for $252.0 million, resulting in The Woodlands, Texas, which generated $64.2 million in net proceeds. Asa gain on sale of September 30, 2020, we had $857.4 million of Cash and cash equivalents on our Condensed Consolidated Balance Sheets.$39.1 million.
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Third Quarter 2020 Highlights |
Comparison of the three months ended September 30, 2020, to the three months ended September 30, 2019
Capital and Financing Activities
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– | On August 18, 2020, the Company issued $750 million in senior notes due August 2028 (the “Senior Notes due 2028”), which will pay interest semi-annually at a rate of 5.375% per annum payable on August 1st and February 1st of each year, beginning on February 1, 2021. The Senior Notes due 2028 are unsecured senior obligations of the Company and are guaranteed by certain subsidiaries of the Company. The Company used the net proceeds from this issuance, together with cash on hand, for the repayment of existing indebtedness of approximately $807.9 million. |
–In September 2021, the Company closed on a $75.0 million construction loan for the development of 1700 Pavilion in Summerlin. The loan bears interest at LIBOR plus 3.80% with an initial maturity of September 2025 and a two-year extension option and an immaterial amount drawn as of September 30, 2021.
–In September 2021, the Company closed on a $59.5 million construction loan for the development of Tanager Echo, a multi-family development in Summerlin. The loan bears interest at LIBOR plus 2.90% with an initial maturity of September 2025 and a two-year extension option and an immaterial amount drawn as of September 30, 2021.
–In September 2021, the Company closed on a $275.0 million financing secured by MUD receivables and land in Bridgeland, retiring an existing $250.0 million credit facility secured by MUD receivables, land and certain other collateral in both The Woodlands and Bridgeland MPCs. The loan has a net effective interest rate of Secured Overnight Financing Rate (SOFR) plus 2.30%, subject to a SOFR floor of 0.10%, with maturity in September 2026.
Operating Assets
–Operating Assets NOI totaled $63.0 million in the current quarter, a $27.1 million or 75% increase compared to $35.9 million in the prior-year period.
–Retail NOI increased $9.2 million, primarily due to improving rent collections of 83.3% and continued recovery as business rebounds from the COVID-19 pandemic.
–Other property NOI increased $6.9 million, primarily due to the return of the Las Vegas Aviators 2021 baseball season. The Las Vegas Ballpark generated $5.4 million of NOI during the quarter as the Las Vegas Aviators began the 2021 season in May at 50% capacity but were able to operate at 100% capacity through the third quarter. This compares to a $0.8 million loss in the prior-year period when the impacts of COVID-19 resulted in the cancellation of the entire 2020 minor league baseball season.
–Multi-family NOI increased $5.3 million, primarily due to faster than expected lease-up at our newer properties, with The Lane at Waterway at 98% occupancy, Juniper Apartments at 91% occupancy and Two Lakes Edge at 88% occupancy.
–Office NOI increased $4.0 million, primarily due to the expiration of rent abatements at our newer properties and improved rent collections.
–Hospitality NOI increased $1.7 million. We completed the sale of all of our hospitality properties in September 2021.
MPC
–MPC EBT totaled $54.1 million in the current quarter, a $17.5 million or 48% increase compared to $36.6 million in the prior-year period.
–The increase in EBT was primarily due to higher land sales revenues at Summerlin due to an increase in superpad sales and higher Equity in earnings (losses) from real estate and other affiliates at The Summit due to the impact of increased amenity cost and higher unit completion cost in the prior-year period that did not repeat in 2021. These increases were partially offset by lower land sales revenues at Bridgeland due to a delay in lot deliveries as a result of the timing of governmental agency approvals and weather delays.
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– | NOI decreased $18.4 million due to decreases of $8.8 million in our retail properties, $6.6 million in our hospitality properties and $1.3 million in our other properties. These decreases were primarily due to rent deferrals and collection reserves related to our retail properties, declines in occupancy at our recently reopened hospitality properties and cancellation of the Las Vegas Aviators 2020 baseball season, all as a result of the COVID-19 pandemic. |
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– | Despite COVID-19, we saw strong demand for our newly completed multifamily assets, which have leased at or above our expectations. |
MANAGEMENT’S DISCUSSION AND ANALYSIS
EXECUTIVE OVERVIEW
MPC
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– | Segment earnings before taxes (“EBT”) decreased by $25.5 million primarily due to lower land sales revenues primarily driven by reductions in acres sold at Summerlin due to the timing of super pad sales and lower Equity in earnings (losses) from real estate and other affiliates at The Summit. |
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– | The Woodlands Hills, Bridgeland and Summerlin during the third quarter of 2020, compared to the same period in 2019.
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– | Bridgeland price per acre increased 8.3% with acres sold remaining consistent with acres sold in the third quarter of 2019. |
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– | The Woodlands Hills’ price per acre increased 9.6% coupled with a 103.6% increase in acres sold due to a higher volume and change in product type of lots sold in the third quarter of 2020, compared to the same period in 2019. |
Seaport District
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– | Segment EBT decreased $11.0 million to a loss of $27.6 million primarily due to a decrease in segment revenues and operating expenses as a result of business closures and cancellations of events related to the COVID-19 pandemic, and an $11.6 million loss on extinguishment of debt upon retirement of the $250 million Seaport District loan in August 2020. |
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– | Seaport District NOI decreased $3.2 million to a net operating loss of $6.1 million primarily due to a $2.5 million decrease in our events, sponsorships, and catering category, and a $0.8 million decrease in our managed business entities. The decreases in NOI were primarily a result of business closures and cancellation of events related to the COVID-19 pandemic. |
–Seaport EBT increased $12.7 million to a loss of $14.9 million, primarily due to an increase in revenues, partially offset by an increase in operating expenses as a result of increased activity in 2021 as restrictions related to the COVID-19 pandemic have eased and a decrease in loss on extinguishment of debt and interest expense due to the early repayment of the $250 million Seaport loan in August 2020.
–Seaport NOI increased $2.6 million to a loss of $3.5 million, primarily due to a $2.6 million increase in our managed business entities and a $2.2 million increase in our events, sponsorships and catering business, partially offset by a $2.1 million decrease in our landlord entities. The increases in NOI were primarily due to increased revenue, partially offset by increased operating expenses as business resumed after the onset of the COVID-19 pandemic in 2020.
Strategic Developments
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– | Segment EBT increased $248.6 million to income of $274.6 million primarily due to a $267.5 million gain on deconsolidation of 110 North Wacker attributable to the initial fair value step-up of the retained equity method investment at the time of deconsolidation and an additional $15.4 million attributable to the recognition of previously eliminated 110 North Wacker development fees upon deconsolidation. These increases were partially offset by a $24.2 million gain recognized for the sale of the Cottonwood Mall during the three months ended September 30, 2019, and the timing of condominium closings. The Company closed units at Ke Kilohana and Ae‘o in 2019, with no new condominium towers scheduled for completion in 2020. Please refer to Note 3 - –Strategic Developments EBT totaled a loss of $6.8 million in the current quarter, a $281.4 million decrease compared to income of $274.6 million in the prior-year period.Real Estate and Other Affiliates in the Company’s Condensed Consolidated Financial Statements for further details on the 110 North Wacker deconsolidation. |
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– | Continued sales at Ward Village by contracting to sell 24 condominiums in the third quarter of 2020. Victoria Place, our newest building that began public sales in December 2019, accounted for 13 of the units contracted this quarter and was 71.3% presold as of September 30, 2020. |
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– | Excluding Victoria Place, we have sold 2,446 residential units at our six under construction towers in Ward Village since inception, bringing the total percentage of units sold at these condominium towers to 90.7%. |
–The decrease in EBT was primarily due to the deconsolidation of 110 North Wacker in the third quarter of 2020. As part of the deconsolidation, a gain of $267.5 million was recognized in Equity in earnings (losses) from real estate and other affiliates attributable to the initial fair value step-up of the retained equity method investment at the time of deconsolidation and an additional $15.4 million of previously eliminated 110 North Wacker development fees were recognized in Other land, rental and property revenues.
–We continued to experience strong condominium unit sales in Ward Village, evidenced by the 61 condominium units we contracted to sell during the third quarter of 2021 at our towers that are under construction. Victoria Place, which began construction in February 2021, accounted for 16 of the units contracted during the quarter and was 98.0% presold as of September 30, 2021, with only 7 units remaining to be sold.
–The Park Ward Village, our eighth condominium project at Ward Village, began public sales in July 2021 and as of September 30, 2021, we have entered into contracts for 255 units, representing 47% of total units.
–Subsequent to quarter end, we completed construction at ‘A‘ali‘i and began welcoming residents in October 2021. As of November 2, 2021, we closed on 495 units, totaling $332.1 million in net revenue.
HHC 20202021 FORM 10-Q | 4544
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MANAGEMENT’S DISCUSSION AND ANALYSIS | |
EXECUTIVE OVERVIEW | |
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MANAGEMENT’S DISCUSSION AND ANALYSIS EXECUTIVE OVERVIEW |
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| Overview of Business Segments |
Operating Assets
Office and Multi-family We have seen continued strength in the performance of our office and multi-family assets. For the three months ended September 30, 2021, we collected 99.1% of our office portfolio billings and 97.5% of our multi-family portfolio billings. Multi-family net operating income (NOI) increased 135% or $5.3 million, from $3.9 million for the three months ended September 30, 2020, to $9.2 million for the three months ended September 30, 2021, due to our newly completed multi-family assets continuing to lease at or above our expectations. Office NOI increased 17% or $4.0 million, from $23.8 million for the three months ended September 30, 2020 to $27.8 million for the three months ended September 30, 2021, primarily due to the expiration of rent abatements at our newer properties and improved rent collections.
Retail Retail locations at our properties were significantly negatively impacted by the pandemic in 2020. Beginning in April 2020, we experienced the temporary closure of all non-essential retail in Summerlin, Houston and Ward Village, and the complete closure of the Outlet Collection at Riverwalk. Several of our tenants were able to resume limited operations in May and June 2020, and the majority of our tenants had reopened by the end of the third quarter of 2020. As a result of these closures, collections of our retail portfolio billings reached a low of 49.7% during the three months ended June 30, 2020. Despite these negative impacts, we began to see notable improvements in the performance of our retail assets during the fourth quarter of 2020 and collections of our retail billings increased to 72.6% for the three months ended December 31, 2020. This trend continued throughout 2021 with collections increasing each quarter and reaching 83.3% for the three months ended September 30, 2021. As a result of improved collections and continued recovery as business rebounds from the COVID-19 pandemic, NOI increased 133% or $9.2 million, from $6.9 million for the three months ended September 30, 2020, to $16.1 million for the three months ended September 30, 2021, which is in line with pre-pandemic levels.
Hospitality At the onset of the pandemic in March 2020, we temporarily closed all three of our hospitality properties. The Woodlands Resort reopened in May 2020, the Embassy Suites reopened in June 2020 and The Westin at The Woodlands reopened in July 2020. As a result, occupancy levels rose throughout the second half of 2020 and into 2021 but remained lower than levels achieved prior to the pandemic. On September 16, 2021, the Company completed the sale of all three hospitality assets for $252.0 million, resulting in a gain on sale of $39.1 million. Refer to Note 3 - Dispositions for additional information.
Las Vegas Aviators The Minor League Baseball season was canceled for 2020, which impacted the Las Vegas Aviators, our Triple-A professional baseball team. Following the 2021 restructuring of Minor League Baseball, the Las Vegas Aviators are participating in the Triple-A West Professional Development League. The team began the 2021 season in May at 50% capacity and were able to operate at 100% capacity through the third quarter. As a result, NOI has increased substantially from a loss of $0.8 million for the three months ended September 30, 2020, to income of $5.4 million for the three months ended September 30, 2021.
MPCAt the onset of the pandemic, 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.
New home sales in our MPC locations, a leading indicator of land sales, dropped considerably in April of 2020 as a result of stay-at-home orders, but experienced large upticks in May through December of 2020. In response, we restarted horizontal development to maintain a sufficient supply of lots and superpads to keep up with the strong home sales. This trend has continued through 2021, with 2,163 new homes sold in our MPCs year to date, representing a 6.1% increase compared to the nine months ended September 30, 2020. In addition, the price per acre of residential land across all our MPCs increased 11.6% year to date to $604 thousand per acre compared to $541 thousand per acre in the prior-year period.
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MANAGEMENT’S DISCUSSION AND ANALYSIS EXECUTIVE OVERVIEW |
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Seaport In response to the pandemic, we completely closed the Seaport and halted construction on the Tin Building in March 2020. Social distancing restrictions also resulted in cancellation of our 2020 Seaport summer concert series. While restrictions remained in place throughout 2020 and into 2021, many of the businesses within the Seaport were able to resume operations, on a limited basis, in the third quarter of 2020. Most restrictions were lifted in June of 2021; however, many businesses at the Seaport continued to operate at reduced levels primarily due to labor shortages. Construction on the Tin Building resumed in May 2020 and is expected to be substantially complete in the fourth quarter of 2021 and open in early 2022, with an expanded focus on in-person dining, retail shopping, mobile ordering and delivery. We are closely monitoring our revenues, and based on collections for the three months ended September 30, 2021, we have collected 100.0% of our $1.2 million of office portfolio billings and a nominal amount of our $1.2 million of retail portfolio billings as we have restructured many leases as a result of the impacts of the pandemic.
In place of the 2020 summer concert series, we launched a new concept at the Pier 17 rooftop called The Greens, which allowed people to reserve socially distanced, mini-lawn spaces. These lawn spaces were converted to individual dining cabins for guests to enjoy in the winter months. The Greens concept returned in May 2021 to complement the 2021 summer concert series. The Greens concept generated high customer demand and hosted several major events, including ESPN’s The ESPYS in July 2021. The Greens concept will return in November 2021.
The 2021 summer concert series began in July 2021 and ran through mid-October 2021. During the 11-week concert season, Pier 17 hosted over 30 concerts, of which 20 were sold out. In total, approximately 74,000 guests attended the concert series, representing 90% of available ticket inventory.
In April 2021, Momofuku reopened the Ssäm Bar in the space previously occupied by its former concept, Bar Wayō. Additionally, Andrew Carmellini’s Noho Hospitality opened Mister Dips in May 2021 and Carne Mare in June 2021.
We have also announced the future opening of two new concepts at the Fulton Market Building in the space previously occupied by 10 Corso Como. In spring of 2022, in a joint partnership with Endorphin Ventures, we expect to launch The Lawn Club, a new concept that will transform 20,000 square feet of the Fulton Market Building into an immersive indoor and outdoor experience that includes an extensive indoor grass area, a stylish clubhouse bar and a wide variety of lawn games. We also expect to launch a new restaurant concept by Josh Eden and Wylie Dufresne at 1 Fulton Street featuring an all-day menu with many specialty to-go items and an expansive outdoor café in early 2022.
In October 2020, we announced our comprehensive proposal for the redevelopment of 250 Water Street, which includes the transformation of this underutilized full-block surface parking lot into a mixed-use development that would include affordable and market rate apartments, community-oriented spaces and office space. In May 2021, we received approval from the New York City Landmarks Preservation Commission (LPC) on our proposed design for the 250 Water Street building. The LPC’s approval confirms that the proposed architecture is appropriate for the South Street Seaport Historic District, allowing us to proceed with the formal New York City Uniform Land Use Review Procedure known as ULURP, which is required to complete the necessary transfer of development rights to the parking lot site. We anticipate the 250 Water Street ULURP to conclude this December. A proposal subject to a separate ULURP to extend the Seaport ground lease for an additional 48 years from its current expiration in 2072 until 2120 is also underway. In September, the New York State Supreme Court dismissed on procedural grounds a lawsuit challenging the LPC approval. This project, which includes approximately 540,000 zoning square feet, presents a unique opportunity at the Seaport to transform this development site into a vibrant mixed-use asset. The plan as proposed will provide long-term viability to the South Street Seaport Museum and deliver much-needed affordable housing and economic stimulus to the area. We will continue working with the City to advance this process with the goal of bringing these benefits to this one-of-a-kind neighborhood.
Strategic DevelopmentsGiven the challenges presented by the pandemic, we launched digital sales efforts in early 2020, including virtual tours to sell condominiums in Hawai’i, which we will continue to maintain until social distancing recommendations are lifted. We 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 our websites conducive to social distancing recommendations. As a result, overall progress at our condominium projects remains strong. As of September 30, 2021, our four completed towers are 99.8% sold and our three under-construction towers are 90.1% presold.
We have not experienced any delays in our existing construction as a result of COVID-19, other than the brief delay of construction on the Tin Building discussed above. In December 2020, we began construction on Starling at Bridgeland, a luxury multi-family development in Bridgeland. During the first quarter of 2021, we began construction on Marlow, a multi-family development in Columbia, and Victoria Place, our seventh condominium project in Ward Village. During the second quarter of 2021 in Downtown Summerlin, we began construction on 1700 Pavilion, an office building and Tanager Echo, a luxury apartment complex.
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MANAGEMENT’S DISCUSSION AND ANALYSIS EXECUTIVE OVERVIEW |
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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). 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:
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– | cash expenditures, or future requirements for capital expenditures or contractual commitments |
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– | corporate general and administrative expenses |
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– | interest expense on our corporate debt |
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– | income taxes that we may be required to pay |
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– | any cash requirements for replacement of fully depreciated or amortized assets |
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– | limitations on, or costs related to, the transfer of earnings from our real estate and other affiliates to us |
–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
–limitations on, or costs related to, the transfer of earnings from our real estate and other affiliates to us
HHC 20202021 FORM 10-Q | 4845
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MANAGEMENT’S DISCUSSION AND ANALYSIS EXECUTIVE OVERVIEW |
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EXECUTIVE OVERVIEW | |
A reconciliation between EBT and Net income is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| thousands | Operating Assets Segment (a) | | MPC Segment | | Seaport Segment | | Strategic Developments Segment | | Total |
| Three Months Ended September 30, 2021 | | | | | | | | |
| Total revenues | $ | 125,072 | | | $ | 72,061 | | | $ | 21,143 | | | $ | 809 | | | $ | 219,085 | |
| Total operating expenses | (61,091) | | | (35,474) | | | (25,219) | | | (6,708) | | | (128,492) | |
| Segment operating income (loss) | 63,981 | | | 36,587 | | | (4,076) | | | (5,899) | | | 90,593 | |
| Depreciation and amortization | (44,224) | | | (102) | | | (9,087) | | | (1,741) | | | (55,154) | |
| Interest income (expense), net | (18,027) | | | 10,362 | | | 377 | | | 850 | | | (6,438) | |
| Other income (loss), net | (285) | | | — | | | (1,134) | | | 5 | | | (1,414) | |
| Equity in earnings (losses) from real estate and other affiliates | (15,108) | | | 8,277 | | | (1,009) | | | (8) | | | (7,848) | |
| Gain (loss) on sale or disposal of real estate and other assets, net | 39,141 | | | — | | | — | | | — | | | 39,141 | |
| | | | | | | | | |
| Gain (loss) on extinguishment of debt | (573) | | | (1,004) | | | — | | | — | | | (1,577) | |
| | | | | | | | | |
| Segment EBT | $ | 24,905 | | | $ | 54,120 | | | $ | (14,929) | | | $ | (6,793) | | | $ | 57,303 | |
| Corporate income, expenses and other items | | | | | | | | | (55,186) | |
| Net income (loss) | | | | | | | | | 2,117 | |
| Net (income) loss attributable to noncontrolling interests | | | | | | | | | 1,936 | |
| Net income (loss) attributable to common stockholders | | | | | | | | | $ | 4,053 | |
| | | | | | | | | |
| Three Months Ended September 30, 2020 | | | | | | | | | |
| Total revenues | $ | 81,667 | | | $ | 52,158 | | | $ | 4,204 | | | $ | 16,365 | | | $ | 154,394 | |
| Total operating expenses | (47,590) | | | (23,059) | | | (11,522) | | | (9,922) | | | (92,093) | |
| Segment operating income (loss) | 34,077 | | | 29,099 | | | (7,318) | | | 6,443 | | | 62,301 | |
| Depreciation and amortization | (41,395) | | | (91) | | | (7,174) | | | (1,643) | | | (50,303) | |
| Interest income (expense), net | (21,045) | | | 9,176 | | | (2,811) | | | 1,921 | | | (12,759) | |
| Other income (loss), net | (17) | | | — | | | 1,590 | | | 134 | | | 1,707 | |
| Equity in earnings (losses) from real estate and other affiliates | 962 | | | (1,563) | | | (288) | | | 267,727 | | | 266,838 | |
| Gain (loss) on sale or disposal of real estate and other assets, net | 108 | | | — | | | — | | | — | | | 108 | |
| | | | | | | | | |
| Gain (loss) on extinguishment of debt | (1,521) | | | — | | | (11,645) | | | — | | | (13,166) | |
| | | | | | | | | |
| Segment EBT | $ | (28,831) | | | $ | 36,621 | | | $ | (27,646) | | | $ | 274,582 | | | $ | 254,726 | |
| Corporate income, expenses and other items | | | | | | | | | (90,724) | |
| Net income (loss) | | | | | | | | | 164,002 | |
| Net (income) loss attributable to noncontrolling interests | | | | | | | | | (24,292) | |
| Net income (loss) attributable to common stockholders | | | | | | | | | $ | 139,710 | |
|
| | | | | | | | | | | | | | | | | |
| thousands | Operating Assets
Segment (a) | MPC
Segment | Seaport
Segment | | Strategic Developments
Segment | | Total |
| Three Months Ended September 30, 2020 | | | | | | |
| Total revenues | $ | 81,667 |
| $ | 52,158 |
| $ | 4,204 |
| | $ | 16,365 |
| | $ | 154,394 |
|
| Total operating expenses | (47,590 | ) | (23,059 | ) | (11,522 | ) | | (9,922 | ) | | (92,093 | ) |
| Segment operating income (loss) | 34,077 |
| 29,099 |
| (7,318 | ) | | 6,443 |
| | 62,301 |
|
| Depreciation and amortization | (41,395 | ) | (91 | ) | (7,174 | ) | | (1,643 | ) | | (50,303 | ) |
| Interest expense, net | (21,045 | ) | 9,176 |
| (2,811 | ) | | 1,921 |
| | (12,759 | ) |
| Other income (loss), net | (17 | ) | — |
| 1,590 |
| | 134 |
| | 1,707 |
|
| Equity in earnings (losses) from real estate and other affiliates | 962 |
| (1,563 | ) | (288 | ) | | 267,727 |
| | 266,838 |
|
| Gain (loss) on sale or disposal of real estate, net | 108 |
| — |
| — |
| | — |
| | 108 |
|
| Gain (loss) on extinguishment of debt | (1,521 | ) | — |
| (11,645 | ) | | — |
| | (13,166 | ) |
| Segment EBT | $ | (28,831 | ) | $ | 36,621 |
| $ | (27,646 | ) | | $ | 274,582 |
| | $ | 254,726 |
|
| Corporate income, expenses and other items | | | | | | | (90,724 | ) |
| Net income (loss) | | | | | | | 164,002 |
|
| Net (income) loss attributable to noncontrolling interests | | | | | | | (24,292 | ) |
| Net income (loss) attributable to common stockholders | | | | | | | $ | 139,710 |
|
| | | | | | | | |
| Three Months Ended September 30, 2019 | | | | | | | |
| Total revenues | $ | 104,223 |
| $ | 92,287 |
| $ | 23,130 |
| | $ | 11,515 |
| | $ | 231,155 |
|
| Total operating expenses | (47,950 | ) | (43,697 | ) | (27,330 | ) | | (11,327 | ) | | (130,304 | ) |
| Segment operating income (loss) | 56,273 |
| 48,590 |
| (4,200 | ) | | 188 |
| | 100,851 |
|
| Depreciation and amortization | (28,844 | ) | (88 | ) | (6,767 | ) | | (2,070 | ) | | (37,769 | ) |
| Interest expense, net | (21,645 | ) | 8,550 |
| (4,984 | ) | | 3,002 |
| | (15,077 | ) |
| Other income (loss), net | 63 |
| 534 |
| — |
| | 354 |
| | 951 |
|
| Equity in earnings (losses) from real estate and other affiliates | 441 |
| 4,523 |
| (705 | ) | | 283 |
| | 4,542 |
|
| Gain (loss) on sale or disposal of real estate, net | — |
| — |
| — |
| | 24,201 |
| | 24,201 |
|
| Selling profit from sales-type leases | 13,537 |
| — |
| — |
| | — |
| | 13,537 |
|
| Segment EBT | $ | 19,825 |
| $ | 62,109 |
| $ | (16,656 | ) | | $ | 25,958 |
| | $ | 91,236 |
|
| Corporate income, expenses and other items | | | | | | | (61,193 | ) |
| Net income (loss) | | | | | | | 30,043 |
|
| Net (income) loss attributable to noncontrolling interests | | | | | | | (285 | ) |
| Net income (loss) attributable to common stockholders | | | | | | | $ | 29,758 |
|
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| (a) | Total revenues includes hospitality revenues of $8.1 million for the three months ended September 30, 2020, and $20.0 million for the three months ended September 30, 2019. Total operating expenses includes hospitality operating costs of $7.6 million for the three months ended September 30, 2020, and $14.1 million for the three months ended September 30, 2019. |
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MANAGEMENT’S DISCUSSION AND ANALYSIS | |
EXECUTIVE OVERVIEW | |
|
| | | | | | | | | | | | | | | | | |
| thousands | Operating Assets
Segment (a) | MPC
Segment | Seaport
Segment | | Strategic Developments
Segment | | Total |
| Nine Months Ended September 30, 2020 | | | | | | | |
| Total revenues | $ | 280,201 |
| $ | 171,517 |
| $ | 16,170 |
| | $ | 17,749 |
| | $ | 485,637 |
|
| Total operating expenses | (142,052 | ) | (78,751 | ) | (34,297 | ) | | (126,738 | ) | | (381,838 | ) |
| Segment operating income (loss) | 138,149 |
| 92,766 |
| (18,127 | ) | | (108,989 | ) | | 103,799 |
|
| Depreciation and amortization | (115,479 | ) | (273 | ) | (34,825 | ) | | (5,054 | ) | | (155,631 | ) |
| Interest expense, net | (70,341 | ) | 26,033 |
| (12,490 | ) | | 4,909 |
| | (51,889 | ) |
| Other income (loss), net | 150 |
| — |
| (2,187 | ) | | 1,427 |
| | (610 | ) |
| Equity in earnings (losses) from real estate and other affiliates | 5,831 |
| 4,403 |
| (8,964 | ) | | 268,365 |
| | 269,635 |
|
| Gain (loss) on sale or disposal of real estate, net | 38,232 |
| — |
| — |
| | 8,000 |
| | 46,232 |
|
| Gain (loss) on extinguishment of debt | (1,521 | ) | — |
| (11,645 | ) | | — |
| | (13,166 | ) |
| Provision for impairment | (48,738 | ) | — |
| — |
| | — |
| | (48,738 | ) |
| Segment EBT | $ | (53,717 | ) | $ | 122,929 |
| $ | (88,238 | ) | | $ | 168,658 |
| | $ | 149,632 |
|
| Corporate income, expenses and other items | | | | | | | (144,815 | ) |
| Net income (loss) | | | | | | | 4,817 |
|
| Net (income) loss attributable to noncontrolling interests | | | | | | | (24,325 | ) |
| Net income (loss) attributable to common stockholders | | | | | | | $ | (19,508 | ) |
| | | | | | | | |
| Nine Months Ended September 30, 2019 | | | | | | | |
| Total revenues | $ | 305,395 |
| $ | 216,042 |
| $ | 43,051 |
| | $ | 451,873 |
| | $ | 1,016,361 |
|
| Total operating expenses | (139,589 | ) | (109,676 | ) | (59,735 | ) | | (382,341 | ) | | (691,341 | ) |
| Segment operating income (loss) | 165,806 |
| 106,366 |
| (16,684 | ) | | 69,532 |
| | 325,020 |
|
| Depreciation and amortization | (84,890 | ) | (334 | ) | (19,713 | ) | | (4,386 | ) | | (109,323 | ) |
| Interest expense, net | (60,695 | ) | 24,376 |
| (8,440 | ) | | 9,499 |
| | (35,260 | ) |
| Other income (loss), net | 1,186 |
| 601 |
| (147 | ) | | 664 |
| | 2,304 |
|
| Equity in earnings (losses) from real estate and other affiliates | 3,195 |
| 18,859 |
| (1,788 | ) | | 581 |
| | 20,847 |
|
| Gain (loss) on sale or disposal of real estate, net | — |
| — |
| (6 | ) | | 24,057 |
| | 24,051 |
|
| Selling profit from sales-type leases | 13,537 |
| | | | | | 13,537 |
|
| Segment EBT | $ | 38,139 |
| $ | 149,868 |
| $ | (46,778 | ) | | $ | 99,947 |
| | $ | 241,176 |
|
| Corporate income, expenses and other items | | | | | | | (165,880 | ) |
| Net income (loss) | | | | | | | 75,296 |
|
| Net (income) loss attributable to noncontrolling interests | | | | | | | (240 | ) |
| Net income (loss) attributable to common stockholders | | | | | | | $ | 75,056 |
|
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(a) | Total revenues includes hospitality revenues of $27.9 million for the nine months ended September 30, 2020, and $68.5 million for the nine months ended September 30, 2019. Total operating expenses includes hospitality operating costs of $24.8 million for the nine months ended September 30, 2020, and $46.3 million for the nine months ended September 30, 2019. |
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MANAGEMENT’S DISCUSSION AND ANALYSIS | |
RESULTS OF OPERATIONS | |
Net income attributable to common stockholders increased $110.0 million to income of $139.7$14.0 million for the three months ended September 30, 2020,2021, and decreased $94.6$8.1 million to a lossfor the three months ended September 30, 2020. Total operating expenses includes hospitality operating costs of $19.5$11.7 million for the three months ended September 30, 2021, and $7.6 million for the three months ended September 30, 2020. In September 2021, the Company completed the sale of its three hospitality properties.
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MANAGEMENT’S DISCUSSION AND ANALYSIS EXECUTIVE OVERVIEW |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| thousands | Operating Assets Segment (a) | | MPC Segment | | Seaport Segment | | Strategic Developments Segment | | Total |
| Nine Months Ended September 30, 2021 | | | | | | | | | |
| Total revenues | $ | 334,933 | | | $ | 194,926 | | | $ | 39,494 | | | $ | 52,575 | | | $ | 621,928 | |
| Total operating expenses | (161,516) | | | (92,646) | | | (53,721) | | | (84,971) | | | (392,854) | |
| Segment operating income (loss) | 173,417 | | | 102,280 | | | (14,227) | | | (32,396) | | | 229,074 | |
| Depreciation and amortization | (123,850) | | | (272) | | | (22,926) | | | (4,936) | | | (151,984) | |
| Interest income (expense), net | (55,179) | | | 31,734 | | | 666 | | | 2,610 | | | (20,169) | |
| Other income (loss), net | (10,539) | | | — | | | (2,088) | | | 19 | | | (12,608) | |
| Equity in earnings (losses) from real estate and other affiliates | (36,931) | | | 54,568 | | | (1,697) | | | (125) | | | 15,815 | |
| Gain (loss) on sale or disposal of real estate and other assets, net | 39,141 | | | — | | | — | | | 21,333 | | | 60,474 | |
| | | | | | | | | |
| | | | | | | | | |
| Gain (loss) on extinguishment of debt | (1,455) | | | (1,004) | | | — | | | — | | | (2,459) | |
| Provision for impairment | — | | | — | | | — | | | (13,068) | | | (13,068) | |
| Segment EBT | $ | (15,396) | | | $ | 187,306 | | | $ | (40,272) | | | $ | (26,563) | | | $ | 105,075 | |
| Corporate income, expenses and other items | | | | | | | | | (167,500) | |
| Net income (loss) | | | | | | | | | (62,425) | |
| Net (income) loss attributable to noncontrolling interests | | | | | | | | | 4,725 | |
| Net income (loss) attributable to common stockholders | | | | | | | | | $ | (57,700) | |
| | | | | | | | | |
| Nine Months Ended September 30, 2020 | | | | | | | | | |
| Total revenues | $ | 280,201 | | | $ | 171,517 | | | $ | 16,170 | | | $ | 17,749 | | | $ | 485,637 | |
| Total operating expenses | (142,052) | | | (78,751) | | | (34,297) | | | (126,738) | | | (381,838) | |
| Segment operating income (loss) | 138,149 | | | 92,766 | | | (18,127) | | | (108,989) | | | 103,799 | |
| Depreciation and amortization | (115,479) | | | (273) | | | (34,825) | | | (5,054) | | | (155,631) | |
| Interest income (expense), net | (70,341) | | | 26,033 | | | (12,490) | | | 4,909 | | | (51,889) | |
| Other income (loss), net | 150 | | | — | | | (2,187) | | | 1,427 | | | (610) | |
| Equity in earnings (losses) from real estate and other affiliates | 5,831 | | | 4,403 | | | (8,964) | | | 268,365 | | | 269,635 | |
| Gain (loss) on sale or disposal of real estate and other assets, net | 38,232 | | | — | | | — | | | 8,000 | | | 46,232 | |
| | | | | | | | | |
| | | | | | | | | |
| Gain (loss) on extinguishment of debt | (1,521) | | | — | | | (11,645) | | | — | | | (13,166) | |
| Provision for impairment | (48,738) | | | — | | | — | | | — | | | (48,738) | |
| Segment EBT | $ | (53,717) | | | $ | 122,929 | | | $ | (88,238) | | | $ | 168,658 | | | $ | 149,632 | |
| Corporate income, expenses and other items | | | | | | | | | (144,815) | |
| Net income (loss) | | | | | | | | | 4,817 | |
| Net (income) loss attributable to noncontrolling interests | | | | | | | | | (24,325) | |
| Net income (loss) attributable to common stockholders | | | | | | | | | $ | (19,508) | |
(a)Total revenues includes hospitality revenues of $35.6 million for the nine months ended September 30, 2020, compared2021, and $27.9 million for the nine months ended September 30, 2020. Total operating expenses includes hospitality operating costs of $30.5 million for the nine months ended September 30, 2021, and $24.8 million for the nine months ended September 30, 2020. In September 2021, the Company completed the sale of its three hospitality properties.
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MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS |
|
Net income attributable to the prior year periods.
Forcommon stockholders decreased $135.7 million to income of $4.1 million for the three months ended September 30, 2020:
Total segment EBT increased $163.52021, and decreased $38.2 million to a loss of $57.7 million for the nine months ended September 30, 2021, compared to the prior year period primarily dueprior-year periods. This decrease was the result of the recognition of a $267.5 million gain on the deconsolidation for 110 North Wacker in the third quarter of 2020 that did not reoccur during the current period.
Refer to the following:Third Quarter 2021 Highlights section above for information on the variances for three months ended September 30, 2021.
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– | higher Strategic Developments EBT primarily due a gain on deconsolidation of 110 North Wacker attributable to the initial fair value step-up of the retained equity method investment at the time of deconsolidation and the recognition of previously eliminated 110 North Wacker development fees upon deconsolidation, partially offset by a gain recognized for the sale of the Cottonwood Mall during the three months ended September 30, 2019 and lower Condominium rights and unit sales, net of costs, driven by the timing of condominium closings. |
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– | lower Operating Asset EBT primarily due to decreases in operating revenues due to rent deferrals and collection reserves related to our retail properties, declines in occupancy at our recently reopened hospitality properties and cancellation of the Las Vegas Aviators 2020 baseball season as a result of the COVID-19 pandemic |
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– | lower MPC EBT primarily due to lower MPC land sales revenues, driven by timing of Summerlin superpad sales |
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– | lower Seaport EBT primarily due to decreases in segment revenues and operating expenses primarily as a result of business closures and cancellations of events related to the COVID-19 pandemic |
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– | loss on extinguishment of debt due to the early retirement of Seaport and Operating loans |
For the nine months ended September 30, 2020:2021:
Total segment EBT decreased $91.5$44.6 million compared to the prior yearprior-year period primarily due to the following:
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– | lower Operating Asset EBT primarily due to decreases in operating revenues due to rent deferrals and collection reserves related to our retail properties, declines in occupancy at our recently reopened hospitality properties, cancellation of the Las Vegas Aviators 2020 baseball season as a result of the COVID-19 pandemic and an impairment charge for Outlet Collection at Riverwalk |
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– | lower Seaport EBT primarily due to decreases in segment revenues and operating expenses primarily as a result of business closures and cancellations of events related to the COVID-19 pandemic |
| |
– | lower MPC EBT primarily due to lower MPC land sales revenues, driven by timing of Summerlin superpad sales |
| |
– | loss on extinguishment of debt due to the early retirement of Seaport and Operating loans |
| |
– | higher Strategic EBT due a gain on deconsolidation of 110 North Wacker attributable to the initial fair value step-up of the retained equity method investment at the time of deconsolidation and the recognition of previously eliminated 110 North Wacker development fees upon deconsolidation, partially offset by a charge related to our expected funding of costs to correct alleged defects at Waiea, which we expect to recover from responsible parties and insurance proceeds, as well as lower Condominium rights and unit sales, net of costs, driven by the timing of condominium closings |
| |
– | an increase in the Gain on sale or disposal of real estate, net due to the termination payment received related to the sale of West Windsor in the second quarter of 2020, and the sale of 100 Fellowship Drive in the first quarter of 2020 |
–lower Strategic Development EBT driven by the recognition of a gain on deconsolidation for 110 North Wacker in the third quarter of 2020 that did not reoccur in the current period, partially offset by a decrease in charges related to our expected funding of costs to correct alleged construction defects at Waiea
–higher MPC EBT primarily due to higher Equity in earnings (losses) from real estate and other affiliates at The Summit resulting from an increased number of units sold in 2021 and the impact of increased amenities cost and higher unit completion cost in the prior-year period that did not repeat in 2021, and higher land sales revenues at Summerlin due to an increase in super pad and custom lot sales, partially offset by lower land sales revenues at Bridgeland and The Woodlands due to reductions in acres sold
–higher Seaport EBT primarily due to increased revenue, partially offset by increased operating expenses as business resumed after the onset of the COVID-19 pandemic in 2020, the write off of retail inventory and building improvements related to the permanent closure of 10 Corso Como Retail and Café in the first quarter of 2020 and the impairment of our equity method investment in Mr. C Seaport in the second quarter of 2020 that did not reoccur in 2021 and a decrease in interest expense due to the retirement of a $250 million Seaport loan in August 2020
–higher Operating Assets EBT primarily due to an increase in our Other land, rental and property revenues primarily related to the return of the Las Vegas Aviators 2021 baseball season after cancellation in 2020 as a result of the COVID-19 pandemic, an increase in Rental revenue primarily due to multi-family properties placed in service leasing up faster than expected and increased collections at our retail portfolio in 2021, and a decrease in interest expense due to the retirement or refinancing of various loans, partially offset by lower Equity in earnings (losses) from real estate and other affiliates at 110 North Wacker related to losses during the lease-up period
–lower impairment charge of Century Park during the second quarter of 2021, compared to the impairment on the Outlet Collection at Riverwalk in the first quarter of 2020
–loss on the settlement of the rate-lock agreement associated with the loans for 1201 Lake Robbins and The Woodlands Warehouse upon repayment in February 2021
–higher Gain on sale or disposal of real estate, net due to the sale of our hospitality properties and Monarch City in 2021, compared to the sale of 100 Fellowship Drive in 2020 and the receipt of a termination payment in 2020 related to the sale of West Windsor
Net expenses related to Corporate income, expenses and other items increased $22.7 million compared to the prior-year period primarily due to the following:
–increase in net expense due to a loss on extinguishment of debt related to the repurchase of the Company’s $1.0 billion 5.375% Senior Notes due 2025 during the first quarter of 2021
–increase in net expense due to higher corporate interest expense, net primarily as a result of the issuance of $750 million 5.375% Senior Notes in August 2020, as well as the issuance of $650 million 4.125% Senior Notes and $650 million 4.375% Senior Notes in the first quarter of 2021, offset by the repurchase of $1.0 billion 5.375% Senior Notes in the first quarter of 2021
–decrease in general and administrative expense related to workforce reductions and other corporate initiatives
–decrease in income tax expense, primarily due to a decrease in income before income taxes
See segment discussions for more detail of the changes described above.
HHC 20202021 FORM 10-Q | 4851
|
| | | | |
MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS | |
RESULTS OF OPERATIONS |
|
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 Segment EBT for Operating Assets is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating Assets Segment EBT | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
| Rental Revenue | $ | 93,295 | | | $ | 68,813 | | | $ | 24,482 | | | $ | 262,943 | | | $ | 235,976 | | | $ | 26,967 | |
| Other land, rental and property revenues | 31,777 | | | 12,854 | | | 18,923 | | | 71,990 | | | 44,225 | | | 27,765 | |
| Total revenues | 125,072 | | | 81,667 | | | 43,405 | | | 334,933 | | | 280,201 | | | 54,732 | |
| | | | | | | | | | | |
| Operating costs | (47,348) | | | (32,572) | | | (14,776) | | | (124,870) | | | (98,682) | | | (26,188) | |
| Rental property real estate taxes | (13,606) | | | (13,692) | | | 86 | | | (38,754) | | | (38,589) | | | (165) | |
| (Provision for) recovery of doubtful accounts | (137) | | | (1,326) | | | 1,189 | | | 2,108 | | | (4,781) | | | 6,889 | |
| Total operating expenses | (61,091) | | | (47,590) | | | (13,501) | | | (161,516) | | | (142,052) | | | (19,464) | |
| Segment operating income (loss) | 63,981 | | | 34,077 | | | 29,904 | | | 173,417 | | | 138,149 | | | 35,268 | |
| Depreciation and amortization | (44,224) | | | (41,395) | | | (2,829) | | | (123,850) | | | (115,479) | | | (8,371) | |
| Interest income (expense), net | (18,027) | | | (21,045) | | | 3,018 | | | (55,179) | | | (70,341) | | | 15,162 | |
| Other income (loss), net | (285) | | | (17) | | | (268) | | | (10,539) | | | 150 | | | (10,689) | |
| Equity in earnings (losses) from real estate and other affiliates | (15,108) | | | 962 | | | (16,070) | | | (36,931) | | | 5,831 | | | (42,762) | |
| Gain (loss) on sale or disposal of real estate and other assets, net | 39,141 | | | 108 | | | 39,033 | | | 39,141 | | | 38,232 | | | 909 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Gain (loss) on extinguishment of debt | (573) | | | (1,521) | | | 948 | | | (1,455) | | | (1,521) | | | 66 | |
| Provision for impairment | — | | | — | | | — | | | — | | | (48,738) | | | 48,738 | |
| Operating Assets segment EBT | $ | 24,905 | | | $ | (28,831) | | | $ | 53,736 | | | $ | (15,396) | | | $ | (53,717) | | | $ | 38,321 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Operating Assets Segment EBT | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2020 | | 2019 | | $ Change | | 2020 | | 2019 | | $ Change |
| Total revenues | $ | 81,667 |
| | $ | 104,223 |
| | $ | (22,556 | ) | | $ | 280,201 |
| | $ | 305,395 |
| | $ | (25,194 | ) |
| Total operating expenses | (47,590 | ) | | (47,950 | ) | | 360 |
| | (142,052 | ) | | (139,589 | ) | | (2,463 | ) |
| Segment operating income (loss) | 34,077 |
| | 56,273 |
| | (22,196 | ) | | 138,149 |
| | 165,806 |
| | (27,657 | ) |
| Depreciation and amortization | (41,395 | ) | | (28,844 | ) | | (12,551 | ) | | (115,479 | ) | | (84,890 | ) | | (30,589 | ) |
| Interest expense, net | (21,045 | ) | | (21,645 | ) | | 600 |
| | (70,341 | ) | | (60,695 | ) | | (9,646 | ) |
| Other income (loss), net | (17 | ) | | 63 |
| | (80 | ) | | 150 |
| | 1,186 |
| | (1,036 | ) |
| Equity in earnings (losses) from real estate and other affiliates | 962 |
| | 441 |
| | 521 |
| | 5,831 |
| | 3,195 |
| | 2,636 |
|
| Gain (loss) on sale or disposal of real estate | 108 |
| | — |
| | 108 |
| | 38,232 |
| | — |
| | 38,232 |
|
| Gain (loss) on extinguishment of debt | (1,521 | ) | | — |
| | (1,521 | ) | | (1,521 | ) | | — |
| | (1,521 | ) |
| Selling profit from sales-type leases | — |
| | 13,537 |
| | (13,537 | ) | | — |
| | 13,537 |
| | (13,537 | ) |
| Provision for impairment | — |
| | — |
| | — |
| | (48,738 | ) | | — |
| | (48,738 | ) |
| Segment EBT | $ | (28,831 | ) | | $ | 19,825 |
| | $ | (48,656 | ) | | $ | (53,717 | ) | | $ | 38,139 |
| | $ | (91,856 | ) |
For the three months ended September 30, 2020:2021:
Operating Assets segment EBT decreased $48.7 million to a loss of $28.8increased $53.7 million compared to the prior yearprior-year period primarily due to the following:
–gain on the sale of The Woodlands Resort, The Westin at The Woodlands and Embassy Suites at Hughes Landing in the third quarter of 2021
–increase in Other land, rental and property revenues, net of related Operating costs, primarily due to the return of the Las Vegas Aviators 2021 baseball season after cancellation in 2020 as a result of the COVID-19 pandemic
–increase in Rental revenue, net of related Operating costs, related to multi-family and office properties in The Woodlands and Columbia placed in service since the beginning of 2020
–increase in Rental revenue as a result of improved collections at our retail properties in 2021
–decrease in interest expense due to the retirement or refinancing of various loans
–partially offset by a decrease in equity earnings, primarily due to losses incurred at 110 North Wacker due to the disproportionate impact of interest expense, real estate taxes and depreciation expense during the lease-up period that were not present in the third quarter of 2020 as the property was in the development phase. Upon completion of construction in the third quarter of 2020, 110 North Wacker was deconsolidated and recorded as an equity method investment.
| | | | | |
–MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS | net decreases in our Other land, rental and property revenues and related Operating expenses primarily due to declines in occupancy at our recently reopened hospitality properties and cancellation
|
| |
– | net decreases in Rental revenue and related Operating expenses primarily due to rent deferrals and collection reserves related to our retail properties |
| |
– | decrease in Selling profit from sales-type leases attributable to the commencement of a lease at our 100 Fellowship Drive property in the third quarter of 2019 |
| |
– | increase in Operating expenses, Interest expense, net and Depreciation and amortization expense, partially offset by Rental revenue related to office and multi-family assets recently placed in service, but still in the lease-up period |
For the nine months ended September 30, 2020:2021:
Operating Assets segment EBT decreased $91.9 million to a loss of $53.7increased $38.3 million compared to the prior yearprior-year period primarily due to the following:
| |
– | increase in the Provision for impairment of $48.7 million for Outlet Collection at Riverwalk, partially offset by an increase in Gain (loss) on sale or disposal of real estate related to the sale of 100 Fellowship Drive, in The Woodlands, Texas, in the first quarter of 2020. Please refer to Note 4 - –impairment on the Outlet Collection at Riverwalk in the first quarter of 2020Recent Transactions and Note 5 - Impairment in the Company’s Condensed Consolidated Financial Statements for further details. |
| |
– | net decreases in our Other land, rental and property revenues and related Operating expenses primarily due to declines in occupancy at our recently reopened hospitality properties and cancellation of the Las Vegas Aviators 2020 baseball season, all as a result of the COVID-19 pandemic |
| |
– | net decreases in Rental revenue and related Operating expenses primarily due rent deferrals and collection reserves related to our retail properties |
| |
– | decrease in Selling profit from sales-type leases attributable to the commencement of a lease at our 100 Fellowship Drive property in the third quarter of 2019 |
| |
– | increase in Operating expenses, Interest expense, net and Depreciation and amortization expense, partially offset by Rental revenue related to office and multi-family assets recently placed in service, but still in the lease-up period |
–increase in Rental revenue as a result of improved collections at our retail properties in 2021
HHC –decrease in interest expense due to the retirement or refinancing of various loans
–increase in our Other land, rental and property revenues, net of related Operating Costs, primarily related to the return of the Las Vegas Aviators 2021 baseball season after cancellation in 2020 FORM 10-Q as a result of the COVID-19 pandemic
–| increase in Rental revenue, net of related Operating costs, related to multi-family properties in The Woodlands and Columbia as well as office property in Columbia placed in service since the beginning of 2020
–49decrease in (Provision for) recovery of doubtful accounts as a result of improved collections across our portfolio in 2021
|
| |
MANAGEMENT’S DISCUSSION AND ANALYSIS | |
RESULTS OF OPERATIONS | |
–decrease in equity earnings, primarily due to losses incurred at 110 North Wacker due to the disproportionate impact of interest expense, real estate taxes and depreciation expense during the lease-up period that were not present in the same period of 2020 as the property was in the development phase. Upon completion of construction in the third quarter of 2020, 110 North Wacker was deconsolidated and recorded as an equity method investment.–gain on the sale of 100 Fellowship Drive, in The Woodlands, Texas, in the first quarter of 2020
–increase in Operating expenses primarily due to the steady return of business operations across our portfolio after the onset of the COVID-19 pandemic in 2020
–loss on the settlement of the rate-lock agreement upon repayment of $280.3 million outstanding on our loans for 1201 Lake Robbins and The Woodlands Warehouse in February 2021
–increase in Depreciation and amortization, primarily related to assets placed in service since the beginning of 2020
–decrease in revenue due to the planned expiration in June 2020 of a short-term lease for approximately 142,000 square feet at The Woodlands Towers at the Waterway which is being actively marketed
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, net; interest expense, net; ground rent amortization; demolition costs; other (loss) income; amortization; depreciation; development-related marketing cost; gain on sale or disposal of real estate and other 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.returns
| | | | | |
MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS |
|
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating Assets NOI | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
| Total Operating Assets segment EBT | $ | 24,905 | | | $ | (28,831) | | | $ | 53,736 | | | $ | (15,396) | | | $ | (53,717) | | | $ | 38,321 | |
| Add back: | | | | | | | | | | | |
| Depreciation and amortization | 44,224 | | | 41,395 | | | 2,829 | | | 123,850 | | | 115,479 | | | 8,371 | |
| Interest (income) expense, net | 18,027 | | | 21,045 | | | (3,018) | | | 55,179 | | | 70,341 | | | (15,162) | |
| Equity in (earnings) losses from real estate and other affiliates | 15,108 | | | (962) | | | 16,070 | | | 36,931 | | | (5,831) | | | 42,762 | |
| (Gain) loss on sale or disposal of real estate and other assets, net | (39,141) | | | (108) | | | (39,033) | | | (39,141) | | | (38,232) | | | (909) | |
| (Gain) loss on extinguishment of debt | 573 | | | 1,521 | | | (948) | | | 1,455 | | | 1,521 | | | (66) | |
| | | | | | | | | | | |
| Provision for impairment | — | | | — | | | — | | | — | | | 48,738 | | | (48,738) | |
| Impact of straight-line rent | (936) | | | 1,766 | | | (2,702) | | | (10,030) | | | (4,585) | | | (5,445) | |
| Other | 215 | | | 69 | | | 146 | | | 10,454 | | | 123 | | | 10,331 | |
| Operating Assets NOI | $ | 62,975 | | | $ | 35,895 | | | $ | 27,080 | | | $ | 163,302 | | | $ | 133,837 | | | $ | 29,465 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Operating Assets NOI | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2020 | | 2019 | | $ Change | | 2020 | | 2019 | | $ Change |
| Total Operating Assets segment EBT | $ | (28,831 | ) | | $ | 19,825 |
| | $ | (48,656 | ) | | $ | (53,717 | ) | | $ | 38,139 |
| | $ | (91,856 | ) |
| Depreciation and amortization | 41,395 |
| | 28,844 |
| | 12,551 |
| | 115,479 |
| | 84,890 |
| | 30,589 |
|
| Interest expense, net | 21,045 |
| | 21,645 |
| | (600 | ) | | 70,341 |
| | 60,695 |
| | 9,646 |
|
| Equity in (earnings) losses from real estate and other affiliates | (962 | ) | | (441 | ) | | (521 | ) | | (5,831 | ) | | (3,195 | ) | | (2,636 | ) |
| (Gain) loss on sale or disposal of real estate and other assets, net | (108 | ) | | — |
| | (108 | ) | | (38,232 | ) | | — |
| | (38,232 | ) |
| (Gain) loss on extinguishment of debt | 1,521 |
| | — |
| | 1,521 |
| | 1,521 |
| | — |
| | 1,521 |
|
| Selling profit from sales-type leases | — |
| | (13,537 | ) | | 13,537 |
| | — |
| | (13,537 | ) | | 13,537 |
|
| Provision for impairment | — |
| | — |
| | — |
| | 48,738 |
| | — |
| | 48,738 |
|
| Impact of straight-line rent | 1,766 |
| | (2,529 | ) | | 4,295 |
| | (4,585 | ) | | (7,911 | ) | | 3,326 |
|
| Other | 69 |
| | 477 |
| | (408 | ) | | 123 |
| | 259 |
| | (136 | ) |
| Operating Assets NOI | $ | 35,895 |
| | $ | 54,284 |
| | $ | (18,389 | ) | | $ | 133,837 |
| | $ | 159,340 |
| | $ | (25,503 | ) |
The below table presents Operating Assets NOI by property type:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating Assets NOI by Property Type | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
| Office | $ | 27,814 | | | $ | 23,819 | | | $ | 3,995 | | | $ | 79,929 | | | $ | 87,110 | | | $ | (7,181) | |
| Retail | 16,130 | | | 6,932 | | | 9,198 | | | 42,932 | | | 30,021 | | | 12,911 | |
| Multi-family | 9,208 | | | 3,924 | | | 5,284 | | | 22,353 | | | 12,286 | | | 10,067 | |
| Hospitality | 2,348 | | | 626 | | | 1,722 | | | 4,922 | | | 3,163 | | | 1,759 | |
| Other | 7,475 | | | 594 | | | 6,881 | | | 13,166 | | | 1,257 | | | 11,909 | |
| Operating Assets NOI | $ | 62,975 | | | $ | 35,895 | | | $ | 27,080 | | | $ | 163,302 | | | $ | 133,837 | | | $ | 29,465 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Operating Assets NOI by Property Type | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2020 | | 2019 | | $ Change | | 2020 | | 2019 | | $ Change |
| Office | $ | 23,819 |
| | $ | 24,159 |
| | $ | (340 | ) | | $ | 87,110 |
| | $ | 63,081 |
| | $ | 24,029 |
|
| Retail | 6,932 |
| | 15,683 |
| | (8,751 | ) | | 30,021 |
| | 47,188 |
| | (17,167 | ) |
| Multi-family | 3,924 |
| | 5,317 |
| | (1,393 | ) | | 12,286 |
| | 14,503 |
| | (2,217 | ) |
| Hospitality | 626 |
| | 7,231 |
| | (6,605 | ) | | 3,163 |
| | 23,419 |
| | (20,256 | ) |
| Other | 594 |
| | 1,894 |
| | (1,300 | ) | | 1,257 |
| | 11,149 |
| | (9,892 | ) |
| Operating Assets NOI | $ | 35,895 |
| | $ | 54,284 |
| | $ | (18,389 | ) | | $ | 133,837 |
| | $ | 159,340 |
| | $ | (25,503 | ) |
|
| |
MANAGEMENT’S DISCUSSION AND ANALYSIS | |
RESULTS OF OPERATIONS | |
For the three months ended September 30, 2020:2021:
Operating Assets NOI decreased $18.4 million to $35.9increased $27.1 million compared to the prior yearprior-year period primarily due to the following:
| |
– | decreases due to rent deferrals and collection reserves related to our retail properties, declines in occupancy at our recently reopened hospitality properties, and cancellation of the Las Vegas Aviators 2020 baseball season, all as a result of the COVID-19 pandemic |
| |
– | decreases related to our multi-family properties as a result of increased concessions and operating expenses on newly opened multi-family assets |
–increase at our retail properties as collections improve and business rebounds from the COVID-19 pandemic
–increase at our multi-family properties primarily related to the lease-up of Juniper Apartments and Two Lakes Edge which opened in 2020
–increase at our other properties primarily related to the return of the Las Vegas Aviators 2021 baseball season after cancellation in 2020 as a result of the COVID-19 pandemic
–increase at our office properties related to the expiration of rent abatements and improved collections
For the nine months ended September 30, 2020:2021:
Operating Assets NOI decreased $25.5 million to $133.8increased $29.5 million compared to the prior yearprior-year period primarily due to the following:
–increase at our other properties primarily related to the return of the Las Vegas Aviators 2021 baseball season after cancellation in 2020 as a result of the COVID-19 pandemic
–increase at our multi-family properties primarily related to the lease-up of Juniper Apartments and Two Lakes Edge which opened in 2020
–increase at our retail properties as collections improve and business rebounds from the COVID-19 pandemic
–partially offset by a decrease in revenue on our office properties primarily related to the planned expiration in June 2020 of a short-term lease for approximately 142,000 square feet at The Woodlands Towers at the Waterway which is being actively marketed
| | | | | |
–MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS | decreases due to rent deferrals and collection reserves related to our retail properties, declines in occupancy at our recently reopened hospitality properties, and cancellation
|
| |
– | partially offset by increases in our office properties, primarily attributable to NOI from the recent acquisition of The Woodlands Towers at the Waterway and placing various office properties into service subsequent to the third quarter of 2019 |
In addition, Operating Assets NOI for the three and nine months ended September 30, 2020,2021, includes NOI from the following assets that were transferred from Strategic Developments to Operating Assets:
–8770 New Trails and Juniper Apartments transferred during the first quarter of 2020
–Two Lakes Edge transferred during the second quarter of 2020
–Merriweather District Area 3 Standalone Restaurant transferred during the third quarter of 2020
–The Lane at Waterway transferred during the fourth quarter of 2020
–Creekside Park The Grove transferred during the second quarter of 2021
| | |
– | 8770 New Trails and Juniper Apartments transferred during the first quarter of 2020 |
| |
– | Two Lakes Edge transferred during the second quarter of 2020 |
| |
– | Merriweather District Area 3 Standalone Restaurant transferred during the third quarter of 2020 |
|
|
| Master Planned Communities |
Segment EBT Segment EBT for MPC Assets is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| MPC Segment EBT | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
| Master Planned Community land sales (a) | $ | 56,305 | | | $ | 39,248 | | | $ | 17,057 | | | $ | 152,124 | | | $ | 136,053 | | | $ | 16,071 | |
| Other land, rental and property revenues | 4,601 | | | 3,680 | | | 921 | | | 13,464 | | | 9,528 | | | 3,936 | |
| Builder price participation (b) | 11,155 | | | 9,230 | | | 1,925 | | | 29,338 | | | 25,936 | | | 3,402 | |
| Total revenues | 72,061 | | | 52,158 | | | 19,903 | | | 194,926 | | | 171,517 | | | 23,409 | |
| | | | | | | | | | | |
| Master Planned Communities cost of sales | (23,419) | | | (15,899) | | | (7,520) | | | (63,928) | | | (58,560) | | | (5,368) | |
| Operating costs | (12,055) | | | (7,160) | | | (4,895) | | | (28,718) | | | (20,191) | | | (8,527) | |
| | | | | | | | | | | |
| Total operating expenses | (35,474) | | | (23,059) | | | (12,415) | | | (92,646) | | | (78,751) | | | (13,895) | |
| Segment operating income (loss) | 36,587 | | | 29,099 | | | 7,488 | | | 102,280 | | | 92,766 | | | 9,514 | |
| Depreciation and amortization | (102) | | | (91) | | | (11) | | | (272) | | | (273) | | | 1 | |
| Interest income (expense), net | 10,362 | | | 9,176 | | | 1,186 | | | 31,734 | | | 26,033 | | | 5,701 | |
| | | | | | | | | | | |
| Equity in earnings (losses) from real estate and other affiliates | 8,277 | | | (1,563) | | | 9,840 | | | 54,568 | | | 4,403 | | | 50,165 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Gain (loss) on extinguishment of debt | (1,004) | | | — | | | (1,004) | | | (1,004) | | | — | | | (1,004) | |
| | | | | | | | | | | |
| MPC segment EBT | $ | 54,120 | | | $ | 36,621 | | | $ | 17,499 | | | $ | 187,306 | | | $ | 122,929 | | | $ | 64,377 | |
(a)Master Planned Community land sales include deferred revenue from land sales closed in a previous period that met criteria for recognition in the current period.
(b)Builder price participation revenue is based on an agreed-upon percentage of the sales price of homes closed relative to the base lot price that was paid by the homebuilders to us. This revenue fluctuates based upon the number and the prices of homes closed that qualify for builder price participation payments .
|
| | | | | | | | | | | | | | | | | | | | | | | |
| MPC Segment EBT | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2020 | | 2019 | | $ Change | | 2020 | | 2019 | | $ Change |
| Total revenues | $ | 52,158 |
| | $ | 92,287 |
| | $ | (40,129 | ) | | $ | 171,517 |
| | $ | 216,042 |
| | $ | (44,525 | ) |
| Total operating expenses | (23,059 | ) | | (43,697 | ) | | 20,638 |
| | (78,751 | ) | | (109,676 | ) | | 30,925 |
|
| Segment operating income (loss) | 29,099 |
| | 48,590 |
| | (19,491 | ) | | 92,766 |
| | 106,366 |
| | (13,600 | ) |
| Depreciation and amortization | (91 | ) | | (88 | ) | | (3 | ) | | (273 | ) | | (334 | ) | | 61 |
|
| Interest income, net | 9,176 |
| | 8,550 |
| | 626 |
| | 26,033 |
| | 24,376 |
| | 1,657 |
|
| Other income (loss), net | — |
| | 534 |
| | (534 | ) | | — |
| | 601 |
| | (601 | ) |
| Equity in earnings (losses) from real estate and other affiliates | (1,563 | ) | | 4,523 |
| | (6,086 | ) | | 4,403 |
| | 18,859 |
| | (14,456 | ) |
| Segment EBT | $ | 36,621 |
| | $ | 62,109 |
| | $ | (25,488 | ) | | $ | 122,929 |
| | $ | 149,868 |
| | $ | (26,939 | ) |
| | | | | |
MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS |
|
For the three months ended September 30, 2020:2021:
MPC segment EBT decreased $25.5 million to $36.6increased $17.5 million compared to the prior yearprior-year period. Lower MPCPerformance was positively impacted by higher land sales revenues were primarily driven by reductions in acres sold at Summerlin due to an increase in superpad sales in the third quarter of 2019, that did not recur in the third quarter of 2020. This decrease was partially offset by increases in price-per-acre metrics for Bridgeland and The Woodlands Hills. Additional highlights for the period included:
| |
– | Bridgeland price per acre increased 8.3% with acres sold remaining consistent with results in the third quarter 2019.
|
| |
– | The Woodlands Hills price per acre increased 9.6% coupled with a 103.6% increase in acres sold due to a higher volume and change in product type of lots sold in the third quarter of 2020, compared to the same period in 2019. |
In addition, performance was negatively impacted by lower Equity in earnings (losses) from real estate and other affiliates at The Summit due to the impact of increased amenitiesamenity cost and higher unit completion cost.cost in the prior-year period that did not repeat in 2021. These increases were partially offset by lower land sales revenues at Bridgeland due to a delay in lot deliveries as a result of the timing of governmental agency approvals and weather delays. Additional highlights for the period included:
|
| |
MANAGEMENT’S DISCUSSION AND ANALYSIS | |
RESULTS OF OPERATIONS | |
For the nine months ended September 30, 2020:2021:
MPC segment EBT decreased $26.9 million to $122.9increased $64.4 million compared to the prior yearprior-year period. Lower MPC land sales revenues 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. Additional highlights for the period included:
| |
– | The Woodlands price per acre increased 82.6% 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 residential land sales realized an increase of $5.7 million, or 12.4%, driven by a 9.5% increase in price per acre and a 2.6% increase in acres sold in the nine months ended September 30, 2020, compared to the same period in 2019. In addition, in 2020, a 16.6-acre school site was sold for $2.2 million. |
| |
– | The Woodlands Hills’ price per acre increased 8.3% coupled with a 25.3% increase in acres sold due to a change in product type of lots sold in the nine months ended September 30, 2020, compared to the same period in 2019. |
In addition, performancePerformance was negativelypositively impacted by lowerhigher Equity in earnings (losses) from real estate and other affiliates at The Summit due to the impact of unit closings during the period compared to the nine months ended 2020 and the impact of increased amenities cost and higher unit completion cost.cost in the prior-year period that did not repeat in 2021. In addition, higher MPC land sales revenues were primarily attributable to an increase in Summerlin superpad and custom lot sales, partially offset by fewer acres sold for the first nine months of 2021 in The Woodlands, where only 26 residential acres remain to be sold as the development of residential land nears completion, and a reduction in acres sold at Bridgeland. The reduction at Bridgeland is due to greater than expected demand accelerating lot sales into the third and fourth quarter of 2020 that were originally expected to occur in the first nine months of 2021, as well as a delay in lot deliveries in the current period due to the timing of governmental agency approvals and weather delays. Additional highlights for the period included:
–Summerlin experienced an increase in superpad land sales, 94.5 acres sold at a price of $729,000 per acre in the nine months ended September 30, 2021 versus 36.4 acres sold at a price of 687,000 per acre sales for the same period of 2020.
–Summerlin experienced an increase in custom lot sales, 11.7 acres sold at a price of $1.9 million per acre in the nine months ended September 30, 2021 versus 4.0 acres sold at a price of $1.5 million per acre for the same period of 2020.
–The Woodlands Hills’ residential land sales realized an increase of $4.6 million due to an increase in the quantity of lots sold, 49.3 acres at an average price of $328,000 per acre in the in the nine months ended September 30, 2021 compared to 38.6 acres at an average price of $301,000 per acre for the same period of 2020.
MPC Net Contribution In addition to MPC segment EBT, we believe thatMPC Net Contribution is a non-GAAP financial measure derived from EBT, adjusted for certain investorsitems as discussed below. Management uses this measure because it captures current period performance through the valuevelocity of sales, as well as current period development expenditures based upon demand at our MPCs, which varies depending upon the stage of the assets in this segment based on their contribution to liquidityMPCs development lifecycle, and capital available for investment.the overall economic environment. 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”)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 forContribution:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| MPC Net Contribution | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
| MPC Segment EBT | $ | 54,120 | | | $ | 36,621 | | | $ | 17,499 | | | $ | 187,306 | | | $ | 122,929 | | | $ | 64,377 | |
| Plus: | | | | | | | | | | | |
| Cost of sales - land | 23,419 | | | 15,899 | | | 7,520 | | | 63,928 | | | 58,560 | | | 5,368 | |
| Depreciation and amortization | 102 | | | 91 | | | 11 | | | 272 | | | 273 | | | (1) | |
| MUD and SID bonds collections, net (a) | (3,669) | | | (101) | | | (3,568) | | | (1,068) | | | 5,957 | | | (7,025) | |
| Distributions from real estate and other affiliates | 10,000 | | | 1,186 | | | 8,814 | | | 111,672 | | | 3,531 | | | 108,141 | |
| Less: | | | | | | | | | | | |
| MPC development expenditures | (89,257) | | | (43,833) | | | (45,424) | | | (215,559) | | | (160,217) | | | (55,342) | |
| | | | | | | | | | | |
| Equity in (earnings) losses in real estate and other affiliates | (8,277) | | | 1,563 | | | (9,840) | | | (54,568) | | | (4,403) | | | (50,165) | |
| MPC Net Contribution | $ | (13,562) | | | $ | 11,426 | | | $ | (24,988) | | | $ | 91,983 | | | $ | 26,630 | | | $ | 65,353 | |
(a)SID collections are shown net of SID transfers to buyers in the three and nine months ended September 30:respective periods.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| MPC Net Contribution | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2020 | | 2019 | | $ Change | | 2020 | | 2019 | | $ Change |
| MPC Segment EBT | $ | 36,621 |
| | $ | 62,109 |
| | $ | (25,488 | ) | | $ | 122,929 |
| | $ | 149,868 |
| | $ | (26,939 | ) |
| Plus: | | | | | | | | | | | |
| Cost of sales - land | 15,899 |
| | 33,304 |
| | (17,405 | ) | | 58,560 |
| | 78,128 |
| | (19,568 | ) |
| Depreciation and amortization | 91 |
| | 88 |
| | 3 |
| | 273 |
| | 334 |
| | (61 | ) |
| MUD and SID bonds collections, net (a) | (101 | ) | | 10,099 |
| | (10,200 | ) | | 5,957 |
| | 11,080 |
| | (5,123 | ) |
| Distributions from real estate and other affiliates | 1,186 |
| | 1,320 |
| | (134 | ) | | 3,531 |
| | 4,061 |
| | (530 | ) |
| Less: | | | | | | | | | | | |
| MPC development expenditures | (43,833 | ) | | (60,890 | ) | | 17,057 |
| | (160,217 | ) | | (180,733 | ) | | 20,516 |
|
| MPC land acquisitions | — |
| | — |
| | — |
| | — |
| | (752 | ) | | 752 |
|
| Equity in (earnings) losses in real estate and other affiliates | 1,563 |
| | (4,523 | ) | | 6,086 |
| | (4,403 | ) | | (18,859 | ) | | 14,456 |
|
| MPC Net Contribution | $ | 11,426 |
| | $ | 41,507 |
| | $ | (30,081 | ) | | $ | 26,630 |
| | $ | 43,127 |
| | $ | (16,497 | ) |
| | | | | |
(a)MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS | SID collections are shown net
|
MPC Net Contribution decreased $30.1$25.0 million for the three months ended September 30, 2021, compared to the same period in 2020, and $16.5primarily due to an increase in MPC development expenditures related to projected lot deliveries. MPC Net Contribution increased $65.4 million for the nine months ended September 30, 2020,2021, compared to the same periodsperiod in 2019,2020, primarily due to the decreasean increase in MPC land sales revenues mentioned above and lower MUD and SID bonds collections, net,distributions from The Summit partially offset by decreasesan increase in operating expenses and MPC development expenditures.expenditures related to projected lot deliveries.
|
| |
MANAGEMENT’S DISCUSSION AND ANALYSIS | |
RESULTS OF OPERATIONS | |
The following table sets forth MPC land inventory activity for the nine months ended September 30, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| thousands | Bridgeland | | Columbia | | Summerlin | | The Woodlands | | The Woodlands Hills | | Total MPC |
| Balance December 31, 2020 | $ | 486,867 | | | $ | 16,625 | | | $ | 888,954 | | | $ | 177,341 | | | $ | 117,732 | | | $ | 1,687,519 | |
| | | | | | | | | | | |
| Development expenditures (a) | 88,904 | | | — | | | 111,071 | | | 4,441 | | | 11,143 | | | 215,559 | |
| MPC Cost of sales | (8,888) | | | — | | | (47,646) | | | (927) | | | (6,467) | | | (63,928) | |
| MUD reimbursable costs (b) | (59,637) | | | — | | | — | | | (127) | | | (5,072) | | | (64,836) | |
| Transfer to Strategic Developments | (402) | | | — | | | — | | | — | | | — | | | (402) | |
| Other (c) | 11,337 | | | — | | | 4,938 | | | (580) | | | 415 | | | 16,110 | |
| Balance September 30, 2021 | $ | 518,181 | | | $ | 16,625 | | | $ | 957,317 | | | $ | 180,148 | | | $ | 117,751 | | | $ | 1,790,022 | |
(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.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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) | 73,113 |
| | — |
| | 72,638 |
| | 4,699 |
| | 9,767 |
| | 160,217 |
|
| MPC cost of sales | (17,386 | ) | | — |
| | (23,219 | ) | | (13,544 | ) | | (4,411 | ) | | (58,560 | ) |
| MUD reimbursable costs (b) | (47,803 | ) | | — |
| | — |
| | (480 | ) | | (6,254 | ) | | (54,537 | ) |
| Other (c) | (7,737 | ) | | (18 | ) | | (1,223 | ) | | (511 | ) | | 173 |
| | (9,316 | ) |
| Balance at September 30, 2020 | $ | 487,501 |
| | $ | 16,625 |
| | $ | 893,636 |
| | $ | 176,937 |
| | $ | 118,779 |
| | $ | 1,693,478 |
|
| | |
(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. |
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 ofof: (i) seasonality; (ii) potential sponsorship revenue; (iii) potential event revenue; and (iv) business operating risks from various start-up businesses. We operate and own, either directly, through license agreements or in partnership with third parties,joint ventures, many of the tenants in the Seaport, District, including retail stores such as SJP by Sarah Jessica Parker and restaurants such as The Fulton by Jean-Georges, Ssäm Bar (formerly Bar Wayō), Malibu Farm, two concepts by Andrew Carmellini, R17Mister Dips and Carne Mare, The Greens at Pier 17 and the 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.Seaport. 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 financial 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 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 marketplace in the Tin Building. As a result of impacts related to COVID-19, there were delays in construction on the Tin Building,Building; however, construction is still on track for substantial completion in the fourth quarter of 2021, with an expanded focus on experiences including in-person dining, retail shopping, mobile ordering and delivery. As a result of COVID-19, we expect stabilization to take at least 18 months. Given the factors and uncertainties listed above combined with potential futurethe continued impacts related to COVID-19, and our operating experience during this past summer as we opened multiple new venues, we do not currently provide guidance on our expected NOI yield and stabilization date for the Seaport District.Seaport. As we move closer to opening a critical mass of offerings at the Seaport, District, we will re-establish goals for yield on costs and stabilization dates when the uncertainties and range of possible outcomes are clearer.
We primarily categorize the businesses in the Seaport District segment into three groups: landlord operations, managed businesses, and events and sponsorships. Real Estate Operations (Landlord)Landlord operations represents physical real estate we have developed and own, either wholly or through joint ventures, and is inclusive of our office, retail and multi-family properties.
| | | | | |
MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS |
|
Managed Businessesbusinesses represents retail and food and beverage businesses that HHC owns, either wholly or through partnerships with third parties, and operates, including license and management agreements. For the nine months ended September 30, 2020, ourOur managed businesses include, among others, The Fulton, SJP by Sarah Jessica Parker, R17,Cobble & Co., Mister Dips, Carne Mare, Malibu Farm and Ssäm Bar (formerly Bar Wayō). The Fulton, Cobble & Co. and Malibu Farm. In July 2020, Seaport entered into management agreements withFarm are managed by Creative Culinary Management Company, LLC, (Creative Culinary), a Jean-Georges company, to manage and operate its foodMister Dips and beverage operations for the Fulton, R17, Cobble & Co. and Malibu Farm. Creative Culinary will beCarne Mare are managed by Seaport F&B LLC , an Andrew Carmellini company. These third party management companies are 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.
In early 2022, we plan to expand our managed business portfolio with the launch of The Lawn Club, a new concept that will transform 20,000 square feet of the Fulton Market Building into an immersive indoor and outdoor experience that includes an extensive indoor grass area, a stylish clubhouse bar and a wide variety of lawn games. We also expect to launch a new restaurant concept by Josh Eden and Wylie Dufresne at 1 Fulton Street featuring an all-day menu with many specialty to-go items and an expansive outdoor café in early 2022.
Our events and sponsorship businesses have historically includedincludes our concert series, Winterland skatingan outdoor socially distanced space rental and bar,dining concept at the Pier 17 rooftop called The Greens, event catering, private events and sponsorships from 11 partners. Withsponsorships. Food and beverage operations associated with The Greens, concert concessions and catering are operated under management agreements with Creative culinary. The Greens concept replaced the cancellation of thecancelled 2020 summer concert series and the Winterland skating and bar and continued through the end of the first quarter of 2021. The Greens concept returned in August, we launched a new concept atMay 2021 to compliment the 2021 summer concert series, which began in July 2021 and ran through mid-October 2021. During the 11-week concert season, Pier 17 rooftop calledhosted over 30 concerts, of which 20 were sold out. In total, approximately 74,000 guests attended the concert series, representing 90% of available ticket inventory. The Greens which allows groups of up to eight people to reserve their own socially distanced, mini-lawn space. The Greens generated high customer demand for the outdoor venue and helped to fulfill obligations under our sponsorship agreements, which would have been drastically reduced without the concert series.concept will return in November 2021.
|
| |
MANAGEMENT’S DISCUSSION AND ANALYSIS | |
RESULTS OF OPERATIONS | |
Segment EBT Segment EBT for Seaport District is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Seaport Segment EBT | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
| Rental Revenue | $ | 1,756 | | | $ | 1,155 | | | $ | 601 | | | $ | 6,123 | | | $ | 5,235 | | | $ | 888 | |
| Other land, rental and property revenues | 19,387 | | | 3,049 | | | 16,338 | | | 33,371 | | | 10,935 | | | 22,436 | |
| Total revenues | 21,143 | | | 4,204 | | | 16,939 | | | 39,494 | | | 16,170 | | | 23,324 | |
| | | | | | | | | | | |
| Operating costs | (24,879) | | | (11,087) | | | (13,792) | | | (52,560) | | | (33,043) | | | (19,517) | |
| Rental property real estate taxes | (323) | | | (374) | | | 51 | | | (997) | | | (1,081) | | | 84 | |
| (Provision for) recovery of doubtful accounts | (17) | | | (61) | | | 44 | | | (164) | | | (173) | | | 9 | |
| Total operating expenses | (25,219) | | | (11,522) | | | (13,697) | | | (53,721) | | | (34,297) | | | (19,424) | |
| Segment operating income (loss) | (4,076) | | | (7,318) | | | 3,242 | | | (14,227) | | | (18,127) | | | 3,900 | |
| Depreciation and amortization | (9,087) | | | (7,174) | | | (1,913) | | | (22,926) | | | (34,825) | | | 11,899 | |
| Interest income (expense), net | 377 | | | (2,811) | | | 3,188 | | | 666 | | | (12,490) | | | 13,156 | |
| Other income (loss), net | (1,134) | | | 1,590 | | | (2,724) | | | (2,088) | | | (2,187) | | | 99 | |
| Equity in earnings (losses) from real estate and other affiliates | (1,009) | | | (288) | | | (721) | | | (1,697) | | | (8,964) | | | 7,267 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Gain (loss) on extinguishment of debt | — | | | (11,645) | | | 11,645 | | | — | | | (11,645) | | | 11,645 | |
| | | | | | | | | | | |
| Seaport segment EBT | $ | (14,929) | | | $ | (27,646) | | | $ | 12,717 | | | $ | (40,272) | | | $ | (88,238) | | | $ | 47,966 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Seaport District Segment EBT | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2020 | | 2019 | | $ Change | | 2020 | | 2019 | | $ Change |
| Total revenues | $ | 4,204 |
| | $ | 23,130 |
| | $ | (18,926 | ) | | $ | 16,170 |
| | $ | 43,051 |
| | $ | (26,881 | ) |
| Total operating expenses | (11,522 | ) | | (27,330 | ) | | 15,808 |
| | (34,297 | ) | | (59,735 | ) | | 25,438 |
|
| Segment operating income (loss) | (7,318 | ) | | (4,200 | ) | | (3,118 | ) | | (18,127 | ) | | (16,684 | ) | | (1,443 | ) |
| Depreciation and amortization | (7,174 | ) | | (6,767 | ) | | (407 | ) | | (34,825 | ) | | (19,713 | ) | | (15,112 | ) |
| Interest expense, net | (2,811 | ) | | (4,984 | ) | | 2,173 |
| | (12,490 | ) | | (8,440 | ) | | (4,050 | ) |
| Other income (loss), net | 1,590 |
| | — |
| | 1,590 |
| | (2,187 | ) | | (147 | ) | | (2,040 | ) |
| Equity in earnings (losses) from real estate and other affiliates | (288 | ) | | (705 | ) | | 417 |
| | (8,964 | ) | | (1,788 | ) | | (7,176 | ) |
| Gain (loss) on sale or disposal of real estate | — |
| | — |
| | — |
| | — |
| | (6 | ) | | 6 |
|
| Gain (loss) on extinguishment of debt | (11,645 | ) | | — |
| | (11,645 | ) | | (11,645 | ) | | — |
| | (11,645 | ) |
| Segment EBT | $ | (27,646 | ) | | $ | (16,656 | ) | | $ | (10,990 | ) | | $ | (88,238 | ) | | $ | (46,778 | ) | | $ | (41,460 | ) |
For the three months ended September 30, 2020:2021:
Seaport District segment EBT loss decreased $11.0 million to a loss of $27.6$12.7 million compared to the prior yearprior-year period primarily due to the following:
–increase in segment revenues, partially offset by an increase in operating expenses, primarily as a result of increased activity in 2021 as restrictions related to the COVID-19 pandemic have eased
–loss on extinguishment of debt and decrease in interest expense due to the early repayment of the $250 million Seaport loan in August 2020
| | | | | |
–MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS | decrease in segment revenues and operating expenses primarily as a result
|
| |
– | $11.6 million loss on extinguishment of debt upon retirement of the $250 million Seaport District loan in August 2020 |
| |
– | partially offset by a decrease in Interest expense, net due to the early repayment of the loan and an increase in Other income (loss), net due to liquidation sales of 10 Corso Como Retail inventory |
For the nine months ended September 30, 2020:2021:
Seaport District segment EBT loss decreased $41.5$48.0 million to a loss of $88.2 million. In additioncompared to the items affecting the three months ended September 30, 2020, the decrease for the nine months ended September 30, 2020, wasprior-year period primarily driven bydue to the following:
| |
– | $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. |
| |
– | write-offs of retail inventory recorded within Other income (loss), net and building improvements recorded within Depreciation and amortization due to the permanent closure of 10 Corso Como Retail and Café during the first quarter |
–increase in segment revenues, partially offset by an increase in operating expenses, primarily as a result of increased activity in 2021 as restrictions related to the COVID-19 pandemic have eased
–charges in the first quarter of 2020 related to write-offs of building improvements recorded within Depreciation and amortization and retail inventory recorded within Other income (loss), net due to the permanent closure of 10 Corso Como Retail and Café that did not reoccur in 2021
–loss on extinguishment of debt and decrease in interest expense due to the early repayment of the $250 million Seaport loan in August 2020
–$6.0 million impairment of the Company’s equity investment in Mr. C Seaport in the second quarter of 2020
Net Operating Income A reconciliation of Seaport District segment EBT to Seaport District NOI is presented in the table below.below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Seaport NOI | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
| Total Seaport segment EBT | $ | (14,929) | | | $ | (27,646) | | | $ | 12,717 | | | $ | (40,272) | | | $ | (88,238) | | | $ | 47,966 | |
| Add back: | | | | | | | | | | | |
| Depreciation and amortization | 9,087 | | | 7,174 | | | 1,913 | | | 22,926 | | | 34,825 | | | (11,899) | |
| Interest (income) expense, net | (377) | | | 2,811 | | | (3,188) | | | (666) | | | 12,490 | | | (13,156) | |
| Equity in (earnings) losses from real estate and other affiliates | 1,009 | | | 288 | | | 721 | | | 1,697 | | | 8,964 | | | (7,267) | |
| | | | | | | | | | | |
| (Gain) loss on extinguishment of debt | — | | | 11,645 | | | (11,645) | | | — | | | 11,645 | | | (11,645) | |
| Impact of straight-line rent | 398 | | | 1,027 | | | (629) | | | 1,265 | | | 2,360 | | | (1,095) | |
| Other (income) loss, net (a) | 1,287 | | | (1,398) | | | 2,685 | | | 3,006 | | | 4,525 | | | (1,519) | |
| Seaport NOI | $ | (3,525) | | | $ | (6,099) | | | $ | 2,574 | | | $ | (12,044) | | | $ | (13,429) | | | $ | 1,385 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Seaport District NOI | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2020 | | 2019 | | $ Change | | 2020 | | 2019 | | $ Change |
| Total Seaport District segment EBT | $ | (27,646 | ) | | $ | (16,656 | ) | | $ | (10,990 | ) | | $ | (88,238 | ) | | $ | (46,778 | ) | | $ | (41,460 | ) |
| Depreciation and amortization | 7,174 |
| | 6,767 |
| | 407 |
| | 34,825 |
| | 19,713 |
| | 15,112 |
|
| Interest expense, net | 2,811 |
| | 4,984 |
| | (2,173 | ) | | 12,490 |
| | 8,440 |
| | 4,050 |
|
| Equity in (earnings) losses from real estate and other affiliates | 288 |
| | 705 |
| | (417 | ) | | 8,964 |
| | 1,788 |
| | 7,176 |
|
| (Gain) loss on sale or disposal of real estate | — |
| | — |
| | — |
| | — |
| | 6 |
| | (6 | ) |
| (Gain) loss on extinguishment of debt | 11,645 |
| | — |
| | 11,645 |
| | 11,645 |
| | — |
| | 11,645 |
|
| Impact of straight-line rent | 1,027 |
| | 412 |
| | 615 |
| | 2,360 |
| | 1,658 |
| | 702 |
|
| Other (income) loss, net (a) | (1,398 | ) | | 896 |
| | (2,294 | ) | | 4,525 |
| | 5,405 |
| | (880 | ) |
| Seaport District NOI | $ | (6,099 | ) | | $ | (2,892 | ) | | $ | (3,207 | ) | | $ | (13,429 | ) | | $ | (9,768 | ) | | $ | (3,661 | ) |
| |
(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, and income related to inventory liquidation sales in the third quarter of 2020. |
|
| |
MANAGEMENT’S DISCUSSION AND ANALYSIS | |
RESULTS OF OPERATIONS | |
The below table presents Seaport District NOI by category:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Seaport NOI by Category | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
| Landlord Operations - Historic District & Pier 17 | $ | (4,152) | | | $ | (2,022) | | | $ | (2,130) | | | $ | (11,226) | | | $ | (5,494) | | | $ | (5,732) | |
| Multi-family | (52) | | | 46 | | | (98) | | | 84 | | | 260 | | | (176) | |
| Hospitality | — | | | — | | | — | | | — | | | (12) | | | 12 | |
| Managed Businesses - Historic District & Pier 17 | 923 | | | (1,657) | | | 2,580 | | | 7 | | | (4,993) | | | 5,000 | |
| | | | | | | | | | | |
| Events, Sponsorships & Catering Business | (244) | | | (2,466) | | | 2,222 | | | (909) | | | (3,190) | | | 2,281 | |
| Seaport NOI | $ | (3,525) | | | $ | (6,099) | | | $ | 2,574 | | | $ | (12,044) | | | $ | (13,429) | | | $ | 1,385 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Seaport District NOI by Category | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2020 | | 2019 | | $ Change | | 2020 | | 2019 | | $ Change |
| Historic District & Pier 17 - Landlord | $ | (2,022 | ) | | $ | (2,150 | ) | | $ | 128 |
| | $ | (5,494 | ) | | $ | (5,156 | ) | | $ | (338 | ) |
| Multi-family | 46 |
| | 112 |
| | (66 | ) | | 260 |
| | 303 |
| | (43 | ) |
| Hospitality | — |
| | — |
| | — |
| | (12 | ) | | 41 |
| | (53 | ) |
| Historic District & Pier 17 - Managed Businesses | (1,657 | ) | | (879 | ) | | (778 | ) | | (4,993 | ) | | (4,420 | ) | | (573 | ) |
| Events, Sponsorships & Catering Business | (2,466 | ) | | 25 |
| | (2,491 | ) | | (3,190 | ) | | (536 | ) | | (2,654 | ) |
| Seaport District NOI | $ | (6,099 | ) | | $ | (2,892 | ) | | $ | (3,207 | ) | | $ | (13,429 | ) | | $ | (9,768 | ) | | $ | (3,661 | ) |
Seaport District NOI decreasedincreased for the three and nine months ended September 30, 2020, primarily a result of business closures and cancellations of events related2021, compared to the prior-year period, primarily due to increased revenue, partially offset by increased operating expenses, as business resumed after the onset of the COVID-19 pandemic.pandemic in 2020.
Including managed businesses, events, sponsorships, catering and the Tin Building, the Seaport District is approximately 54%58% 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. We expect to incur operating losses for our landlord operations, managed business entities and eventevents and sponsorshipsponsorships until businesses in New York are able to safely reopen,operate at full capacity, the economy recovers from the economic impact of the COVID-19 pandemic and the Seaport District reaches its critical mass of offerings.offerings, including the opening of the Tin Building.
| | | | | |
MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS |
|
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 Operating Assets 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 Segment EBT for Strategic Developments is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Strategic Developments Segment EBT | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
| Condominium rights and unit sales | $ | 163 | | | $ | 142 | | | $ | 21 | | | $ | 50,191 | | | $ | 185 | | | $ | 50,006 | |
| Rental Revenue | 80 | | | 76 | | | 4 | | | 272 | | | 283 | | | (11) | |
| Other land, rental and property revenues | 566 | | | 16,147 | | | (15,581) | | | 2,112 | | | 17,281 | | | (15,169) | |
| Total revenues | $ | 809 | | | $ | 16,365 | | | $ | (15,556) | | | $ | 52,575 | | | $ | 17,749 | | | $ | 34,826 | |
| | | | | | | | | | | |
| Condominium rights and unit cost of sales | (82) | | | (1,087) | | | 1,005 | | | (68,485) | | | (105,336) | | | 36,851 | |
| Operating costs | (5,743) | | | (7,453) | | | 1,710 | | | (13,718) | | | (16,847) | | | 3,129 | |
| Rental property real estate taxes | (883) | | | (1,382) | | | 499 | | | (2,768) | | | (4,555) | | | 1,787 | |
| | | | | | | | | | | |
| Total operating expenses | (6,708) | | | (9,922) | | | 3,214 | | | (84,971) | | | (126,738) | | | 41,767 | |
| Segment operating income (loss) | (5,899) | | | 6,443 | | | (12,342) | | | (32,396) | | | (108,989) | | | 76,593 | |
| Depreciation and amortization | (1,741) | | | (1,643) | | | (98) | | | (4,936) | | | (5,054) | | | 118 | |
| Interest income (expense), net | 850 | | | 1,921 | | | (1,071) | | | 2,610 | | | 4,909 | | | (2,299) | |
| Other income (loss), net | 5 | | | 134 | | | (129) | | | 19 | | | 1,427 | | | (1,408) | |
| Equity in earnings (losses) from real estate and other affiliates | (8) | | | 267,727 | | | (267,735) | | | (125) | | | 268,365 | | | (268,490) | |
| Gain (loss) on sale or disposal of real estate and other assets, net | — | | | — | | | — | | | 21,333 | | | 8,000 | | | 13,333 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Provision for impairment | — | | | — | | | — | | | (13,068) | | | — | | | (13,068) | |
| Strategic Developments segment EBT | $ | (6,793) | | | $ | 274,582 | | | $ | (281,375) | | | $ | (26,563) | | | $ | 168,658 | | | $ | (195,221) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Strategic Developments Segment EBT | Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2020 | | 2019 | | $ Change | | 2020 | | 2019 | | $ Change |
| Total revenues | $ | 16,365 |
| | $ | 11,515 |
| | $ | 4,850 |
| | $ | 17,749 |
| | $ | 451,873 |
| | $ | (434,124 | ) |
| Total operating expenses | (9,922 | ) | | (11,327 | ) | | 1,405 |
| | (126,738 | ) | | (382,341 | ) | | 255,603 |
|
| Segment operating (loss) income | 6,443 |
| | 188 |
| | 6,255 |
| | (108,989 | ) | | 69,532 |
| | (178,521 | ) |
| Depreciation and amortization | (1,643 | ) | | (2,070 | ) | | 427 |
| | (5,054 | ) | | (4,386 | ) | | (668 | ) |
| Interest income, net | 1,921 |
| | 3,002 |
| | (1,081 | ) | | 4,909 |
| | 9,499 |
| | (4,590 | ) |
| Other income (loss), net | 134 |
| | 354 |
| | (220 | ) | | 1,427 |
| | 664 |
| | 763 |
|
| Equity in earnings (losses) from real estate and other affiliates | 267,727 |
| | 283 |
| | 267,444 |
| | 268,365 |
| | 581 |
| | 267,784 |
|
| Gain (loss) on sale or disposal of real estate, net | — |
| | 24,201 |
| | (24,201 | ) | | 8,000 |
| | 24,057 |
| | (16,057 | ) |
| Segment EBT | $ | 274,582 |
| | $ | 25,958 |
| | $ | 248,624 |
| | $ | 168,658 |
| | $ | 99,947 |
| | $ | 68,711 |
|
|
| |
MANAGEMENT’S DISCUSSION AND ANALYSIS | |
RESULTS OF OPERATIONS | |
For the three months ended September 30, 2020:2021:
Strategic Developments segment EBT increased $248.6 million to income of $274.6decreased $281.4 million compared to the prior yearprior-year period primarily due to the following:
–decrease in Equity in earnings (losses) from real estate and other affiliates primarily due to a $267.5 million gain on deconsolidation of 110 North Wacker attributable to the initial fair value step-up of the retained equity method investment at the time of deconsolidation in the third quarter of 2020. Please refer to Note 2 - Real Estate and Other Affiliates in the Company’s Condensed Consolidated Financial Statements for additional information.
–decrease in Other land, rental and property revenues primarily due to the recognition of $15.4 million of previously eliminated 110 North Wacker development fees upon deconsolidation in the third quarter of 2020
| | | | | |
–MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS | Note 3 - Real Estate and Other Affiliates in the Company’s Condensed Consolidated Financial Statements for further details.
|
| |
– | increase in Other land, rental and property revenues primarily due to the recognition of $15.4 million of previously eliminated 110 North Wacker development fees upon deconsolidation |
These increases were partially offset by the following:
| |
– | decrease in Gain (loss) on sale or disposal of real estate, net driven by the $24.2 million gain on the sale of the Cottonwood Mall in during the three months ended September 30, 2019 |
| |
– | decrease in Condominium rights and unit sales, net of costs driven by the timing of condominium closings. The Company closed on a large number of units at Ke Kilohana and Ae’o in 2019, with no new condominium towers scheduled for completion in 2020. |
For the nine months ended September 30, 2020:2021:
Strategic Developments segment EBT increased $68.7 million to income of $168.7decreased $195.2 million compared to the prior year periodprior-year period. In addition to the impact of the gain on deconsolidation of 110 North Wacker in the third quarter of 2020 discussed above, the decrease was primarily due to the following:
| |
– | increase in Equity in earnings (losses) from real estate and other affiliates primarily–increase in Provision for impairment of $13.1 million due to a $267.5 million gain on deconsolidation of 110 North Wacker attributable to the initial fair value step-up of the retained equity method investment at the time of deconsolidation. Please refer to an impairment of Century Park in the second quarter of 2021. Refer to Note 4 - Impairment in the Company’s Condensed Consolidated Financial Statements for additional information.
Note 3 - Real Estate and Other Affiliates in the Company’s Condensed Consolidated Financial Statements for further details.
|
| |
– | increase in Other land, rental and property revenues primarily due to the recognition of $15.4 million of previously eliminated 110 North Wacker development fees upon deconsolidation |
These increasesdecreases in EBT were partially offset by the following:
| |
– | increase in Condominium rights and unit cost of sales primarily driven by 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. Please refer to Note 10–decrease in Condominium rights and unit cost of sales primarily driven by charges related to our expected funding of costs to correct alleged construction defects at Waiea. An additional $21.0 million was charged during the nine months ended September 30, 2021, related to additional anticipated costs, compared to charges of $99.2 million during the nine months ended September 30, 2020. Refer to Note 9 - Commitments and Contingencies in our Condensed Consolidated Financial Statements for additional information.Commitments and Contingencies in our Condensed Consolidated Financial Statements for additional information related to the alleged construction defects at Waiea. |
| |
– | decrease in Condominium rights and unit sales, net of costs, driven by the timing of condominium closings. The Company closed on a large number of units at Ke Kilohana and Ae’o in 2019, with no new condominium towers scheduled for completion in 2020. |
| |
– | decrease in Gain (loss) on sale or disposal of real estate, net of $16.1 million driven by the receipt of an $8.0 million termination payment in the second quarter of 2020, related to the October 2019 sale of West Windsor, compared to the $24.2 million gain on the sale of the Cottonwood Mall recognized in the third quarter of 2019 |
| |
– | increase in Condominium rights and unit cost of sales of $6.0 million driven by a reduction in 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 |
–decrease in Condominium rights and unit cost of sales driven by a loss of $6.0 million recorded during nine months ended September 30, 2020 related to the write down of inventory units to better align the expected price with recent final sales prices, with no similar write downs during 2021
–increase in Condominium rights and unit sales, net of costs, driven by the timing of condominium closings. The Company closed on four units at Waiea and two units at Anaha during the nine months ended September 30, 2021, compared to no closings during the nine months ended September 30, 2020.
HHC 20202021 FORM 10-Q | 5661
|
| | | | |
MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS | |
RESULTS OF OPERATIONS |
|
Ward Village 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 zeroonly six condominium inventory units during the three and nine months ended September 30, 2020, compared to 7 for the three months ended September 30, 2019, and 594 for the nine months ended September 30, 2019. However, overall2021, as well as no condominium unit closings during the nine months ended September 30, 2020. Overall progress at our condominium projects remains strong. Atstrong, as evidenced by the six units closed at our completed towers and 152 units contracted to sell at our under-construction towers during the nine months ended September 30, 2020,2021. Victoria Place, our sixnewest project and Ward Village’s fastest-selling tower to date, accounted for 74 of these contracted units and is 98.0% sold as of September 30, 2021, with only 7 units remaining to be sold.
Completed Condominiums As of September 30, 2021, our four completed or under construction towers are 90.7% sold with99.8% sold. During the nine months ended September 30, 2021 we closed on four of the remaining units at Waiea, resulting in only fivethree units that remainremaining to be sold at Waiea and onesold. Additionally, during the nine months ended September 30, 2021, we closed on the two remaining units at Anaha. Both Ae‘oAs a result, Ae’o, Ke Kilohana and Ke KilohanaAnaha are completely sold.
Under-Construction Condominiums As of September 30, 2021, our three under-construction towers are 90.1% sold. ‘A‘ali‘i is a result42-story, 750-unit mixed-use condominium project that will consist of strong demand demonstrated by salesstudio, one- and two-bedroom residences and 150 workforce units. Kō'ula is a 41-story, 565-unit, mixed-use condominium project that will consist of studio, one-, two- and three-bedroom residences. We began construction on Victoria Place, our seventh condominium tower, in February 2021. Victoria Place is a 40-story, 349-unit condominium project that will consist of one-, two- and three-bedroom residences.
Subsequent to quarter end, we completed construction at ‘A‘ali‘i and Kō'ula,began welcoming residents in October 2021. As of November 2, 2021, we closed on 495 units, totaling $332.1 million in net revenue.
Predevelopment Condominiums We launched public sales of our seventheighth condominium project at Ward Village in December 2019. Victoria PlaceJuly 2021. The Park Ward Village will be a 40-story, 349-unit41-story, 545-unit condominium project located betweenat Ward Avenue and Auahi Street, and Ala Moana Boulevard, immediately to the west of Waiea and adjacent to Victoria Ward Park. The project will consist of one, twostudio, one-, two- and three-bedroom residences. Theresidences, with the units will rangeranging from approximately 750400 square feet to 1,8501,500 square feet. Additionally, there will be approximately 15,600 square feetAs of ground level open space, and 64,000 square feet of indoor and outdoor recreational space. WeSeptember 30, 2021, we have entered into contracts for 255 of the 545 units, representing 47% of total units. This strong sales activity continued after quarter end, and as of October 31, 2020,29, 2021, we have entered into contracts for 348 units, representing 73.1%64% of total units and 75.2% of the total residential square feet available for sale. units.
The following provides further detail for Ward Village as of September 30, 2020:2021:
| | | | | | | | | | | | | | | | | | | | |
| Units Closed | Units Under Contract | Total Units | Total % of Units Closed or Under Contract | Total % of Residential Square Feet Closed or Under Contract | Completion Date |
| Completed | | | | | | |
| Waiea (a) | 174 | | — | | 177 | | 98.3 | % | 97.7 | % | Q4 2016 |
| Anaha (a) | 317 | | — | | 317 | | 100.0 | % | 100.0 | % | Q4 2017 |
| Ae’o (b) | 465 | | — | | 465 | | 100.0 | % | 100.0 | % | Q4 2018 |
| Ke Kilohana (a) | 423 | | — | | 423 | | 100.0 | % | 100.0 | % | Q2 2019 |
| Under construction | | | | | | |
| ‘A‘ali‘i (c) | — | | 669 | | 750 | | 89.2 | % | 84.2 | % | Q4 2021 |
| Kō'ula (d) | — | | 488 | | 565 | | 86.4 | % | 89.0 | % | 2022 |
| Victoria Place | — | | 342 | | 349 | | 98.0 | % | 98.5 | % | 2024 |
| Predevelopment | | | | | | |
| The Park Ward Village (e) | — | | 255 | | 545 | | 46.8 | % | 47.0 | % | 2025 |
|
| | | | | | | | | | |
| | Units Closed | Units Under Contract | Total Units | Total % of Units Closed or Under Contract | Total % of Residential Square Feet Closed or Under Contract |
| Completed | | | | | |
| Waiea (a) | 170 |
| 2 |
| 177 |
| 97.2 | % | 95.2 | % |
| Anaha (a) | 315 |
| 1 |
| 317 |
| 99.7 | % | 98.7 | % |
| Ae’o (b) | 465 |
| — |
| 465 |
| 100.0 | % | 100.0 | % |
| Ke Kilohana (a) | 423 |
| — |
| 423 |
| 100.0 | % | 100.0 | % |
| Under construction | | | | | |
| ‘A‘ali‘i | — |
| 635 |
| 750 |
| 84.7 | % | 80.0 | % |
| Kō'ula (c) | — |
| 435 |
| 565 |
| 77.0 | % | 79.3 | % |
| Predevelopment | | | | | |
| Victoria Place | — |
| 249 |
| 349 |
| 71.3 | % | 73.4 | % |
| |
(a) | (a)The retail portions of these projects are 100% leased and has been placed in service. |
| |
(b) | The retail portion of the project, which is primarily comprised of the 57,000-square-foot flagship Whole Foods Market, is 98% leased and has been placed into service. |
| |
(c) | During the nine months ended September 30, 2020, two purchasers defaulted on their obligations to purchase condominiums. |
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 September 30, 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 significantservice.
(b)The retail portion of the remaining costs forproject, which is primarily comprised of the following properties in the Operating Assets57,000-square-foot flagship Whole Foods Market, is 97.9% leased and Seaport District segments:has been placed into service.
| |
– | 6100 Merriweather and Garage |
| |
– | Merriweather District Area 3 Standalone Restaurant |
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(c)There will be able to meet our cash funding requirements with a combinationapproximately 12,000 square feet of existing and anticipated construction loans, condominium buyer deposits, free cash flow from our Operating Assets and MPC segments, net proceeds from condominium sales, our existing cash balances andnew street level retail space as necessary, the postponementpart of certain projects.this project.
(d)There will be approximately 37,000 square feet of retail space as part of this project.
(e)There will be approximately 26,800 square feet of retail space as part of this project.
HHC 20202021 FORM 10-Q | 5762
|
| | | | |
MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS | |
RESULTS OF OPERATIONS |
|
|
| | | | | | | | | | | | | | | | | | | | |
| thousands | Total
Estimated
Costs (a) | Costs Paid Through September 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 |
| $ | 105,929 |
| $ | 32,292 |
| $ | — |
| $ | 31,384 |
| $ | 908 |
| (d) | Open |
| Juniper Apartments | 116,386 |
| 94,516 |
| 21,870 |
| — |
| 21,709 |
| 161 |
| | Open |
| Merriweather District Area 3 Standalone Restaurant | 5,680 |
| 2,857 |
| 2,823 |
| — |
| — |
| 2,823 |
| (d)(e) | Open |
| The Woodlands | | | | | | | | |
| Creekside Park West | 22,625 |
| 18,170 |
| 4,455 |
| — |
| 3,524 |
| 931 |
| (d) | Open |
| 8770 New Trails | 45,985 |
| 38,376 |
| 7,609 |
| — |
| 5,924 |
| 1,685 |
| | Open |
| Two Lakes Edge | 107,706 |
| 90,802 |
| 16,904 |
| — |
| 13,281 |
| 3,623 |
| | Open |
| Bridgeland | | | | | | | | |
| Lakeside Row | 48,412 |
| 43,428 |
| 4,984 |
| — |
| 2,880 |
| 2,104 |
| | Open |
| Total Operating Assets | 485,015 |
| 394,078 |
| 90,937 |
| — |
| 78,702 |
| 12,235 |
| | |
| | | | | | | | | |
| Seaport District | | | | | | | | |
| Pier 17 and Seaport District Historic Area / Uplands | 659,018 |
| 600,980 |
| 58,038 |
| — |
| — |
| 58,038 |
| (d)(f)(g) | Open |
| Tin Building | 173,452 |
| 99,836 |
| 73,616 |
| — |
| — |
| 73,616 |
| (g) | Q4 2021 |
| Total Seaport District | 832,470 |
| 700,816 |
| 131,654 |
| — |
| — |
| 131,654 |
| | |
| | | | | | | | | |
| Strategic Developments | | | | | | | | |
| The Woodlands | | | | | | | | |
| Creekside Park Apartments Phase II | 57,472 |
| 19,412 |
| 38,060 |
| — |
| 37,861 |
| 199 |
| | Q2 2021 |
| Residences at the Lane at Waterway | 45,033 |
| 31,065 |
| 13,968 |
| — |
| 12,949 |
| 1,019 |
| (h) | Q4 2020 |
| Ward Village | | | | | | | | |
| ‘A‘ali‘i | 411,900 |
| 231,543 |
| 180,357 |
| 8,368 |
| 177,964 |
| (5,975 | ) | (i) | Q4 2021 |
| Anaha | 401,314 |
| 398,838 |
| 2,476 |
| — |
| — |
| 2,476 |
| | Open |
| Ke Kilohana | 218,898 |
| 213,983 |
| 4,915 |
| — |
| — |
| 4,915 |
| (j) | Open |
| Kō'ula | 487,039 |
| 91,510 |
| 395,529 |
| 77,524 |
| 293,109 |
| 24,896 |
| | 2022 |
| Waiea | 566,256 |
| 426,615 |
| 139,641 |
| — |
| — |
| 139,641 |
| (k) | Open |
| Total Strategic Developments | 2,187,912 |
| 1,412,966 |
| 774,946 |
| 85,892 |
| 521,883 |
| 167,171 |
| (l) | |
| Combined Total | $ | 3,505,397 |
| $ | 2,507,860 |
| $ | 997,537 |
| $ | 85,892 |
| $ | 600,585 |
| $ | 311,060 |
| | |
| | |
(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 September 30, 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) | Merriweather District 3 Stand Alone Restaurant has been placed in service but will not open until tenant build-out is complete. |
| |
(f) | Pier 17 and Seaport District Historic Area / Uplands Total Estimated Costs and Costs Paid Through September 30, 2020, include costs required for the Pier 17 and Seaport District Historic Area / Uplands and are not reduced by the insurance proceeds received to date. |
| |
(g) | We closed on a $250.0 million loan for the redevelopment of the Seaport District during the three months ended June 30, 2019. This loan was repaid during the three months ended September 30, 2020, with proceeds from the issuance of the Senior Notes due 2028 in the third quarter of 2020. Refer to Note 7 - Mortgages, Notes and Loans Payable, Net for additional information.
|
| |
(h) | Millennium Phase III Apartments was renamed to Residences at the Lane at Waterway as of Q3 2020. |
| |
(i) | Negative balances represent cash to be received in excess of Estimated Remaining to be Spent. These items are primarily related to September 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. |
| |
(j) | The Ke Kilohana facility was repaid in June 2019, in conjunction with closing on the sales of units at the property. |
| |
(k) | Total estimate includes $115.4 million for necessary 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.
|
| |
(l) | 110 North Wacker was placed in service during the third quarter of 2020. As a result, the venture was deconsolidated as of September 30, 2020, and removed from this table. Refer to Note 3 - Real Estate and Other Affiliates for additional information.
|
|
| |
MANAGEMENT’S DISCUSSION AND ANALYSIS | |
RESULTS OF OPERATIONS | |
|
|
| Corporate Income, Expenses and Other Items |
Corporate income, expensesThe following table contains certain corporate related and other items increased by $29.5 millionnot related to a $90.7 million net expensesegment activities and that are not otherwise included within the segment analyses. Variances related to income and expenses included in NOI or EBT are explained within the previous segment discussions. Significant variances for the three months ended September 30, 2020, and decreased by $21.1 million to a $144.8 million net expense for the nine months ended September 30, 2020, compared to the prior year periods.consolidated items not included in NOI or EBT are described below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| thousands | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
| Corporate income | $ | 103 | | | $ | 46 | | | $ | 57 | | | $ | 297 | | | $ | 151 | | | $ | 146 | |
| General and administrative | (19,033) | | | (23,441) | | | 4,408 | | | (61,133) | | | (84,755) | | | 23,622 | |
| Corporate interest expense, net | (25,106) | | | (18,755) | | | (6,351) | | | (76,952) | | | (44,920) | | | (32,032) | |
| Gain (loss) on extinguishment of debt | — | | | — | | | — | | | (35,084) | | | — | | | (35,084) | |
| | | | | | | | | | | |
| Corporate other income (loss), net | 107 | | | (423) | | | 530 | | | 330 | | | (183) | | | 513 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Corporate depreciation and amortization | (1,145) | | | (2,092) | | | 947 | | | (3,411) | | | (5,364) | | | 1,953 | |
| Demolition costs | (43) | | | — | | | (43) | | | (192) | | | — | | | (192) | |
| Development-related marketing costs | (4,020) | | | (1,912) | | | (2,108) | | | (8,061) | | | (6,541) | | | (1,520) | |
| Income tax (expense) benefit | (6,049) | | | (44,147) | | | 38,098 | | | 16,706 | | | (3,203) | | | 19,909 | |
| Total Corporate income, expenses and other items | $ | (55,186) | | | $ | (90,724) | | | $ | 35,538 | | | $ | (167,500) | | | $ | (144,815) | | | $ | (22,685) | |
For the three months ended September 30, 2020:2021:
Corporate income, expenses and other items was favorably impacted compared to the prior yearprior-year period by the following:
| |
– | $10.8 million decrease in General and administrative expenses primarily related to the reduction of labor costs due to workforce reductions, which are part of an overall plan to reduce recurring overhead costs, and lower travel and entertainment costs, which are attributable to COVID-19 travel restrictions |
| |
– | $3.4 million decrease in Development-related marketing costs primarily related to the reduction of labor costs due to reduction in staff and reduction of costs at parts of Victoria Place, Downtown Columbia, Ward Village–decrease in income tax expense primarily due to a decrease in income before income taxes, partially offset by the impact of the release of a valuation allowance on the Company’s capital loss carryover in 2021. Refer to Note 10 - Income Taxes for additional information. –decrease in general and administrative expenses as more costs were reclassified to projects due to increased lease up activity and projects under construction in the current period.
the Seaport District
|
Corporate income, expenses and other items was unfavorably impacted compared to the prior yearprior-year period by the following:
| |
– | $35.4 million increase in the Provision (benefit) for income taxes primarily due to a $169.4 million increase in income before taxes |
| |
– | $7.9 million increase in corporate interest expense, net primarily due to the $750 million issuance of senior notes in August 2020, as well as a decrease in interest income due to lower interest rates |
–increase in corporate interest expense, net primarily due to the issuance of $750 million 5.375% Senior Notes in August 2020, as well as the issuance of $650 million 4.125% Senior Notes and $650 million 4.375% Senior Notes in the first quarter of 2021, offset by the repurchase of $1.0 billion 5.375% Senior Notes in the first quarter of 2021
For the nine months ended September 30, 2020:2021:
In addition to the items affecting the three months ended September 30, 2021, the period was also unfavorably impacted by the following:
–loss on extinguishment of debt of $35.1 million due to the repurchase of the Company’s $1.0 billion 5.375% Senior Notes due 2025
Corporate income, expenses and other items was favorably impacted compared to the prior yearprior-year period by the following:
| |
– | $21.0 million decrease in the Provision (benefit) for income taxes primarily due to a $91.5 million decrease in income before taxes |
| |
– | $10.3 million decrease in Development-related marketing costs primarily related to the reduction of labor costs due to reduction in staff and reduction of costs at parts of Victoria Place, Downtown Columbia, Las Vegas Ballpark, Ward Village andthe Seaport District
|
| |
– | $9.6 million decrease in General–decrease in general and administrative expenses primarily related to the reduction of labor costs due to workforce reductions which are part of an overall plan to reduce recurring overhead costs, and lower travel and entertainment costs, which are attributable to COVID-19 travel restrictions |
Corporate income, expenses and other items was unfavorably impacted comparedcorporate initiatives, which are part of an overall plan to the prior year period by the following:reduce recurring overhead costs, and a decrease in consulting expenses as a result of fewer IT projects taking place in 2021
| |
– | $11.5 million increase in corporate interest expense, net primarily due to a decrease in interest income due to lower interest rates, as well as an increase in interest expense due to the $750 million issuance of senior notes in August 2020 |
| |
– | $9.7 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 |
HHC 20202021 FORM 10-Q | 6359
|
| |
MANAGEMENT’S DISCUSSION AND ANALYSIS | |
LIQUIDITY AND CAPITAL RESOURCES | |
|
| | | | |
| MANAGEMENT’S DISCUSSION AND ANALYSIS | |
| LIQUIDITY AND CAPITAL RESOURCES | |
| | |
| Liquidity and Capital Resources |
In direct response toThroughout the unprecedented COVID-19 pandemic and the impactswe have focused on our four business segments, as well as the economy and capital markets in general, we initiated measures to increase our liquidity. InAs a result, we have been able to maintain a strong balance sheet and ensure we maintain the second quarter 2020, we entered into an agreementfinancial flexibility and liquidity necessary to extend the existing Downtown Summerlin loanfund future growth. We continued to enhance our liquidity profile in 2021 through debt refinancings at lower interest rates, extensions of debt maturities and the bridge loan for The Woodlands Towers at the Waterwaynew construction loans. Refer to Note 6 - Mortgages, Notes and The Woodlands Warehouse. As previously reported, we also generated $593.7 million in proceeds from the issuance of common stockLoans Payable, Net in the first quarter of 2020. On August 18, 2020, the Company issued $750 million in 5.375% senior notes due August 2028. These senior notes are unsecured senior obligations of the Company and are guaranteed by certain subsidiaries of the Company. The Company used the net proceeds from this issuance, together with cash on hand, for the repayment property specific indebtedness of approximately $807.9 million in order to push out the average maturity date of our indebtedness. We ended the third quarter with $857.4 million of Cash and cash equivalents on our Condensed Consolidated Balance Sheets as of September 30, 2020.Financial Statement for additional information.
Our primary sources of cash include cash flow from land sales in MPC,our MPCs, 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. The 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 obligations and anticipated ordinary course operating expenses for at least the next 12 months, even after taking into account the consequences of the COVID-19 pandemic discussed above.months. 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, through the sale of non-core assets at the appropriate 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 completion guarantees to the City of New York for the redevelopment of Pier 17 and the Tin Building, as well as the Hawai’i Community Development Authority for reserve condominium units at Ward Village.
During 2021, we have continued to pursue the sale of our remaining non-core assets. We closed on the sale of Monarch City during the second quarter of 2021 for net proceeds after debt repayment of $50.9 million and the sale of our hospitality properties in The Woodlands during the third quarter of 2021 for net proceeds after debt repayment of $119.7 million. Since the fourth quarter of 2019, we have completed the sales of twelve non-core assets generating approximately $376.0 million of net proceeds after debt repayment.
In October 2021, the board of directors of The Howard Hughes Corporation, authorized a share repurchase program, pursuant to which the Company may, from time to time, purchase up to $250.0 million of its common stock through open market transactions. The date and time of such repurchases will depend upon market conditions. All repurchases will be made in compliance with, and at such times as permitted by, federal securities laws and may be suspended or discontinued at any time. The new program replaces the Company’s prior share repurchase program adopted in October 2019, which authorized the repurchase of up to $100 million of its common stock. Under this program, the Company had repurchased an aggregate value of $53.9 million of its common stock as of September 30, 2021.
Total outstanding debt was $4.2$4.4 billion as of September 30, 2020. Certain mortgages may require paydowns in order to exercise contractual extension terms.2021. Refer to Note 76 - 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 $252.5$292.8 million as of September 30, 2020. 2021. All of this indebtedness is without recourse to the Company, with the exception of $100.6 million related to 110 North Wacker.
The following table summarizes our net debt on a segment basis as of September 30, 2020.2021. Net debt is defined as Mortgages, notes and loans payable, net, 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.
|
| | | | | | | | | | | | | | | | | | | | | |
| thousands | Operating
Assets
(a) | Master
Planned
Communities
(b) | Seaport District
(c) | Strategic
Developments
(d) | Segment
Totals | Non-
Segment
Amounts | September 30, 2020 |
| Mortgages, notes and loans payable, net | $ | 1,998,974 |
| $ | 187,071 |
| $ | 98,948 |
| $ | 202,123 |
| $ | 2,487,116 |
| $ | 1,732,218 |
| $ | 4,219,334 |
|
| Mortgages, notes and loans payable of real estate and other affiliates | 246,615 |
| 5,851 |
| — |
| — |
| 252,466 |
| — |
| 252,466 |
|
| Less: | | | | | | | |
| Cash and cash equivalents | (56,498 | ) | (94,264 | ) | (5,740 | ) | (6,669 | ) | (163,171 | ) | (694,219 | ) | (857,390 | ) |
| Cash and cash equivalents of real estate and other affiliates | (2,882 | ) | (84,656 | ) | (81 | ) | (1,184 | ) | (88,803 | ) | — |
| (88,803 | ) |
| Special Improvement District receivables | — |
| (60,198 | ) | — |
| — |
| (60,198 | ) | — |
| (60,198 | ) |
| Municipal Utility District receivables, net | — |
| (331,451 | ) | — |
| — |
| (331,451 | ) | — |
| (331,451 | ) |
| TIF receivable | — |
| — |
| — |
| (1,980 | ) | (1,980 | ) | — |
| (1,980 | ) |
| Net debt | $ | 2,186,209 |
| $ | (377,647 | ) | $ | 93,127 |
| $ | 192,290 |
| $ | 2,093,979 |
| $ | 1,037,999 |
| $ | 3,131,978 |
|
HHC 20202021 FORM 10-Q | 6460
|
| | | | |
| MANAGEMENT’S DISCUSSION AND ANALYSIS | |
| LIQUIDITY AND CAPITAL RESOURCES | |
| |
(a) | Includes our share of Mortgages, notes and loans payable, net and Cash and cash equivalents of our real estate and other affiliates in the Operating Assets segment (110 North Wacker, Woodlands Sarofim #1, The Metropolitan Downtown Columbia, Stewart Title of Montgomery County and m.flats/TEN.M). |
| |
(b) | Includes our share of Mortgages, notes and loans payable, net and Cash and cash equivalents of our real estate and other affiliates in the MPC segment (The Summit). |
| |
(c) | Includes our share of Mortgages, notes and loans payable, net and Cash and cash equivalents of our real estate and other affiliates in the Seaport District segment (Bar Wayō). |
| |
(d) | Includes our share of Cash and cash equivalents of our real estate and other affiliates in the Strategic Developments segment (KR Holdings, HHMK Development and Circle T Ranch and Power Center). |
| | | | | | | | | | | | | | | | | | | | | | | |
| thousands | Operating Assets | Master Planned Communities | Seaport | Strategic Developments | Segment Totals | Non-Segment Amounts | September 30, 2021 |
| Mortgages, notes and loans payable | $ | 1,592,443 | | $ | 341,067 | | $ | 99,453 | | $ | 369,413 | | $ | 2,402,376 | | $ | 2,021,259 | | $ | 4,423,635 | |
| Mortgages, notes and loans payable of real estate and other affiliates | 289,061 | | 3,747 | | — | | — | | 292,808 | | — | | 292,808 | |
| Less: | | | | | | | |
| Cash and cash equivalents | (143,708) | | (132,722) | | (7,660) | | (1,698) | | (285,788) | | (724,831) | | (1,010,619) | |
| Cash and cash equivalents of real estate and other affiliates | (5,330) | | (51,181) | | (471) | | (232) | | (57,214) | | — | | (57,214) | |
| Special Improvement District receivables | — | | (89,677) | | — | | — | | (89,677) | | — | | (89,677) | |
| Municipal Utility District receivables, net | — | | (383,696) | | — | | — | | (383,696) | | — | | (383,696) | |
| TIF receivable | — | | — | | — | | (751) | | (751) | | — | | (751) | |
| Net Debt | $ | 1,732,466 | | $ | (312,462) | | $ | 91,322 | | $ | 366,732 | | $ | 1,878,058 | | $ | 1,296,428 | | $ | 3,174,486 | |
During the second quarter of 2020,
Due to the COVID-19 pandemic, necessitated temporary closure of some of the Company’s Operating Assets, primarilyCompany experienced a decline in operating results for certain 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 the outstanding Senior Secured Credit Facility Revolver Loan balance of $61.3 million. The Company cured this failure with the repayment of the Revolver Loan in August 2020. As of September 30,December 31, 2020, the Company did not meet the debt service coverage ratio for the $615.0 million Term Loan portion of the Senior Secured Credit Facility and as a result, the excess net cash flow after debt service from the underlying properties became restricted. TheAs a result of the $181.8 million payment on the Term Loan in the third quarter, the Company met the debt service coverage ratio as of September 30, 2021. However, two consecutive quarters of compliance are required to release the restricted cash requirement, and $58.8 million of cash was restricted as of September 30, 2021. While the restricted cash cannot be used for general corporate purposes, butit can continue to be used to fund operations of the underlying assets. The Company is negotiating an amendment withassets, and during the lender. Asthird quarter of June 30, 2020,2021, the Company did not meet the debt service coverage ratiossubmitted reimbursement for two loan agreements$33.1 million related to operating expenses. This does not have a material impact on the Self-Storage Operating Assets. Both loans, which totaled $10.9 million, were fully repaid in August 2020. As of June 30, 2020, the Company did not meet a semi-annual operating covenant within the $62.5 million loan for The Woodlands Resort and Conference Center. The loan for The Woodlands Resort and Conference Center provides a partial repayment cure for the debt service coverage ratio test. Management is documenting a modification of the existing terms of the Woodlands Resort and Conference Center loan with the lender to receive a waiver of the $24.1 million repayment to cure.Company’s liquidity.
As of September 30, 2020, apart from the Term Loan portion of the Senior Secured Credit Facility and the Woodlands Resort and Conference Center described above,2021, the Company was in compliance with all remaining financial covenants included in the agreements governing its indebtedness.
| | | | | | | | | | | |
| | Nine Months Ended September 30, |
| thousands | 2021 | | 2020 |
| Cash provided by (used in) operating activities | $ | (40,400) | | | $ | (169,798) | |
| Cash provided by (used in) investing activities | 176,902 | | | (404,522) | |
| Cash provided by (used in) financing activities | 69,070 | | | 1,044,686 | |
Operating Activities Each segment’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 2020.2021. Operating cash continued to be utilized in the first quarter of 2020,2021, 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 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 impact, such as the speed and effectiveness of vaccine and treatment developments and their deployment, potential mutations of COVID-19, and the direct and indirect economic effects of the pandemic and containment measures, among others.
| | | | | |
| MANAGEMENT’S DISCUSSION AND ANALYSIS | |
| LIQUIDITY AND CAPITAL RESOURCES | |
Net cash used in operating activities was $40.4 million for the nine months ended September 30, 2021, and $169.8 million for the nine months ended September 30, 2020, as compared to net cash provided by operating activities of $137.2 million for the nine months ended September 30, 2019.2020. The $307.0$129.4 million net increasedecrease in cash used in operating activities in the nine months ended September 30, 2020,2021, compared to the same period in 2019,2020, was primarily relateddue to the current period net loss of $5 million as well as a decrease of $266.0 millionan increase in condominium rights and units of cost due to timing, which were partially offset by proceeds received from the sale of lease receivable and condominium deposits received. The current period net loss was largely offset by a $267.5 million gain on the deconsolidation of 110 North Wacker.
|
| |
MANAGEMENT’S DISCUSSION AND ANALYSIS | |
LIQUIDITY AND CAPITAL RESOURCES | |
Investing Activities Net cash used inprovided by investing activities was $176.9 million for the nine months ended September 30, 2021, compared to net cash used by investing activities of $404.5 million for the nine months ended September 30, 2020, and $535.82020. The $581.4 million for the nine months ended September 30, 2019. The $131.3 millionnet decrease in cash used was primarily the result of thea $299.1 million increase in proceeds from sales of properties related to our hospitality properties in The Woodlands and Monarch City, a $200.5 million decrease in property development and redevelopment expenditures, as well asand a decrease$83.0 million increase in operating property improvements expendituresdistributions received from real estate and other affiliates during the nine months ended September 30, 2020, primarily attributable to temporary shut downs of construction activity due to the COVID-19 pandemic.2021.
Financing Activities Net cash provided by financing activities was $1,044.7$69.1 million for nine months ended September 30, 2020, as compared to2021, and $1.0 billion for nine months ended September 30, 2020. The net decrease in cash provided by financing activities of $517.0 million for nine months ended September 30, 2019. The increase of $527.7$975.6 million was primarily due to proceeds from mortgages, notes and loans payable and the issuance of$593.6 million common stock partially offset by an increase of $665.9 millionissuance in 2020 that did not repeat in 2021. In addition, principal payments on mortgages, notes and loans payable during the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019.increased $896.8 million, partially offset by an increase of $546.0 million in proceeds from mortgages, notes and loans payable.
|
| |
| Contractual Cash Obligations and Commitments |
The following table summarizes our contractual obligations as of September 30, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| thousands | Remaining in 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total |
| Mortgages, notes and loans payable (a) | $ | 30,925 | | | $ | 76,032 | | | $ | 893,078 | | | $ | 287,242 | | | $ | 165,404 | | | $ | 354,064 | | | $ | 2,661,968 | | | $ | 4,468,713 | |
| Interest payments (b) | 48,072 | | | 186,376 | | | 177,901 | | | 150,785 | | | 142,895 | | | 133,667 | | | 362,192 | | | 1,201,888 | |
| Ground lease and other leasing commitments | 971 | | | 4,318 | | | 4,364 | | | 4,412 | | | 4,461 | | | 4,511 | | | 245,290 | | | 268,327 | |
| Total | $ | 79,968 | | | $ | 266,726 | | | $ | 1,075,343 | | | $ | 442,439 | | | $ | 312,760 | | | $ | 492,242 | | | $ | 3,269,450 | | | $ | 5,938,928 | |
(a)Based on final maturity, inclusive of extension options. In October 2021, the Company closed on an extension of the $27.2 million loan for Outlet Collection at Riverwalk, extending the maturity date to October 2022 with a one-year extension option, and closed on a $250.0 million interest-only loan for 1201 Lake Robbins maturing in October 2031. The outstanding balance on the construction loan for ‘A‘ali‘i was $229.6 million as of September 30, 2021, with an extended maturity date of June 2023. Subsequent to quarter end, the ‘A‘ali‘i construction loan was repaid in conjunction with closing on the sales of units at the property.
(b)Interest is based on the borrowings that are presently outstanding and current floating interest rates.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| thousands | Remaining in 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | Total |
| Mortgages, notes and loans payable (a) | $ | 3,610 |
| | $ | 321,634 |
| | $ | 77,607 |
| | $ | 1,046,439 |
| | $ | 419,873 |
| | $ | 1,118,045 |
| | $ | 1,266,387 |
| | $ | 4,253,595 |
|
| Interest payments (b) | 48,160 |
| | 177,921 |
| | 174,616 |
| | 161,631 |
| | 127,050 |
| | 74,769 |
| | 241,149 |
| | 1,005,296 |
|
| Ground lease and other leasing commitments | 1,339 |
| | 7,184 |
| | 6,507 |
| | 6,464 |
| | 6,432 |
| | 5,047 |
| | 261,805 |
| | 294,778 |
|
| Total | $ | 53,109 |
| | $ | 506,739 |
| | $ | 258,730 |
| | $ | 1,214,534 |
| | $ | 553,355 |
| | $ | 1,197,861 |
| | $ | 1,769,341 |
| | $ | 5,553,669 |
|
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(a) | Based on final maturity, inclusive of extension options. |
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(b) | Interest is based on the borrowings that are presently outstanding and current floating interest rates. |
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| 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 totaling $491.4$634.5 million as of September 30, 2020,2021, the financings are non-recourse to us, with the exception of $100.6 million related to 110 North Wacker.
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|
| 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 - BasisSummary of Presentation and OrganizationSignificant Accounting Policies in our Annual Report and Note 2 - Accounting Policies and Pronouncementsin this Quarterly Report.
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| MARKET RISK AND CONTROLS AND PROCEDURES | |
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 September 30, 2020,2021, of our $1.9$1.7 billion of variable-rate debt outstanding, $644.6$650.5 million is swapped to a fixed rate.fixed-rate. We may enter into interest rate cap contracts to mitigate our exposure to rising interest rates. We have a $75.0 million cap contract at a 5% interest rate related to properties in The Woodlands. Additionally, we have cap contracts totaling $368.2 million at a 2% interest rate for our credit facility for The Woodlands and Bridgeland,construction loan on Victoria Place, which has an outstanding balance of which $150.0$49.0 million is outstanding and $75.0 million is capped.as of September 30, 2021. As properties are placed into service and become stabilized, we typically refinance the variable-rate debt with long-term fixed-rate debt.
As of September 30, 2020,2021, annual interest costs would increase approximately $12.2$10.2 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. higher, resulting in greater depreciation or cost of sales in later years.
For additional information concerning our debt and management’s estimation process to arrive at a fair value of our debt as
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MARKET RISK AND CONTROLS AND PROCEDURES | |
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 76 - Mortgages, Notes and Loans Payable, Net and Note 98 - 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 forFor 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.pandemic, see the Liquidity and Capital Resources section of Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 6 - Mortgages, Notes and Loans Payable, Net in our Condensed Consolidated Financial Statements.
HHC 20202021 FORM 10-Q | 6367
Item 4. Controls and Procedures
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| DISCLOSURE CONTROLS AND PROCEDURES |
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in our reports to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure. On September 17, 2020, Paul Layne retired as our principal executive officer. David O’Reilly, our president and principal financial officer, agreed to additionally serve as our interim principal executive officer until a permanent principal executive officer is appointed.
As required by SEC rules, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal financial and accounting officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2020,2021, the end of the period covered by this report. Based on the foregoing, our principal executive officer (David O’Reilly) and principal financial and accounting officer (David O’Reilly) concluded that our disclosure controls and procedures were effective as of September 30, 2020.2021.
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| 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 were 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.
HHC 20202021 FORM 10-Q | 6864
Item 1. Legal Proceedings
Please refer to Note 109 - 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 2020 Annual Report, with the exception of the additional risk factors discussed below.Report.
COVID-19 has disrupted our business and has had a material adverse effect on our business, financial performance and condition, operating results and cash flows, and will continue to materially 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:
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– | 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 |
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– | our ability to continue to collect rents, on a timely basis or at all, without reductions or other concessions, in multi-family and office properties (revenues from which properties accounted for 13% of our revenues for the year ended December 31, 2019) |
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– | our ability to keep our hotels open, even at a limited capacity, given current and potential government restrictions and the dramatic decline in travel caused by COVID-19 (revenues from our hotel properties accounted for 7% of our total revenue for the year ended December 31, 2019) |
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– | 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) |
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– | 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) |
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– | 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) |
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– | fluctuations in regional and local economies, the residential housing and condominium markets, local real estate conditions, and tenant rental rates |
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– | our ability to continue to make condominium sales in Hawai’i and land sales in our MPCs, in light of the impact on the overall economy and consumers’ reluctance to make significant capital decisions in times of economic uncertainty, particularly if there is reduced availability of loans for such consumers |
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– | our ability to attract people to the Seaport District through socially distanced events and programs and resume the Seaport District summer concert series in 2021, the revenue and sponsorship of which historically has been a meaningful contribution to our annual revenue |
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– | 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 |
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– | the continued service and availability of personnel, including our executive officers and other leaders that are part of our management team and our ability to recruit, attract and retain skilled personnel to the extent our management or personnel are impacted in significant numbers or in other significant ways by the outbreak of pandemic or epidemic disease and are not available or allowed to conduct work |
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– | 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 |
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– | 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 |
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– | delays in, or our ability to complete, our “Transformation Plan” on the expected terms or timing |
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– | 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 that 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 impact, 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. In addition to governmental restrictions, we cannot predict when our customers will again feel comfortable with frequenting retail and hospitality establishments or working from offices.
The effects of restrictions on our operations, including future restrictions and extended periods of remote work arrangements, could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business. The rapid development and fluidity of this situation precludes any prediction as to the full adverse impact of the COVID-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 Annual Report should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None. | | |
| PURCHASES OF EQUITY SECURITIES BY THE ISSUER |
The following sets forth information with respect to repurchases made by the Company of its shares of common stock during the third quarter of 2021:
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| Total number of shares purchased (a) | | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | | Approximate dollar value of shares that may yet be purchased under the plans or programs (b) |
| Period | | | | | | |
| July 1 - 31, 2021 | — | | | $ | — | | — | | | $ | 46,100,000 | |
| August 1 - 31, 2021 | 1,774 | | | $ | 90.74 | | — | | | $ | 46,100,000 | |
| September 1 - 30, 2021 | — | | | $ | — | | — | | | $ | 46,100,000 | |
| Total | 1,774 | | | $ | 90.74 | | — | | | |
(a)The shares repurchased related to stock received by the Company for the payment of withholding taxes due on employee share issuances under share-based compensation plans.
(b)Subsequent to the third quarter, in October 2021, the board of directors of The Howard Hughes Corporation, authorized a share repurchase program, pursuant to which the Company may, from time to time, purchase up to $250.0 million of its common stock through open market transactions. The new program replaces the Company’s prior share repurchase program adopted in October 2019. Please refer to Note 1 - Summary of Significant Accounting Policies in the Condensed Consolidated Financial Statements for additional details.
Item 3. Default Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
On November 4, 2020, the Company entered into an Amendment No. 1 to Restricted Stock Agreements (“Restricted Stock Amendments”) with each of David O’Reilly and Peter F. Riley. The Restricted Stock Amendments amended certain time-based restricted stock awards previously granted to each of Mr. O’Reilly and Mr. Riley, by providing Mr. O’Reilly and Mr. Riley with eligibility to vest in full in such time-based restricted stock awards if their employment with the Company ends by reason of death or disability. The foregoing summary of the Restricted Stock Amendments does not purport to be complete and is qualified in its entirely by reference to the full text of the Restricted Stock Amendments, filed as Exhibits 10.3 and 10.4 herewith.
HHC 20202021 FORM 10-Q | 6669
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.
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| Exhibit Number | | Description |
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Exhibit Number | | Description |
3.131.1+ | | |
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3.2 | | |
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3.3 | | |
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3.4 | | |
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4.1 | | |
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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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10.2** | | |
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10.3**+ | | |
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10.4**+ | | |
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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 nine months ended September 30, 20202021 and 2019,2020, (ii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 20202021, and 2019,2020, (iii) the Condensed Consolidated Balance Sheets as of September 30, 20202021 and December 31, 2019,2020, (iv) Condensed Consolidated Statements of Equity for the three and nine months ended September 30, 20202021 and 2019,2020, (v) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 20202021 and 2019,2020, and (vi) the Notes to Condensed Consolidated Financial Statements.
HHC 20202021 FORM 10-Q | 6870
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’ReillyCorrene Loeffler |
| | | David R. O’ReillyCorrene Loeffler |
| | | Interim Chief Executive Officer, President and Chief Financial Officer |
| | | November 5, 20204, 2021 |
HHC 20202021 FORM 10-Q | 6971
