DALLAS, Feb. 26, 2018 /PRNewswire/ -- The Howard Hughes Corporation ® (NYSE: HHC) (the "Company") announced operating results for the fourth quarter and year ended December 31, 2017. The financial statements, exhibits and reconciliations of non-GAAP measures in the attached Appendix and the Supplemental Information, as available through the Investors section of our website at www.howardhughes.com, provide further details of these results.

 
 

Full Year Earnings Highlights

 

  • Net income attributable to common stockholders decreased $33.9 million in 2017, to $168.4 million and $3.91 per diluted share, compared to 2016 net income of $202.3 million or $4.73 per diluted share. The decrease is primarily due to a decline in gains on sales of properties, increased warrant liabilities loss, and decreased equity in earnings from real estate and other affiliates, offset by a $164.3 million decrease in our tax provision, primarily due to a $101.7 million benefit provided by the Tax Cuts and Jobs Act of 2017 (the "Tax Act").
  • Total net operating income ("NOI") from operating assets, excluding assets sold or in redevelopment and including our share of NOI from joint ventures, was $157.0 million for the year ended December 31, 2017, an increase of $18.0 million or 13.0% over the year ended December 31, 2016 driven by strong performance and the stabilization of assets across all property types.
  • Master Planned Communities ("MPC") segment earnings before tax ("EBT") increased by $10.9 million or 6.1% to $190.4 million for the year ended December 31, 2017, compared to $179.5 million for the year ended December 31, 2016, bolstered by strong performance in Bridgeland and Summerlin as well as the opening and initial land sales at our newest MPC, The Woodlands Hills.
  • Sold 177 condominiums at Ward Village in 2017, bringing total homes closed or under contract to 1,286 homes or 93.1% of the 1,381 residences available for sale at our four residential projects.
  • Completed and placed into service four projects including two office buildings and two self-storage facilities and commenced construction on five projects including three office buildings, one multi-family project and one retail center.
  • Closed on the sales of six of our non-core assets for total proceeds of $88.6 million, resulting in a net gain of $55.3 million while generating $88.5 million in taxable losses.
  • Subsequent to the end of the year, repurchased 475,920 shares of common stock in a private, unaffiliated transaction at a purchase price of $120.33 per share, or approximately $57.3 million.
  • In February 2018, executed an agreement with an affiliate of Noho Hospitality Group, cofounded by two-time James Beard award-winning chef, Andrew Carmellini, to open a new restaurant in the Pier Village as well as multi-year sponsorship agreements with Ticketmaster and Heineken (through NYC Seaport SP Group, LLC).

Fourth Quarter 2017 Highlights

  • Net income attributable to common stockholders increased to $149.1 million or $3.46 per diluted share for the three months ended December 31, 2017, as compared to $43.6 million, or $1.02 per diluted share, for the three months ended December 31, 2016, due in large part to a $94.0 million tax benefit primarily driven by the Tax Act.
  • Total NOI from operating assets was $36.2 million for the three months ended December 31, 2017, a decrease of $2.2 million or 5.7% compared to $38.4 million for the three months ended December 31, 2016 reflecting a decrease at our 110 North Wacker property due to the tenant no longer paying rent as we prepare for imminent redevelopment.
  • MPC segment EBT was $52.6 million for the three months ended December 31, 2017, a decrease of $10.1 million or 16.1% compared to the three months ended December 31, 2016 largely as a result of the timing of land sales.
  • Sold 59 condominiums at Ward Village in the fourth quarter of 2017, bringing total homes closed or under contract to 1,286 homes or 93.1% of the 1,381 residences available for sale at our four residential projects.
  • Sold four non-core properties for $52.1 million in proceeds, resulting in $22.8 million in gains while generating $43.6 million in taxable losses.
  • Acquired our joint venture partner's 50.0% interest in Constellation, our multi-family project in Summerlin, for $8.0 million in cash and 50% of the joint venture's liabilities for a total of $16.0 million. As a result of the change in control, we recognized a gain of $17.8 million in Gain on acquisition of joint venture partner's interest in conjunction with this acquisition relating to the step-up to fair value of the assets acquired.
  • Announced on October 9, 2017 that ESPN will open live broadcast studios and broadcast numerous daily shows from Pier 17 at the Seaport District in New York through a long-term lease with ESPN's studio provider NEP Imaging Group, LLC.
  • Broke ground on the development of a new ballpark located in the Downtown Summerlin area for our wholly owned Las Vegas 51s Triple-A professional baseball team and signed a 20-year, $80.0 million naming rights agreement for the future stadium with the Las Vegas Convention and Visitor's Authority.
  • Began construction in the first quarter of 2018 on Downtown Summerlin Apartments, a 267-unit multi-family project in Summerlin.

"In 2017, we continued making significant progress across each of our core markets and business segments. We had our third consecutive year of increased land sales at our MPCs, highest year of NOI in our history within our Operating Assets segment, and a record year of sales at Ward Village without the launch of a new building - contracting 177 units bringing our sales to 93% of total homes sold at our four buildings delivered or under construction. Additionally, we continued to unlock value within our deep development pipeline, placing four new properties into operation while commencing construction on five projects, which upon stabilization should add $28.2 million of recurring NOI." said David R. Weinreb, Chief Executive Officer. "We closed the year out strong with a successful quarter in which we sold four non-core properties, recycling the proceeds into our core assets, and unlocking meaningful tax benefits. We also increased total land sales revenues and operating income compared to the fourth quarter last year, demonstrating the continued robust demand in the market for homes within our award-winning master planned communities and the ongoing strength of our stabilizing operating portfolio."

Financial Results

Throughout 2017, we demonstrated strong operating results realizing $1.1 billion in total revenues, an increase of $65.1 million as compared to 2016 driven by increases in our Operating Assets and MPC segments offset by a modest decline in our Strategic Developments segment. The decrease in revenues in our Strategic Developments segment was due to a decrease in condominium rights and unit sales recognized on a percentage of completion, as two of our residential towers are substantially sold. Despite higher revenues, the decline in operating income was largely the result of one-time gain on sales of properties realized in 2016, including the result of a one-time opportunistic gain of $140.5 million on the 2016 sale of 80 South Street Assemblage, and is not indicative of the underlying business results within our operating segments.

                         
   

Three Months Ended December 31, 

 

Year Ended December 31, 

(In thousands, except per share amounts)

 

2017

 

2016

 

2017

 

2016

Net income attributable to common stockholders

 

$

149,121

 

$

43,595

 

$

168,404

 

$

202,303

Basic income per share

 

$

3.48

 

$

1.10

 

$

4.07

 

$

5.12

Diluted income per share

 

$

3.46

 

$

1.02

 

$

3.91

 

$

4.73

                         

Funds from operations (FFO)

 

$

168,033

 

$

67,963

 

$

260,278

 

$

244,588

FFO per weighted average diluted share

 

$

3.90

 

$

1.59

 

$

6.04

 

$

5.72

                         

Core FFO

 

$

75,437

 

$

98,631

 

$

297,980

 

$

333,715

Core FFO per weighted average diluted share

 

$

1.75

 

$

2.31

 

$

6.92

 

$

7.81

                         

AFFO

 

$

68,822

 

$

92,278

 

$

279,182

 

$

316,302

AFFO per weighted average diluted share

 

$

1.60

 

$

2.16

 

$

6.48

 

$

7.40

 

The $105.5 million increase in Net income attributable to common stockholders for the three months ended December 31, 2017 as compared to the same period in 2016 primarily relates to a $101.7 million tax benefit as well as increased operating income in our MPC segment and an increase in gains on sales of properties. These increases were partially offset by accelerated depreciation relating to operating assets closing for redevelopment. The $33.9 million decrease in Net income attributable to common stockholders for the year ended December 31, 2017 as compared to 2016 is primarily due to a decline in gains on sales of properties, a loss from redemption of senior notes, increased warrant liabilities loss, and decreased equity in earnings from real estate and other affiliates.  These decreases were offset by a $164.3 million decrease in our tax provision, primarily due to a $101.7 million benefit provided by the Tax Act.

FFO for the three months ended December 31, 2017 increased $100.1 million or $2.31 per diluted share compared to the same period in 2016 primarily due to the items mentioned above.  FFO for the year ended December 31, 2017 increased $15.7 million or $0.32 per diluted share as compared to the year ended December 31, 2016 primarily due to $125.4 million overall reduction in the tax provision, offset by a $46.4 million loss on redemption of senior notes due 2021, $19.0 million in additional warrant liability losses in 2017, decreases of approximately $38.2 million in segment earnings primarily driven by a decrease in condominium rights and units sales as homes at Waiea and Anaha are substantially sold, and a decrease of $3.8 million as compared to prior year on gains on acquisition of joint venture partner's interest.

Core FFO for the three months ended December 31, 2017 decreased $23.2 million or $0.56 per diluted share as compared to the same period in 2016, and for the year ended December 31, 2017 decreased $35.7 million or $0.89 per diluted share as compared to 2016.  The decreases in both periods were primarily due to a decline in condominium rights and unit sales under the percentage of completion method as well as a decline in equity in earnings in real estate and other affiliates due to timing of sales at The Summit joint venture and a sale in 2016 at our Circle T Ranch and Power Center joint venture which did not recur in 2017. These decreases are offset by increases in the MPC and Operating Assets segment earnings, adjusted to exclude gains, depreciation and amortization on depreciable real estate property.

Adjusted FFO ("AFFO"), our Core FFO adjusted to exclude recurring capital improvements and leasing commissions, decreased $23.5 million or $0.56 per diluted share for the three months ended December 31, 2017 as compared to the same period in 2016 primarily due to the items discussed above.  Adjusted FFO decreased $37.1 million or $0.92 per diluted share for the year ended December 31, 2017 as compared 2016 primarily due to the items discussed above as well as a slight increase of $1.6 million in recurring tenant and capital improvements. Please reference FFO, Core FFO and AFFO as defined and reconciled to the closest GAAP measure in the Appendix to this release and the reasons why we believe these non-GAAP measures are meaningful to investors.

Business Segment Operating Results

Master Planned Communities

In 2017, we increased our MPC segment earnings before tax to $190.4 million, an increase of 6.1% as compared to prior year, bolstered by strong performance in Bridgeland and Summerlin as well as the opening and initial land sales at our newest MPC, The Woodlands Hills. In total during 2017, we sold 349.6 acres of residential land at a price per acre increase of 1.3%, 26.1% and 12.1% at Bridgeland, Summerlin and The Woodlands, respectively.  These increases, along with the sale of 35.7 acres of commercial land, helped drive an increase in total revenue in our MPC segment by $46.2 million. In addition, we recognized our $23.2 million share of earnings from The Summit, our luxury golf course joint venture development within Summerlin, and received a $10.0 million cash distribution generated by $55.9 million in land sales at the joint venture.

Operating Assets

In our Operating Assets segment, we increased net operating income ("NOI"), including our share of NOI from equity investments and excluding properties sold or in redevelopment, by $18.0 million, or 13.0%, to $157.0 million in 2017 compared to $139.0 million in 2016. This increase was driven by strong performance and the stabilization of assets across all property types, partially offset by NOI reductions related to the wind down of operating activities at both 110 North Wacker and certain areas of Ward Village, where we will execute on development in the coming months as we pursue future value creation opportunities. We experienced particularly strong NOI growth in our office and hospitality assets for the years ended December 31, 2017 and 2016 with an increase in NOI of $7.3 million and $6.9 million, respectively.

Also during 2017, we acquired our joint venture partner's 50.0% interest in Constellation for $8.0 million in cash and 50% of the joint venture's liabilities, for a total of $16.0 million, resulting in a gain of $17.8 million on step-up to fair value of net assets acquired.  We also acquired our joint venture partner's 50.0% interest in the Las Vegas 51s minor league baseball team, which upon completion of a new stadium will serve as an amenity for our Summerlin MPC, for $16.4 million, resulting in a gain of $5.4 million on step-up to fair value of the net assets acquired.

Strategic Developments

Our Strategic Developments segment experienced another strong year of execution with respect to both the sale of condominium units in Ward Village as well as development activities throughout the portfolio, with two new condominium towers under construction, two that have welcomed residents and three projects completed at The Woodlands and Columbia. We reported revenues of $464.3 million from condominium rights and unit sales at our four residential condominium towers available for sale in Ward Village, as compared to $485.6 million in 2016 and $305.3 million in 2015.  Through December 31, 2017 we have closed on the sales of a total of 464 units to new residents. With the opening of both Waiea and Anaha to new residents and the associated proceeds generated from the closings of those units, we repaid the $195.3 million outstanding balance on the Waiea and Anaha construction loan.  

Also within our Strategic Development segment during 2017, we completed construction on: (i) two self-storage facilities in The Woodlands totaling 1,438 units; (ii) One Merriweather, a 202,603 square foot, Class A office building in Downtown Columbia; and (iii) Two Merriweather, a 124,635 square foot, Class A office building in Downtown Columbia. We commenced construction on six projects including: (i) Aristocrat, a 12-acre build-to-suit project including two 90,000 square foot office buildings, 100% pre-leased to Aristocrat Technologies; (ii) Two Summerlin, a 145,000 square foot Class A office building; (iii) 100 Fellowship Drive, a three-story, 203,000 rentable square foot medical building in The Woodlands which is 100% pre-leased; (iv) Creekside Park Apartments, a 292-unit apartment complex in The Woodlands; (v) Lake Woodlands Crossing Retail center, containing approximately 60,300 rentable retail square feet in The Woodlands; and (vi) 33 Peck Slip, our joint venture project for redevelopment of a 66-room hotel serving as an amenity in the Seaport District. Finally, we broke ground on a new ballpark in downtown Summerlin for the Las Vegas 51s minor league baseball team as well as signed a naming rights agreement with the Las Vegas Convention and Visitor's Authority for the new ballpark which will pay us $4 million annually for a 20-year term.

Balance Sheet Fourth Quarter Activity and Subsequent Events

As of December 31, 2017, our total consolidated debt equaled approximately 42.5% of our total assets. Our leverage ratio (debt to enterprise value, as defined in the Supplemental Information) was 36.2% as of December 31, 2017. We believe our low leverage, with a focus on project specific financing, reduces our exposure to potential downturns and provides us with the ability to evaluate new opportunities.

In 2017, we were also able to maintain our strong balance sheet, financial flexibility and liquidity to fund future growth. As of December 31, 2017, we have $861.1 million of cash and cash equivalents, and, based on extended maturity dates, we have only $78.2 million of debt maturing during 2018. In March of 2017, we issued $800 million of 5.375% senior notes due March 15, 2025 (the "2025 Notes"), using the sales proceeds to redeem all $750 million of the 6.875% senior notes, to pay related transaction fees and expenses, and to repay construction financings and fund ongoing development projects and general corporate needs. This refinancing transaction added meaningful duration to our debt maturity profile, reduced our current coupon by 150 basis points and maintained our current liquidity profile all at a positive net present value basis. In June of 2017, we opportunistically issued an additional $200.0 million of the 2025 Notes at a premium to par of 102.25%, further increasing our liquidity profile.

In addition, our liquidity was further enhanced during the year by obtaining approximately $127.6 million in construction financings, obtaining $49.2 million in non-recourse financings, a $30.0 million increase in The Woodlands Master Credit Facility, the receipt of our first reimbursement of $1.6 million from the first tranche of $38.5 million in Tax Increment Financed bonds issued by Howard County, Maryland (with another $14.4 million submitted for reimbursement as of December 31, 2017, to offset our development costs), and the receipt of $52.0 million from our CEO and President as consideration for the issuance of warrants to these executives. Finally, we closed on the sales of six non-core assets for total proceeds of $88.6 million, resulting in a net gain of $51.4 million included in Gains on sales of properties from our Strategic Developments segment and $3.9 million in Gains on sales of operating properties from our Operating Assets segment. These sales have generated $88.5 million in taxable losses.

On February 23, 2018, we repurchased 475,920 shares of our common stock, par value $0.01 per share, in a private transaction with an unaffiliated entity at a purchase price of $120.33 per share, or approximately $57,267,453 in the aggregate.  The repurchase transaction was consummated on February 21, 2018, and was funded with cash on hand.

On January 19, 2018, we paid off the $18.9 million mortgage loan on our 110 North Wacker property and settled the related swap position. As of January 2018, our tenant has vacated, and demolition has begun on 110 North Wacker to allow for redevelopment of the property.  The newly constructed 110 North Wacker will be a 53-story, Class A, downtown office building with 1.4 million square feet, and it is currently 34.8% pre-leased to Bank of America.

On December 28, 2017, we closed on a $24.2 million non-recourse financing for Constellation, a multi-family building located in Summerlin. The loan bears interest at 4.07% and matures on January 1, 2033.

On December 5, 2017, we executed a modification of our $65.5 million Three Hughes Landing Facility to extend the maturity 30 days to January 5, 2018. On January 5, 2018, we modified and extended the $65.5 million loan which bears interest at one-month LIBOR plus 2.60% with an initial maturity of December 5, 2018, with two, one-year extension options.

About The Howard Hughes Corporation®

The Howard Hughes Corporation owns, manages and develops commercial, residential and mixed-use real estate throughout the U.S. Our properties include master planned communities, operating properties, development opportunities and other unique assets spanning 14 states from New York to Hawai'i. The Howard Hughes Corporation is traded on the New York Stock Exchange under HHC with major offices in New York, Columbia, MD, Dallas, Houston, Las Vegas and Honolulu. For additional information about HHC, visit www.howardhughes.com or find us on FacebookTwitterInstagram, and LinkedIn.

Safe Harbor Statement

We may make forward-looking statements in this press release and in other reports and presentations that we file or furnish with the Securities and Exchange Commission. In addition, our management may make forward-looking statements orally to analysts, investors, creditors, the media and others. Forward-looking statements include:

  • budgeted costs, future lot sales and estimates of NOI and EBT;
  • capital required for our operations and development opportunities for the properties in our Operating Assets and Strategic Developments segments;
  • expected commencement and completion for property developments and timing of sales or rentals of certain properties;
  • expected performance of our MPC segment and other current income producing properties;
  • forecasts of our future economic performance; and
  • future liquidity, development opportunities, development spending and management plans.

These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements to materially differ from any future results, performance and achievements expressed or implied by such forward-looking statements. These risk factors are described in our Annual Report, which has been filed with the Securities and Exchange Commission on February 26, 2018. Any factor could, by itself, or together with one or more other factors, adversely affect our business, results of operations or financial condition. There may be other factors currently unknown to us that we have not described in our Annual Report that could cause results to differ from our expectations. These forward-looking statements present our estimates and assumptions as of the date of this press release. Except as may be required by law, we undertake no obligation to modify or revise any forward-looking statements to reflect events or circumstances occurring after the date of this release.

 

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED

                         
   

Three Months Ended December 31, 

 

Year Ended December 31, 

(In thousands, except per share amounts)

 

2017

 

2016

 

2017

 

2016

Revenues:

                       

Condominium rights and unit sales

 

$

122,043

 

$

123,021

 

$

464,251

 

$

485,634

Master Planned Community land sales

   

71,064

   

68,150

   

248,595

   

215,318

Minimum rents

   

46,972

   

45,013

   

183,025

   

173,268

Tenant recoveries

   

11,187

   

11,222

   

45,814

   

44,330

Hospitality revenues

   

18,830

   

16,126

   

76,020

   

62,252

Builder price participation

   

8,222

   

5,755

   

22,835

   

21,386

Other land revenues

   

8,560

   

4,009

   

28,166

   

16,232

Other rental and property revenues

   

14,105

   

5,250

   

31,414

   

16,585

  Total revenues

   

300,983

   

278,546

   

1,100,120

   

1,035,005

                         

Expenses:

                       

Condominium rights and unit cost of sales

   

85,152

   

81,566

   

338,361

   

319,325

Master Planned Community cost of sales

   

32,828

   

29,599

   

121,116

   

95,727

Master Planned Community operations

   

13,896

   

11,919

   

38,777

   

42,371

Other property operating costs

   

31,576

   

18,465

   

91,729

   

65,978

Rental property real estate taxes

   

7,420

   

5,737

   

29,185

   

26,847

Rental property maintenance costs

   

3,416

   

3,175

   

13,432

   

12,392

Hospitality operating costs

   

14,828

   

11,980

   

56,362

   

49,359

Provision for doubtful accounts

   

982

   

1,035

   

2,710

   

5,664

Demolition costs

   

1,620

   

994

   

1,923

   

2,212

Development-related marketing costs

   

5,717

   

6,598

   

20,504

   

22,184

General and administrative

   

26,459

   

25,083

   

89,882

   

86,588

Depreciation and amortization

   

36,059

   

24,618

   

132,252

   

95,864

  Total expenses

   

259,953

   

220,769

   

936,233

   

824,511

                         

Operating income before other items

   

41,030

   

57,777

   

163,887

   

210,494

                         

Other:

                       

Provision for impairment

   

   

   

   

(35,734)

Gains on sales of properties

   

18,915

   

   

51,367

   

140,549

Other (loss) income, net

   

2,498

   

1,595

   

3,248

   

11,453

Total other

   

21,413

   

1,595

   

54,615

   

116,268

                         

Operating income

   

62,443

   

59,372

   

218,502

   

326,762

                         

Interest income

   

872

   

459

   

4,043

   

1,359

Interest expense

   

(15,021)

   

(17,096)

   

(64,568)

   

(65,724)

Loss on redemption of senior notes due 2021

   

   

   

(46,410)

   

Warrant liability (loss) gain

   

   

(2,780)

   

(43,443)

   

(24,410)

Gain on acquisition of joint venture partner's interest

   

17,842

   

   

23,332

   

27,088

Gain (loss) on disposal of operating assets

   

3,868

   

(1,117)

   

3,868

   

(1,117)

Equity in earnings from Real Estate and Other Affiliates

   

(323)

   

21,118

   

25,498

   

56,818

Income before taxes

   

69,681

   

59,956

   

120,822

   

320,776

(Benefit) provision for income taxes

   

(77,647)

   

16,361

   

(45,801)

   

118,450

Net income

   

147,328

   

43,595

   

166,623

   

202,326

Net loss (income) attributable to noncontrolling interests

   

1,793

   

   

1,781

   

(23)

Net income attributable to common stockholders

 

$

149,121

 

$

43,595

 

$

168,404

 

$

202,303

                         

Basic income per share:

 

$

3.48

 

$

1.10

 

$

4.07

 

$

5.12

                         

Diluted income per share:

 

$

3.46

 

$

1.02

 

$

3.91

 

$

4.73

 

 

THE HOWARD HUGHES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED

             
   

December 31, 

(In thousands, except share amounts)

 

2017

 

2016

Assets:

           

Investment in real estate:

           

Master Planned Community assets

 

$

1,642,278

 

$

1,669,561

Buildings and equipment

   

2,238,617

   

2,027,363

Less: accumulated depreciation

   

(321,882)

   

(245,814)

Land

   

277,932

   

320,936

Developments

   

1,196,582

   

961,980

  Net property and equipment

   

5,033,527

   

4,734,026

Investment in Real Estate and Other Affiliates

   

76,593

   

76,376

Net investment in real estate

   

5,110,120

   

4,810,402

Cash and cash equivalents

   

861,059

   

665,510

Accounts receivable, net 

   

13,041

   

9,883

Municipal Utility District receivables, net

   

184,811

   

150,385

Notes receivable, net

   

5,864

   

155

Deferred expenses, net

   

80,901

   

64,531

Prepaid expenses and other assets, net

   

473,268

   

666,516

Total assets

 

$

6,729,064

 

$

6,367,382

             

Liabilities:

           

Mortgages, notes and loans payable, net

 

$

2,857,945

 

$

2,690,747

Deferred tax liabilities

   

160,850

   

200,945

Warrant liabilities

   

   

332,170

Accounts payable and accrued expenses

   

521,718

   

572,010

Total liabilities

   

3,540,513

   

3,795,872

             

Equity:

           

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

   

   

Common stock: $.01 par value; 150,000,000 shares authorized, 43,300,253 shares
issued and 43,270,880 outstanding as of December 31, 2017 and 39,802,064 shares
issued and 39,790,003 outstanding as of December 31, 2016

   

433

   

398

Additional paid-in capital

   

3,302,502

   

2,853,269

Accumulated deficit

   

(109,508)

   

(277,912)

Accumulated other comprehensive loss

   

(6,965)

   

(6,786)

Treasury stock, at cost, 29,373 shares and 12,061 shares as of December 31, 2017 and 2016,
respectively

   

(3,476)

   

(1,231)

Total stockholders' equity

   

3,182,986

   

2,567,738

Noncontrolling interests

   

5,565

   

3,772

Total equity

   

3,188,551

   

2,571,510

  Total liabilities and equity

 

$

6,729,064

 

$

6,367,382

 

Appendix – Reconciliations of Non-GAAP Measures

As of and for the Three Months and Year Ended December 31, 2017

We use certain non-GAAP performance measures, in addition to the required GAAP presentations, 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 the Company's reported non-GAAP performance measures to determine how best to provide relevant information to the public, and thus such reported measures could change. The non-GAAP financial measures used herein are Net operating income ("NOI"), Funds from operations ("FFO"), Core funds from operations ("Core FFO"), and Adjusted funds from operations ("AFFO").

Because our three segments, Master Planned Communities, Operating Assets and Strategic Developments, are managed separately, we use different operating measures to assess operating results and allocate resources among these three segments. The one common operating measure used to assess operating results for our business segments is EBT. EBT, as it relates to each business segment, represents the revenues less expenses of each segment, including interest income, interest expense and Equity in earnings of real estate and other affiliates. EBT excludes corporate expenses and other items that are not allocable to the segments. We present EBT because we use this measure, among others, internally to assess the core operating performance of our assets. However, EBT should not be considered as an alternative to GAAP net income.

                               

Reconciliation of  EBT to income before taxes

 

Three Months Ended December 31, 

 

Year Ended December 31, 

(In thousands)

 

2017

 

2016

 

2017

 

2016

 

2015

MPC segment EBT

 

$

52,604

 

$

62,706

 

$

190,351

 

$

179,481

 

$

114,366

Operating Assets segment EBT

   

(14,356)

   

5,191

   

(28,664)

   

(22,985)

   

(9,646)

Strategic Developments segment EBT

   

51,985

   

36,102

   

169,041

   

302,022

   

97,580

Total consolidated segment EBT

   

90,233

   

103,999

   

330,728

   

458,518

   

202,300

Corporate and other items:

                             

General and administrative

   

(26,459)

   

(25,083)

   

(89,882)

   

(86,588)

   

(81,345)

Corporate interest expense, net

   

(12,105)

   

(13,104)

   

(48,700)

   

(52,460)

   

(52,995)

Warrant liability (loss) gain

   

   

(2,780)

   

(43,443)

   

(24,410)

   

58,320

Gain on acquisition of joint venture partner's interest

   

17,842

   

   

23,332

   

27,088

   

Gain (loss) on disposal of operating assets

   

3,868

   

(1,117)

   

3,868

   

(1,117)

   

29,073

Gains on sales of properties

   

125

   

   

125

   

   

Equity in earnings in Real Estate and Other Affiliates

   

(453)

   

   

(453)

   

   

Loss on redemption of senior notes due 2021

   

   

   

(46,410)

   

   

Corporate other (expense) income, net

   

(923)

   

51

   

(45)

   

6,241

   

1,409

Corporate depreciation and amortization

   

(2,447)

   

(2,010)

   

(8,298)

   

(6,496)

   

(6,042)

Total Corporate and other items

   

(20,552)

   

(44,043)

   

(209,906)

   

(137,742)

   

(51,580)

Income before taxes

 

$

69,681

 

$

59,956

 

$

120,822

 

$

320,776

 

$

150,720

 

NOI

We believe that NOI is a useful supplemental measure of the performance of our Operating Assets portfolio 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. 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, including our share of NOI from equity investees). NOI excludes straight-line rents and amortization of tenant incentives, net interest expense, ground rent amortization, demolition costs, amortization, depreciation, and development-related marketing. All management fees have been eliminated for all internally-managed properties. We use NOI to evaluate our operating performance on a property-by-property basis because NOI allows us to evaluate the impact that factors, which vary by property, such as lease structure, lease rates and tenant base have on our operating results, gross margins and investment returns. Variances between years in NOI typically result from changes in rental rates, occupancy, tenant mix and operating expenses. Although we believe that NOI provides useful information to investors about the performance of our Operating Assets, due to the exclusions noted above, NOI should only be used as an additional measure of the financial performance of the assets of this segment of our business and not as an alternative to GAAP net income (loss). For reference, and as an aid in understanding our computation of NOI, a reconciliation of Operating Assets EBT to Operating Assets NOI has been presented in the table below.

                         
   

Three Months Ended
December 31, 

 

Year Ended December 31, 

(In thousands)

 

2017

 

2016

 

2017

 

2016

Total Operating Assets segment EBT

 

$

(14,356)

 

$

5,191

 

$

(28,664)

 

$

(22,985)

                         

Add Back:

                       

Straight-line lease amortization

   

(2,801)

   

(1,057)

   

(7,999)

   

(10,689)

Demolition costs

   

1,443

   

194

   

1,605

   

194

Development-related marketing costs

   

1,029

   

46

   

3,346

   

947

Provision for impairment

   

   

   

   

35,734

Depreciation and Amortization

   

33,503

   

21,767

   

122,421

   

86,313

Write-off of lease intangibles and other

   

492

   

61

   

575

   

25

Other income, net

   

50

   

(1,475)

   

315

   

(4,601)

Equity in earnings from Real Estate Affiliates

   

472

   

(185)

   

(3,267)

   

(2,802)

Interest, net

   

15,580

   

13,458

   

61,584

   

50,427

Total Operating Assets NOI - Consolidated

   

35,412

   

38,000

   

149,916

   

132,563

                         

Exclude:

                       

Redevelopments

                       

Historic Area / Uplands

   

   

   

   

(589)

Landmark Mall

   

   

(150)

   

   

(676)

Total Operating Asset Redevelopments NOI

   

   

(150)

   

   

(1,265)

                         

Dispositions

                       

Cottonwood Square

   

250

   

176

   

750

   

705

Park West

   

1

   

490

   

(60)

   

1,835

Total Operating Asset Dispositions NOI

   

251

   

666

   

690

   

2,540

                         

Consolidated Operating Assets NOI excluding properties sold or in redevelopment

 

$

35,161

 

$

37,484

 

$

149,226

 

$

131,288

                         

Company's Share NOI - Equity investees

 

$

1,084

 

$

888

 

$

4,401

 

$

5,069

                         

Distributions from Summerlin Hospital Investment

   

   

   

3,383

   

2,616

                         

Total NOI

 

$

36,245

 

$

38,372

 

$

157,010

 

$

138,973

 

FFO, Core FFO, and Adjusted FFO (AFFO)

FFO is defined by the National Association of Real Estate Investment Trusts (NAREIT) as net income calculated in accordance with GAAP, excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization and impairment charges (which we believe are not indicative of the performance of our operating portfolio). We calculate FFO in accordance with NAREIT's definition. Since FFO excludes depreciation and amortization and gains and losses from depreciable property dispositions, and impairments, it can provide a performance measure that, when compared year over year, reflects the impact on operations from trends in land sales prices, occupancy rates, rental rates, operating costs, acquisition and development activities, and financing costs. This provides a perspective of our financial performance not immediately apparent from net income determined in accordance with GAAP. Core FFO is calculated by adjusting FFO to exclude the impact of certain non-cash and/or nonrecurring income and expense items, as set forth in the calculation below. These items can vary greatly from period to period, depending upon the volume of our acquisition activity and debt retirements, among other factors. We believe that by excluding these items, Core FFO serves as a useful, supplementary measure of the ongoing operating performance of our core operations, and we believe it is used by investors in a similar manner. Finally, AFFO adjusts our Core FFO operating measure to deduct cash spent on recurring tenant improvements and capital expenditures of a routine nature as well as leasing commissions to present an adjusted measure of Core FFO. Core FFO and AFFO are non-GAAP and non-standardized measures and may be calculated differently by other peer companies.

While FFO, Core FFO, AFFO and NOI are relevant and widely used measures of operating performance of real estate companies, they do not represent cash flows from operations or net income as defined by GAAP and should not be considered an alternative to those measures in evaluating our liquidity or operating performance. FFO, Core FFO, AFFO, and NOI do not purport to be indicative of cash available to fund our future cash requirements. Further, our computations of FFO, Core FFO AFFO and NOI may not be comparable to those reported by other real estate companies. We have included a reconciliation of FFO, Core FFO, and AFFO to GAAP net income below. Non-GAAP financial measures should not be considered independently, or as a substitute, for financial information presented in accordance with GAAP.

                         
   

Three Months Ended
December 31, 

 

Year Ended
December 31, 

(In thousands)

 

2017

 

2016

 

2017

 

2016

Net income attributable to common shareholders

 

$

149,121

 

$

43,595

 

$

168,404

 

$

202,303

Add:

                       

Segment real estate related depreciation and amortization

   

33,612

   

22,608

   

123,954

   

89,368

(Gain) loss on disposal of operating assets

   

(3,868)

   

1,117

   

(3,868)

   

1,117

Gains on sales of properties

   

(18,915)

   

   

(51,367)

   

(140,549)

Income tax expense (benefit) adjustments - deferred:

                       

(Gain) loss on disposal of operating assets

   

1,424

   

(419)

   

1,424

   

(419)

Gains on sales of properties

   

6,963

   

   

19,127

   

52,706

Impairment of depreciable real estate properties

   

   

   

   

35,734

Reconciling items related to noncontrolling interests

   

(1,793)

   

   

(1,781)

   

23

Our share of the above reconciling items included in earnings from unconsolidated joint
ventures

   

1,489

   

1,062

   

4,385

   

4,305

FFO

 

$

168,033

 

$

67,963

 

$

260,278

 

$

244,588

                         

Adjustments to arrive at Core FFO:

                       

Acquisition expenses

   

77

   

   

109

   

526

Loss on redemption of senior notes due 2021

   

   

   

46,410

   

Gain on acquisition of joint venture partner's interest

   

(17,842)

   

   

(23,332)

   

(27,088)

Warrant loss

   

   

2,780

   

43,443

   

24,410

Severance expenses

   

123

   

253

   

2,525

   

453

Non-real estate related depreciation and amortization

   

2,447

   

2,010

   

8,298

   

6,496

Straight-line rent adjustment

   

(2,849)

   

(1,203)

   

(7,782)

   

(10,861)

Deferred income tax expense (benefit)

   

(85,334)

   

18,178

   

(64,014)

   

61,411

Non-cash fair value adjustments related to hedging instruments

   

506

   

265

   

905

   

1,364

Share based compensation

   

2,860

   

587

   

8,211

   

7,343

Other non-recurring expenses (development related marketing and demolition costs)

   

7,337

   

7,592

   

22,427

   

24,396

Our share of the above reconciling items included in earnings from unconsolidated joint
ventures

   

79

   

206

   

502

   

677

Core FFO

 

$

75,437

 

$

98,631

 

$

297,980

 

$

333,715

                         

Adjustments to arrive at Adjusted FFO ("AFFO"):

                       

Tenant and capital improvements

   

(5,647)

   

(4,881)

   

(15,803)

   

(14,224)

Leasing commissions

   

(968)

   

(1,472)

   

(2,995)

   

(3,189)

AFFO

 

$

68,822

 

$

92,278

 

$

279,182

 

$

316,302

                         

FFO per diluted share value

 

$

3.90

 

$

1.59

 

$

6.04

 

$

5.72

                         

Core FFO per diluted share value

 

$

1.75

 

$

2.31

 

$

6.92

 

$

7.81

                         

AFFO per diluted share value

 

$

1.60

 

$

2.16

 

$

6.48

 

$

7.40

 

Contact Information:
David R. O'Reilly
Chief Financial Officer
(214) 741-7744                                                
David.OReilly@howardhughes.com

 

CisionView original content with multimedia:http://www.prnewswire.com/news-releases/the-howard-hughes-corporation-reports-fourth-quarter-and-full-year-2017-results-300604443.html

SOURCE The Howard Hughes Corporation