10-Q 1 hhc-20160331x10q.htm 10-Q hhc_Current Folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2016

 

or

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission file number 001-34856

 

THE HOWARD HUGHES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

36-4673192

(State or other jurisdiction of

(I.R.S. employer

incorporation or organization)

identification number)

 

13355 Noel Road, 22nd Floor, Dallas, Texas 75240

(Address of principal executive offices, including zip code)

 

(214) 741-7744

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 Yes     No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 Yes     No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer  (Do not check if a smaller reporting company)

Smaller reporting company 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 Yes     No

 

The number of shares of common stock, $0.01 par value, outstanding as of May 2, 2016 was 39,823,786.

 

 


 

THE HOWARD HUGHES CORPORATION

 

INDEX

 

 

 

 

 

 

 

    

PAGE
NUMBER

 

 

 

 

 

 

PART IFINANCIAL INFORMATION

 

 

 

 

 

Item 1:Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets
as of March 31, 2016 and December 31, 2015
 

 

 

 

 

Condensed Consolidated Statements of Operations
for the three months ended March 31, 2016 and 2015
 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)
for the three months ended March 31, 2016 and 2015
 

 

 

 

 

Condensed Consolidated Statements of Equity
for the three months ended March 31, 2016 and 2015
 

 

 

 

 

Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2016 and 2015
 

 

 

 

 

Notes to Condensed Consolidated Financial Statements 

 

 

 

 

Item 2:Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

31 

 

 

 

Item 3:Quantitative and Qualitative Disclosures about Market Risk 

 

57 

 

 

 

Item 4:Controls and Procedures 

 

58 

 

 

 

PART II  OTHER INFORMATION 

 

58 

 

 

 

Item 1:Legal Proceedings 

 

58 

 

 

 

Item 1A: Risk Factors 

 

58 

 

 

 

Item 6:Exhibits 

 

58 

 

 

 

SIGNATURE 

 

59 

 

 

 

EXHIBIT INDEX 

 

60 

 

 

2


 

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

(In thousands, except share amounts)

    

2016

    

2015

 

Assets:

 

 

 

 

 

 

 

Investment in real estate:

 

 

 

 

 

 

 

Master Planned Community assets

 

$

1,647,947

 

$

1,642,842

 

Land

 

 

325,412

 

 

322,462

 

Buildings and equipment

 

 

1,884,772

 

 

1,772,401

 

Less: accumulated depreciation

 

 

(252,095)

 

 

(232,969)

 

Developments

 

 

806,862

 

 

1,036,927

 

Net property and equipment

 

 

4,412,898

 

 

4,541,663

 

Investment in Real Estate and Other Affiliates

 

 

56,295

 

 

57,811

 

Net investment in real estate

 

 

4,469,193

 

 

4,599,474

 

Cash and cash equivalents

 

 

736,834

 

 

445,301

 

Accounts receivable, net 

 

 

29,118

 

 

32,203

 

Municipal Utility District receivables, net

 

 

157,282

 

 

139,946

 

Notes receivable, net

 

 

25,076

 

 

1,664

 

Deferred expenses, net

 

 

63,532

 

 

61,804

 

Prepaid expenses and other assets, net

 

 

550,939

 

 

441,190

 

Total assets

 

$

6,031,974

 

$

5,721,582

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Mortgages, notes and loans payable

 

$

2,543,638

 

$

2,443,962

 

Deferred tax liabilities

 

 

141,972

 

 

89,221

 

Warrant liabilities

 

 

277,940

 

 

307,760

 

Uncertain tax position liability

 

 

3,340

 

 

1,396

 

Accounts payable and accrued expenses

 

 

564,621

 

 

515,354

 

Total liabilities

 

 

3,531,511

 

 

3,357,693

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (see Note 15)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

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

 

 

 —

 

 

 —

 

Common stock: $.01 par value; 150,000,000 shares authorized, 39,832,176 shares issued and 39,823,786 outstanding as of March 31, 2016 and 39,714,838 shares issued and outstanding as of December 31, 2015

 

 

398

 

 

398

 

Additional paid-in capital

 

 

2,851,343

 

 

2,847,823

 

Accumulated deficit

 

 

(336,450)

 

 

(480,215)

 

Accumulated other comprehensive loss

 

 

(17,760)

 

 

(7,889)

 

Treasury stock, at cost, 8,390 shares as of March 31, 2016 and 0 shares as of December 31, 2015

 

 

(840)

 

 

 —

 

Total stockholders' equity

 

 

2,496,691

 

 

2,360,117

 

Noncontrolling interests

 

 

3,772

 

 

3,772

 

Total equity

 

 

2,500,463

 

 

2,363,889

 

Total liabilities and equity

 

$

6,031,974

 

$

5,721,582

 

 

See Notes to Condensed Consolidated Financial Statements.

3


 

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

(In thousands, except per share amounts)

    

2016

    

2015

 

Revenues:

 

 

 

 

 

 

 

Condominium rights and unit sales

 

$

122,094

 

$

34,857

 

Master Planned Community land sales

 

 

41,942

 

 

48,081

 

Minimum rents

 

 

41,309

 

 

35,194

 

Builder price participation

 

 

4,647

 

 

5,698

 

Tenant recoveries

 

 

10,528

 

 

9,667

 

Hospitality revenues

 

 

12,909

 

 

12,003

 

Other land revenues

 

 

3,033

 

 

3,293

 

Other rental and property revenues

 

 

3,204

 

 

6,297

 

Total revenues

 

 

239,666

 

 

155,090

 

 

 

 

 

 

 

 

 

Expenses and other income:

 

 

 

 

 

 

 

Condominium rights and unit cost of sales

 

 

74,815

 

 

22,409

 

Master Planned Community cost of sales

 

 

15,688

 

 

23,896

 

Master Planned Community operations

 

 

9,594

 

 

9,983

 

Other property operating costs

 

 

15,742

 

 

18,145

 

Rental property real estate taxes

 

 

6,748

 

 

6,200

 

Rental property maintenance costs

 

 

3,132

 

 

2,744

 

Hospitality expenses

 

 

10,475

 

 

9,078

 

Provision for doubtful accounts

 

 

3,041

 

 

809

 

Demolition costs

 

 

472

 

 

117

 

Development-related marketing costs

 

 

4,531

 

 

6,243

 

General and administrative

 

 

20,324

 

 

18,963

 

Other income, net

 

 

(359)

 

 

(1,464)

 

Gain on sale of 80 South Street Assemblage

 

 

(140,479)

 

 

 —

 

Depreciation and amortization

 

 

22,972

 

 

21,510

 

Total expenses, net of other income

 

 

46,696

 

 

138,633

 

 

 

 

 

 

 

 

 

Operating income

 

 

192,970

 

 

16,457

 

 

 

 

 

 

 

 

 

Interest income

 

 

269

 

 

136

 

Interest expense

 

 

(15,993)

 

 

(13,246)

 

Warrant liability gain (loss)

 

 

29,820

 

 

(108,810)

 

Equity in earnings from Real Estate and Other Affiliates

 

 

1,932

 

 

1,788

 

Income (loss) before taxes

 

 

208,998

 

 

(103,675)

 

Provision for income taxes

 

 

65,233

 

 

2,284

 

Net income (loss)

 

 

143,765

 

 

(105,959)

 

Net income attributable to noncontrolling interests

 

 

 —

 

 

 —

 

Net income (loss) attributable to common stockholders

 

$

143,765

 

$

(105,959)

 

 

 

 

 

 

 

 

 

Basic income (loss) per share:

 

$

3.64

 

$

(2.68)

 

 

 

 

 

 

 

 

 

Diluted income (loss) per share:

 

$

2.69

 

$

(2.68)

 

 

See Notes to Condensed Consolidated Financial Statements.

4


 

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

(In thousands)

    

2016

    

2015

 

Net income (loss)

 

$

143,765

 

$

(105,959)

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Interest rate swaps (a)

 

 

(9,808)

 

 

512

 

Capitalized swap interest expense (b)

 

 

(63)

 

 

(59)

 

Other comprehensive income (loss)

 

 

(9,871)

 

 

453

 

Comprehensive income (loss)

 

 

133,894

 

 

(105,506)

 

Comprehensive income attributable to noncontrolling interests

 

 

 —

 

 

 —

 

Comprehensive income (loss) attributable to common stockholders

 

$

133,894

 

$

(105,506)

 


(a)

Amount is shown net of deferred tax benefit of $5.3 million and deferred tax expense of $0.1 million for the three months ended March 31, 2016 and 2015, respectively.

(b)

Net of deferred tax benefit of $0.1 million for both the three months ended March 31, 2016 and 2015.

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

5


 

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Common stock

    

Additional
paid-in

 

Accumulated

    

Accumulated
other
comprehensive

 

Treasury stock

    

Noncontrolling

    

Total

(In thousands, except share amounts)

 

Shares

    

Amount

 

capital

    

deficit

 

income (loss)

    

Shares

    

Amount

 

interests

 

equity

Balance, December 31, 2014

 

39,638,094

 

$

396

 

$

2,838,013

 

$

(606,934)

 

$

(7,712)

 

 —

 

$

 —

 

$

3,743

 

$

2,227,506

Net loss

 

 

 

 

 —

 

 

 —

 

 

(105,959)

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(105,959)

Preferred dividend payment on behalf of REIT subsidiary

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

29

 

 

29

Interest rate swaps, net of tax of $61

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

512

 

 —

 

 

 —

 

 

 —

 

 

512

Capitalized swap interest, net of tax benefit of $31

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

(59)

 

 —

 

 

 —

 

 

 —

 

 

(59)

Stock plan activity

 

69,241

 

 

1

 

 

1,696

 

 

(1)

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

1,696

Balance, March 31, 2015

 

39,707,335

 

$

397

 

$

2,839,709

 

$

(712,894)

 

$

(7,259)

 

 —

 

$

 —

 

$

3,772

 

$

2,123,725

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

 

39,714,838

 

$

398

 

$

2,847,823

 

$

(480,215)

 

$

(7,889)

 

 —

 

$

 —

 

$

3,772

 

$

2,363,889

Net income

 

 

 

 

 —

 

 

 —

 

 

143,765

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

143,765

Interest rate swaps, net of tax of  $5,268

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

(9,808)

 

 —

 

 

 —

 

 

 —

 

 

(9,808)

Capitalized swap interest, net of tax benefit of  $34

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

(63)

 

 —

 

 

 —

 

 

 —

 

 

(63)

Stock plan activity

 

117,338

 

 

 —

 

 

3,520

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

3,520

Treasury stock activity

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

(8,390)

 

 

(840)

 

 

 —

 

 

(840)

Balance, March 31, 2016

 

39,832,176

 

$

398

 

$

2,851,343

 

$

(336,450)

 

$

(17,760)

 

(8,390)

 

$

(840)

 

$

3,772

 

$

2,500,463

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

6


 

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

(In thousands)

    

2016

    

2015

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net income (loss)

 

$

143,765

 

$

(105,959)

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

 

 

 

 

 

 

Depreciation

 

 

19,496

 

 

17,087

Amortization

 

 

3,476

 

 

4,423

Amortization of deferred financing costs

 

 

1,685

 

 

1,569

Amortization of intangibles other than in-place leases

 

 

(186)

 

 

421

Straight-line rent amortization

 

 

(2,792)

 

 

(1,886)

Deferred income taxes

 

 

60,571

 

 

2,127

Restricted stock and stock option amortization

 

 

2,722

 

 

1,696

Gain on disposition of 80 South Street Assemblage

 

 

(140,479)

 

 

 —

Warrant liability (gain) loss

 

 

(29,820)

 

 

108,810

Equity in earnings from Real Estate and Other Affiliates, net of distributions

 

 

944

 

 

1,264

Provision for doubtful accounts

 

 

3,041

 

 

809

Master Planned Community land acquisitions

 

 

(69)

 

 

(1,101)

Master Planned Community development expenditures

 

 

(34,468)

 

 

(37,343)

Master Planned Community cost of sales

 

 

15,450

 

 

21,782

Condominium development expenditures

 

 

(64,363)

 

 

(34,439)

Condominium rights and unit cost of sales

 

 

74,815

 

 

22,409

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

 

 

(122,094)

 

 

(34,857)

Net changes:

 

 

 

 

 

 

Accounts and notes receivable

 

 

4,564

 

 

(2,880)

Prepaid expenses and other assets

 

 

3,139

 

 

(1,312)

Condominium deposits received

 

 

17,381

 

 

9,572

Deferred expenses

 

 

(578)

 

 

1,572

Accounts payable and accrued expenses

 

 

8,745

 

 

(7,735)

Condominium deposits held in escrow

 

 

(17,381)

 

 

(9,572)

Condominium deposits released from escrow

 

 

10,607

 

 

21,606

Other, net

 

 

(532)

 

 

35

Cash used in operating activities

 

 

(42,361)

 

 

(21,902)

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Property and equipment expenditures

 

 

(5,855)

 

 

(2,221)

Operating property improvements

 

 

(2,670)

 

 

(1,857)

Property developments and redevelopments

 

 

(110,918)

 

 

(218,550)

Proceeds from disposition of 80 South Street Assemblage, net

 

 

378,257

 

 

 —

Distributions from Real Estate and Other Affiliates

 

 

7,070

 

 

8,933

Note issued to Real Estate Affiliate

 

 

(25,000)

 

 

 —

Investments in Real Estate and Other Affiliates, net

 

 

(6,498)

 

 

(436)

Change in restricted cash

 

 

4,785

 

 

1,707

Cash provided by (used in) investing activities

 

 

239,171

 

 

(212,424)

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

Proceeds from mortgages, notes and loans payable

 

 

98,616

 

 

137,566

Principal payments on mortgages, notes and loans payable

 

 

(1,981)

 

 

(4,923)

Deferred financing costs

 

 

(1,072)

 

 

(396)

Taxes paid on vested restricted stock

 

 

(840)

 

 

 —

Cash provided by financing activities

 

 

94,723

 

 

132,247

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

291,533

 

 

(102,079)

Cash and cash equivalents at beginning of period

 

 

445,301

 

 

560,451

Cash and cash equivalents at end of period

 

$

736,834

 

$

458,372

 

 

 

 

7


 

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

(In thousands)

    

2016

    

2015

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

Interest paid

 

$

15,236

 

$

10,471

Interest capitalized

 

 

13,959

 

 

11,264

Income taxes paid

 

 

181

 

 

210

 

 

 

 

 

 

 

Non-Cash Transactions:

 

 

 

 

 

 

Special Improvement District bond transfers associated with land sales

 

 

32

 

 

2,114

Property developments and redevelopments

 

 

 —

 

 

(3,534)

Accrued interest on construction loan borrowing

 

 

2,429

 

 

905

Capitalized stock compensation

 

 

798

 

 

 —

MPC Land contributed to Real Estate Affiliates

 

 

 —

 

 

15,231

Special Improvement District bond transfer to The Summit

 

 

 —

 

 

(1,518)

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

8


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

 

NOTE 1BASIS OF PRESENTATION AND ORGANIZATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), with intercompany transactions eliminated between consolidated subsidiaries for interim financial statements and 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”). Such condensed consolidated financial statements do not include all of the information and disclosures required by GAAP for complete financial statements. In addition, readers of this Quarterly Report on Form 10-Q (“Quarterly Report”) should refer to The Howard Hughes Corporation’s (“HHC” or the “Company”) audited Consolidated Financial Statements which are included in the Company’s Annual Report on Form 10-K (the “Annual Report”) for the fiscal year ended December 31, 2015. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. Certain amounts in 2015 have been reclassified to conform to 2016 presentation. The results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ended December 31, 2016.

 

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.

 

NOTE 2RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU 2016-02, ‘‘Leases.’’ ASU 2016-02, codified in Accounting Standards Codification (“ASC”) 842, amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective beginning in the first quarter of 2019. Early adoption of ASU 2016-02 as of its issuance is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the impact of adopting ASU 2016-02 on our consolidated financial statements. 

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810) - Amendments to the Consolidation Analysis.” The standard modifies whether: (1) fees paid to a decision maker or service provider represent a variable interest; (2) a limited partnership or similar entity has the characteristics of a variable interest entity (“VIE”) per consolidation guidance in ASC 810-10-65; and (3) a reporting entity is the primary beneficiary of a VIE. The effective date of the standard is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 for public companies. We adopted the standard as of January 1, 2016, and there was no impact on our consolidated financial statements.

In May 2014, the FASB and International Accounting Standards Board (“IASB”) issued ASU 2014-09 “Revenues from Contracts with Customers (Topic 606).” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The effective date of this standard will be for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted after December 15, 2016. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance in the ASU. We are currently evaluating the new guidance to determine the impact on our consolidated financial statements. 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements — Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This ASU requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards as specified in the guidance. This ASU becomes effective for the annual and interim periods ending after December 15, 2016 and for annual and interim periods thereafter. We do not expect the adoption of this ASU to have an impact on our consolidated financial statements.

 

NOTE 3SPONSOR AND MANAGEMENT WARRANTS

On November 9, 2010, we issued warrants to purchase shares of our common stock to certain of our sponsors (the “Sponsor Warrants”). The exercise price for the warrants of $50.00 per share and the number of shares of common stock underlying each warrant are subject to adjustment for future stock dividends, splits or reverse splits of our common stock or certain other events. The 1,916,667 of Sponsor Warrants outstanding are exercisable at any time and expire on November 9, 2017.

 

In November 2010 and February 2011, we entered into certain agreements (the “Management Warrants”) with David R. Weinreb, our Chief Executive Officer, Grant Herlitz, our President, and Andrew C. Richardson, our Chief Financial Officer, in each case prior to his appointment to such position to purchase shares of our common stock. The Management Warrants represent 2,862,687 underlying shares, which may be adjusted pursuant to a net settlement option, were issued pursuant to such agreements at fair value in exchange for a combined total of approximately $19.0 million in cash from such executives at the commencement of their respective employment. Mr. Weinreb and Mr. Herlitz’s warrants have exercise prices of $42.23 per share and Mr. Richardson’s warrants have an exercise price of $54.50 per share. Generally, the Management Warrants become exercisable in November 2016 and expire in February 2018.

 

As of March 31, 2016, the estimated $109.0 million fair value for the Sponsor Warrants representing warrants to purchase 1,916,667 shares and the estimated $168.9 million fair value for the Management Warrants representing warrants to purchase 2,862,687 shares have been recorded as liabilities because the holders of these warrants could require us to settle such warrants in cash upon a change of control. The estimated fair values for the outstanding Sponsor Warrants and Management Warrants were $123.1 million and $184.7 million, respectively, as of December 31, 2015. The fair values were estimated using an option pricing model and Level 3 inputs due to the unavailability of comparable market data, as further discussed in Note 7 – Fair Value of Financial Instruments. Decreases and increases in the fair value of the Sponsor Warrants and the Management Warrants are recognized as either warrant liability gains or losses, respectively, in the condensed consolidated statements of operations.

 

NOTE 4EARNINGS PER SHARE

 

Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted‑average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of all potentially dilutive common shares. The dilutive effect of options and nonvested stock issued under stock‑based compensation plans is computed using the “treasury stock” method. The dilutive effect of the Sponsor Warrants and Management Warrants is computed using the if‑converted method. Gains associated with the changes in the fair value of the Sponsor Warrants and Management Warrants are excluded from the numerator in computing diluted earnings per share because inclusion of such gains in the computation would be anti‑dilutive.

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

Information related to our EPS calculations is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

(In thousands, except per share amounts)

    

2016

    

2015

 

Basic EPS:

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

Net income (loss)

 

$

143,765

 

$

(105,959)

 

Net income attributable to noncontrolling interests

 

 

 —

 

 

 —

 

Net income (loss) attributable to common stockholders

 

$

143,765

 

$

(105,959)

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

 

39,473

 

 

39,465

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

 

$

143,765

 

$

(105,959)

 

Less: Warrant liability gain

 

 

(29,820)

 

 

 —

 

Adjusted net income (loss) attributable to common stockholders

 

$

113,945

 

$

(105,959)

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

 

39,473

 

 

39,465

 

Restricted stock and stock options

 

 

357

 

 

 —

 

Warrants

 

 

2,570

 

 

 —

 

Weighted average diluted common shares outstanding

 

 

42,400

 

 

39,465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share:

 

$

3.64

 

$

(2.68)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per share:

 

$

2.69

 

$

(2.68)

 

The diluted EPS computation for the three months ended March 31, 2016 excludes 392,000 stock options and 37,440 shares of restricted stock because their inclusion would have been anti-dilutive.

The diluted EPS computation for the three months ended March 31, 2015 excludes 1,027,740 stock options, 241,931 shares of restricted stock, 1,916,667 shares of common stock underlying the Sponsor Warrants and 2,862,687 shares of common stock underlying the Management Warrants because their inclusion would have been anti-dilutive. 

 

NOTE 5RECENT TRANSACTIONS

 

On March 16, 2016, we sold the 80 South Street Assemblage (“80 South Street”) for net cash proceeds of $378.3 million, resulting in a pre-tax gain of $140.5 million. 80 South Street was comprised of a 42,694 square foot lot with certain air rights, providing total residential and commercial development rights of 817,784 square feet that had been acquired over the course of 2014 and 2015.

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

NOTE 6IMPAIRMENT

 

We review our real estate assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  GAAP related to the impairment or disposal of long‑lived assets requires that if impairment indicators exist and expected undiscounted cash flows generated by the asset are less than its carrying amount, an impairment provision should be recorded to write down the carrying amount of the asset to its fair value. The impairment analysis does not consider the timing of future cash flows and whether the asset is expected to earn an above or below market rate of return.

 

Each investment in Real Estate and Other Affiliates is evaluated periodically for recoverability and valuation declines that are other-than-temporary. If the decrease in value of our investment in a Real Estate and Other Affiliate is deemed to be other-than-temporary, our investment in such Real Estate and Other Affiliate is reduced to its estimated fair value.

 

No impairment charges were recorded during the three months ended March 31, 2016 or March 31, 2015. We continually evaluate our strategic alternatives with respect to each of our properties and may revise our strategy from time to time, including our intent to hold the asset on a long-term basis or the timing of potential asset dispositions. For example, we may decide to sell property that is held for use, and the sale price may be less than the carrying amount. As a result, these changes in strategy could result in impairment charges in future periods.

 

NOTE 7FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC 820, Fair Value Measurement, emphasizes that fair value is a market-based measurement that should be determined on the assumptions market participants would use in pricing an asset or liability. The standard establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring assets or liabilities at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the asset or liability. Assets or liabilities with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree or judgment used in measuring fair value.

The following table presents the fair value measurement hierarchy levels required under ASC 820 for each of our assets and liabilities that are measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

December 31, 2015

 

 

Fair Value Measurements Using

 

Fair Value Measurements Using

(In thousands)

    

Total

    

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

    

Significant
Other
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

    

Total

    

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

    

Significant
Other
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

18

 

$

18

 

$

 —

 

$

 —

 

$

18

 

$

18

 

$

 —

 

$

 —

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

 

277,940

 

 

 —

 

 

 —

 

 

277,940

 

 

307,760

 

 

 —

 

 

 —

 

 

307,760

Interest Rate Swaps & Caps

 

 

3,099

 

 

 —

 

 

3,099

 

 

 —

 

 

4,217

 

 

 —

 

 

4,217

 

 

 —

Cash equivalents consist of registered money market mutual funds which invest in United States treasury securities that are valued at the net asset value of the underlying shares in the funds as of the close of business at the end of each period.

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates derived from observable market interest rate curves. The valuation of warrants is based on an option pricing valuation model, utilizing inputs which are classified as Level 3 due to the unavailability of comparable market data. The following table presents a roll forward of the valuation of our Sponsor and Management Warrants:

 

 

 

 

 

 

 

(In thousands)

    

2016

    

2015

Balance as of January 1

 

$

307,760

 

$

366,080

Warrant liability (gain)/loss (a)

 

 

(29,820)

 

 

108,810

Balance as of March 31 

 

$

277,940

 

$

474,890

 


(a)

All (gains) and losses during 2016 and 2015 were unrealized. Changes in the fair value of the Sponsor and Management Warrants are recognized in net income as a warrant liability gain or loss.

 

The inputs to the valuation model include the fair value of stock related to the warrants, exercise price and term of the warrants, expected volatility, risk-free interest rate and dividend yield and, with respect to the Management Warrants, a discount for lack of marketability. Generally, an increase in expected volatility would increase the fair value of the liability, while a decrease in expected volatility would decrease the fair value of the liability, but the impact of the volatility on fair value diminishes as the market value of the stock increases above the strike price. As the period of restriction lapses, the marketability discount reduces to zero and increases the fair value of the warrants.

 

The significant unobservable inputs used in the fair value measurement of our warrants as of March 31, 2016 and December 31, 2015 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Unobservable Inputs

 

 

    

    

Expected
Volatility (a)

    

Marketability
Discount (b)

 

March 31, 2016

 

 

33.2%

 

8.0% - 10.0%

 

December 31, 2015

 

 

27.4%

 

10.0% - 12.0%

 


(a)

Based on our implied equity volatility.

(b)

Represents the discount rate for lack of marketability of the Management Warrants.

 

The estimated fair values of our financial instruments that are not measured at fair value on a recurring basis are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

December 31, 2015

 

(In thousands)

    

Fair Value
Hierarchy

    

Carrying
Amount

    

Estimated
Fair Value

    

Carrying
Amount

    

Estimated
Fair Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

Level 1

 

$

736,816

 

$

736,816

 

$

445,283

 

$

445,283

 

Notes receivable, net (a)

 

Level 3

 

 

25,076

 

 

25,076

 

 

1,664

 

 

1,664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate debt

 

Level 2

 

$

1,113,866

 

$

1,110,712

 

$

1,141,381

 

$

1,137,166

 

Variable-rate debt

 

Level 2

 

 

1,441,551

 

 

1,441,551

 

 

1,314,973

 

 

1,314,973

 


(a)

Notes receivable is shown net of an allowance of $0.7 million as of March 31, 2016 and $0.2 million as of December 31, 2015.

 

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

Notes receivable are carried at net realizable value which approximates fair value. The estimated fair values are based on certain factors, such as current interest rates, terms of the note and credit worthiness of the borrower.

 

The fair value of fixed-rate debt in the table above, not including our Senior Notes (please refer to Note 9 – Mortgages, Notes and Loans Payable), was estimated based on a discounted future cash payment model, which includes risk premiums and a risk free rate derived from the current London Interbank Offered Rate (“LIBOR”) or U.S. Treasury obligation interest rates. The discount rates reflect our judgment as to what the approximate current lending rates for 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 fair values of our Senior Notes, included in fixed rate debt in the table above, are based upon the last trade price closest to the end of the period presented.

 

The carrying amounts for our variable-rate debt approximate fair value given that the interest rates are variable and adjust with current market rates for instruments with similar risks and maturities.

 

The carrying amounts of cash and cash equivalents and accounts receivable approximate fair value because of the short‑term maturity of these instruments.

 

NOTE 8REAL ESTATE AND OTHER AFFILIATES

 

In the ordinary course of business, we enter into partnerships or joint ventures primarily for the development and operations of real estate assets that are referred to as “Real Estate Affiliates”. These partnerships or joint ventures are accounted for in accordance with FASB ASC 810 Consolidation.

 

In accordance with ASC 810, we assess our joint ventures at inception to determine if any meet the qualifications of a VIE. We consider a partnership or joint venture a VIE if: (a) the total equity investment is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) characteristics of a controlling financial interest are missing (either the ability to make decisions through voting or other rights, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity); or (c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity and/or their rights to receive the expected residual returns of the entity, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights. Upon the occurrence of certain events outlined in ASC 810, we reassess our initial determination of whether the partnership or joint venture is a VIE. 

 

We perform a qualitative assessment of each VIE to determine if we are the primary beneficiary, as required by ASC 810. A company has a controlling financial interest and must consolidate the VIE if it has both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s performance, and (2) “benefits,” defined as the obligation to absorb the losses of the VIE that potentially could be significant to the VIE or the right to receive benefits from the VIE that potentially could be significant to the VIE. The variable interest model requires a reporting entity to reevaluate whether an entity is a VIE upon the occurrence of certain significant events as listed in ASC 810-10-35-4, including any event that changes the design of the entity and calls into question the entity’s sufficiency of equity at risk or characteristics of a controlling financial interest (i.e. amendments to legal governing documents, returns or additions of equity, curtailments or modifications to activities in a way that impacts the equity at risk, etc.).

 

We account for investments in joint ventures which are not VIEs where we own a non-controlling interest and investments in joint ventures deemed to be VIEs for which we are not considered to be the primary beneficiary but have significant influence using the equity method. We use the cost method to account for investments where we do not have significant influence over the joint venture’s operations and financial policies. Generally, the operating agreements with respect to

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THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

our Real Estate Affiliates provide that assets, liabilities and funding obligations are shared in accordance with our ownership percentages.

 

Our investment in real estate and other affiliates that are reported on the equity and cost methods are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Economic/Legal Ownership

 

Carrying Value

 

Share of Earnings/Dividends

 

 

March 31, 

 

December 31, 

 

March 31, 

 

December 31, 

 

Three Months Ended March 31, 

($ in Thousands)

   

2016

   

2015

   

2016

   

2015

   

2016

   

2015

Equity Method Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Master Planned Communities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Summit (a)

 

 —

(a)  

 —

(a)  

$

12,052

 

$

12,052

 

$

 —

 

$

 —

Operating Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33 Peck Slip (a)

 

35.00

%

 —

%  

 

5,969

 

 

 —

 

 

19

 

 

 —

Millennium Woodlands Phase II, LLC (b) (c)

 

81.43

%

81.43

%  

 

 

 

 

 —

 

 

13

 

 

(661)

Stewart Title

 

50.00

%

50.00

%

 

3,567

 

 

3,715

 

 

102

 

 

194

Clark County Las Vegas Stadium, LLC (c)

 

50.00

%

50.00

%

 

10,891

 

 

11,050

 

 

(159)

 

 

(117)

The Metropolitan Downtown Columbia (d)

 

50.00

%

50.00

%

 

4,156

 

 

4,872

 

 

(717)

 

 

(319)

Woodlands Sarofim

 

20.00

%

20.00

%

 

2,631

 

 

2,588

 

 

53

 

 

40

Strategic Developments: