10-Q 1 hhc-20170630x10q.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 June 30, 2017

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

Large accelerated filer 

Accelerated filer 

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

Smaller reporting company 

 

Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

☐ Yes    ☒ No

 

The number of shares of common stock, $0.01 par value, outstanding as of July 27, 2017 was 43,187,266.

 

 

 


 

THE HOWARD HUGHES CORPORATION

 

INDEX

 

 

 

 

 

 

 

 

 

PAGE

NUMBER

 

 

 

 

PART I FINANCIAL INFORMATION 

 

 

 

 

 

 

Item 1:

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets
as of June 30, 2017 and December 31, 2016

3

 

 

 

 

 

 

Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 2017 and 2016

4

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 2017 and 2016

5

 

 

 

 

 

 

Condensed Consolidated Statements of Equity
for the six months ended June 30, 2017 and 2016

6

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2017 and 2016

7

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

 

 

Item 2:

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

34

 

 

 

 

 

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

65

 

 

 

 

 

Item 4:

Controls and Procedures

65

 

 

 

 

PART II  OTHER INFORMATION 

66

 

 

 

 

 

Item 1:

Legal Proceedings

66

 

 

 

 

 

Item 1A:

Risk Factors

66

 

 

 

 

 

Item 2:

Unregistered Sales of Equity Securities And Use Of Proceeds

66

 

 

 

 

 

Item 3:

Default Upon Senior Securities

67

 

 

 

 

 

Item 4:

Mine Safety Disclosures

67

 

 

 

 

 

Item 5:

Other Information

67

 

 

 

 

 

Item 6:

Exhibits

67

 

 

 

 

 

SIGNATURE

68

 

 

 

 

EXHIBIT INDEX

69

 

 

 

2


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31,

(In thousands, except share amounts)

 

2017

 

2016

Assets:

    

 

 

 

 

 

Investment in real estate:

 

 

 

 

 

 

Master Planned Community assets

 

$

1,676,263

 

$

1,669,561

Buildings and equipment

 

 

2,152,915

 

 

2,027,363

Land

 

 

314,383

 

 

320,936

Less: accumulated depreciation

 

 

(282,557)

 

 

(245,814)

Developments

 

 

1,048,849

 

 

961,980

Net property and equipment

 

 

4,909,853

 

 

4,734,026

Investment in Real Estate and Other Affiliates

 

 

81,797

 

 

76,376

Net investment in real estate

 

 

4,991,650

 

 

4,810,402

Cash and cash equivalents

 

 

660,086

 

 

665,510

Accounts receivable, net 

 

 

11,953

 

 

10,038

Municipal Utility District receivables, net

 

 

175,822

 

 

150,385

Deferred expenses, net

 

 

75,351

 

 

64,531

Prepaid expenses and other assets, net

 

 

752,587

 

 

666,516

Total assets

 

$

6,667,449

 

$

6,367,382

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Mortgages, notes and loans payable

 

$

3,002,846

 

$

2,690,747

Deferred tax liabilities

 

 

224,097

 

 

200,945

Warrant liabilities

 

 

 —

 

 

332,170

Accounts payable and accrued expenses

 

 

473,013

 

 

572,010

Total liabilities

 

 

3,699,956

 

 

3,795,872

 

 

 

 

 

 

 

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, 43,202,100 shares

issued and 43,185,718 outstanding as of June 30, 2017 and 39,802,064 shares

issued and 39,790,003 outstanding as of December 31, 2016

 

 

432

 

 

398

Additional paid-in capital

 

 

3,243,342

 

 

2,853,269

Accumulated deficit

 

 

(269,133)

 

 

(277,912)

Accumulated other comprehensive loss

 

 

(9,157)

 

 

(6,786)

Treasury stock, at cost, 16,382 shares as of June 30, 2017 and 12,061 shares as of December 31, 2016, respectively

 

 

(1,763)

 

 

(1,231)

Total stockholders' equity

 

 

2,963,721

 

 

2,567,738

Noncontrolling interests

 

 

3,772

 

 

3,772

Total equity

 

 

2,967,493

 

 

2,571,510

Total liabilities and equity

 

$

6,667,449

 

$

6,367,382

 

See Notes to Condensed Consolidated Financial Statements.

 

3


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

(In thousands, except per share amounts)

    

2017

    

2016

    

2017

    

2016

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Condominium rights and unit sales

 

$

148,211

 

$

125,112

 

$

228,356

 

$

247,206

Master Planned Community land sales

 

 

69,144

 

 

61,098

 

 

122,625

 

 

103,040

Minimum rents

 

 

45,073

 

 

42,036

 

 

91,399

 

 

83,345

Tenant recoveries

 

 

11,642

 

 

10,923

 

 

23,041

 

 

21,451

Hospitality revenues

 

 

19,703

 

 

19,129

 

 

39,414

 

 

32,038

Builder price participation

 

 

4,480

 

 

6,501

 

 

9,141

 

 

11,148

Other land revenues

 

 

4,463

 

 

4,122

 

 

15,045

 

 

8,170

Other rental and property revenues

 

 

5,923

 

 

4,593

 

 

11,380

 

 

7,797

Total revenues

 

 

308,639

 

 

273,514

 

 

540,401

 

 

514,195

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Condominium rights and unit cost of sales

 

 

106,195

 

 

79,726

 

 

166,678

 

 

154,541

Master Planned Community cost of sales

 

 

33,376

 

 

29,008

 

 

59,245

 

 

44,696

Master Planned Community operations

 

 

7,307

 

 

9,169

 

 

16,701

 

 

19,778

Other property operating costs

 

 

20,291

 

 

15,236

 

 

38,799

 

 

30,978

Rental property real estate taxes

 

 

6,550

 

 

7,329

 

 

14,087

 

 

14,077

Rental property maintenance costs

 

 

3,608

 

 

2,753

 

 

6,636

 

 

5,885

Hospitality operating costs

 

 

14,164

 

 

14,242

 

 

28,009

 

 

24,717

Provision for doubtful accounts

 

 

745

 

 

(352)

 

 

1,280

 

 

2,689

Demolition costs

 

 

63

 

 

490

 

 

128

 

 

962

Development-related marketing costs

 

 

4,716

 

 

6,339

 

 

8,921

 

 

10,870

General and administrative

 

 

22,944

 

 

20,053

 

 

41,061

 

 

40,377

Depreciation and amortization

 

 

34,770

 

 

24,952

 

 

60,294

 

 

47,924

Total expenses

 

 

254,729

 

 

208,945

 

 

441,839

 

 

397,494

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income before other items

 

 

53,910

 

 

64,569

 

 

98,562

 

 

116,701

 

 

 

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Gains on sales of properties

 

 

 —

 

 

 —

 

 

32,215

 

 

140,479

Other income, net

 

 

223

 

 

9,067

 

 

910

 

 

9,426

Total other

 

 

223

 

 

9,067

 

 

33,125

 

 

149,905

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

54,133

 

 

73,636

 

 

131,687

 

 

266,606

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

785

 

 

435

 

 

1,407

 

 

704

Interest expense

 

 

(14,448)

 

 

(16,533)

 

 

(32,306)

 

 

(32,526)

Loss on redemption of senior notes due 2021

 

 

 —

 

 

 —

 

 

(46,410)

 

 

 —

Warrant liability loss

 

 

(30,881)

 

 

(44,150)

 

 

(43,443)

 

 

(14,330)

Gain on acquisition of joint venture partner's interest

 

 

 —

 

 

 —

 

 

5,490

 

 

 —

Equity in earnings from Real Estate and Other Affiliates

 

 

9,834

 

 

20,275

 

 

18,354

 

 

22,207

Income before taxes

 

 

19,423

 

 

33,663

 

 

34,779

 

 

242,661

Provision for income taxes

 

 

16,303

 

 

26,693

 

 

26,000

 

 

91,926

Net income

 

 

3,120

 

 

6,970

 

 

8,779

 

 

150,735

Net income attributable to noncontrolling interests

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net income attributable to common stockholders

 

$

3,120

 

$

6,970

 

$

8,779

 

$

150,735

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income per share:

 

$

0.08

 

$

0.18

 

$

0.22

 

$

3.82

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted income per share:

 

$

0.07

 

$

0.16

 

$

0.20

 

$

3.53

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

(In thousands)

    

2017

    

2016

    

2017

    

2016

Net income

 

$

3,120

 

$

6,970

 

$

8,779

 

$

150,735

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps (a)

 

 

(2,683)

 

 

(5,565)

 

 

(2,250)

 

 

(15,373)

Capitalized swap interest expense (b)

 

 

(46)

 

 

(254)

 

 

(121)

 

 

(317)

Pension adjustment (c)  

 

 

 —

 

 

(573)

 

 

 —

 

 

(573)

Other comprehensive income (loss)

 

 

(2,729)

 

 

(6,392)

 

 

(2,371)

 

 

(16,263)

Comprehensive income

 

 

391

 

 

578

 

 

6,408

 

 

134,472

Comprehensive income attributable to common stockholders

 

$

391

 

$

578

 

$

6,408

 

$

134,472


(a)

Net of deferred tax benefit of $1.5 million and $3.0 million for the three months ended June 30, 2017 and 2016, respectively, $1.2 million and $8.3 million for the six months ended June 30, 2017 and 2016, respectively.

(b)

The deferred tax impact was immaterial for the three months ended June 30, 2017 and 2016, respectively. Amount is net of deferred tax benefit of $0.1 million for the six months ended June 30, 2017 and 2016, respectively.

(c)

Net of deferred tax benefit of $0.4 million for the three and six months ended June 30, 2016, respectively.

 

See Notes to Condensed Consolidated Financial Statements.

 

 

5


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Accumulated

 

Comprehensive

 

Treasury Stock

 

Noncontrolling

 

Total

(In thousands, except shares)

  

Shares

  

Amount

   

Capital

    

Deficit

 

(Loss)

    

Shares

    

Amount

    

Interests

    

Equity

Balance December 31, 2015

 

39,714,838

 

$

398

 

$

2,847,823

 

$

(480,215)

 

$

(7,889)

 

 —

 

$

 —

 

$

3,772

 

$

2,363,889

Net income

 

 —

 

 

 —

 

 

 —

 

 

150,735

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

150,735

Interest rate swaps, net of tax $8,245

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(15,373)

 

 —

 

 

 —

 

 

 —

 

 

(15,373)

Pension adjustment, net of tax of $350

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(573)

 

 —

 

 

 —

 

 

 —

 

 

(573)

Capitalized swap interest, net of tax $61

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(317)

 

 —

 

 

 —

 

 

 —

 

 

(317)

Stock plan activity

 

131,198

 

 

 —

 

 

6,057

 

 

 —

 

 

 —

 

(12,061)

 

 

(1,231)

 

 

 —

 

 

4,826

Balance, June 30, 2016

 

39,846,036

 

 

398

 

 

2,853,880

 

 

(329,480)

 

 

(24,152)

 

(12,061)

 

 

(1,231)

 

 

3,772

 

 

2,503,187

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2016

 

39,802,064

 

 

398

 

 

2,853,269

 

 

(277,912)

 

 

(6,786)

 

(12,061)

 

 

(1,231)

 

 

3,772

 

 

2,571,510

Net income

 

 —

 

 

 —

 

 

 —

 

 

8,779

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

8,779

Interest rate swaps, net of tax of $1,221

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,250)

 

 —

 

 

 —

 

 

 —

 

 

(2,250)

Capitalized swap interest, net of tax of $66

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(121)

 

 —

 

 

 —

 

 

 —

 

 

(121)

Grant of management warrants (a)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock plan activity

 

347,583

 

 

 3

 

 

14,491

 

 

 —

 

 

 —

 

(4,321)

 

 

(532)

 

 

 —

 

 

13,962

Exercise of warrants

 

3,052,453

 

 

31

 

 

375,582

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

375,613

Balance, June 30, 2017

 

43,202,100

 

$

432

 

$

3,243,342

 

$

(269,133)

 

$

(9,157)

 

(16,382)

 

$

(1,763)

 

$

3,772

 

$

2,967,493


(a)

Represents the $50.0 million warrant granted to purchase 1,965,409 shares upon receipt of the $50.0 million purchase price for the warrant grant executed on June 16, 2017 between the Company and our CEO, David R. Weinreb. Per the terms of the agreement, Mr. Weinreb has 75 days from June 16, 2017 to pay the purchase price of the new warrant. See Note 3 – Sponsor and Management Warrants for additional information. 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

6


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

(In thousands)

    

2017

    

2016

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net income

 

$

8,779

 

$

150,735

Adjustments to reconcile net income to cash used in operating activities:

 

 

 

 

 

 

Depreciation

 

 

51,779

 

 

41,126

Amortization

 

 

8,515

 

 

6,798

Amortization of deferred financing costs

 

 

2,940

 

 

3,747

Amortization of intangibles other than in-place leases

 

 

(791)

 

 

(710)

Straight-line rent amortization

 

 

(2,553)

 

 

(5,187)

Deferred income taxes

 

 

24,440

 

 

85,927

Restricted stock and stock option amortization

 

 

3,407

 

 

4,670

Gains on sales of properties

 

 

(32,215)

 

 

(140,479)

Gain on acquisition of joint venture partner's interest

 

 

(5,490)

 

 

 —

Warrant liability loss (gain)

 

 

43,443

 

 

14,330

Loss on redemption of senior notes due 2021

 

 

46,410

 

 

 —

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

 

 

(13,440)

 

 

(8,212)

Provision for doubtful accounts

 

 

1,280

 

 

2,689

Master Planned Community land acquisitions

 

 

(1,415)

 

 

(69)

Master Planned Community development expenditures

 

 

(90,973)

 

 

(70,678)

Master Planned Community cost of sales

 

 

53,240

 

 

41,310

Condominium development expenditures

 

 

(191,499)

 

 

(155,222)

Condominium rights and unit cost of sales

 

 

166,678

 

 

154,541

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

 

 

(228,356)

 

 

(247,206)

Net changes:

 

 

 

 

 

 

Accounts receivable

 

 

272

 

 

(3,230)

Prepaid expenses and other assets

 

 

(7,949)

 

 

2,616

Condominium deposits received

 

 

31,872

 

 

51,573

Deferred expenses

 

 

(9,672)

 

 

(1,659)

Accounts payable and accrued expenses

 

 

(40,526)

 

 

(24,798)

Condominium deposits held in escrow

 

 

(31,872)

 

 

(51,573)

Condominium deposits released from escrow

 

 

116,244

 

 

15,661

Other, net

 

 

(191)

 

 

(3,535)

Cash used in operating activities

 

 

(97,643)

 

 

(136,835)

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Property and equipment expenditures

 

 

(4,814)

 

 

(7,339)

Operating property improvements

 

 

(8,967)

 

 

(5,712)

Property developments and redevelopments

 

 

(195,189)

 

 

(214,276)

Acquisition of partner's interest in Las Vegas 51s

 

 

(15,404)

 

 

 —

Proceeds for reimbursement of development costs

 

 

11,165

 

 

2,915

Proceeds from sales of properties

 

 

36,000

 

 

378,257

Proceeds from insurance claims

 

 

 —

 

 

3,107

Distributions from Real Estate and Other Affiliates

 

 

 —

 

 

12,002

Note issued to Real Estate Affiliate

 

 

 —

 

 

(25,000)

Proceeds from repayment of note to Real Estate Affiliate

 

 

 —

 

 

25,000

Investments in Real Estate and Other Affiliates, net

 

 

(1,391)

 

 

(11,813)

Change in restricted cash

 

 

(3,919)

 

 

4,658

Cash (used in) provided by investing activities

 

 

(182,519)

 

 

161,799

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

Proceeds from mortgages, notes and loans payable

 

$

1,399,843

 

$

207,561

Principal payments on mortgages, notes and loans payable

 

 

(1,085,438)

 

 

(4,492)

Premium paid to redeem 2021 senior notes

 

 

(39,966)

 

 

 —

Special Improvement District bond funds released from (held in) escrow

 

 

1,602

 

 

 —

Deferred financing costs

 

 

(11,383)

 

 

(1,303)

Taxes paid on vested stock options and restricted stock

 

 

(9,029)

 

 

(1,231)

Stock options exercised

 

 

19,109

 

 

 —

Cash provided by financing activities

 

 

274,738

 

 

200,535

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(5,424)

 

 

225,499

Cash and cash equivalents at beginning of period

 

 

665,510

 

 

445,301

Cash and cash equivalents at end of period

 

$

660,086

 

$

670,800

 

 

7


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

2017

    

2016

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

Interest paid

 

$

60,566

 

$

57,335

Interest capitalized

 

 

35,291

 

 

28,681

Income taxes paid

 

 

1,873

 

 

3,067

 

 

 

 

 

 

 

Non-Cash Transactions:

 

 

 

 

 

 

Exercise of Sponsor and Management Warrants

 

 

375,613

 

 

 —

Special Improvement District bond transfers associated with land sales

 

 

6,005

 

 

3,386

Accrued interest on construction loan borrowing

 

 

2,522

 

 

3,005

Capitalized stock compensation

 

 

765

 

 

1,387

Acquisition of Las Vegas 51s

 

 

 

 

 

 

Building

 

 

87

 

 

 —

Developments

 

 

65

 

 

 —

Accounts receivable

 

 

633

 

 

 —

Other assets

 

 

33,313

 

 

 —

Other liabilities

 

 

(2,294)

 

 

 —

 

See Notes to Condensed Consolidated Financial Statements.

 

 

8


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

NOTE 1 BASIS OF PRESENTATION AND ORGANIZATION

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), with intercompany transactions between consolidated subsidiaries eliminated. In accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as issued by the Securities and Exchange Commission (the “SEC”), these Condensed Consolidated Financial Statements do not include all of the information and disclosures required by GAAP for complete financial statements. Readers of this Quarterly Report on Form 10-Q (“Quarterly Report”) should refer to The Howard Hughes Corporation’s (“HHC” or the “Company”) audited Consolidated Financial Statements, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “Annual Report”), filed on February 23, 2017 with the SEC. Certain amounts in 2016 have been reclassified to conform to 2017 presentation. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations, comprehensive income (loss), cash flows and equity for the interim periods have been included. The results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ended December 31, 2017.

 

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 2 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

The following is a summary of recently issued and other notable accounting pronouncements which relate to our business.

 

In May 2017, the Financial Accounting Standards Board’s (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting to provide clarity and reduce the diversity in practice and cost and complexity when applying the guidance in Topic 718, Compensation–Stock Compensation. Stakeholders observed that the definition of the term "modification" is broad and that its interpretation results in diversity in practice. The ASU states that when an entity concludes that a change is not substantive, then modification accounting does not apply. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2017. The new standard must be adopted prospectively to an award modified on or after the adoption date. Early adoption is permitted. Once adopted, HHC will apply this guidance to any modifications made to either the stock option or restricted stock award plans. We will adopt the ASU on January 1, 2018.

 

In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). The standard defines an “in-substance non-financial asset,” as a financial asset promised to a counterparty in a contract if substantially all the fair value of the assets is concentrated in nonfinancial assets. The ASU also provides guidance for accounting for partial sales of non-financial assets. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2017. The new standard must be adopted retrospectively with early adoption permitted. We are currently evaluating the potential impact of this ASU on our consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350). This standard is intended to simplify the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. 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

9


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

prospectively with early adoption permitted. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.

 

In January 2017, the FASB formally issued, and we early adopted ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, as permitted, on a prospective basis. The standard provides criteria to determine when an integrated set of assets and activities is not a business. The criteria requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. However, to be considered a business, the set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. Under the new guidance, the acquisition of a property with an in-place lease generally will no longer be accounted for as an acquisition of a business, but instead as an asset acquisition, meaning the transaction costs of such an acquisition will now be capitalized instead of expensed. Our adoption did not have a material impact on our accounting for acquisitions.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash FlowsRestricted Cash, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flow. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period, but any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The new standard must be adopted retrospectively. ASU 2016-18 will impact our presentation of operating, investing and financing activities related to restricted cash on our consolidated statements of cash flows.

 

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control. The standard requires reporting entities to evaluate whether they should consolidate a variable interest entity (“VIE”) in certain situations involving entities under common control. Specifically, the standard changes the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a reporting entity that is a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The new standard was effective January 1, 2017, and must be adopted retrospectively. We currently have no VIEs involving entities under common control, and accordingly, adoption of this ASU had no impact on our consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15,  Classification of Certain Cash Receipts and Cash Payments. The standard addresses how certain cash receipts and payments are presented and classified in the statement of cash flows, including debt extinguishment costs, distributions from equity method investees and contingent consideration payments made after a business combination. The effective date of this standard is for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. The new standard must be adopted retrospectively. ASU 2016-15 will impact our presentation of operating, investing and financing activities related to certain cash receipts and payments on our consolidated statements of cash flows.  

 

In June 2016, the FASB issued ASU 2016-13, Financial InstrumentsCredit Losses. The standard modifies the impairment model for most financial assets, including trade accounts receivables and loans, and will require the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. The effective date of the standard is for fiscal years, and for interim periods within those years, beginning after December 15, 2019 with early adoption permitted. We are currently evaluating the adoption of ASU 2016-13 on our consolidated financial statements but do not anticipate significant impact.

10


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

In March 2016, the FASB issued ASU 2016-09, CompensationStock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting, the standard amends several aspects of accounting for share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. We adopted the ASU as of January 1, 2017, and it did not have a material impact on our accounting for excess tax benefits and tax deficiencies as our stock compensation plans, which permit net-share settlement, had minimal vesting and exercise activity prior to January 1, 2017. The new guidance requires entities to recognize all income tax effects of awards in the income statement when the awards vest or are settled, in contrast to current guidance wherein such effects are recorded in additional paid-in capital (“APIC”). The amounts recorded in APIC prior to our adoption remain in APIC per the new standard. It also allows an employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. Our plans allow us, at the employee’s request, to withhold shares with a fair value up to the amount of tax owed using the maximum statutory tax rate for the employee’s applicable jurisdiction. We elected to continue to estimate forfeitures as allowed by an election under the new guidance. Our condensed consolidated statements of cash flows for the six months ended June 30, 2017 and 2016 present excess tax benefits as an operating activity and employee taxes paid as a financing activity as required by ASU 2016-09.

 

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02, codified in Accounting Standards Codification (“ASC”) 842. The standard amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The effective date of this standard is for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application. We are currently evaluating the impact of adopting ASU 2016-02 on our consolidated financial statements.  We anticipate a material increase to our assets and liabilities as we will be required to capitalize our ground leases, office leases and certain office equipment where we are the lessee. We will also be considering certain services that are considered non-lease components such as common area maintenance under the new guidance. Upon adoption of ASC 842, these services will be accounted for under ASU 2014-09, Revenues from Contracts with Customers (Topic 606), which is further discussed below.

 

In May 2014, the FASB and International Accounting Standards Board issued ASU 2014-09. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The ASU requires companies to identify performance obligations in the contract, estimate the amount of variable consideration to include in the transaction price and allocate the transaction price to each separate performance obligation. The effective date of this standard is for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. We have concluded that after adoption we will not be able to recognize revenue for condominium projects on a percentage of completion basis, and generally revenue will be recognized when the units close and the title has transferred to the buyer. Entities have the option of using either a full retrospective or a modified retrospective approach. We have elected to apply a modified retrospective approach of adoption. We are continuing to evaluate the new guidance to determine all impacts on our consolidated financial statements.

 

NOTE 3 SPONSOR AND MANAGEMENT WARRANTS

 

On November 9, 2010, we issued warrants to purchase 1,916,667 shares of our common stock (the “Sponsor Warrants”) to certain funds of Pershing Square Capital Management, L.P. (“Pershing Square”). The exercise price for the warrants of $50.00 per share and the number of shares of common stock underlying each warrant were subject to adjustment for future stock dividends, splits or reverse splits of our common stock or certain other events.

 

In November 2010 and February 2011, we entered into certain agreements (the “Management Warrants”) with David R.

11


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

Weinreb, our Chief Executive Officer, Grant Herlitz, our President, and Andrew C. Richardson, our former Chief Financial Officer, in each case prior to his appointment to such position, to purchase 2,367,985,  315,731 and 178,971 shares, respectively, of our common stock. The Management Warrants represent underlying shares, which may be adjusted pursuant to a net settlement option, and 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 became exercisable in November 2016, and Mr. Weinreb and Mr. Herlitz’s warrants had an exercise price of $42.23 per share and Mr. Richardson’s warrants became exercisable in February 2017 and had an exercise price of $54.50 per share.

 

Pershing Square exercised its Sponsor Warrants on June 30, 2017, resulting in a net issuance of 1,136,517 shares in accordance with the warrant provisions. Mr. Herlitz exercised his warrants in early January 2017, resulting in the net issuance of 198,184 shares in accordance with the warrant provisions. Mr. Herlitz also donated 6,850 shares to a charitable trust, which were net share settled for 4,400 shares in accordance with the warrant provisions. In February and March 2017, Mr. Richardson exercised 130,000 Management Warrants, resulting in the net issuance of 70,014 shares in accordance with the warrant provisions. In June 2017, Mr. Weinreb exercised all his 2,367,985 Management Warrants and Mr. Richardson exercised his remaining 48,971 Management Warrants, resulting in the net issuance of 1,614,803 and 28,535 shares, respectively, in accordance with the warrant provisions.

 

As of June 30, 2017, all Sponsor and the original Management Warrants have been exercised. The fair values for the Sponsor and Management Warrants as of December 31, 2016 were 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 $123.5 million and $208.7 million, respectively, as of December 31, 2016. The fair values were estimated using an option pricing model and Level 3 inputs due to the unavailability of comparable market data, as further discussed in Note 7 – Fair Value of Financial Instruments in our Condensed Consolidated Financial Statements. Decreases and increases in the fair value of the Sponsor and Management Warrants were recognized as warrant liability gains or losses in the Condensed Consolidated Statements of Operations.

 

On October 7, 2016, we entered into a management warrant agreement with our new Chief Financial Officer, David R. O’Reilly, prior to his appointment to the position. This warrant represents 50,125 underlying shares with an exercise price of $112.08 per share and was issued at fair value in exchange for $1.0 million in cash from Mr. O’Reilly. On June 16, 2017, we also entered into a new warrant agreement (“New CEO Warrant”) with Mr. Weinreb to acquire 1,965,409 shares for the purchase price of $50.0 million. The New CEO Warrant shall become exercisable on June 15, 2022, at an exercise price of $124.64 per share, subject to certain change in control, separation and termination provisions. The new warrants, which qualify as equity instruments, are included within additional paid-in capital in the Condensed Consolidated Balance Sheets at June 30, 2017 and December 31, 2016. At June 30, 2017, the New CEO Warrant is fully offset by a contribution receivable of $50.0 million from Mr. Weinreb. Mr. Weinreb has 75 days from June 16, 2017 per the terms of the warrant grant agreement to pay the purchase price of the New CEO Warrant.

 

NOTE 4 EARNINGS PER SHARE

 

Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted‑average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of all potentially dilutive common shares. The dilutive effect of options and 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 prior to their exercise. In previous periods, gains associated with the changes in the fair value of the Sponsor Warrants and Management Warrants, if applicable, are excluded from the numerator in computing diluted earnings per share because inclusion of such gains in the computation would be anti‑dilutive.

12


 

Table of Contents

THE HOWARD HUGHES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

UNAUDITED

 

 

Information related to our EPS calculations is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

(In thousands, except per share amounts)

    

2017

    

2016

    

2017

    

2016

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,120

 

$

6,970

 

$

8,779

 

$

150,735

Net income attributable to noncontrolling interests

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net income attributable to common stockholders

 

$

3,120

 

$

6,970

 

$

8,779

 

$

150,735

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

 

40,373