UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2022
or
Commission file number 001-34856
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification number) | ||||
(Address of principal executive offices, including zip code)
(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.
| ☒ | 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:
| Title of each class | Trading Symbol | Name of each exchange on which registered: | ||||||||||||
The number of shares of common stock, $0.01 par value, outstanding as of May 3, 2022, was 51,352,222 .
| TABLE OF CONTENTS | Page | |||||||
| Item 1. | Financial Statements | |||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
PART II | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
| FINANCIAL STATEMENTS | |||||
| PART I | ||
Item 1. Condensed Consolidated Financial Statements (Unaudited)
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| thousands except par values and share amounts | March 31, 2022 | December 31, 2021 | |||||||||
| ASSETS | |||||||||||
| Investment in real estate: | |||||||||||
| Master Planned Communities assets | $ | $ | |||||||||
| Buildings and equipment | |||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Land | |||||||||||
| Developments | |||||||||||
| Net property and equipment | |||||||||||
| Investment in real estate and other affiliates | |||||||||||
| Net investment in real estate | |||||||||||
| Net investment in lease receivable | |||||||||||
| Cash and cash equivalents | |||||||||||
| Restricted cash | |||||||||||
| Accounts receivable, net | |||||||||||
| Municipal Utility District receivables, net | |||||||||||
| Notes receivable, net | |||||||||||
| Deferred expenses, net | |||||||||||
| Operating lease right-of-use assets, net | |||||||||||
| Prepaid expenses and other assets, net | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES | |||||||||||
| Mortgages, notes and loans payable, net | $ | $ | |||||||||
| Operating lease obligations | |||||||||||
| Deferred tax liabilities | |||||||||||
| Accounts payable and accrued expenses | |||||||||||
| Total liabilities | |||||||||||
| Commitments and Contingencies (see Note 9) | |||||||||||
| Redeemable noncontrolling interest | |||||||||||
| EQUITY | |||||||||||
Preferred stock: $ | |||||||||||
Common stock: $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive income (loss) | ( | ( | |||||||||
Treasury stock, at cost, | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements.
HHC 2022 FORM 10-Q | 2
| FINANCIAL STATEMENTS | |||||
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, | |||||||||||
| thousands except per share amounts | 2022 | 2021 | |||||||||
| REVENUES | |||||||||||
| Condominium rights and unit sales | $ | $ | |||||||||
| Master Planned Communities land sales | |||||||||||
| Rental revenue | |||||||||||
| Other land, rental and property revenues | |||||||||||
| Builder price participation | |||||||||||
| Total revenues | |||||||||||
| EXPENSES | |||||||||||
| Condominium rights and unit cost of sales | |||||||||||
| Master Planned Communities cost of sales | |||||||||||
| Operating costs | |||||||||||
| Rental property real estate taxes | |||||||||||
| Provision for (recovery of) doubtful accounts | ( | ||||||||||
| General and administrative | |||||||||||
| Depreciation and amortization | |||||||||||
| Other | |||||||||||
| Total expenses | |||||||||||
| OTHER | |||||||||||
| Gain (loss) on sale or disposal of real estate and other assets, net | ( | ||||||||||
| Other income (loss), net | ( | ( | |||||||||
| Total other | ( | ( | |||||||||
| Operating income (loss) | ( | ||||||||||
| Interest income | |||||||||||
| Interest expense | ( | ( | |||||||||
| Gain (loss) on extinguishment of debt | ( | ( | |||||||||
| Equity in earnings (losses) from real estate and other affiliates | |||||||||||
| Income (loss) before income taxes | ( | ||||||||||
| Income tax expense (benefit) | ( | ||||||||||
| Net income (loss) | ( | ||||||||||
| Net (income) loss attributable to noncontrolling interests | ( | ||||||||||
| Net income (loss) attributable to common stockholders | $ | $ | ( | ||||||||
| Basic income (loss) per share | $ | $ | ( | ||||||||
| Diluted income (loss) per share | $ | $ | ( | ||||||||
See Notes to Condensed Consolidated Financial Statements.
HHC 2022 FORM 10-Q | 3
| FINANCIAL STATEMENTS | |||||
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| thousands | 2022 | 2021 | |||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Other comprehensive income (loss): | |||||||||||
| Interest rate swaps (a) | |||||||||||
| Reclassification of the Company's share of previously deferred derivative gains to net income (b) | ( | — | |||||||||
| Share of investee’s other comprehensive income (c) | — | ||||||||||
| Other comprehensive income (loss) | |||||||||||
| Comprehensive income (loss) | ( | ||||||||||
| Comprehensive (income) loss attributable to noncontrolling interests | ( | ||||||||||
| Comprehensive income (loss) attributable to common stockholders | $ | $ | ( | ||||||||
(a)Amounts are shown net of tax expense of $4.5 million for the three months ended March 31, 2022, and $1.8 million for the three months ended March 31, 2021.
(b)In March 2022, the Company completed the sale of its ownership interest in 110 North Wacker and released a net of $6.7 million from Accumulated other comprehensive income (loss), representing the Company’s $8.6 million share of previously deferred gains associated with the Venture’s derivative instruments net of tax expense of $1.9 million. See Note 2 - Investment in Real Estate and Other Affiliates for additional information.
(c)Amount is shown net of tax expense of $0.3 million for the three months ended March 31, 2021.
See Notes to Condensed Consolidated Financial Statements.
HHC 2022 FORM 10-Q | 4
| FINANCIAL STATEMENTS | |||||
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
| Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Additional | Other | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Comprehensive | Treasury Stock | Stockholders' | Noncontrolling | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| thousands except shares | Shares | Amount | Capital | Deficit | Income (Loss) | Shares | Amount | Equity | Interests (a) | Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2021 | $ | $ | $ | ( | $ | ( | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps, net of tax expense (benefit) of $ | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deconsolidation of Associations of Unit Owners | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Reclassification of the Company’s share of previously deferred derivative gains, net of tax expense of $ | — | — | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common shares | — | — | — | — | — | ( | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock plan activity | — | — | ( | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2022 | $ | $ | $ | ( | $ | ( | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2020 | $ | $ | $ | ( | $ | ( | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) excluding income (loss) of $( | — | — | — | ( | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps, net of tax expense (benefit) of $ | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Share of investee's other comprehensive income, net of tax expense (benefit) of $ | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares | — | — | ( | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock plan activity | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2021 | $ | $ | $ | ( | $ | ( | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
(a)Excludes redeemable noncontrolling interest. See Note 2 - Investment in Real Estate and Other Affiliates.
(b)In March 2022, the Company completed the sale of its ownership interest in 110 North Wacker and released a net of $6.7 million from Accumulated other comprehensive income (loss), representing the Company’s $8.6 million share of previously deferred gains associated with the Venture’s derivative instruments net of tax expense of $1.9 million. See Note 2 - Investment in Real Estate and Other Affiliates for additional information.
See Notes to Condensed Consolidated Financial Statements.
HHC 2022 FORM 10-Q | 5
| FINANCIAL STATEMENTS | |||||
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, | |||||||||||
| thousands | 2022 | 2021 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization | |||||||||||
| Amortization of deferred financing costs | |||||||||||
| Amortization of intangibles other than in-place leases | |||||||||||
| Straight-line rent amortization | ( | ( | |||||||||
| Deferred income taxes | ( | ( | |||||||||
| Restricted stock and stock option amortization | |||||||||||
| Net gain on sale of equity method investments | ( | ||||||||||
| (Gain) loss on extinguishment of debt | |||||||||||
| Impairment charges | |||||||||||
| Equity in (earnings) losses from real estate and other affiliates, net of distributions and impairment charges | ( | ( | |||||||||
| Provision for doubtful accounts | |||||||||||
| Master Planned Community development expenditures | ( | ( | |||||||||
| Master Planned Community cost of sales | |||||||||||
| Condominium development expenditures | ( | ( | |||||||||
| Condominium rights and units cost of sales | |||||||||||
| Net Changes: | |||||||||||
| Accounts and notes receivable | ( | ||||||||||
| Prepaid expenses and other assets | ( | ||||||||||
| Condominium deposits received | |||||||||||
| Deferred expenses | ( | ( | |||||||||
| Accounts payable and accrued expenses | ( | ( | |||||||||
| Cash provided by (used in) operating activities | ( | ( | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Property and equipment expenditures | ( | ( | |||||||||
| Operating property improvements | ( | ( | |||||||||
| Property development and redevelopment | ( | ( | |||||||||
| Distributions from real estate and other affiliates | |||||||||||
| Investments in real estate and other affiliates, net | ( | ( | |||||||||
| Cash provided by (used in) investing activities | ( | ||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Proceeds from mortgages, notes and loans payable | |||||||||||
| Principal payments on mortgages, notes and loans payable | ( | ( | |||||||||
| Repurchases of common shares | ( | ||||||||||
| Debt extinguishment costs | ( | ||||||||||
| Special Improvement District bond funds released from (held in) escrow | |||||||||||
| Deferred financing costs and bond issuance costs, net | ( | ( | |||||||||
| Taxes paid on stock options exercised and restricted stock vested | ( | ( | |||||||||
| Stock options exercised | |||||||||||
| Cash provided by (used in) financing activities | ( | ||||||||||
| Net change in cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
HHC 2022 FORM 10-Q | 6
| FINANCIAL STATEMENTS | |||||
THE HOWARD HUGHES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, | |||||||||||
| thousands | 2022 | 2021 | |||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||||||
| Interest paid | $ | $ | |||||||||
| Interest capitalized | |||||||||||
| Income taxes paid (refunded), net | |||||||||||
| NON-CASH TRANSACTIONS | |||||||||||
| Reclassification of Redeemable noncontrolling interest to Accounts payable and accrued expenses upon sale of 110 North Wacker | |||||||||||
| Accrued property improvements, developments and redevelopments | |||||||||||
| Accrued repurchase of common shares | |||||||||||
| Capitalized stock compensation | |||||||||||
See Notes to Condensed Consolidated Financial Statements.
HHC 2022 FORM 10-Q | 7
FINANCIAL STATEMENTS FOOTNOTES | |||||
1. Summary of Significant 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), 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 (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, 2021, filed with the SEC on February 28, 2022 (the 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 months ended March 31, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, and future fiscal years.
Certain amounts in the 2021 Condensed Consolidated Income Statement have been reclassified to conform to the current presentation. Specifically, the Company reclassified Demolition costs and Development-related marketing costs to Other.
Management has evaluated for disclosure or recognition all material events occurring subsequent to the date of the Condensed Consolidated Financial Statements up to the date and time this Quarterly Report was filed.
COVID-19 Pandemic The outbreak of COVID-19 resulted in a negative impact on the Company’s financial performance in 2020, particularly in the Operating Asset and Seaport segments. However, the Company experienced significant performance improvement during the second half of 2020 that continued through 2021, with full-year 2021 segment results equaling or exceeding pre-pandemic levels for the majority of the Company’s segments.
The following table represents the components of Accounts Receivable, net of amounts considered uncollectible, in the accompanying Condensed Consolidated Balance Sheets:
| thousands | March 31, 2022 | December 31, 2021 | |||||||||
| Straight-line rent receivables | $ | $ | |||||||||
| Tenant receivables | |||||||||||
| Other receivables | |||||||||||
| Accounts receivable, net (a) | $ | $ | |||||||||
(a)As of March 31, 2022, the total reserve balance for amounts considered uncollectible was $15.9 million, comprised of $10.1 million related to ASC 842 and $5.8 million related to ASC 450. As of December 31, 2021, the total reserve balance was $16.5 million, comprised of $11.5 million related to ASC 842 and $5.0 million related to ASC 450.
HHC 2022 FORM 10-Q | 8
FINANCIAL STATEMENTS FOOTNOTES | |||||
The following table summarizes the impacts of the ASC 842 and ASC 450 reserves in the accompanying Condensed Consolidated Statements of Operations:
Three Months Ended March 31, | ||||||||||||||
| thousands | Income Statement Location | 2022 | 2021 | |||||||||||
| ASC 842 reserve | Rental revenue | $ | ( | $ | ||||||||||
| ASC 450 reserve | Provision for (recovery of) doubtful accounts | ( | ||||||||||||
| Total impact | $ | $ | ||||||||||||
Financial Instruments - Credit Losses The 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, 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 amortized cost basis of financing receivables, consisting primarily of MUD receivables, totaled $503.1 million as of March 31, 2022, including accrued interest of $24.5 million. There has been no material activity in the allowance for credit losses for financing receivables for the three months ended March 31, 2022.
Financing receivables are considered to be past due once they are 30 days contractually past due under the terms of the agreement. The Company does 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 current period for financing receivables.
HHC 2022 FORM 10-Q | 9
FINANCIAL STATEMENTS FOOTNOTES | |||||
2. Investment in Real Estate and Other Affiliates | ||
As of March 31, 2022, the Company does not consolidate the investments below as it does not have the power to direct the activities that most significantly impact the economic performance of the 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 March 31, 2022, these ventures had mortgage financing totaling $204.0 million, with the Company’s proportionate share of this debt totaling $100.5 million. All of this indebtedness is without recourse to the Company.
Investments in real estate and other affiliates are reported as follows:
| Economic/Legal Ownership | Carrying Value | Share of Earnings/Dividends | |||||||||||||||||||||||||||
| March 31, | December 31, | March 31, | December 31, | Three Months Ended March 31, | |||||||||||||||||||||||||
| thousands except percentages | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Equity Method Investments | |||||||||||||||||||||||||||||
| Operating Assets: | |||||||||||||||||||||||||||||
| 110 North Wacker (a) | % | see below | $ | $ | $ | $ | ( | ||||||||||||||||||||||
| The Metropolitan Downtown Columbia (b) | % | % | ( | ||||||||||||||||||||||||||
| Stewart Title of Montgomery County, TX | % | % | |||||||||||||||||||||||||||
| Woodlands Sarofim #1 | % | % | |||||||||||||||||||||||||||
| m.flats/TEN.M (c) | % | % | |||||||||||||||||||||||||||
| Master Planned Communities: | |||||||||||||||||||||||||||||
| The Summit (d) | see below | see below | |||||||||||||||||||||||||||
| Trillium (d) | % | % | ( | ||||||||||||||||||||||||||
| Seaport | |||||||||||||||||||||||||||||
| The Lawn Club (d) | see below | see below | |||||||||||||||||||||||||||
Ssäm Bar (Momofuku) (d) | see below | see below | ( | ( | |||||||||||||||||||||||||
The Tin Building by Jean-Georges (d) | see below | see below | ( | ||||||||||||||||||||||||||
| Jean-Georges Restaurants (e) | % | % | |||||||||||||||||||||||||||
| Strategic Developments: | |||||||||||||||||||||||||||||
| HHMK Development | % | % | |||||||||||||||||||||||||||
| KR Holdings | % | % | ( | ||||||||||||||||||||||||||
| West End Alexandria | see below | see below | |||||||||||||||||||||||||||
| Other equity investments (f) | |||||||||||||||||||||||||||||
| Investment in real estate and other affiliates | $ | $ | $ | $ | |||||||||||||||||||||||||
(a)During the first quarter of 2022, the Company completed the sale of its ownership interest in 110 North Wacker. Refer to discussion below for additional information.
(b)The Metropolitan Downtown Columbia was in a deficit position of $9.4 million at March 31, 2022, and $11.3 million at December 31, 2021, due to distributions from operating cash flows in excess of basis. These deficit balances are presented in Accounts payable and accrued expenses at March 31, 2022, and December 31, 2021.
(c)M.flats/TEN.M was in a deficit position of $4.0 million at March 31, 2022, and $6.0 million at December 31, 2021, due to distributions from operating cash flows in excess of basis. These deficit balances are presented in Accounts payable and accrued expenses at March 31, 2022, and December 31, 2021.
(d)Refer to the discussion below for details on the ownership structure.
(e)On March 1, 2022, the Company purchased a 25 % interest in Jean-Georges Restaurants. Refer to discussion below for additional information.
Significant activity for Investment in real estate and other affiliates and the related accounting considerations are described below.
110 North Wacker The Company formed a partnership with a local developer (the 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 (collectively, the local developer and USAA are the Partners) to construct and operate the building at 110 North Wacker (the Venture).
HHC 2022 FORM 10-Q | 10
FINANCIAL STATEMENTS FOOTNOTES | |||||
The Company concluded that the Venture was within the scope of the variable interest model (VIE) model, and that it was the primary beneficiary of the Venture during the development phase of the project, and thus consolidated the venture; however, upon the building’s completion in the third quarter of 2020, the Company concluded it was no longer the primary beneficiary, resulting in the deconsolidation of the Venture. As of September 30, 2020, the Company derecognized all assets, liabilities and noncontrolling interest related to the Venture, recognized an equity method investment based on the fair value of its interest in 110 North Wacker and recognized a gain on deconsolidation of $267.5 million.
The Partnership was determined to be a VIE, and as the Company had the power to direct the activities of the Partnership that most significantly impact its economic performance, the Company was considered the primary beneficiary and consolidated the Partnership. Additionally, the local developer had the right to require the Company to purchase its interest in the Partnership if the Venture had not been sold or refinanced (with distributions made to the local developer and Company sufficient to repay all capital contributions) within a specified time period. Therefore, the local developer’s redeemable noncontrolling interest in the Partnership was presented as temporary equity as of December 31, 2021, on the Condensed Consolidated Balance Sheets. 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 was recognized based on the Hypothetical Liquidation at Book Value (HLBV) method. In 2021, the Company recorded a $17.7 million impairment of its equity investment in the Venture due to a change in the anticipated holding period as it entered into a plan to sell the Partnership’s interest in the Venture.
On March 30, 2022, the Partnership completed the sale of its ownership interest in the Venture for a gross sales price of $208.6 million. Upon sale, the Company recognized income of $5.0 million in Equity in earnings (losses) from real estate and other affiliates in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2022. The amount recognized represents: (i) the difference between the sales price less related transaction costs of $17.6 million and the $195.0 million carrying value of the equity investment; (ii) a $0.4 million adjustment to the carrying value of the noncontrolling interest to reflect actual cash proceeds and (iii) $8.6 million of net fair value gains that were reclassed out of Accumulated other comprehensive income (loss) associated with the Venture’s derivative instruments. Based upon the Partnership’s waterfall, $168.9 million of the net sales proceeds were allocated to the Company with the remaining $22.1 million allocated to the local developer.
Upon sale of the equity interest in the Venture, the local developer’s put right that could require the Company to purchase its interest in the Partnership lapsed. Therefore, as of March 31, 2022, the local developer’s redeemable noncontrolling interest in the Partnership was reclassified from temporary equity to Accounts payable and accrued expenses on the Condensed Consolidated Balance Sheets. However, due to the timing of the sale transaction, the local developer’s share of the sales proceeds were not distributed until April 2022.
The following table presents changes in Redeemable noncontrolling interest:
| thousands | Redeemable Noncontrolling Interest | |||||||
Balance as of December 31, 2021 | $ | |||||||
| Net income (loss) attributable to noncontrolling interest | ( | |||||||
| Disposition of noncontrolling interest related to 110 North Wacker | ( | |||||||
Balance as of March 31, 2022 | $ | |||||||
Balance as of December 31, 2020 | $ | |||||||
| Net income (loss) attributable to noncontrolling interest | ( | |||||||
| Share of investee’s other comprehensive income | ||||||||
Balance as of March 31, 2021 | $ | |||||||
The 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 indoor grass, a stylish clubhouse bar and a wide variety of lawn games. This concept is expected to open in late 2022. Under the terms of the agreement, the Company will fund 80 % of the cost to construct the restaurant, and Endorphin Ventures will contribute the remaining 20 %. 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 equity method.
HHC 2022 FORM 10-Q | 11
FINANCIAL STATEMENTS FOOTNOTES | |||||
Available cash will be distributed 80 % to the Company and 20 % to Endorphin Ventures until each member’s unreturned capital account has been reduced to zero. Distributions will then be allocated 60 % to the Company and 40 % 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 property 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 provisions for the liquidation of assets, the Company’s share of The Lawn Club’s income-producing activities will be recognized based on the HLBV method.
Ssäm Bar In 2016, the Company formed Pier 17 Restaurant C101, LLC (Ssäm Bar) with MomoPier, LLC (Momofuku), an affiliate of the Momofuku restaurant group, to construct and operate a restaurant and bar at Pier 17 in the Seaport. Under the terms of the agreement, the Company funded 89.75 % of the costs to construct the restaurant, and Momofuku contributed the remaining 10.25 %.
As of March 31, 2022, and December 31, 2021, Ssäm Bar 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 as of March 31, 2022, is $6.0 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 % preferred return on its capital contributions, available cash will be allocated 75 % to the Company and 25 % to Momofuku, until each member’s unreturned capital account has been reduced to zero. Any remaining cash will be distributed 50 % to each of the members. Given the nature of the Ssäm Bar’s capital structure and the provisions for the liquidation of assets, the Company’s share of the Ssäm Bar’s income-producing activities is recognized based on the HLBV method.
The Tin Building by Jean-Georges In 2015, the Company formed Fulton Seafood Market, LLC with VS-Fulton Seafood Market, LLC (Fulton Partner) to operate The Tin Building by Jean-Georges, a 53,783 square foot marketplace with an expanded focus on experiences including in-person dining, retail shopping, mobile ordering and delivery. The marketplace is expected to open in the second quarter of 2022.
As of March 31, 2022, The Tin Building by Jean-Georges is classified as a VIE because the equity holders, as a group, lack the characteristics of a controlling financial interest. The Company further concluded that it is not the primary beneficiary of the VIE as it does not have the power to direct the restaurant related activities that most significantly impact its economic performance. As such, the Company accounts for its ownership interest in accordance with the equity method.
The Company owns 100 % of the Tin Building and entered into a lease agreement with Fulton Seafood Market LLC to lease the constructed space for this venture. The Company, as landlord, funded 100 % of the development and construction of the Tin Building, and under the terms of the agreement contributes the cash necessary to fund pre-opening, opening and operating costs of Fulton Seafood Market LLC. The Fulton Partner is not required to make any capital contributions under the LLC agreements. Because the Company is unable to quantify the maximum amount of additional capital contributions that may be funded in the future associated with this investment, the Company’s maximum exposure related to loss as a result of this investment is based upon the carrying value of the investment.
Under the LLC agreement, available cash (other than available cash attributable to a capital event) will be distributed 100 % to the Company until it receives a cumulative preferred return of 18 % per year on its costs incurred in excess of a specified threshold. Available cash will then be allocated 65 % to the Company and 35 % to the Fulton Partner.
Given the nature of The Tin Building by Jean-Georges’ capital structure and the provisions for the liquidation of assets, the Company’s share of The Tin Building by Jean-Georges’ income-producing activity will be recognized based on the HLBV method. The HLBV calculation utilizes a distribution waterfall that returns available cash attributable to a capital event first, to the Company until 100 % of the Company’s unreturned capital amount and the preferred return has been paid in full; then, 65 % to the Company and 35 % to the Fulton Partner.
The carrying value of The Tin Building by Jean-Georges as of March 31, 2022, is $7.8 million and represents HHC contributions of $11.4 million, partially offset by $3.6 million of equity losses for the current period related to pre-opening expenses.
HHC 2022 FORM 10-Q | 12
FINANCIAL STATEMENTS FOOTNOTES | |||||
Jean-Georges Restaurants On March 1, 2022, the Company acquired a 25 % interest in JG Restaurant HoldCo LLC (Jean-Georges Restaurants) for $45.0 million from JG TopCo LLC (Jean-Georges). Jean-Georges Restaurants currently has over 40 hospitality offerings and a pipeline of new concepts. The Company concluded that Jean-Georges Restaurants is not a VIE. The Company further concluded that it does not possess a controlling financial interest under the voting model. As such, the Company will account for its ownership interest in accordance with the equity method and recorded its initial investment at cost, inclusive of legal fees and transaction costs. Under the terms of the agreement, all cash distributions and the recognition of income producing activities will be pro rata based on economic ownership interest.
Concurrent with the aforementioned acquisition by the Company of a 25 % interest in Jean-Georges Restaurants, the Company entered into a warrant agreement with Jean-Georges. The Company paid $10.0 million for the option to acquire up to an additional 20 % interest in Jean-Georges Restaurants. The warrant became exercisable on March 2, 2022, subject to automatic exercise in the event of dissolution or liquidation, and will expire on March 2, 2026. Per the agreement, the $10.0 million is to be used for working capital of Jean-Georges Restaurants. The Company has elected the measurement alternative for this purchase option as the equity security does not have a readily determinable fair value. As such, the investment will be measured at cost, less any identified impairment charges.
Creative Culinary Management Company, LLC (CCMC), a wholly owned subsidiary of Jean-Georges Restaurants, provides management services for certain retail and food and beverages businesses that HHC owns, either wholly or through partnerships with third parties. The Company’s businesses managed by CCMC include The Tin Building by Jean-Georges, The Fulton, The Greens and Malibu Farm. Pursuant to the various management agreements, CCMC is responsible for employment and supervision of all employees providing services for the food and beverage operations and restaurant as well as the day-to-day operations and accounting for the food and beverage operations.
The Summit In 2015, the Company formed DLV/HHPI Summerlin, LLC (The Summit) with Discovery Land Company (Discovery). The Company contributed land with a carrying value of $13.4 million and transferred SID bonds related to such land with a carrying value of $1.3 million to The Summit at the agreed upon capital contribution value of $125.4 million, or $226,000 per 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, of which $3.8 million has 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.
As of March 31, 2022, the Company has received cash distributions equal to its capital contribution of $125.4 million and a 5.0 % preferred return on such capital contribution, and Discovery has received cash distributions equal to two times its equity contribution. Any further cash distributions and income-producing activities will be recognized according to equity ownership. As of March 31, 2022, HHC has received $179.1 million in total distributions and Discovery has received $27.0 million in total distributions.
Trillium In the fourth quarter of 2021, simultaneous with the Douglas Ranch land acquisition, the Company entered into a Limited Liability Company Agreement (LLC Agreement) with JDM Partners and El Dorado Holdings to form Trillium Development Holding Company, LLC (Trillium) for the purpose of developing the first village within the new Douglas Ranch MPC in Phoenix’s West Valley.
Within the 3,029 -acre Trillium development located in the greater Phoenix, Arizona area, JDM Partners owned approximately 2,579 acres and El Dorado Holdings owned approximately 450 acres. Simultaneously with the LLC Agreement, all parties executed the Contribution and Purchase Agreement under which the Company acquired a 50 % interest in the land owned by JDM Partners and a 50 % interest in the land owned by El Dorado Holdings for $59.0 million, and immediately contributed its ownership interest in the property to Trillium in exchange for a 50 % equity interest. At the same time, JDM Partners contributed its remaining 50 % interest in its land and El Dorado Holdings contributed its remaining 50 % interest in its land to Trillium in exchange for the remaining equity interest. Subsequent to these contributions, member equity interest in Trillium was 50 % for the Company, 42.5 % for JDM Partners and 7.5 % for El Dorado Holdings. The Company will report its ownership interest in accordance with the equity method. Under the terms of the agreement, all future capital contributions, cash distributions and the recognition of income producing activities will be pro rata based on economic ownership interest. The first Trillium land sales are expected to occur by the third quarter of 2022.
HHC 2022 FORM 10-Q | 13
FINANCIAL STATEMENTS FOOTNOTES | |||||
West End Alexandria In the fourth quarter of 2021, the Company entered into an Asset Contribution Agreement with Foulger-Pratt Development, LLC (Foulger-Pratt) and Seritage SRC Finance (Seritage). Prior to this agreement, Foulger-Pratt owned 100 % interest in Landmark Land Holdings, LLC (West End Alexandria). Pursuant to this agreement, the Company conveyed its 33 -acre Landmark Mall property with an agreed upon fair value of $56.0 million and Seritage conveyed an additional 19 acres of land with an agreed upon fair value of $30.0 million to West End Alexandria in exchange for equity interest. Additionally, Foulger-Pratt agreed to contribute $10.0 million to West End Alexandria. Subsequent to these conveyances and contributions, each member received an equity interest proportionate to the agreed upon values, defined as 58.33 % for the Company, 31.25 % for Seritage, and 10.42 % for Foulger-Pratt.
Also in the fourth quarter of 2021, West End Alexandria executed a Purchase and Sale Agreement with the City of Alexandria to sell approximately 11 acres to the City of Alexandria for $54.0 million. The City will lease this land to Inova Health Care Services for construction of a new hospital.
Development plans for the remaining 41 acre property includes approximately four million square feet of residential, retail, commercial, and entertainment offerings integrated into a cohesive neighborhood with a central plaza, a network of parks and public transportation. Demolition is set to begin in the second quarter of 2022, with completion of the first buildings expected in 2025.
Given the nature of the capital structure, the Company recognizes its allocable share of earnings of the investee based upon the HLBV method. Pursuant to the Amended and Restated Limited Liability Company Agreement, dated November 17, 2021, the distribution waterfall provides that: (i) each member other than Foulger-Pratt is to receive a 15 % preferred return, compounded annually, on any preferred capital contributions made to fund controllable cost overruns; (ii) return of any preferred capital contributions on a pro rata basis in proportion to the outstanding preferred capital contributions; (iii) 100 % to all members pro rata in accordance with each member’s respective Percentage Interests until each member has received an internal rate of return of 10 % on its capital contributions: (iv) 20 % to Foulger-Pratt and 80 % to all members pro rata in accordance with their respective percentage interests until each member has received an internal rate of return of 15 % percent; (v) 100 % to Foulger-Pratt until they have received an amount equal to all of its unreturned controllable cost overrun contributions; and (vi) 30 % to Foulger-Pratt and 70 % to all members pro rata in accordance with their respective percentage interests.
3. Acquisitions and Dispositions | ||
Acquisitions On March 1, 2022, the Company acquired a 25 % interest in Jean-Georges Restaurants for $45.0 million and paid $10.0 million for the option to acquire up to an additional 20 % interest in Jean-Georges Restaurants through March 2026. Jean-Georges Restaurants currently has over 40 hospitality offerings and a pipeline of new concepts. See Note 2 - Investment in Real Estate and Other Affiliates for additional information.
In October 2021, the Company announced the acquisition of Douglas Ranch, a new large-scale master planned community 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. Pursuant to the purchase and sale agreement, $33.8 million of the purchase price was held in escrow related to a six-month option for the seller, or permitted assignee, to repurchase up to 50 % interest in Douglas Ranch. The total repurchase price payable for the option is $270.5 million, which consists of a payment of $236.7 million and the $33.8 million withheld at the initial closing, plus 50 % of any costs incurred to manage and maintain Douglas Ranch from the time of the original closing through the date that the option is exercised.
On April 13, 2022, the purchase and sale agreement was amended to extend the term of the option to June 17, 2022, and grant a minimum purchase of a 9.24 % interest in Douglas Ranch for $50.0 million and up to a maximum purchase of a 50 % interest for $270.5 million. The $33.8 million amount currently held in escrow will be applied to reduce the seller’s purchase price provided they exercise the minimum purchase amount of $50.0 million. However, if the seller does not repurchase the minimum purchase amount on or before June 17, 2022, it forfeits the $33.8 million currently held in escrow.
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 the greater Phoenix, Arizona area. In total, the Douglas Ranch MPC encompasses almost 37,000 fully-entitled, “shovel-ready” acres and is poised for growth with in-place entitlements for 100,000 residential homes and 55
Dispositions On March 30, 2022, the Company completed the sale of its ownership interest in 110 North Wacker for $208.6 million. See Note 2 - Investment in Real Estate and Other Affiliates for additional information.
HHC 2022 FORM 10-Q | 14
FINANCIAL STATEMENTS FOOTNOTES | |||||
On December 22, 2021, the Company completed the sale of Century Park, a 63 -acre, 1,302,597 square foot campus with 17 office buildings in the West Houston Energy Corridor, for $25.0 million resulting in a loss on sale of $7.4 million, inclusive of approximately $0.4 million in related transaction costs. The loss on sale is included in Gain (loss) on sale or disposal of real estate and other assets, net in the Consolidated Statements of Operations. This asset was previously impaired during the second quarter of 2021.
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 resulting in a gain on sale of $39.1 million, inclusive of approximately $2.9 million in related transaction costs. The gain on sale is included in Gain (loss) on sale or disposal of real estate and other assets, net in the Consolidated Statements of Operations. Additionally, as part of the sale, the Company repaid $132.3 million of debt directly associated with the properties sold.
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, resulting in a gain on sale of $21.3 million, inclusive of approximately $1.5 million in related transaction costs. The gain on sale is included in Gain (loss) on sale or disposal of real estate and other assets, net in the Consolidated Statements of Operations.
4. Impairment | ||
The Company reviews its long-lived assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. No
Each investment in real estate and other affiliates discussed in Note 2 - 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 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
The Company periodically evaluates strategic alternatives with respect to each property and may revise the strategy from time to time, including the intent to hold the asset on a long-term basis or the timing of potential asset dispositions. For example, the Company may decide to sell property that is held for use, and the sale price may be less than the carrying amount. As a result, changes in strategy could result in impairment charges in future periods.
5. Other Assets and Liabilities | ||
Prepaid Expenses and Other Assets The following table summarizes the significant components of Prepaid expenses and other assets:
| thousands | March 31, 2022 | December 31, 2021 | $ Change | ||||||||||||||
| Special Improvement District receivable | $ | $ | $ | ( | |||||||||||||
| Security, escrow and other deposits | |||||||||||||||||
| Condominium inventory (a) | ( | ||||||||||||||||
| In-place leases | ( | ||||||||||||||||
| Intangibles | ( | ||||||||||||||||
| Prepaid expenses | ( | ||||||||||||||||
| Other | |||||||||||||||||
| Tenant incentives and other receivables | |||||||||||||||||
| TIF receivable | |||||||||||||||||
| Food and beverage and lifestyle inventory | ( | ||||||||||||||||
| Prepaid expenses and other assets, net | $ | $ | $ | ( | |||||||||||||
(a)The decrease in Condominium inventory is primarily attributable to the closing on inventory units at ‘A’ali’i.
HHC 2022 FORM 10-Q | 15
FINANCIAL STATEMENTS FOOTNOTES | |||||
Accounts Payable and Accrued Expenses The following table summarizes the significant components of Accounts payable and accrued expenses:
| thousands | March 31, 2022 | December 31, 2021 | $ Change | ||||||||||||||
| Condominium deposit liabilities (a) | $ | $ | $ | ||||||||||||||
| Construction payables | |||||||||||||||||
| Deferred income | ( | ||||||||||||||||
| Other (b) | |||||||||||||||||
| Accounts payable and accrued expenses (c) | ( | ||||||||||||||||
| Tenant and other deposits | |||||||||||||||||
| Accrued interest (d) | ( | ||||||||||||||||
| Accrued real estate taxes | ( | ||||||||||||||||
| Accrued payroll and other employee liabilities (e) | ( | ||||||||||||||||
| Interest rate swap liabilities (f) | ( | ||||||||||||||||
| Accounts payable and accrued expenses | $ | $ | $ | ( | |||||||||||||
(a)The increase in Condominium deposit liabilities is primarily attributable to contracted sales at The Park Ward Village.
(b)The increase in Other is primarily attributable to the reclassification of the 110 North Wacker redeemable noncontrolling interest of $22.1 million from temporary equity to Other. The amount was distributed in April 2022. See Note 2 - Investment in Real Estate and Other Affiliates for details.
(c)The decrease in Accounts payable and accrued expenses is primarily attributable to a change in accrual amounts related to repurchases of common stock in December 2021 and March 2022.
(d)The decrease in Accrued interest is primarily due to the timing of semi-annual interest payments on the Company’s Senior Notes.
(e)The decrease in Accrued payroll and other employee liabilities is primarily due to the payment of the 2021 annual incentive bonus in the first quarter of 2022.
(f)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.
6. Mortgages, Notes and Loans Payable, Net | ||
Mortgages, notes and loans payable, net are summarized as follows:
| thousands | March 31, 2022 | December 31, 2021 | |||||||||
| Fixed-rate debt | |||||||||||
Unsecured | $ | $ | |||||||||
Unsecured | |||||||||||
Unsecured | |||||||||||
| Secured mortgages, notes and loans payable | |||||||||||
| Special Improvement District bonds | |||||||||||
| Variable-rate debt (a) | |||||||||||
| Secured Bridgeland Notes due 2026 | |||||||||||
| Mortgages, notes and loans payable | |||||||||||
| Unamortized deferred financing costs (b) | ( | ( | |||||||||
| Total mortgages, notes and loans payable, net | $ | $ | |||||||||
(a)The Company has entered into derivative instruments to manage a portion of the variable interest rate exposure. See Note 8 - 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).
Debt Collateral 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 March 31, 2022, land, buildings and equipment and developments with a net book value of $4.8 billion have been pledged as collateral for HHC’s mortgages, notes and loans payable.
HHC 2022 FORM 10-Q | 16
FINANCIAL STATEMENTS FOOTNOTES | |||||
Credit Facilities In 2018, the Company entered 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 Term Loan, the Senior Secured Credit Facility or the Loans), which is included in Variable-rate debt above. 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, of which $69.8 million was directly associated with the properties sold. Refer to Note 3 - Acquisitions and Dispositions for additional information. As of March 31, 2022, the Company had $242.2 million of outstanding borrowings on the Term Loan. The Company has a one -time right to request an increase of $50.0 million in the aggregate amount of the Revolver Loan. As of March 31, 2022, the Company had no outstanding borrowings under the Revolver Loan. The Loans are secured by a first priority security interest in certain of the Company’s properties.
Special Improvement District Bonds 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. During the three months ended March 31, 2022, no new SID bonds were issued and no obligations were assumed by buyers.
Debt Compliance As of March 31, 2022, the Company did not meet the debt service coverage ratios for the Two Hughes Landing and 4 Waterway Square loans, which did not have a material impact on the Company’s liquidity.
Financing Activity During the Three Months Ended March 31, 2022
The Company’s borrowing activity is summarized as follows:
| thousands | Initial / Extended Maturity (a) | Interest Rate | Carrying Value | ||||||||||||||
Balance at December 31, 2021 | $ | ||||||||||||||||
| Borrowings: | |||||||||||||||||
| Two Summerlin | February 2027 / February 2029 | % | (b) | ||||||||||||||
| One Merriweather | February 2032 | % | (c) | ||||||||||||||
| Two Merriweather | February 2032 | % | (d) | ||||||||||||||
| Draws on existing mortgages, notes and loans payable | |||||||||||||||||
| Repayments: | |||||||||||||||||
| Senior Secured Credit Facility | September 2023 | % | (c) | ( | |||||||||||||
| Repayments on existing mortgages, notes and loans payable | ( | ||||||||||||||||
| Other: | |||||||||||||||||
| Deferred financing costs, net | |||||||||||||||||
Balance at March 31, 2022 | $ | ||||||||||||||||
(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 certain terms which 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)In February 2022, the Company closed on a $40.8 million non-recourse financing of Two Summerlin which was previously unencumbered. The loan bears interest at Secured Overnight Financing Rate (SOFR) plus 1.75 % with an initial maturity of February 2027 and two one-year extension options. Concurrent with the funding of the loan, the Company entered into an interest rate swap agreement with a notional amount equal to the principal amount of the loan and an interest rate of 3.425 %.
(c)In January 2022, the Company closed on a $49.8 million non-recourse, interest-only financing of One Merriweather. The loan bears interest at 3.525 % with maturity in February 2032. Proceeds from this financing were used to repay a portion of the Senior Secured Credit Facility.
(d)In January 2022, the Company closed on a $25.6 million non-recourse, interest-only financing of Two Merriweather which was previously unencumbered. The loan bears interest at 3.825 % with maturity in February 2032.
HHC 2022 FORM 10-Q | 17
FINANCIAL STATEMENTS FOOTNOTES | |||||
7. Fair Value | ||
ASC 820, Fair Value Measurement, emphasizes that fair value is a market-based measurement that should be determined using assumptions market participants would use in pricing an asset or liability. The standard establishes a hierarchical disclosure framework that 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:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate derivative liabilities | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
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:
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| thousands | Fair Value Hierarchy | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Cash and Restricted cash | Level 1 | $ | $ | $ | $ | |||||||||||||||||||||
| Accounts receivable, net (a) | Level 3 | |||||||||||||||||||||||||
| Notes receivable, net (b) | Level 3 | |||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Fixed-rate debt (c) | Level 2 | |||||||||||||||||||||||||
| Variable-rate debt (c) | Level 2 | |||||||||||||||||||||||||
(a)Accounts receivable, net is shown net of an allowance of $15.9 million at March 31, 2022, and $16.5 million at December 31, 2021. Refer to Note 1 - Summary of Significant Accounting Policies for additional information on the allowance.
HHC 2022 FORM 10-Q | 18
FINANCIAL STATEMENTS FOOTNOTES | |||||
(b)Notes receivable, net is shown net of an allowance of $0.1 million at March 31, 2022, and $0.2 million at December 31, 2021. Refer to Note 1 - Summary of Significant Accounting Policies for additional information on the allowance.
(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 6 - Mortgages, Notes and Loans Payable, Net 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 non-financial assets that were measured at fair value on a non-recurring basis resulting in the properties being impaired:
| 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 | $ | $ | $ | $ | |||||||||||||||||||||
(a)The fair value was measured using weighted income and market valuation techniques as of the impairment date in the second quarter of 2021. Refer to Note 4 - Impairment for additional information.
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 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 caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up‑front premium. The Company’s interest rate caps are not currently designated as hedges, and therefore, any gains or losses are recognized in current-period earnings. These derivatives are recorded on a gross basis at fair value on the balance sheet.
Assessments of hedge effectiveness are performed quarterly using regression analysis. The change in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in Accumulated other comprehensive income (loss) (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 provided by (used in) 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. To mitigate its credit risk, the Company reviews the creditworthiness of counterparties and enters into agreements with those that are considered credit-worthy, such as large financial institutions with favorable credit ratings. There were no events of default as of March 31, 2022, or as of December 31, 2021.
HHC 2022 FORM 10-Q | 19
FINANCIAL STATEMENTS FOOTNOTES | |||||
If the derivative contracts are terminated prior to their maturity, the amounts previously recorded in AOCI are recognized into earnings over the period that the hedged transaction impacts earnings. If the hedging relationship is discontinued because it is probable that the forecasted transaction will not occur in accordance with the original strategy, any related amounts previously recorded in AOCI are recognized in earnings immediately. During the three months ended March 31, 2022, and the year ended December 31, 2021, there were no 0.3 million reduction in Interest expense during the three months ended March 31, 2022, and a $0.8 million reduction in Interest expense during the three months ended March 31, 2021, related to the amortization of terminated swaps.
The Company did no
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 $6.6 million of net loss will be reclassified to Interest expense including amounts related to the amortization of terminated swaps.
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 | March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| Derivative instruments not designated as hedging instruments: (b) | ||||||||||||||||||||||||||||||||
| Interest rate cap | (c) | Prepaid expenses and other assets, net | $ | % | 3/12/2021 | 9/15/2023 | $ | $ | ||||||||||||||||||||||||
| Interest rate cap | (c) | Prepaid expenses and other assets, net | % | 3/12/2021 | 9/15/2023 | |||||||||||||||||||||||||||
| Interest rate cap | Prepaid expenses and other assets, net | % | 8/31/2020 | 10/17/2022 | ||||||||||||||||||||||||||||
| Interest rate cap | (d) | Prepaid expenses and other assets, net | % | 10/12/2021 | 9/29/2025 | |||||||||||||||||||||||||||
| Interest rate cap | (e) | Prepaid expenses and other assets, net | % | 10/12/2021 | 9/29/2025 | |||||||||||||||||||||||||||
| Derivative instruments designated as hedging instruments: | ||||||||||||||||||||||||||||||||
| Interest rate swap | (f) | Accounts payable and accrued expenses | $ | % | 9/21/2018 | 9/18/2023 | $ | ( | $ | ( | ||||||||||||||||||||||
| Interest rate swap | (g) | Prepaid expenses and other assets, net | % | 3/1/2022 | 2/18/2027 | |||||||||||||||||||||||||||
| Interest rate swap | (h) | Accounts payable and accrued expenses | % | 11/1/2019 | 1/1/2032 | ( | ( | |||||||||||||||||||||||||
| Total fair value derivative assets | $ | $ | ||||||||||||||||||||||||||||||
| Total fair value derivative liabilities | ( | ( | ||||||||||||||||||||||||||||||
| Total fair value derivatives, net | $ | $ | ( | |||||||||||||||||||||||||||||
(a)These rates represent the strike rate on HHC’s interest swaps and caps.
(b)Interest expense included in the Condensed Statements of Operations for the three months ended March 31, 2022, and the year ended December 31, 2021, related to these contracts was not material.
(c)Concurrent with the closing of the $368.2 million construction loan for Victoria Place in 2021, the Company entered into two new LIBOR interest rate caps.
(d)Concurrent with the closing of the $75.0 million construction loan for 1700 Pavilion in 2021, the Company entered into this interest rate cap.
(e)Concurrent with the closing of the $59.5 million construction loan for Tanager Echo in 2021, the Company entered into this interest rate cap.
(f)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. This swap covers the outstanding balance on the Term Loan in addition to other LIBOR-based debt held by the Company.
(g)Concurrent with the closing of the $40.8 million financing of Two Summerlin in the first quarter of 2022, 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 Trails in 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 months ended March 31, 2022, and 2021:
| Amount of Gain (Loss) Recognized in AOCI on Derivatives | |||||||||||
| Derivatives in Cash Flow Hedging Relationships | Three Months Ended March 31, | ||||||||||
| thousands | 2022 | 2021 | |||||||||
| Interest rate derivatives | $ | $ | |||||||||
HHC 2022 FORM 10-Q | 20
FINANCIAL STATEMENTS FOOTNOTES | |||||
| Amount of Gain (Loss) Reclassified from AOCI into Operations | |||||||||||
| Location of Gain (Loss) Reclassified from AOCI into Operations | Three Months Ended March 31, | ||||||||||
| thousands | 2022 | 2021 | |||||||||
| Interest expense | $ | ( | $ | ( | |||||||
| Total Interest Expense Presented in the Results of Operations in which the Effects of Cash Flow Hedges are Recorded | |||||||||||
| Interest Expense Presented in Results of Operations | Three Months Ended March 31, | ||||||||||
| thousands | 2022 | 2021 | |||||||||
| Interest expense | $ | $ | |||||||||
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.
The fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $9.4 million as of March 31, 2022, and $28.5 million as of December 31, 2021. If the Company had breached any of these provisions at March 31, 2022, it could have been required to settle its obligations under the agreements at their termination value of $9.4 million.
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.
Litigation On June 14, 2018, the Company was served with a petition involving approximately 500 individuals or entities who claim that their properties, located in the Timarron Park neighborhood of The Woodlands, were damaged by flood waters that resulted from the unprecedented rainfall that occurred throughout Harris County and surrounding areas during Hurricane Harvey in August 2017. The complaint was filed in State Court in Harris County of the State of Texas. In general, the plaintiffs allege negligence in the development of Timarron Park and violations of Texas’ Deceptive Trade Practices Act and name as defendants The Howard Hughes Corporation, The Woodlands Land Development Company and two unaffiliated parties involved in the planning and engineering of Timarron Park. The plaintiffs are seeking restitution for damages to their property and diminution of their property values. The Company intends to vigorously defend the matter as it believes that these claims are without merit and that it has substantial legal and factual defenses to the claims and allegations contained in the complaint. Based upon the present status of this matter, the 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.
The Company entered into a settlement agreement with the Waiea homeowners association related to certain construction defects at the condominium 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; however, the Company can provide no assurances that all or any portion of the costs will be recovered. The Company recorded total expenses of $99.2 million for the estimated repair costs related to this matter during 2020, with an additional $21.0 million charged during 2021. These amounts were included in Condominium rights and unit cost of sales in the Condensed Consolidated Statements of Operations. As of March 31, 2022, a total of $82.1 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 Sheets.
HHC 2022 FORM 10-Q | 21
FINANCIAL STATEMENTS FOOTNOTES | |||||
Environmental Matters The Company purchased its 250 Water Street property in the Seaport in June 2018. The site is currently used as a parking lot while the Company continues to move forward with redevelopment planning. The Company engaged a third-party specialist to perform a Phase I Environmental Site Assessment (ESA), and the ESA identified, among other findings, the existence of mercury in the soil at levels above New York State regulatory criteria. The site is in the State Brownfield Cleanup Program and will be remediated under this program. The normal operations of the parking lot do not require the property to be remediated, and the Company had not started any redevelopment activities as of March 31, 2022. As a result, the potential remediation had no financial impact for the three months ended March 31, 2022.
Letters of Credit and Surety Bonds As of March 31, 2022, the Company had outstanding letters of credit totaling $5.1 million and surety bonds totaling $321.7 million. As of December 31, 2021, the Company had outstanding letters of credit totaling $5.1 million and surety bonds totaling $331.0 million. These letters of credit and surety bonds were issued primarily in connection with insurance requirements, special real estate assessments and construction obligations.
Operating Leases 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 15 - Leases for further discussion. Contractual rental expense, including participation rent, was $1.5 million for the three months ended March 31, 2022, compared to $1.7 million for the three months ended March 31, 2021. The amortization of above and below‑market ground leases and straight‑line rents included in the contractual rent amount was not significant.
Guarantee Agreements In conjunction with the execution of the ground lease for the Seaport, the Company executed a completion guarantee for the redevelopment of the Tin Building. The completion guaranty for the Tin Building is for the core and shell construction, which is now complete. The Company is working with the New York City Economic Development Corporation to relinquish the guarantee.
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. To 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 March 31, 2022, 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, which is triggered once the necessary permits are granted and construction commences, was satisfied for Waiea, Anaha and Ae‘o, with the opening of Ke Kilohana, which is a workforce tower fully earmarked to fulfill this obligation for the first four towers. The reserved units for ‘A‘ali‘i are included in the ‘A‘ali‘i tower. The reserved units for Kō'ula and Victoria Place, the two towers under construction, will be satisfied with the construction of Ulana Ward Village, which is a second workforce tower fully earmarked to satisfy the remaining reserved housing guarantee in the community. As a result of this guarantee, the Company expects reserved housing towers to 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 March 31, 2022, and December 31, 2021.
10. Income Taxes | ||
| Three Months Ended March 31, | |||||||||||||||||
| thousands except percentages | 2022 | 2021 | $ Change | ||||||||||||||
| Income tax expense (benefit) | $ | $ | ( | $ | |||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||
| Effective tax rate | % | % | NM | ||||||||||||||
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 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.
HHC 2022 FORM 10-Q | 22
FINANCIAL STATEMENTS FOOTNOTES | |||||
11. Warrants | ||
On October 7, 2016, the Company entered into a warrant agreement with David R. O’Reilly, (O’Reilly Warrant) prior to his appointment to his previous 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 became exercisable on April 6, 2022, subject to earlier exercise upon certain change in control, separation and termination provisions, and will expire on October 2, 2022. The O’Reilly Warrant was not exercised as of March 31, 2022.
On June 16, 2017, and October 4, 2017, the Company entered into warrant agreements with its then Chief Executive Officer, David R. Weinreb, (Weinreb Warrant) and then President, Grant Herlitz, (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. The Weinreb Warrant expires June 15, 2023, and 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 March 31, 2022, and December 31, 2021.
12. Accumulated Other Comprehensive Income (Loss) | ||
The following tables summarize changes in AOCI by component, all of which are presented net of tax:
| thousands | |||||
Balance as of December 31, 2021 | $ | ( | |||
| Other comprehensive income (loss) before reclassifications | |||||
| (Gain) loss reclassified from accumulated other comprehensive loss to net income | |||||
| Reclassification of the Company's share of previously deferred derivative gains to net income (a) | ( | ||||
| Net current-period other comprehensive loss | |||||
Balance as of March 31, 2022 | $ | ( | |||
Balance as of December 31, 2020 | $ | ( | |||
| Other comprehensive income (loss) before reclassifications | |||||
| (Gain) loss reclassified from accumulated other comprehensive loss to net income | |||||
| Share of investee's other comprehensive income | |||||
| Net current-period other comprehensive loss | |||||
Balance as of March 31, 2021 | $ | ( | |||
HHC 2022 FORM 10-Q | 23
FINANCIAL STATEMENTS FOOTNOTES | |||||
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 March 31, | Affected line items in the Statements of Operations | |||||||||||||
| thousands | 2022 | 2021 | ||||||||||||
| (Gains) losses on cash flow hedges | $ | $ | Interest expense | |||||||||||
| Company's share of previously deferred derivative gains | ( | Equity in earnings (losses) from real estate and other affiliates | ||||||||||||
| Income tax expense (benefit) | ( | Income tax expense (benefit) | ||||||||||||
| Total reclassifications of (income) loss, net of tax | $ | ( | $ | |||||||||||
13. Earnings Per Share | ||
Basic earnings (loss) per share (EPS) is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of all potentially dilutive common shares. The dilutive effect of options and non-vested stock issued under stock-based compensation plans is computed using the treasury stock method. The dilutive effect of the warrants is computed using the if-converted method.
Information related to the Company’s EPS calculations is summarized as follows:
Three Months Ended March 31, | |||||||||||
| thousands except per share amounts | 2022 | 2021 | |||||||||
| Net income (loss) | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Net (income) loss attributable to noncontrolling interests | ( | ||||||||||
| Net income (loss) attributable to common stockholders | $ | $ | ( | ||||||||
| Shares | |||||||||||
| Weighted-average common shares outstanding - basic | |||||||||||
| Restricted stock and stock options | |||||||||||
| Weighted-average common shares outstanding - diluted | |||||||||||
| Net income (loss) per common share | |||||||||||
| Basic income (loss) per share | $ | $ | ( | ||||||||
| Diluted income (loss) per share | $ | $ | ( | ||||||||
For the three months ended March 31, 2022, the diluted EPS computation excludes 247,287 shares of stock options and 297,816 shares of restricted stock because their effect is anti-dilutive. For the three months ended March 31, 2021, the diluted EPS computation excludes 296,012 shares of stock options and 486,164 shares of restricted stock because their effect is anti-dilutive. For both periods, the diluted EPS computation excludes 2,103,485
Common Stock Repurchases In October 2021, the Company’s board of directors (Board) authorized a share repurchase program, pursuant to which the Company was authorized to purchase up to $250.0 million of its common stock through open market transactions. During the fourth quarter of 2021, the Company repurchased 1,023,284 shares of its common stock, par value $0.01 per share, for $96.6 million, or approximately $94.42 per share. During the first quarter of 2022, the Company repurchased an additional 1,579,646 shares of its common stock, for $153.4 million, or approximately $97.10 per share, thereby completing all authorized purchases under the October 2021 program.
In March 2022, the Board, authorized an additional 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 and the program may be suspended or discontinued at any time. During the first quarter of 2022, the Company repurchased 171,022 shares of its common stock, for $17.3 million, or approximately $101.09 per share under the March 2022 program. The Company repurchased an additional 1,079,000 shares of its common stock, for $109.0 million, or approximately $100.98 per share, through May 3, 2022. All purchases were funded with cash on hand.
HHC 2022 FORM 10-Q | 24
FINANCIAL STATEMENTS FOOTNOTES | |||||
14. Revenues | ||
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. Revenue and cost of sales for condominium units sold are not recognized until the construction is complete, the sale closes and the title to the property has transferred to the buyer (point in time). Additionally, certain real estate selling costs, such as the costs related to the Company’s condominium model units, are either expensed immediately or capitalized as property and equipment and depreciated over their estimated useful life.
The following presents the Company’s revenues disaggregated by revenue source:
| Three Months Ended March 31, | |||||||||||
| thousands | 2022 | 2021 | |||||||||
| Revenues from contracts with customers | |||||||||||
| Recognized at a point in time: | |||||||||||
| Condominium rights and unit sales | $ | $ | |||||||||
| Master Planned Communities land sales | |||||||||||
| Builder price participation | |||||||||||
| Total | |||||||||||
| Recognized at a point in time or over time: | |||||||||||
| Other land, rental and property revenues | |||||||||||
| Rental and lease-related revenues | |||||||||||
| Rental revenue | |||||||||||
| Total revenues | $ | $ | |||||||||
| Revenues by segment | |||||||||||
| Operating Assets revenues | $ | $ | |||||||||
| Master Planned Communities revenues | |||||||||||
| Seaport revenues | |||||||||||
| Strategic Developments revenues | |||||||||||
| Corporate revenues | |||||||||||
| Total revenues | $ | $ | |||||||||
HHC 2022 FORM 10-Q | 25
FINANCIAL STATEMENTS 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 periods presented. 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 periods presented are as follows:
| thousands | Contract Liabilities | |||||||
Balance as of December 31, 2021 | $ | |||||||
| Consideration earned during the period | ( | |||||||
| Consideration received during the period | ||||||||
Balance as of March 31, 2022 | $ | |||||||
Balance as of December 31, 2020 | $ | |||||||
| Consideration earned during the period | ( | |||||||
| Consideration received during the period | ||||||||
Balance as of March 31, 2021 | $ | |||||||
Remaining Unsatisfied Performance Obligations The Company’s remaining unsatisfied performance obligations 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 March 31, 2022, is $2.2 billion. The Company expects to recognize this amount as revenue over the following periods:
| thousands | Less than 1 year | 1-2 years | Thereafter | |||||||||||||||||
| Total remaining unsatisfied performance obligations | $ | $ | $ | |||||||||||||||||
15. Leases | ||
Lessee Arrangements 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 March 31, 2022.
HHC 2022 FORM 10-Q | 26
FINANCIAL STATEMENTS FOOTNOTES | |||||
The Company’s lessee agreements consist of operating leases primarily for ground leases and other real estate. The majority of the Company’s leases have remaining lease terms of approximately 25 years and one lease with a remaining lease term of 52 years, excluding extension options. Most leases include one or more options to renew, with renewal terms that can extend the lease term from to 48 years, and some of which may include options to terminate the leases within one year . The Company considers its strategic plan and the life of associated agreements in determining when options to extend or terminate lease terms are reasonably certain of being exercised. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Certain of the Company’s lease agreements include variable lease payments based on a percentage of income generated through subleases, changes in price indices and market rates, and other costs arising from operating, maintenance, and taxes. The Company’s lease agreements do not contain residual value guarantees or restrictive covenants. The Company leases certain buildings and office space constructed on its ground leases to third parties.
The Company’s leased assets and liabilities are as follows:
| thousands | March 31, 2022 | December 31, 2021 | |||||||||
| Assets | |||||||||||
| Operating lease right-of-use assets, net | $ | $ | |||||||||
| Liabilities | |||||||||||
| Operating lease obligations | |||||||||||
The components of lease expense are as follows:
| Three Months Ended March 31, | |||||||||||
| thousands | 2022 | 2021 | |||||||||
| Operating lease cost | $ | $ | |||||||||
| Variable lease costs | |||||||||||
| Net lease cost | $ | $ | |||||||||
Future minimum lease payments as of March 31, 2022, are as follows:
| thousands | Operating Leases | ||||
Remainder of 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total lease payments | |||||
| Less: imputed interest | ( | ||||
| Present value of lease liabilities | $ | ||||
Other information related to the Company’s lessee agreements is as follows:
| Supplemental Condensed Consolidated Statements of Cash Flows Information | Three Months Ended March 31, | ||||||||||
| thousands | 2022 | 2021 | |||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows on operating leases | $ | $ | |||||||||
HHC 2022 FORM 10-Q | 27
FINANCIAL STATEMENTS FOOTNOTES | |||||
| Other Information | March 31, 2022 | March 31, 2021 | |||||||||
| Weighted-average remaining lease term (years) | |||||||||||
| Operating leases | |||||||||||
| Weighted-average discount rate | |||||||||||
| Operating leases | % | % | |||||||||
Lessor Arrangements The Company receives rental income from the leasing of retail, office, multi-family and other space under operating leases, as well as certain variable tenant recoveries. Such operating leases are with a variety of tenants and have a remaining average term of approximately four years . Lease terms generally vary among tenants and may include early termination options, extension options and fixed rental rate increases or rental rate increases based on an index. The minimum rentals based on operating leases of the consolidated properties held as of March 31, 2022, are as follows:
| Three Months Ended March 31, | |||||||||||
| thousands | 2022 | 2021 | |||||||||
| Total minimum rent payments | $ | $ | |||||||||
Total future minimum rents associated with operating leases are as follows as of March 31, 2022:
| thousands | Total Minimum Rent | ||||
Remainder of 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total | $ | ||||
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.
16. Segments | ||
The Company has four business segments that offer different products and services. HHC’s four 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). 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 - Acquisitions and Dispositions for additional information.
–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; Phoenix, Arizona; and Columbia, Maryland.
HHC 2022 FORM 10-Q | 28
FINANCIAL STATEMENTS FOOTNOTES | |||||
–Seaport – consists of approximately 461,000 square feet of restaurant, retail and entertainment properties situated in three primary locations in New York, New York: Pier 17, Historic Area/Uplands and Tin Building as well as the 250 Water Street parking lot, and equity interest in Jean-Georges Restaurants.
–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.
Segment operating results are as follows:
| thousands | Operating Assets Segment (a) | MPC Segment | Seaport Segment | Strategic Developments Segment | Total | |||||||||||||||
Three Months Ended March 31, 2022 | ||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Total operating expenses | ( | ( | ( | ( | ( | |||||||||||||||
| Segment operating income (loss) | ( | |||||||||||||||||||
| Depreciation and amortization | ( | ( | ( | ( | ( | |||||||||||||||
| Interest income (expense), net | ( | ( | ( | |||||||||||||||||
| Other income (loss), net | ( | ( | ( | |||||||||||||||||
| Equity in earnings (losses) from real estate and other affiliates | ( | |||||||||||||||||||
| Gain (loss) on sale or disposal of real estate and other assets, net | ( | ( | ||||||||||||||||||
| Gain (loss) on extinguishment of debt | ( | ( | ||||||||||||||||||
| Segment EBT | $ | $ | $ | ( | $ | $ | ||||||||||||||
| Corporate income, expenses and other items | ( | |||||||||||||||||||
| Net income (loss) | ||||||||||||||||||||
| Net (income) loss attributable to noncontrolling interests | ( | |||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | |||||||||||||||||||
Three Months Ended March 31, 2021 | ||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Total operating expenses | ( | ( | ( | ( | ( | |||||||||||||||
| Segment operating income (loss) | ( | ( | ||||||||||||||||||
| Depreciation and amortization | ( | ( | ( | ( | ( | |||||||||||||||
| Interest income (expense), net | ( | ( | ||||||||||||||||||
| Other income (loss), net | ( | ( | ( | |||||||||||||||||
| Equity in earnings (losses) from real estate and other affiliates | ( | ( | ( | |||||||||||||||||
| Gain (loss) on extinguishment of debt | ( | ( | ||||||||||||||||||
| Segment EBT | $ | ( | $ | $ | ( | $ | ( | $ | ( | |||||||||||
| Corporate income, expenses and other items | ( | |||||||||||||||||||
| Net income (loss) | ( | |||||||||||||||||||
| Net (income) loss attributable to noncontrolling interests | ||||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | ( | ||||||||||||||||||
HHC 2022 FORM 10-Q | 29
FINANCIAL STATEMENTS 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:
| thousands | March 31, 2022 | December 31, 2021 | |||||||||
| Operating Assets | $ | $ | |||||||||
| Master Planned Communities | |||||||||||
| Seaport | |||||||||||
| Strategic Developments | |||||||||||
| Total segment assets | |||||||||||
| Corporate | |||||||||||
| Total assets | $ | $ | |||||||||
HHC 2022 FORM 10-Q | 30
| 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) and in The Howard Hughes Corporation’s (HHC or the Company) annual report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission (SEC) on February 28, 2022 (the Annual Report). All references to numbered Notes are to specific notes to our unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.
| Index | Page | ||||
HHC 2022 FORM 10-Q | 31
| MANAGEMENT’S DISCUSSION AND ANALYSIS | |||||
| FORWARD-LOOKING INFORMATION | ||
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 are forward-looking statements and may include words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “likely,” “may,” “plan,” “project,” “realize,” “should,” “transform,” “would,” and other statements of similar expression.
These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to 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 unknown future adverse impact of COVID-19 on our financial condition, results of operations, cash flows and performance, on our industry, and on the global economy and financial markets. The extent to which COVID-19 will continue to impact us depends on future developments that remain uncertain and cannot be predicted with confidence, including the scope and duration of the pandemic, actions taken by governments and authorities to contain or mitigate the impact of the virus, the speed of distribution and effectiveness of vaccines, the impact of ongoing and future mutations of the virus, and the short and long-term economic and consumer behavior impact caused by the pandemic. In addition, you should interpret many of the risks identified below and set forth in our 2021 Annual Report on Form 10-K (2021 Annual Report), as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19.
Some of the risks, uncertainties and other important factors that may affect future results or cause actual results to differ materially from those expressed or implied by forward-looking statements include:
–the impact of the ongoing COVID-19 pandemic on our business, 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, interest rates and inflation;
–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;
–extreme weather conditions or climate change, including natural disasters, that may cause property damage or interrupt business;
–contamination of our properties by hazardous or toxic substances
–terrorist activity, acts of violence, or breaches of our data security, 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 and resurgence of different variants, issues with the global supply chain, the recent invasion by Russia of Ukraine and any further escalation of hostilities which may impact the global energy supply, that may disrupt our business;
HHC 2022 FORM 10-Q | 32
| MANAGEMENT’S DISCUSSION AND ANALYSIS | |||||
–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 our other reports and other public filings with the SEC.
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 are reasonable, all forward-looking statements are inherently subjective, uncertain and subject to change, as they involve substantial risks and uncertainties, including those beyond our control. New factors emerge from time to time, and it 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 otherwise may be required by 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 2021 Annual Report. The risk factors contained in our 2021 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 make with the SEC.
HHC 2022 FORM 10-Q | 33
MANAGEMENT’S DISCUSSION AND ANALYSIS OVERVIEW | |||||
| OVERVIEW | ||
| Description of Business | ||
Our award-winning assets include one of the nation's largest portfolios of master planned communities (MPCs) spanning approximately 118,000 gross acres, as well as operating properties, strategic developments, and other unique assets across 9 states from New York to Hawai‘i. We create some of the most sought-after communities in the country by curating an environment tailored to meet the needs of our residents and tenants. Our unique business model allows us to drive outsized risk-adjusted returns while maintaining a sharp focus on sustainability to ensure our communities are equipped with the resources to last several decades.
We operate through four business segments: Operating Assets, MPCs, Strategic Development and Seaport. We create a unique and continuous value-creation cycle through our operational and financial synergies associated with our three primary business segments of Operating Assets, MPCs and Strategic Developments. In our MPC segment, we plan, develop and manage small cities and large-scale, mixed-use communities, in markets with strong long-term growth fundamentals. This business focuses on the horizontal development of residential land. The improved acreage is then sold to homebuilders that build and sell homes to new residents. New homeowners create demand for commercial developments, such as retail, office, self-storage and hospitality offerings. We build these commercial properties through Strategic Developments at the appropriate time using the cash flow harvested from the sale of land to homebuilders, which helps mitigate development risk. Once the commercial developments are completed, the assets transition to Operating Assets, which increase recurring Net Operating Income (NOI), further funding our 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 typically exceed the broader market. This increased demand for residential land generates more cash flow from MPCs, thus continuing the value-creation cycle. Our fourth business segment, the Seaport, is one of the few multi-block districts largely under private management by a single owner in New York City. This historic waterfront area is being revitalized and enhanced into a mixed-use neighborhood featuring unique culinary and entertainment offerings.
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.
COVID-19 Pandemic The outbreak of COVID-19 resulted in a negative impact on our financial performance in 2020, particularly in our Operating Asset and Seaport segments. However, we saw significant performance improvement during the second half of the 2020 that continued through 2021, with full-year 2021 segment results equaling or exceeding pre-pandemic levels for the majority of our segments.
HHC 2022 FORM 10-Q | 34
MANAGEMENT’S DISCUSSION AND ANALYSIS OVERVIEW | |||||
First Quarter 2022 Highlights | ||
Comparison of the three months ended March 31, 2022, to the three months ended March 31, 2021
Total Company
–Net income attributable to common stockholders increased to $2.1 million, or $0.04 per diluted share, for the three months ended March 31, 2022, compared to loss of $66.6 million, or $(1.20) per diluted share, for the three months ended March 31, 2021.
–We continue to maintain a strong liquidity position with $688.0 million of cash and cash equivalents and available capacity of $85 million on the revolver portion of our credit facilities as of March 31, 2022, with limited near-term debt maturities.
–On March 1, 2022, the Company acquired a 25% interest in Jean-Georges Restaurants for $45.0 million and paid $10.0 million for the option to acquire up to an additional 20% interest in Jean-Georges Restaurants through March 2026.
–On March 30, 2022, the Company completed the sale of its ownership interest in 110 North Wacker for net proceeds of $168.9 million on a net investment of $12.7 million.
Capital and Financing Activities
–In January 2022, the Company closed on a $49.8 million non-recourse, interest-only financing of One Merriweather. The loan bears interest at 3.525% with maturity in February 2032. Proceeds from this financing and additional payments using cash on hand were used to repay $74.5 million on the Senior Secured Credit Facility in the first quarter.
–In January 2022, the Company closed on a $25.6 million non-recourse, interest-only financing of Two Merriweather which was previously unencumbered. The loan bears interest at 3.825% with maturity in February 2032.
–In February 2022, the Company closed on a $40.8 million non-recourse financing of Two Summerlin which was previously unencumbered. The loan bears interest at SOFR plus 1.75% with an initial maturity of February 2027 and two one-year extension options. Concurrent with the funding of the loan, the Company entered into an interest rate swap agreement with a notional amount equal to the principal amount of the loan and an interest rate of 3.425%.
–Repurchased 1,750,668 shares of common stock funded with $170.7 million of cash on hand at an average price of $97.49 per share.
Operating Assets
–Operating Assets NOI totaled $50.5 million in the current quarter, a $6.4 million or 14% increase compared to $44.1 million in the prior-year period.
–Multi-family NOI increased $5.4 million compared to the prior-year period, primarily due to lease-up at our newer properties, including The Lane at Waterway, Two Lakes Edge, and Creekside Park The Grove in The Woodlands and Juniper Apartments in Downtown Columbia that are all at or near full occupancy.
–Retail NOI increased $1.5 million compared to the prior-year period, primarily due to improved rent collections of 90.4% compared to 77.5% in the prior-year period.
–Office NOI decrease $0.7 million compared to the prior-year period, largely due to abatements on recent lease renewals and certain lease expirations in The Woodlands that have since been backfilled with new tenants subsequent to the end of the first quarter. This was offset by increased NOI in Downtown Columbia following the expiration of rent abatements at 6100 Merriweather.
MPC
–MPC EBT totaled $59.7 million in the current quarter, a $3.7 million or 6% decrease compared to $63.4 million in the prior-year period.
–The decrease in EBT was primarily due to lower Equity in earnings (losses) from real estate and other affiliates at The Summit due to the impact of fewer unit closings in the first quarter of 2022 as compared to the same period in 2021, partially offset by higher land sales revenues at Summerlin and Bridgeland and higher builder price participation primarily at Summerlin due to more eligible home closings in 2022.
–The increase in land sales revenues primarily related to higher commercial land sales at Summerlin due to the sale of 16.6 acres of institutional land for approximately $26 million in 2022, compared to no institutional land sales in the first quarter of 2021, and an increase in acres sold and price per acre at Bridgeland.
HHC 2022 FORM 10-Q | 35
MANAGEMENT’S DISCUSSION AND ANALYSIS OVERVIEW | |||||
Seaport
–Seaport NOI totaled a loss of $5.7 million in the current quarter, a $1.5 million or 35% decrease compared to a loss of $4.2 million in the prior-year period, primarily due to a decrease in our managed businesses, while our landlord entities and events, sponsorships and catering business remained relatively flat.
–Managed Business NOI decreased $2.0 million compared to the prior-year period. While activity increased for the quarter due to recovery from the COVID-19 pandemic and new restaurant concepts launched in 2021 including Mister Dips, Carne Mare and seasonal pop-ups, expenses outpaced revenues, due to increases in food and beverage costs, and increases in labor costs due to a strategic decision to maintain staffing levels to ensure workforce retention heading into the summer season and the Tin Building opening.
Strategic Developments
–Strategic Developments EBT totaled $5.4 million in the current quarter, a $27.4 million increase compared to a loss of $21.9 million in the prior-year period.
–The increase in EBT was primarily attributable to a prior-year accrual of $20.5 million related to defect remediation at Waiea, and the timing of condominium closings.
–We continued to experience strong condominium unit sales in Ward Village, evidenced by the 37 condominium units we contracted to sell during the first quarter of 2022 at our towers that are completed or under construction.
–Victoria Place, which began construction in February 2021, accounted for two of the units contracted during the quarter and was 99.7% presold as of March 31, 2022. Subsequent to quarter end, we contracted the remaining unit, resulting in Victoria Place being completed sold.
–The Park Ward Village, our eighth condominium project at Ward Village, began public sales in July 2021 and as of March 31, 2022, we have entered into contracts for 483 units, representing 88.6% of total units.
–Our ninth condominium project, Ulana Ward Village, was announced in 2021, with all units designated as workforce housing units offered to local residents who meet certain maximum income and net worth requirements. In March 2022, the Company advanced the lottery for local residents. As of May 5, 2022, we have entered into contracts for 576 units, representing 82.8% of total units.
–We began construction of Creekside Park Medical Plaza, a 33,000 square-foot multi-tenant medical office building in The Woodlands.
| Earnings Before Taxes | ||
In addition to the required presentations using GAAP, we use certain non-GAAP performance measures, as we believe these measures improve the understanding of our operational results and make comparisons of operating results among peer companies more meaningful. Management continually evaluates the usefulness, relevance, limitations and calculation of our reported non-GAAP performance measures to determine how best to provide relevant information to the public, and thus such reported measures could change.
Because our four segments, Operating Assets, MPC, Seaport and Strategic Developments, are managed separately, we use different operating measures to assess operating results and allocate resources among them. The one common operating measure used to assess operating results for our business segments is earnings before taxes (EBT). EBT, as it relates to each business segment, represents the revenues less expenses of each segment, including interest income, interest expense, depreciation and amortization and equity in earnings of real estate and other affiliates. EBT excludes corporate expenses and other items that are not allocable to the segments. See discussion herein at Corporate income, expenses and other items for further details. We present EBT for each segment because we use this measure, among others, internally to assess the core operating performance of our assets.
EBT should not be considered an alternative to GAAP net income attributable to common stockholders or GAAP net income, as it has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of the limitations of EBT are that it does not include the following in our calculations:
–cash expenditures, or future requirements for capital expenditures or contractual commitments
–corporate general and administrative expenses
–interest expense on our corporate debt
–income taxes that we may be required to pay
–any cash requirements for replacement of fully depreciated or amortized assets
–limitations on, or costs related to, the transfer of earnings from our real estate and other affiliates to us
HHC 2022 FORM 10-Q | 36
MANAGEMENT’S DISCUSSION AND ANALYSIS 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 March 31, 2022 | ||||||||||||||||||||
| Total revenues | $ | 99,687 | $ | 80,692 | $ | 9,376 | $ | 20,456 | $ | 210,211 | ||||||||||
| Total operating expenses | (46,615) | (36,896) | (18,859) | (18,077) | (120,447) | |||||||||||||||
| Segment operating income (loss) | 53,072 | 43,796 | (9,483) | 2,379 | 89,764 | |||||||||||||||
| Depreciation and amortization | (38,430) | (90) | (7,823) | (1,332) | (47,675) | |||||||||||||||
| Interest income (expense), net | (20,118) | 10,422 | (47) | 3,989 | (5,754) | |||||||||||||||
| Other income (loss), net | (169) | — | 350 | (485) | (304) | |||||||||||||||
| Equity in earnings (losses) from real estate and other affiliates | 15,175 | 5,550 | (3,711) | 898 | 17,912 | |||||||||||||||
| Gain (loss) on sale or disposal of real estate and other assets, net | — | — | — | (9) | (9) | |||||||||||||||
| Gain (loss) on extinguishment of debt | (282) | — | — | — | (282) | |||||||||||||||
| Segment EBT | $ | 9,248 | $ | 59,678 | $ | (20,714) | $ | 5,440 | $ | 53,652 | ||||||||||
| Corporate income, expenses and other items | (51,481) | |||||||||||||||||||
| Net income (loss) | 2,171 | |||||||||||||||||||
| Net (income) loss attributable to noncontrolling interests | (49) | |||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | 2,122 | ||||||||||||||||||
Three Months Ended March 31, 2021 | ||||||||||||||||||||
| Total revenues | $ | 96,439 | $ | 48,287 | $ | 7,453 | $ | 38,300 | $ | 190,479 | ||||||||||
| Total operating expenses | (47,234) | (23,267) | (12,506) | (59,623) | (142,630) | |||||||||||||||
| Segment operating income (loss) | 49,205 | 25,020 | (5,053) | (21,323) | 47,849 | |||||||||||||||
| Depreciation and amortization | (39,651) | (72) | (6,835) | (1,598) | (48,156) | |||||||||||||||
| Interest income (expense), net | (19,000) | 10,757 | 102 | 1,101 | (7,040) | |||||||||||||||
| Other income (loss), net | (10,098) | — | (336) | — | (10,434) | |||||||||||||||
| Equity in earnings (losses) from real estate and other affiliates | (11,404) | 27,650 | (352) | (98) | 15,796 | |||||||||||||||
| Gain (loss) on extinguishment of debt | (836) | — | — | — | (836) | |||||||||||||||
| Segment EBT | $ | (31,784) | $ | 63,355 | $ | (12,474) | $ | (21,918) | $ | (2,821) | ||||||||||
| Corporate income, expenses and other items | (65,338) | |||||||||||||||||||
| Net income (loss) | (68,159) | |||||||||||||||||||
| Net (income) loss attributable to noncontrolling interests | 1,565 | |||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | (66,594) | ||||||||||||||||||
(a)Total revenues includes hospitality revenues of $7.7 million for the three months ended March 31, 2021. Total operating expenses includes hospitality operating costs of $7.9 million for the three months ended March 31, 2021. In September 2021, the Company completed the sale of its three hospitality properties.
HHC 2022 FORM 10-Q | 37
| RESULTS OF OPERATIONS | ||
Net income attributable to common stockholders was $2.1 million for the three months ended March 31, 2022, an increase of $68.7 million, compared to the prior-year period.
For the three months ended March 31, 2022:
Total segment EBT increased $56.5 million compared to the prior-year period primarily due to the following:
–higher Operating Assets EBT primarily due to an increase in equity earnings related to the sale of 110 North Wacker and an increase in Rental revenue primarily due to multi-family properties placed in service leasing up faster than expected and continued increases in collections at our retail portfolio in 2022
–higher Strategic Development EBT primarily attributable to a prior-year accrual of $20.5 million related to defect remediation at Waiea, and timing of condominium closings. The Company closed on 24 units at ‘A‘ali‘i in 2022, compared to 4 units at Waiea and 1 unit at Anaha in 2021.
–lower Seaport EBT due to expenses outpacing revenues, primarily due to increased food, beverage and labor costs and a decrease in equity earnings primarily related to pre-opening costs for The Tin Building by Jean-Georges in 2022
–lower MPC EBT primarily due to lower Equity in earnings (losses) from real estate and other affiliates at The Summit due to the impact of fewer unit closings in the first quarter of 2022, compared to the same period in 2021, partially offset by higher commercial land sales revenues at Summerlin related to the sale of 16.6 acres for approximately $26 million in 2022 and higher builder price participation primarily at Summerlin due to more eligible home closings in 2022
–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, that did not repeat in 2022
Net expenses related to Corporate income, expenses and other items decreased $13.9 million compared to the prior-year period primarily due to the following:
–decrease 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
–decrease in net expense due to lower corporate interest expense, net primarily as a result of the change in value related to derivative instruments, and prepayment penalties and changes in interest related to the repurchase of the $1.0 billion 5.375% Senior Notes in the first quarter of 2021, partially offset by the issuance of $650 million 4.125% Senior Notes and $650 million 4.375% Senior Notes in the first quarter of 2021
–increase in income tax expense, primarily due to an increase in income before income taxes
–increase in general and administrative expense primarily attributable to an increase in severance costs related to the former Chief Financial Officer, as well as increases in consulting, and marketing and events expenses
See segment discussions for more detail of the changes described above.
HHC 2022 FORM 10-Q | 38
| Operating Assets | ||
The Operating Assets segment consists of retail, office, hospitality and multi-family properties along with other real estate investments, excluding the properties located at the Seaport, which are reported in the Seaport segment for all periods presented.
Segment EBT Segment EBT for Operating Assets is presented below:
| Operating Assets Segment EBT | Three Months Ended March 31, | ||||||||||||||||
| thousands | 2022 | 2021 | $ Change | ||||||||||||||
| Rental Revenue | $ | 93,606 | $ | 83,499 | $ | 10,107 | |||||||||||
| Other land, rental and property revenues | 6,081 | 12,940 | (6,859) | ||||||||||||||
| Total revenues | 99,687 | 96,439 | 3,248 | ||||||||||||||
| Operating costs | (31,635) | (35,143) | 3,508 | ||||||||||||||
| Rental property real estate taxes | (14,159) | (12,722) | (1,437) | ||||||||||||||
| (Provision for) recovery of doubtful accounts | (821) | 631 | (1,452) | ||||||||||||||
| Total operating expenses | (46,615) | (47,234) | 619 | ||||||||||||||
| Segment operating income (loss) | 53,072 | 49,205 | 3,867 | ||||||||||||||
| Depreciation and amortization | (38,430) | (39,651) | 1,221 | ||||||||||||||
| Interest income (expense), net | (20,118) | (19,000) | (1,118) | ||||||||||||||
| Other income (loss), net | (169) | (10,098) | 9,929 | ||||||||||||||
| Equity in earnings (losses) from real estate and other affiliates | 15,175 | (11,404) | 26,579 | ||||||||||||||
| Gain (loss) on extinguishment of debt | (282) | (836) | 554 | ||||||||||||||
| Segment EBT | $ | 9,248 | $ | (31,784) | $ | 41,032 | |||||||||||
For the three months ended March 31, 2022:
Operating Assets segment EBT increased $41.0 million compared to the prior-year period primarily due to the following:
–increase in equity earnings from the recognition of income upon the sale of 110 North Wacker primarily due to the release of our share of AOCI related to the Venture’s derivative instruments and income from other equity investments in the first quarter of 2022, compared to losses incurred at 110 North Wacker in 2021 during the lease-up period
–increase in Rental revenue primarily due to increased lease-up at our multi-family properties in The Woodlands and Columbia and improved collections at our retail properties
–loss in Other income (expense), net related to a $10.0 million loss on the settlement of the rate-lock agreement upon repayment of our outstanding loans for 1201 Lake Robbins and The Woodlands Warehouse in February 2021
–decrease in Other land, rental and property revenues, completely offset by a decrease in Operating costs, primarily due to the sale of our hospitality properties in The Woodlands in the third quarter of 2021
Net Operating Income We believe that NOI is a useful supplemental measure of the performance of our Operating Assets and Seaport 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.
HHC 2022 FORM 10-Q | 39
Although we believe that NOI provides useful information to investors about the performance of our Operating Assets and Seaport 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 section for a reconciliation of Seaport segment EBT to Seaport NOI.
| Operating Assets NOI | Three Months Ended March 31, | ||||||||||||||||
| thousands | 2022 | 2021 | $ Change | ||||||||||||||
| Total Operating Assets segment EBT | $ | 9,248 | $ | (31,784) | $ | 41,032 | |||||||||||
| Add back: | |||||||||||||||||
| Depreciation and amortization | 38,430 | 39,651 | (1,221) | ||||||||||||||
| Interest (income) expense, net | 20,118 | 19,000 | 1,118 | ||||||||||||||
| Equity in (earnings) losses from real estate and other affiliates | (15,175) | 11,404 | (26,579) | ||||||||||||||
| (Gain) loss on extinguishment of debt | 282 | 836 | (554) | ||||||||||||||
| Impact of straight-line rent | (2,438) | (5,107) | 2,669 | ||||||||||||||
| Other | 49 | 10,139 | (10,090) | ||||||||||||||
| Operating Assets NOI | $ | 50,514 | $ | 44,139 | $ | 6,375 | |||||||||||
The below table presents Operating Assets NOI by property type:
| Operating Assets NOI by Property Type | Three Months Ended March 31, | ||||||||||||||||
| thousands | 2022 | 2021 | $ Change | ||||||||||||||
| Office | $ | 25,118 | $ | 25,832 | $ | (714) | |||||||||||
| Retail | 13,477 | 12,003 | 1,474 | ||||||||||||||
| Multi-family | 11,142 | 5,735 | 5,407 | ||||||||||||||
| Other | 789 | 816 | (27) | ||||||||||||||
| Dispositions | (12) | (247) | 235 | ||||||||||||||
| Operating Assets NOI | $ | 50,514 | $ | 44,139 | $ | 6,375 | |||||||||||
For the three months ended March 31, 2022:
Operating Assets NOI increased $6.4 million compared to the prior-year period primarily due to the following:
–increase at our multi-family properties primarily related to the lease-up of Juniper Apartments, Two Lakes Edge, Creekside Park the Grove and The Lane at Waterway
–increase at our retail properties primarily due to improved collections in Ward Village
| Master Planned Communities | ||
Douglas Ranch Acquisition In October 2021, the Company announced the acquisition of Douglas Ranch, a new large-scale master planned community 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. Simultaneous with this land acquisition, the Company closed on the acquisition of a 50% interest in Trillium Development Holding Company, LLC (Trillium), for $59.0 million. Trillium owns approximately 3,029 acres of land in the greater Phoenix, Arizona area. In total, the Douglas Ranch MPC encompasses almost 37,000 fully-entitled, “shovel-ready” acres and is poised for growth with in-place entitlements for 100,000 residential homes and 55 million square feet of commercial development. For additional detail, refer to Note 2 - Investment in Real Estate and Other Affiliates and Note 3 - Acquisitions and Dispositions in the Condensed Consolidated Financial Statements.
HHC 2022 FORM 10-Q | 40
Segment EBT Segment EBT for MPC Assets is presented below:
| MPC Segment EBT | Three Months Ended March 31, | ||||||||||||||||
| thousands | 2022 | 2021 | $ Change | ||||||||||||||
| Master Planned Community land sales (a) | $ | 61,468 | $ | 37,477 | $ | 23,991 | |||||||||||
| Other land, rental and property revenues | 4,728 | 4,016 | 712 | ||||||||||||||
| Builder price participation (b) | 14,496 | 6,794 | 7,702 | ||||||||||||||
| Total revenues | 80,692 | 48,287 | 32,405 | ||||||||||||||
| Master Planned Communities cost of sales | (24,686) | (15,651) | (9,035) | ||||||||||||||
| Operating costs | (12,210) | (7,616) | (4,594) | ||||||||||||||
| Total operating expenses | (36,896) | (23,267) | (13,629) | ||||||||||||||
| Segment operating income (loss) | 43,796 | 25,020 | 18,776 | ||||||||||||||
| Depreciation and amortization | (90) | (72) | (18) | ||||||||||||||
| Interest income (expense), net | 10,422 | 10,757 | (335) | ||||||||||||||
| Equity in earnings (losses) from real estate and other affiliates | 5,550 | 27,650 | (22,100) | ||||||||||||||
| Segment EBT | $ | 59,678 | $ | 63,355 | $ | (3,677) | |||||||||||
(a)MPC land sales include deferred revenue from land sales closed in a previous period that met criteria for recognition in the current period and excludes amounts deferred from current period lands sales that do not yet meet the recognition criteria.
(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.
For the three months ended March 31, 2022:
MPC segment EBT decreased $3.7 million compared to the prior-year period due to the following:
–lower Equity in earnings (losses) from real estate and other affiliates at The Summit due to fewer unit closings in the first quarter of 2022, compared to the prior-year period, primarily due to inventory availability and timing of custom lot sales
–higher MPC land sales, net of associated MPC cost of sales, primarily related to higher commercial land sales at Summerlin due to the sale of 16.6 acres of institutional land for approximately $26 million in 2022, compared to no institutional land sales in the first quarter of 2021, partially offset by fewer custom lots sold in the first quarter of 2022
Additional highlights for the period included:
–Bridgeland experienced an increase in acres sold, with 31.3 acres sold at a price of $495,000 per acre for the first quarter of 2022, compared to 27.6 acres sold at a price of $459,000 per acre for the same period in 2021
MPC Net Contribution In addition to MPC segment EBT, MPC Net Contribution is a non-GAAP financial measure derived from EBT, adjusted for certain items as discussed below. Management uses this measure because it captures current period performance through the velocity of sales, as well as current period development expenditures based upon demand at our MPCs, which varies depending upon the stage of the MPCs development lifecycle, and the overall economic environment. MPC Net Contribution is defined as MPC segment EBT, plus MPC cost of sales, Depreciation and amortization, and net collections from SID bonds and 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.
HHC 2022 FORM 10-Q | 41
The following table sets forth the MPC Net Contribution:
| MPC Net Contribution | Three Months Ended March 31, | ||||||||||||||||
| thousands | 2022 | 2021 | $ Change | ||||||||||||||
| MPC Segment EBT | $ | 59,678 | $ | 63,355 | $ | (3,677) | |||||||||||
| Plus: | |||||||||||||||||
| Master Planned Communities cost of sales | 24,686 | 15,651 | 9,035 | ||||||||||||||
| Depreciation and amortization | 90 | 72 | 18 | ||||||||||||||
| MUD and SID bonds collections, net (a) | 21,759 | 2,894 | 18,865 | ||||||||||||||
| Distributions from real estate and other affiliates | — | 1,144 | (1,144) | ||||||||||||||
| Less: | |||||||||||||||||
| MPC development expenditures | (78,883) | (52,980) | (25,903) | ||||||||||||||
| Equity in (earnings) losses in real estate and other affiliates | (5,550) | (27,650) | 22,100 | ||||||||||||||
| MPC Net Contribution | $ | 21,780 | $ | 2,486 | $ | 19,294 | |||||||||||
(a)SID collections are shown net of SID transfers to buyers in the respective periods.
MPC Net Contribution increased $19.3 million for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to an increase in MUD and SID bond collections, net.
The following table sets forth MPC land inventory activity for the three months ended March 31, 2022:
| thousands | Bridgeland | Columbia | Douglas Ranch | Summerlin | The Woodlands | The Woodlands Hills | Total MPC | ||||||||||||||||||||||||||||||||||
| Balance December 31, 2021 | $ | 520,154 | $ | 16,625 | $ | 510,541 | $ | 931,723 | $ | 187,419 | $ | 116,306 | $ | 2,282,768 | |||||||||||||||||||||||||||
| Development expenditures (a) | 36,842 | — | 123 | 34,228 | 2,729 | 4,961 | 78,883 | ||||||||||||||||||||||||||||||||||
| MPC Cost of sales | (5,146) | — | — | (17,852) | — | (1,688) | (24,686) | ||||||||||||||||||||||||||||||||||
| MUD reimbursable costs (b) | (29,427) | — | — | — | (21) | (2,447) | (31,895) | ||||||||||||||||||||||||||||||||||
| Other (c) | 1,352 | — | — | 6,287 | 419 | 369 | 8,427 | ||||||||||||||||||||||||||||||||||
| Balance March 31, 2022 | $ | 523,775 | $ | 16,625 | $ | 510,664 | $ | 954,386 | $ | 190,546 | $ | 117,501 | $ | 2,313,497 | |||||||||||||||||||||||||||
(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.
HHC 2022 FORM 10-Q | 42
| Seaport | ||
General The Seaport is part non-stabilized operating asset, part development project and part operating business. As such, the Seaport has a greater range of possible outcomes than our other projects. The greater uncertainty is largely the result of: (i) seasonality; (ii) potential sponsorship revenue; (iii) potential event revenue; and (iv) business operating risks from various start-up businesses. We operate and own, either directly, through license agreements or in joint ventures, many of the tenants in the Seaport, and 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. 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 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 reaches its critical mass of offerings. Given the factors and uncertainties listed above, we do not currently provide guidance on our expected NOI yield and stabilization date for the Seaport. As we move closer to opening a critical mass of offerings at the Seaport, we will re-establish goals for yield on costs and stabilization dates when the uncertainties and range of possible outcomes are clearer.
Construction on the core and shell of the Tin Building was completed as of December 31, 2021, and the marketplace operated by Jean-Georges is expected to open in the second quarter of 2022, with an expanded focus on experiences including in-person dining, retail shopping, mobile ordering and delivery.
Due to the range of asset types discussed above, we categorize the businesses in the Seaport segment into three groups: landlord operations, managed businesses, and events and sponsorships.
Landlord Operations Landlord operations represent physical real estate we have developed and own, and is inclusive of our office, retail and multi-family properties.
Managed Businesses Managed businesses represent retail and food and beverage businesses that HHC owns, either wholly or through partnerships with third parties, and operates, including license and management agreements. Our managed businesses include, among others, The Fulton, The Greens, Mister Dips, Carne Mare, Malibu Farm, Ssäm Bar and The Tin Building by Jean-Georges which is expected to open in the second quarter of 2022. The Tin Building by Jean-Georges, The Fulton, The Greens and Malibu Farm are managed by Creative Culinary Management Company, LLC, a Jean-Georges company, and Mister Dips and Carne Mare are managed by Seaport F&B LLC, an Andrew Carmellini company. These management companies are responsible for employment and supervision of all employees providing services for the food and beverage operations and restaurant as well as the day-to-day operations and accounting for the food and beverage operations.
In March of 2022, the Company paid $45 million for a 25% interest in Jean-Georges Restaurants, which currently owns over 40 restaurant and hospitality offerings around the world. The Company also paid $10 million in exchange for the option to acquire up to an additional 20% interest in Jean-Georges Restaurants. The Company reports its ownership interest in accordance with the equity method and recognizes its proportionate share of earnings as Equity in earnings (losses) from real estate and other affiliates.
In late 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 the fall of 2022.
Events and Sponsorships Our events and sponsorship businesses include our concert series, event catering, private events and sponsorships. Food and beverage operations associated with concert concessions and catering are operated under management agreements with Creative Culinary Management Company, LLC.
HHC 2022 FORM 10-Q | 43
250 Water Street 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. This project, which includes approximately 547,000 zoning square feet, presents a unique opportunity at the Seaport to redevelop this site into a vibrant mixed-use asset, provide long-term viability to the South Street Seaport Museum and deliver much-needed affordable housing and economic stimulus to the area. In May 2021, we received approval from the New York City Landmarks Preservation Commission (LPC) on our proposed design for the 250 Water Street and in September 2021, the New York State Supreme Court dismissed on procedural grounds a lawsuit challenging the LPC approval. We received final approvals in December 2021 through the New York City Uniform Land Use Review Procedure known as ULURP, which will allow the necessary transfer of development rights to the parking lot site. Also in December 2021, an amendment to the Seaport ground lease was executed giving the Company extension options, at the discretion of the Company, for an additional 48 years from its current expiration in 2072 until 2120. We expect to begin remediation of the site through the New York State Brownfield Cleanup program and break ground on the development in the second quarter of 2022. In February 2022, an additional lawsuit was filed challenging the land use approvals previously granted to the Company under the ULURP for the redevelopment and construction of 250 Water Street. The Company is vigorously contesting the matter as it believes that these claims are without merit.
Impact of COVID-19 In response to the COVID-19 pandemic, we closed the Seaport in March 2020 and cancelled our 2020 Seaport summer concert series. Many businesses 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 through the third quarter of 2021, primarily due to labor shortages. All venues were open and operating at close to full capacity during the fourth quarter of 2021; however, operations were negatively impacted by the rise of the Omicron variant in the beginning of 2022 before returning to normal in March 2022. As of March 31, 2022, all businesses were open and operating at close to full capacity.
Segment EBT Segment EBT for Seaport is presented below:
| Seaport Segment EBT | Three Months Ended March 31, | ||||||||||||||||
| thousands | 2022 | 2021 | $ Change | ||||||||||||||
| Rental Revenue | $ | 1,503 | $ | 2,228 | $ | (725) | |||||||||||
| Other land, rental and property revenues | 7,873 | 5,225 | 2,648 | ||||||||||||||
| Total revenues | 9,376 | 7,453 | 1,923 | ||||||||||||||
| Operating costs | (18,502) | (12,159) | (6,343) | ||||||||||||||
| Rental property real estate taxes | (334) | (294) | (40) | ||||||||||||||
| (Provision for) recovery of doubtful accounts | (23) | (53) | 30 | ||||||||||||||
| Total operating expenses | (18,859) | (12,506) | (6,353) | ||||||||||||||
| Segment operating income (loss) | (9,483) | (5,053) | (4,430) | ||||||||||||||
| Depreciation and amortization | (7,823) | (6,835) | (988) | ||||||||||||||
| Interest income (expense), net | (47) | 102 | (149) | ||||||||||||||
| Other income (loss), net | 350 | (336) | 686 | ||||||||||||||
| Equity in earnings (losses) from real estate and other affiliates | (3,711) | (352) | (3,359) | ||||||||||||||
| Segment EBT | $ | (20,714) | $ | (12,474) | $ | (8,240) | |||||||||||
For the three months ended March 31, 2022:
Seaport segment EBT decreased $8.2 million compared to the prior-year period primarily due to the following:
–increase in revenues as a result of increased activity attributable to recovery from the COVID-19 pandemic as well as the launch of new restaurant concepts in 2021 including Mister Dips, Carne Mare and seasonal pop-ups, despite temporary impacts of the Omicron variant in early 2022
–increase in segment operating expenses, disproportionate to the increases in revenue, related to increases in food and beverage costs, and increases in labor costs due to a strategic decision to maintain staffing levels to ensure workforce retention heading into the summer season and the Tin Building opening
–decrease in equity earnings primarily related to pre-opening costs for The Tin Building by Jean-Georges in 2022
HHC 2022 FORM 10-Q | 44
Net Operating Income A reconciliation of Seaport segment EBT to Seaport NOI is presented below:
| Seaport NOI | Three Months Ended March 31, | ||||||||||||||||
| thousands | 2022 | 2021 | $ Change | ||||||||||||||
| Total Seaport segment EBT | $ | (20,714) | $ | (12,474) | $ | (8,240) | |||||||||||
| Add back: | |||||||||||||||||
| Depreciation and amortization | 7,823 | 6,835 | 988 | ||||||||||||||
| Interest (income) expense, net | 47 | (102) | 149 | ||||||||||||||
| Equity in (earnings) losses from real estate and other affiliates | 3,711 | 352 | 3,359 | ||||||||||||||
| Impact of straight-line rent | 1,888 | 404 | 1,484 | ||||||||||||||
| Other (income) loss, net | 1,503 | 741 | 762 | ||||||||||||||
| Seaport NOI | $ | (5,742) | $ | (4,244) | $ | (1,498) | |||||||||||
Including managed businesses, events, sponsorships, catering and the Tin Building, the Seaport is approximately 60% leased. We may continue to incur operating expenses in excess of rental revenues while the remaining available space is in lease-up, as the Seaport continues to move toward its critical mass of offerings and until the economy recovers from the economic impact of the COVID-19 pandemic.
The below table presents Seaport NOI by category:
| Seaport NOI by Category | Three Months Ended March 31, | ||||||||||||||||
| thousands | 2022 | 2021 | $ Change | ||||||||||||||
| Landlord Operations - Historic District & Pier 17 | $ | (2,855) | $ | (3,240) | $ | 385 | |||||||||||
| Multi-family | (132) | 92 | (224) | ||||||||||||||
| Managed Businesses - Historic District & Pier 17 | (2,630) | (660) | (1,970) | ||||||||||||||
| Events, Sponsorships & Catering Business | (125) | (436) | 311 | ||||||||||||||
| Seaport NOI | $ | (5,742) | $ | (4,244) | $ | (1,498) | |||||||||||
Managed Business NOI decreased $2.0 million compared to the prior-year period. While activity increased for the quarter due to recovery from the COVID-19 pandemic and new restaurant concepts launched in 2021 including Mister Dips, Carne Mare and seasonal pop-ups, expenses outpaced revenues, due to increases in food and beverage costs, and increases in labor costs due to a strategic decision to maintain staffing levels to ensure workforce retention heading into the summer season and the Tin Building opening.
HHC 2022 FORM 10-Q | 45
| Strategic Developments | ||
Our Strategic Developments assets generally require substantial future development to maximize their value. Other than our condominium properties, most of the properties and projects in this segment do not generate revenues. Our expenses relating to these assets are primarily related to costs associated with constructing the assets, selling condominiums, marketing costs associated with our Strategic Developments, carrying costs including, but not limited to, property taxes and insurance, and other ongoing costs relating to maintaining the assets in their current condition. If we decide to redevelop or develop a Strategic Developments asset, we would expect that with the exception of the residential portion of our condominium projects, upon completion of development, the asset would likely be reclassified to 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 March 31, | ||||||||||||||||
| thousands | 2022 | 2021 | $ Change | ||||||||||||||
| Condominium rights and unit sales | $ | 19,616 | $ | 37,167 | $ | (17,551) | |||||||||||
| Rental Revenue | — | 88 | (88) | ||||||||||||||
| Other land, rental and property revenues | 840 | 1,045 | (205) | ||||||||||||||
| Total revenues | $ | 20,456 | $ | 38,300 | $ | (17,844) | |||||||||||
| Condominium rights and unit cost of sales | (14,180) | (54,968) | 40,788 | ||||||||||||||
| Operating costs | (3,208) | (3,680) | 472 | ||||||||||||||
| Rental property real estate taxes | (689) | (975) | 286 | ||||||||||||||
| Total operating expenses | (18,077) | (59,623) | 41,546 | ||||||||||||||
| Segment operating income (loss) | 2,379 | (21,323) | 23,702 | ||||||||||||||
| Depreciation and amortization | (1,332) | (1,598) | 266 | ||||||||||||||
| Interest income (expense), net | 3,989 | 1,101 | 2,888 | ||||||||||||||
| Other income (loss), net | (485) | — | (485) | ||||||||||||||
| Equity in earnings (losses) from real estate and other affiliates | 898 | (98) | 996 | ||||||||||||||
| Gain (loss) on sale or disposal of real estate and other assets, net | (9) | — | (9) | ||||||||||||||
| Segment EBT | $ | 5,440 | $ | (21,918) | $ | 27,358 | |||||||||||
For the three months ended March 31, 2022:
Strategic Developments segment EBT increased $27.4 million compared to the prior-year period primarily due to the following:
–decrease in Condominium rights and unit cost of sales primarily attributable to a prior-year accrual of $20.5 million related to defect remediation at Waiea
–increase in Condominium rights and unit sales, net of costs of sales, of $2.7 million driven by the timing of condominium closings. The Company closed on 24 units at ‘A‘ali‘i during the three months ended March 31, 2022, compared to four units at Waiea and one unit at Anaha during the three months ended March 31, 2021.
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. We closed on 24 condominium inventory units during the three months ended March 31, 2022, compared to 5 condominium unit closings during the three months ended March 31, 2021. Overall progress at our condominium projects remains strong, as evidenced by the contract activity discussed below.
Completed Condominiums As of March 31, 2022, our five completed towers are 97.3% sold with only 2 units remaining at Waiea and 55 units remaining at ‘A‘ali‘i. Ae’o, Ke Kilohana and Anaha are completely sold.
HHC 2022 FORM 10-Q | 46
Under-Construction Condominiums As of March 31, 2022, our two under-construction towers are 94.6% sold. Kō'ula is a 41-story, 565-unit, mixed-use condominium project that will consist of studio, one-, two- and three-bedroom residences. As of March 31, 2022, Kō'ula is 91.5% presold. 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. As of March 31, 2022, Victoria Place is 99.7% presold. Subsequent to quarter end, we contracted the remaining unit, resulting in Victoria Place being completely sold.
Predevelopment Condominiums We launched public sales of our eighth condominium project in July 2021. The Park Ward Village will be a 41-story, 545-unit condominium project located at Ward Avenue and Auahi Street, and adjacent to Victoria Ward Park. The project will consist of studio, one-, two- and three-bedroom residences, with the units ranging from approximately 400 square feet to 1,500 square feet. As of March 31, 2022, we have entered into contracts for 483 of the 545 units, representing 88.6% of total units. This strong sales activity continued after quarter end, and as of May 5, 2022, we have entered into contracts for 487 units, representing 89.4% of total units. The Park Ward Village is Ward Village’s fastest-selling tower since inception, surpassing Victoria Place which held the previous record.
In 2021, HHC announced plans for our ninth condominium project, Ulana Ward Village. This mixed-use residence will be adjacent to the new Ka Laʻi o Kukuluāeʻo public park and will consist of 696 studio, one-, two- and three-bedroom units. All units are designated as workforce housing units and are being offered to local residents who meet certain maximum income and net worth requirements. In March 2022, the Company advanced the lottery for local residents. As of May 5, 2022, we have entered into contracts for 576 units, representing 82.8% of total units.
The following provides further detail for Ward Village as of March 31, 2022:
| 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) | 175 | — | 177 | 98.9 | % | 99.0 | % | Q4 2016 | ||||||||||||||
| Anaha | (a) | 317 | — | 317 | 100.0 | % | 100.0 | % | Q4 2017 | ||||||||||||||
| Ae’o | (a) | 465 | — | 465 | 100.0 | % | 100.0 | % | Q4 2018 | ||||||||||||||
| Ke Kilohana | (a) | 423 | — | 423 | 100.0 | % | 100.0 | % | Q2 2019 | ||||||||||||||
| ‘A‘ali‘i | (b) | 687 | 8 | 750 | 92.7 | % | 89.3 | % | Q4 2021 | ||||||||||||||
| Under construction | |||||||||||||||||||||||
| Kō'ula | (c) | — | 517 | 565 | 91.5 | % | 93.0 | % | Q3 2022 | ||||||||||||||
| Victoria Place | — | 348 | 349 | 99.7 | % | 99.8 | % | 2024 | |||||||||||||||
| Predevelopment | |||||||||||||||||||||||
| The Park Ward Village | (d) | — | 483 | 545 | 88.6 | % | 89.9 | % | 2025 | ||||||||||||||
(a)The retail portions of these projects are 100% leased and have been placed in service.
(b)The retail portion of this project has been placed in service and is 79% leased.
(c)There will be approximately 36,800 square feet of retail space as part of this project.
(d)There will be approximately 26,800 square feet of retail space as part of this project.
HHC 2022 FORM 10-Q | 47
| Corporate Income, Expenses and Other Items | ||
The following table contains certain corporate related and other items not related to segment activities and that are not otherwise included within the segment analyses. Variances related to income and expenses included in NOI or EBT are explained within the previous segment discussions. Significant variances for consolidated items not included in NOI or EBT are described below:
| Three Months Ended March 31, | |||||||||||||||||
| thousands | 2022 | 2021 | $ Change | ||||||||||||||
| Corporate income | $ | 15 | $ | 101 | $ | (86) | |||||||||||
| General and administrative | (25,891) | (21,766) | (4,125) | ||||||||||||||
| Corporate interest expense, net | (21,660) | (27,129) | 5,469 | ||||||||||||||
| Gain (loss) on extinguishment of debt | — | (35,079) | 35,079 | ||||||||||||||
| Corporate other income (loss), net | 83 | 126 | (43) | ||||||||||||||
| Corporate depreciation and amortization | (918) | (1,152) | 234 | ||||||||||||||
| Other | (2,409) | (1,644) | (765) | ||||||||||||||
| Income tax (expense) benefit | (701) | 21,205 | (21,906) | ||||||||||||||
| Total Corporate income, expenses and other items | $ | (51,481) | $ | (65,338) | $ | 13,857 | |||||||||||
For the three months ended March 31, 2022:
Corporate income, expenses and other items was favorably impacted compared to the prior-year period 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 in the first quarter of 2021
–decrease in corporate interest expense, net primarily due to the change in value related to derivative instruments and prepayment penalties and changes in interest related to the repurchase of the $1.0 billion 5.375% Senior Notes in the first quarter of 2021 and the issuance of $650 million 4.125% Senior Notes and $650 million 4.375% Senior Notes in the first quarter of 2021. Refer to Note 8 - Derivative Instruments and Hedging Activities for additional information on derivative instruments.
Corporate income, expenses and other items was unfavorably impacted compared to the prior-year period by the following:
–increase in income tax expense primarily due to an increase in income before income taxes. Refer to Note 10 - Income Taxes for additional information.
–increase in general and administrative expenses primarily attributable to an increase in severance costs related to the former Chief Financial Officer, as well as increases in consulting, and marketing and events expenses
HHC 2022 FORM 10-Q | 48
| MANAGEMENT’S DISCUSSION AND ANALYSIS | |||||
| LIQUIDITY AND CAPITAL RESOURCES | |||||
| Liquidity and Capital Resources | ||
We continue to maintain a strong balance sheet and ensure we maintain the financial flexibility and liquidity necessary to fund future growth. With the sale of the Company’s ownership interest in 110 North Wacker for net proceeds to the Company of $168.9 million in the first quarter of 2022, we have substantially completed the sales of our remaining non-core assets. Since the fourth quarter of 2019, we have completed the sales of fourteen non-core assets generating approximately $569.9 million of net proceeds after debt repayment.
In October 2021, the board of directors (Board) of The Howard Hughes Corporation, authorized a share repurchase program, pursuant to which the Company was authorized to purchase up to $250.0 million of its common stock through open market transactions. The Company has completed all share repurchases under this plan, with $96.6 million repurchased in the fourth quarter of 2021 and $153.4 million repurchased in the first quarter of 2022.
In March 2022, the Board authorized an additional $250.0 million of share repurchases. Under this program, the Company repurchased $17.3 million in the first quarter of 2022 and an additional $109.0 million through May 3, 2022. All purchases were funded with cash on hand.
| Cash Flows | ||
| Three Months Ended March 31, | |||||||||||
| thousands | 2022 | 2021 | |||||||||
| Cash provided by (used in) operating activities | $ | (100,760) | $ | (84,742) | |||||||
| Cash provided by (used in) investing activities | 33,859 | (56,985) | |||||||||
| Cash provided by (used in) financing activities | (96,216) | 73,058 | |||||||||
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 2022. Operating cash continued to be utilized in 2022 to fund ongoing development expenditures in our Strategic Developments, Seaport and MPC segments, consistent with prior years.
The cash flows and earnings from the MPC business may fluctuate more than from our operating assets because the MPC business generates revenues from land sales rather than recurring contractual revenues from operating leases. MPC land sales are a substantial portion of our cash flows from operating activities and are partially offset by development costs associated with the land sales business and acquisitions of land that is intended to ultimately be developed and sold.
Net cash used in operating activities was $100.8 million for the three months ended March 31, 2022, and $84.7 million for the three months ended March 31, 2021. The $16.0 million net increase in cash used in operating activities was primarily due to an increase of $25.9 million in cash used pertaining to master planned community development expenditures and a decrease of $19.2 million in cash provided by the return of an interest rate lock deposit in the first quarter of 2021 associated with a debt instrument. The impact of these items was partially offset by a $17.4 million increase in MUD receivable collections and an $8.9 million increase in net cash associated with our condominiums.
Investing Activities Net cash provided by investing activities was $33.9 million for the three months ended March 31, 2022, compared to net cash used in investing activities of $57.0 million for the three months ended March 31, 2021. The $90.8 million net increase in cash provided by investing activities was primarily the result of a $204.1 million increase in distributions from real estate and other affiliates related to the sale of the Company’s ownership interest in 110 North Wacker, resulting in a net increase to the Company’s liquidity of $168.9 million after the payment of transaction costs and distributions to our partner. This increase was partially offset by a $48.0 million increase in property development and redevelopment expenditures, and a net $69.0 million increase in investments in real estate and other affiliates, primarily attributable to the Company’s investment in Jean-Georges Restaurants during the three months ended March 31, 2022.
HHC 2022 FORM 10-Q | 49
| MANAGEMENT’S DISCUSSION AND ANALYSIS | |||||
| LIQUIDITY AND CAPITAL RESOURCES | |||||
Financing Activities Net cash used in financing activities was $96.2 million for three months ended March 31, 2022, and net cash provided by financing activities was $73.1 million for three months ended March 31, 2021. The net increase in cash used in financing activities of $169.3 million was primarily due to repurchases of common shares of $179.3 million. In addition, proceeds from mortgages, notes and loans payable decreased by $1.23 billion, partially offset by a decrease in principal payments on mortgages, notes and loans payable of $1.19 billion, primarily due to significant financing activity in 2021.
Short- and Long-Term Liquidity | ||
Short-Term Liquidity In the next twelve months, we expect our primary sources of cash to include cash flow from condominium closings, MPC land sales, cash generated from our Operating assets, first mortgage financings secured by our assets and deposits from condominium sales (which are restricted to funding construction of the related developments). We expect our primary uses of cash to include condominium pre-development and development costs, debt principal payments and debt service costs and MPC land development costs. 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.
Long-Term Liquidity The development and redevelopment opportunities in Strategic Developments, Seaport and Operating Assets are capital intensive and will require significant additional funding, if and when pursued. Any additional funding would be raised with a mix of construction, bridge and long-term financings, by entering into joint venture arrangements, the sale of non-core assets at the appropriate time, as well as 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 financing for our projects. We also provided completion guarantees to the City of New York for the redevelopment of the Tin Building, as well as the Hawai‘i Community Development Authority for reserve condominium units at Ward Village.
Debt Total outstanding debt was $4.7 billion as of March 31, 2022. Refer to Note 6 - 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 totaled $100.5 million as of March 31, 2022. All of this indebtedness is without recourse to the Company.
Debt Compliance As of March 31, 2022, the Company did not meet the debt service coverage ratios for the Two Hughes Landing and 4 Waterway Square loans, which did not have a material impact on the Company’s liquidity.
Net Debt The following table summarizes our net debt on a segment basis as of March 31, 2022. 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 | Master Planned Communities | Seaport | Strategic Developments | Segment Totals | Non-Segment Amounts | March 31, 2022 | ||||||||||||||||
| Mortgages, notes and loans payable, net | $ | 1,972,688 | $ | 339,077 | $ | 99,705 | $ | 240,281 | $ | 2,651,751 | $ | 2,023,199 | $ | 4,674,950 | |||||||||
| Mortgages, notes and loans payable of real estate and other affiliates | 90,385 | 10,127 | — | — | 100,512 | — | 100,512 | ||||||||||||||||
| Less: | |||||||||||||||||||||||
| Cash and cash equivalents | (242,924) | (70,869) | (7,103) | (13,546) | (334,442) | (353,595) | (688,037) | ||||||||||||||||
| Cash and cash equivalents of real estate and other affiliates | (2,566) | (47,214) | (22,585) | (13,919) | (86,284) | — | (86,284) | ||||||||||||||||
| Special Improvement District receivables | — | (82,413) | — | — | (82,413) | — | (82,413) | ||||||||||||||||
| Municipal Utility District receivables, net | — | (409,390) | — | — | (409,390) | — | (409,390) | ||||||||||||||||
| TIF receivable | — | — | — | (1,186) | (1,186) | — | (1,186) | ||||||||||||||||
| Net Debt | $ | 1,817,583 | $ | (260,682) | $ | 70,017 | $ | 211,630 | $ | 1,838,548 | $ | 1,669,604 | $ | 3,508,152 | |||||||||
HHC 2022 FORM 10-Q | 50
Contractual Cash Obligations and Commitments The following table aggregates our contractual cash obligations and commitments as of March 31, 2022:
| thousands | Remaining in 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | ||||||||||||||||||
| Mortgages, notes and loans payable (a) | $ | 99,516 | $ | 473,474 | $ | 379,492 | $ | 174,020 | $ | 367,572 | $ | 24,113 | $ | 3,204,365 | $ | 4,722,552 | ||||||||||
| Interest payments (b) | 159,274 | 221,279 | 189,595 | 172,532 | 160,171 | 144,053 | 344,947 | 1,391,851 | ||||||||||||||||||
| Ground lease and other leasing commitments | 3,349 | 4,521 | 4,577 | 4,635 | 4,695 | 4,756 | 270,473 | 297,006 | ||||||||||||||||||
| Total | $ | 262,139 | $ | 699,274 | $ | 573,664 | $ | 351,187 | $ | 532,438 | $ | 172,922 | $ | 3,819,785 | $ | 6,411,409 | ||||||||||
(a)Based on final maturity, inclusive of extension options. In April 2022, the Company closed on a $19.5 million financing maturing in April 2026 for 20/25 Waterway Avenue, replacing the existing loan with maturity in May 2022, with $4.2 million withheld until the release of upcoming tenant expirations.
(b)Interest is based on the borrowings that are presently outstanding and current floating interest rates.
HHC 2022 FORM 10-Q | 51
| 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 and caps. As of March 31, 2022, of our $1.5 billion of variable-rate debt outstanding, $691.3 million is swapped to a 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 construction loan on Victoria Place, which has an outstanding balance of $49.0 million as of March 31, 2022. We have a $59.5 million cap contract with a LIBOR strike rate of 2.50% on our construction loan on Tanager Echo and a $75.0 million cap contract with a LIBOR strike rate of 2.50% on our construction loan for 1700 Pavilion, both of which have immaterial amounts drawn as of March 31, 2022. As properties are placed into service and become stabilized, we typically refinance the variable-rate debt with long-term fixed-rate debt.
As of March 31, 2022, annual interest costs would increase approximately $8.3 million for every 1.00% increase in floating interest rates. Generally, a significant portion of our interest expense is capitalized due to the level of assets we currently have under development; therefore, the current impact of a change in our interest rate on our Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income would be less than the total change, but we would incur higher cash payments and the development costs of our assets would be higher, 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 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 6 - Mortgages, Notes and Loans Payable, Net and Note 8 - Derivative Instruments and Hedging Activities in our Condensed Consolidated Financial Statements.
Item 4. Controls and Procedures
| DISCLOSURE CONTROLS AND PROCEDURES | ||
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in our reports to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by SEC rules, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal financial and accounting officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2022, the end of the period covered by this report. Based on the foregoing, our principal executive officer and principal financial and accounting officer concluded that our disclosure controls and procedures were effective as of March 31, 2022.
| CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING | ||
There were no 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 2022 FORM 10-Q | 52
| OTHER INFORMATION | |||||
| PART II | ||
Item 1. Legal Proceedings
Please refer to Note 9 - 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 2021 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| PURCHASES OF EQUITY SECURITIES BY THE ISSUER | ||
| Common Stock Repurchases | ||
In October 2021, the Company’s board of directors (Board), authorized a share repurchase program, pursuant to which the Company was authorized to purchase up to $250.0 million of its common stock through open market transactions. During the fourth quarter of 2021, the Company repurchased 1,023,284 shares of its common stock, par value $0.01 per share, for $96.6 million, or approximately $94.42 per share. During the first quarter of 2022, the Company repurchased an additional 1,579,646 shares of its common stock, for $153.4 million, or approximately $97.10 per share, thereby completing all authorized purchases under the October 2021 program.
In March 2022, the Board 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 and the program may be suspended or discontinued at any time. During the first quarter of 2022, the Company repurchased 171,022 shares of its common stock, for $17.3 million, or approximately $101.09 per share under the March 2022 program. The Company repurchased an additional 1,079,000 shares of its common stock, for $109.0 million, or approximately $100.98 per share, through May 3, 2022. All purchases were funded with cash on hand.
The following sets forth information with respect to repurchases made by the Company of its shares of common stock during the first quarter of 2022:
| Period | 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 | ||||||||||||||||
January 1 - 31, 2022 | 1,227,635 | $ | 97.15 | 1,221,101 | $ | 34,704,750 | ||||||||||||||
February 1 - 28, 2022 | 361,943 | $ | 96.77 | 358,545 | $ | 34 | ||||||||||||||
March 1 - 31, 2022 | 171,022 | $ | 101.09 | 171,022 | $ | 232,711,233 | ||||||||||||||
| Total | 1,760,600 | $ | 97.45 | 1,750,668 | ||||||||||||||||
(a)During the first quarter of 2022, 9,932 shares were repurchased related to stock received by the Company for the payment of withholding taxes due on employee share issuances under share-based compensation plans.
Item 3. Default Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
HHC 2022 FORM 10-Q | 53
Item 6. Exhibits
The following Exhibit Index to this Quarterly Report lists the exhibits furnished as required by Item 601 of Regulation S-K and is incorporated by reference.
| Exhibit Number | Description | |||||||
| 31.1+ | ||||||||
| 31.2+ | ||||||||
| 32.1++ | ||||||||
| 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 | |||||||
| 101.SCH+ | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL+ | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.LAB+ | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE+ | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 101.DEF+ | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
+ 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 months ended March 31, 2022, and 2021, (ii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2022, and 2021, (iii) the Condensed Consolidated Balance Sheets as of March 31, 2022, and December 31, 2021, (iv) Condensed Consolidated Statements of Equity for the three months ended March 31, 2022, and 2021, (v) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022, and 2021, and (vi) the Notes to Condensed Consolidated Financial Statements.
HHC 2022 FORM 10-Q | 54
| SIGNATURE | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| The Howard Hughes Corporation | |||||||||||
| By: | /s/ Carlos A. Olea | ||||||||||
| Carlos A. Olea | |||||||||||
| Chief Financial Officer | |||||||||||
| May 9, 2022 | |||||||||||
HHC 2022 FORM 10-Q | 55
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a —
14(a) ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, David R. O'Reilly, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of The Howard Hughes Corporation;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
By: | /s/ David R. O'Reilly | |||||||
David R. O'Reilly | ||||||||
Chief Executive Officer | ||||||||
| May 9, 2022 | ||||||||
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a —
14(a) ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Carlos A. Olea, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of The Howard Hughes Corporation;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
By: | /s/ Carlos A. Olea | |||||||
| Carlos A. Olea | ||||||||
Chief Financial Officer | ||||||||
| May 9, 2022 | ||||||||
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. 1350 ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of The Howard Hughes Corporation (the “Company”) for the period ended March 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers, in their capacity as officers of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to such officer’s knowledge:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By: | /s/ David R. O'Reilly | ||||||||||
David R. O'Reilly | |||||||||||
Chief Executive Officer | |||||||||||
| May 9, 2022 | |||||||||||
By: | /s/ Carlos A. Olea | ||||||||||
| Carlos A. Olea | |||||||||||
Chief Financial Officer | |||||||||||
| May 9, 2022 | |||||||||||