| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| thousands | 2022 | | 2021 | | 2020 |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
| Proceeds from mortgages, notes and loans payable | 1,235,895 | | | 2,422,862 | | | 1,403,923 | |
| Principal payments on mortgages, notes and loans payable | (1,065,348) | | | (2,140,340) | | | (867,935) | |
| Proceeds from issuance of common stock | — | | | — | | | 593,574 | |
| Repurchases of common shares | (403,863) | | | (81,127) | | | — | |
| Debt extinguishment costs | (60) | | | (29,793) | | | — | |
| Special Improvement District bond funds released from (held in) escrow | 23,148 | | | 11,477 | | | 10,151 | |
| Deferred financing costs and bond issuance costs, net | (18,515) | | | (28,517) | | | (17,844) | |
| Taxes paid on stock options exercised and restricted stock vested | (3,011) | | | (2,500) | | | (2,229) | |
| | | | | |
| | | | | |
| Stock options exercised | 345 | | | 4,078 | | | 4,638 | |
| Issuance of Teravalis noncontrolling interest | 31,234 | | | — | | | — | |
| Distribution to noncontrolling interest upon sale of 110 North Wacker | (22,084) | | | — | | | — | |
| Cash provided by (used in) financing activities | (222,259) | | | 156,140 | | | 1,124,278 | |
| | | | | |
| Net change in cash, cash equivalents and restricted cash | (117,700) | | | (26,360) | | | 622,862 | |
| Cash, cash equivalents and restricted cash at beginning of period | 1,216,637 | | | 1,242,997 | | | 620,135 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 1,098,937 | | | $ | 1,216,637 | | | $ | 1,242,997 | |
| | | | | |
| RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | | | | |
| Cash and cash equivalents | $ | 626,653 | | | $ | 843,212 | | | $ | 1,014,686 | |
| Restricted cash | 472,284 | | | 373,425 | | | 228,311 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 1,098,937 | | | $ | 1,216,637 | | | $ | 1,242,997 | |
| | | | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | | | |
| Interest paid, net | $ | 214,583 | | | $ | 182,654 | | | $ | 179,355 | |
| Interest capitalized | 100,607 | | | 71,798 | | | 70,258 | |
| Income taxes paid (refunded), net | 24,974 | | | 1,789 | | | (2,409) | |
| | | | | |
| NON-CASH TRANSACTIONS | | | | | |
| Issuance of Teravalis noncontrolling interest | 33,810 | | | — | | | — | |
| MPC land contributed to unconsolidated venture | 21,450 | | | — | | | — | |
| Accrued property improvements, developments, and redevelopments | 131 | | | 16,885 | | | (92,383) | |
| Special Improvement District bond transfers associated with land sales | 7,774 | | | 8,697 | | | 10,122 | |
| Special Improvement District bonds held in third-party escrow | — | | | 45,425 | | | — | |
| Capitalized stock compensation | 4,785 | | | 2,326 | | | 1,158 | |
| Initial recognition of ASC 842 operating lease ROU asset | 1,488 | | | 6,189 | | | 493 | |
| Initial recognition of ASC 842 operating lease obligation | 1,621 | | | 6,189 | | | 493 | |
| Accrued repurchase of common shares | — | | | 15,492 | | | — | |
| Accrued interest on construction loan borrowing | — | | | — | | | 9,743 | |
See Notes to Consolidated Financial Statements.
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FINANCIAL STATEMENTS FOOTNOTES | |
| | |
| 1. Summary of Significant Accounting Policies |
General The Howard Hughes Corporation is a Delaware corporation that was formed on July 1, 2010. Together with its subsidiaries (herein, HHC or the Company), HHC develops Master Planned Communities (MPC) and residential condominiums, transforms a multi-block district largely under private management in New York City into a lifestyle destination (Seaport), invests in other strategic real estate opportunities in the form of entitled and unentitled land and other development rights (Strategic Developments) and owns, manages and operates real estate assets currently generating revenues (Operating Assets), which may be redeveloped or repositioned from time to time.
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 Assets 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 Company did not experience material adverse effects related to COVID-19 in 2022.
Principles of Consolidation and Basis of Presentation The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The consolidated financial statements include the accounts of the Company and those entities in which the Company has a controlling financial interest. All intercompany transactions and balances are eliminated in consolidation. The Company also consolidates certain variable interest entities (VIEs) in accordance with Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 810 Consolidation (ASC 810). The outside equity interests in certain entities controlled by the Company are reflected in the Consolidated Financial Statements as noncontrolling interests.
Certain amounts in the 2021 and 2020 Consolidated Income Statements have been reclassified to conform to the current presentation. Specifically, the Company reclassified Demolition costs and Development-related marketing costs to Other within Total expenses.
Variable Interest Entities The Company has interests in various legal entities that represent a variable interest entity. A VIE is an entity: (a) that has total equity at risk that is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other entities; (b) where the group of equity holders does not have the power to direct the activities of the entity that most significantly impact the entity’s economic performance, or the obligation to absorb the entity’s expected losses or the right to receive the entity’s expected residual return, or both (i.e., lack the characteristics of a controlling financial interest); or (c) where the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected residual returns of the entity, or both, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights.
The Company determines if a legal entity is a VIE by performing a qualitative analysis that requires certain subjective decisions, taking into consideration the design of the entity, the variability that the entity was designed to create and pass along to its interest holders, the rights of the parties and the purpose of the arrangement. Upon the occurrence of certain reconsideration events, the Company reassesses its initial determination as to whether the entity is a VIE.
The Company also performs a qualitative assessment of each VIE to determine if it is the primary beneficiary. The Company is the primary beneficiary and would consolidate the VIE if it has a controlling financial interest where it has both (a) the power to direct the economically significant activities of the entity and (b) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. This assessment requires certain subjective decisions, taking into consideration the contractual agreements that define the ownership structure, the design of the entity, distribution of profits and losses, risks, responsibilities, indebtedness, voting rights and board representation of the respective parties. Management’s assessment of whether the Company is the primary beneficiary of a VIE is continuously performed.
Upon initial consolidation of a VIE, the Company records the assets, liabilities and noncontrolling interests at fair value and recognizes a gain or loss for the difference between (i) the fair value of the consideration paid, the fair value of noncontrolling interests and the reported amount of any previously held interests and (ii) the net amount of the fair value of the assets and liabilities.
If the Company determines it is no longer the primary beneficiary of a VIE, it will deconsolidate the entity and measure the initial cost basis for any retained interests that are recorded upon the deconsolidation at fair value. The Company will recognize a gain or loss for the difference between the fair value and the previous carrying amount of HHC’s investment in the VIE.
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FINANCIAL STATEMENTS FOOTNOTES | |
Investments in Unconsolidated Ventures The Company’s investments in unconsolidated ventures are accounted for under the equity method to the extent that, based on contractual rights associated with the investments, the Company can exert significant influence over a venture’s operations. Under the equity method, the Company’s investment in the venture is recorded at cost and is subsequently adjusted to recognize the Company’s allocable share of the earnings or losses of the venture. Dividends and distributions received by the Company are recognized as a reduction in the carrying amount of the investment. Generally, joint venture operating agreements provide that assets, liabilities, funding obligations, profits and losses, and cash flows are shared in accordance with ownership percentages. For certain equity method investments, various provisions in the joint venture operating agreements regarding distributions of cash flow based on capital account balances, allocations of profits and losses and preferred returns may result in the Company’s economic interest differing from its stated ownership or if applicable, the Company’s final profit-sharing interest after receipt of any preferred returns based on the venture’s distribution priorities. For these investments, the Company recognizes income or loss based on the joint venture’s distribution priorities, which could fluctuate over time and may be different from its stated ownership or final profit-sharing percentage.
The Company periodically assesses the appropriateness of the carrying amount of its equity method investments, as events or changes in circumstance may indicate that a decrease in value has occurred which is other‑than‑temporary. In addition to the property‑specific impairment analysis performed on the underlying assets of the investment, the Company also considers the ownership, distribution preferences, limitations and rights to sell and repurchase its ownership interests. If a decrease in value of an investment is deemed to be other‑than‑temporary, the investment is reduced to its estimated fair value and an impairment-related loss is recognized in the Consolidated Statements of Operations as a component of Equity in earnings (losses) from investments in unconsolidated ventures.
For investments in ventures where the Company has virtually no influence over operations and the investments do not have a readily determinable fair value, the Company has elected the measurement alternative to carry the securities at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the issuer. Equity securities not accounted for under the equity method, or where the measurement alternative has not been elected, are required to be reported at fair value with unrealized gains and losses reported in the Consolidated Statements of Comprehensive Income (Loss) as Net unrealized gains (losses) on instruments measured at fair value through earnings.
Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The estimates and assumptions include, but are not limited to, capitalization of development costs, provision for income taxes, future cash flows used in impairment analysis and fair value used in impairment calculations, recoverable amounts of receivables and deferred tax assets, initial valuations of tangible and intangible assets acquired and the related useful lives of assets upon which depreciation and amortization is based. Estimates and assumptions have also been made with respect to future revenues and costs, and the fair value of warrants, debt and options granted. In particular, MPC cost of sales estimates are highly judgmental as they are sensitive to cost escalation, sales price escalation and lot absorption, which are subject to judgment and affected by expectations about future market or economic conditions. Actual results could differ from these and other estimates.
Segments Segment information is prepared on the same basis that management reviews information for operational decision-making purposes. Management evaluates the performance of each of HHC’s real estate assets or investments individually and aggregates such properties into segments based on their economic characteristics and types of revenue streams. The Company operates in four business segments: (i) Operating Assets; (ii) MPC; (iii) Seaport and (iv) Strategic Developments.
Net Investment in Real Estate
Master Planned Community Assets, Buildings and Equipment and Land Real estate assets are stated at cost less any provisions for impairments and depreciation as applicable. Expenditures for significant improvements to the Company’s assets are capitalized. Tenant improvements relating to the Company’s operating assets are capitalized and depreciated over the shorter of their economic lives or the lease term. Maintenance and repair costs are charged to expense when incurred.
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FINANCIAL STATEMENTS FOOTNOTES | |
Depreciation The Company periodically reviews the estimated useful lives of properties. Depreciation or amortization expense is computed using the straight‑line method based upon the following estimated useful lives:
| | | | | | | | | | | |
| Asset Type | Years | | Balance Sheet Location |
| Buildings and improvements | 7 - 40 | | Buildings and Equipment |
| Equipment and fixtures | 5 - 20 | | Buildings and Equipment |
| Computer hardware and software, and vehicles | 3 - 5 | | Buildings and Equipment |
| Tenant improvements | Related lease term | | Buildings and Equipment |
| Leasing costs | Related lease term | | Prepaid expenses and other assets, net |
From time to time, the Company may reassess the development strategies for certain buildings and improvements which results in changes to the Company’s estimate of their remaining useful lives. The Company did not recognize additional depreciation expense of significance for the years ended December 31, 2022, 2021 and 2020.
Developments Development costs, which primarily include direct costs related to placing the asset in service associated with specific development properties, are capitalized as part of the property being developed. Construction and improvement costs incurred in connection with the development of new properties or the redevelopment of existing properties are capitalized before they are placed into service. Costs include planning, engineering, design, direct material, labor and subcontract costs. Real estate taxes, utilities, direct legal and professional fees related to the sale of a specific unit, interest, insurance costs and certain employee costs incurred during construction periods are also capitalized. Capitalization commences when the development activities begin and cease when a project is completed, put on hold or at the date that the Company decides not to move forward with a project. Capitalized costs related to a project where HHC has determined not to move forward are expensed if they are not deemed recoverable. Capitalized interest costs are based on qualified expenditures and interest rates in place during the construction period. Demolition costs associated with redevelopments are expensed as incurred unless the demolition was included in the Company’s development plans and imminent as of the acquisition date of an asset. Once the assets are placed into service, they are depreciated in accordance with HHC’s policy. In the event that management no longer has the ability or intent to complete a development, the costs previously capitalized are evaluated for impairment.
Developments consist of the following categories as of December 31:
| | | | | | | | | | | |
| thousands | 2022 | | 2021 |
| Land and improvements | $ | 339,540 | | | $ | 360,957 | |
| Development costs | 785,487 | | | 847,950 | |
| | | |
| Total Developments | $ | 1,125,027 | | | $ | 1,208,907 | |
Acquisitions of Properties The Company accounts for the acquisition of real estate properties in accordance with ASC 805 Business Combinations (ASC 805). This methodology requires that assets acquired and liabilities assumed be recorded at their fair values on the date of acquisition for business combinations and at relative fair values for asset acquisitions. Acquisition costs related to the acquisition of a business are expensed as incurred. Costs directly related to asset acquisitions are considered additions to the purchase price and increase the cost basis of such assets.
The fair value of tangible assets of an acquired property (which includes land, buildings and improvements) is determined by valuing the property as if it were vacant, and the as-if-vacant value is then allocated to land, buildings and improvements based on management’s determination of the fair value of these assets. The as-if-vacant values are derived from several sources which incorporate significant unobservable inputs that are classified as Level 3 inputs in the fair value hierarchy and primarily include a discounted cash flow analysis using discount and capitalization rates based on recent comparable market transactions, where available.
The fair value of acquired intangible assets consisting of in-place, above-market and below-market leases is recorded based on a variety of considerations, some of which incorporate significant unobservable inputs that are classified as Level 3 inputs in the fair value hierarchy. In-place lease considerations include, but are not necessarily limited to: (1) the value associated with avoiding the cost of originating the acquired in-place leases (i.e., the market cost to execute a lease, including leasing commissions and tenant improvements); (2) the value associated with lost revenue related to tenant reimbursable operating costs incurred during the assumed lease-up period (i.e., real estate taxes, insurance and certain other operating expenses); and (3) the value associated with lost rental revenue from existing leases during the assumed lease-up period. Above-market and below-market leases are valued at the present value, using a discount rate that reflects the risks associated with the leases acquired, of the difference between (1) the contractual amounts to be paid pursuant to the in-place lease; and (2) management’s estimate of current market lease rates, measured over the remaining non-cancelable lease term, including any below-market renewal option periods.
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FINANCIAL STATEMENTS FOOTNOTES | |
Impairment HHC reviews its long-lived assets (including those held by its unconsolidated ventures) for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized if the carrying amount of an asset is not recoverable and exceeds its fair value. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future economic conditions, such as occupancy, rental rates, capital requirements and sales values that could differ materially from actual results in future periods. If impairment indicators exist and it is expected that undiscounted cash flows generated by the asset are less than its carrying amount, an impairment provision is recorded to write down the carrying amount of the asset to its fair value.
Impairment indicators for HHC’s assets or projects within MPCs are assessed separately and include, but are not limited to, significant decreases in sales pace or average selling prices, significant increases in expected land development and construction costs or cancellation rates, and projected losses on expected future sales. MPC assets have extended life cycles that may last 20 to 40 years, or longer, and have few long‑term contractual cash flows. Further, MPC assets generally have minimal to no residual values because of their liquidating characteristics. MPC development periods often occur through several economic cycles. Subjective factors such as the expected timing of property development and sales, optimal development density and sales strategy impact the timing and amount of expected future cash flows and fair value.
Impairment indicators for Operating Assets are assessed for each property and include, but are not limited to, significant decreases in net operating income, significant decreases in occupancy, ongoing low occupancy and significant net operating losses.
Impairment indicators for Seaport include, but are not limited to, significant changes in projected completion dates, operating revenues or cash flows, development costs, ongoing low occupancy, and market factors.
Impairment indicators for assets in the Strategic Developments are assessed by project and include, but are not limited to, significant changes in projected completion dates, revenues or cash flows, development costs, market factors, significant decreases in comparable property sale prices and feasibility.
The cash flow estimates used both for determining recoverability and estimating fair value are inherently judgmental and reflect current and projected trends in rental, occupancy, pricing, development costs, sales pace and capitalization rates, and estimated holding periods for the applicable assets. Although the estimated fair value of certain assets may be exceeded by the carrying amount, a real estate asset is only considered to be impaired when its carrying amount is not expected to be recovered through estimated future undiscounted cash flows. To the extent an impairment provision is necessary, the excess of the carrying amount of the asset over its estimated fair value is expensed to operations. In addition, the impairment provision is allocated proportionately to adjust the carrying amount of the asset. The adjusted carrying amount, which represents the new cost basis of the asset, is depreciated over the remaining useful life of the asset or, for MPCs, is expensed as a cost of sales when land is sold. Assets that have been impaired will in the future have lower depreciation and cost of sale expenses. The impairment will have no impact on cash flow.
Cash and Cash Equivalents Cash and cash equivalents consist of highly-liquid investments with maturities at date of purchase of three months or less and include registered money market mutual funds which are invested in United States Treasury bills that are valued at the net asset value of the underlying shares in the funds as of the close of business at the end of each period as well as deposits with major banks throughout the United States. Such deposits are in excess of FDIC limits and are placed with high-quality institutions in order to minimize concentration of counterparty credit risk.
Restricted Cash Restricted cash reflects amounts segregated in escrow accounts in the name of the Company, primarily related to escrowed condominium deposits by buyers and other amounts related to taxes, insurance and legally restricted security deposits and leasing costs.
Accounts Receivable, net Accounts receivable includes tenant rents, tenant recoveries, straight-line rent assets and other receivables. On a quarterly basis, management reviews tenant rents, tenant recoveries and straight-line rent assets for collectability. As required under Accounting Standards Codification (ASC) 842 - Leases, this analysis includes a review of past due accounts and considers factors such as the credit quality of tenants, current economic conditions and changes in customer payment trends. When full collection of a lease receivable or future lease payment is not probable, a reserve for the receivable balance is charged against rental revenue and future rental revenue is recognized on a cash basis. The Company also records reserves for estimated losses under ASC 450 - Contingencies if the estimated losses are probable and can be reasonably estimated.
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FINANCIAL STATEMENTS FOOTNOTES | |
The following table represents the components of Accounts Receivable, net of amounts considered uncollectible, in the accompanying Consolidated Balance Sheets as of December 31:
| | | | | | | | | | | |
| thousands | 2022 | | 2021 |
| Straight-line rent receivables | $ | 84,145 | | | $ | 72,461 | |
| Tenant receivables | 12,044 | | | 8,647 | |
| Other receivables | 7,248 | | | 5,280 | |
| Accounts receivable, net (a) | $ | 103,437 | | | $ | 86,388 | |
(a)As of December 31, 2022, the total reserve balance for amounts considered uncollectible was $8.9 million, comprised of $3.4 million related to ASC 842 and $5.5 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.
The following table summarizes the impacts of the ASC 842 and ASC 450 reserves in the accompanying Consolidated Statements of Operations for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | |
| thousands | Income Statement Location | 2022 | | 2021 | | 2020 |
| ASC 842 reserve | Rental revenue | $ | (3,715) | | | $ | (1,562) | | | $ | 21,825 | |
| ASC 450 reserve | Provision for (recovery of) doubtful accounts | 1,959 | | | (459) | | | 6,009 | |
| | | | | | |
| | | | | | |
| | | | | | |
| Total (income) expense impact | $ | (1,756) | | | $ | (2,021) | | | $ | 27,834 | |
Municipal Utility District Receivables, net In Houston, Texas, certain development costs are reimbursable through the creation of a Municipal Utility District (MUD), also known as Water Control and Improvement Districts, which are separate political subdivisions authorized by Article 16, Section 59 of the Texas Constitution and governed by the Texas Commission on Environmental Quality (TCEQ). MUDs are formed to provide municipal water, wastewater, drainage services, recreational facilities and roads to those areas where they are currently unavailable through the regular city services. Typically, the developer advances funds for the creation of the facilities, which must be designed, bid and constructed in accordance with the City of Houston’s and TCEQ requirements.
The MUD Board of Directors authorizes and approves all MUD development contracts, and MUD bond sale proceeds are used to reimburse the developer for its construction costs, including interest. At the date the expenditures occur, the Company determines the costs it believes will be eligible for reimbursement and recognizes that as MUD receivables. These expenditures are subject to review by the MUD engineers for eligibility in accordance with the development contracts as part of the process for reimbursement. MUD receivables are pledged as security to creditors under the debt facilities relating to Bridgeland.
Notes Receivable, net Notes receivable, net includes non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, they are recorded at amortized cost less any provision for impairment as required under ASC 326 - Financial Instruments - Credit Losses.
Prepaid Expenses and Other Assets, net The major components of Prepaid expenses and other assets, net include Special Improvement District (SID) receivables, condominium inventory, interest rate derivative assets, various intangibles, and prepaid expenses related to the Company’s properties.
SID receivables are amounts due from SID bonds related to the Company’s Summerlin MPC. Proceeds from SID bonds are held in escrow by a third-party and are used to reimburse the Company for a portion of the development costs incurred in Summerlin.
Condominium inventory includes available for sale units at HHC’s completed condominium towers and is stated at the lower of cost or fair value less selling costs. Condominium inventory includes land acquisition and development costs, construction costs, and interest and real estate taxes, which are capitalized during the development period. HHC evaluates condominium inventory for impairment when potential indicators exist. An impairment loss is recognized if the carrying amount of condominium inventory exceeds the fair value less selling costs, which is based on comparable sales in the normal course of business under existing and anticipated market conditions.
Tax increment financing (TIF) receivables are amounts which the Company has submitted for reimbursement from Howard County, Maryland, in conjunction with development costs expended on key roads and infrastructure work within the Merriweather District of Columbia specified per the terms of the county’s TIF legislation and Special Obligation Bonds issued in October 2017.
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FINANCIAL STATEMENTS FOOTNOTES | |
The Company’s intangibles include in-place lease assets and above-market lease assets where HHC is the lessor, trademark and tradename intangibles related to MPCs, and other intangibles relating to the Company’s Las Vegas Aviators Triple-A professional baseball team. The Company amortizes finite-lived intangible assets less any residual value, if applicable, on a straight-line basis over the term of the related lease or the estimated useful life of the asset.
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 MUD receivables, 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 and SID receivables, totaled $545.4 million as of December 31, 2022, and $484.7 million as of December 31, 2021. The MUD receivable balance includes accrued interest of $36.4 million at December 31, 2022 and $18.2 million at December 31, 2021. The allowance for credit losses for financing receivables was not material as of December 31, 2022 and 2021, and there was no material activity related to the allowance for credit losses for the years ended December 31, 2022, 2021 and 2020.
Financing receivables are considered to be past due once they are 30 days contractually past due under the terms of the agreement. The Company currently does not have significant financing receivables that are past due or on nonaccrual status. There have been no significant write-offs or recoveries of amounts previously written-off during the current period for financing receivables.
Income Taxes The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse. Deferred income taxes also reflect the impact of operating loss and tax credit carryforwards.
The Company periodically assesses the realizability of its deferred tax assets. If the Company concludes that it is more likely than not that some of the deferred tax assets will not be realized, the tax asset is reduced by a valuation allowance. The Company considers many factors when assessing the likelihood of future realization of deferred tax assets, including expectations of future taxable income, carryforward periods available to the Company for tax reporting purposes, various income tax strategies and other relevant factors. In addition, interest and penalties related to uncertain tax positions, if necessary, are recognized in income tax expense.
In the Company’s MPCs, gains with respect to land sales, whether for commercial use or for single-family residences, are reported for tax purposes either on the modified accrual method or on the percentage-of-completion method. Under the percentage-of-completion method, a gain is recognized for tax purposes as costs are incurred in satisfaction of contractual obligations.
Deferred Expenses, net Deferred expenses consist principally of leasing costs. Deferred leasing costs are amortized to amortization expense using the straight‑line method over the related lease term. Deferred expenses are shown net of accumulated amortization of $53.8 million as of December 31, 2022, and $49.9 million as of December 31, 2021.
Marketing and Advertising Each of the Company’s segments incur various marketing and advertising costs as part of their development, branding, leasing or sales initiatives. These costs include special events, broadcasts, direct mail and online digital and social media programs, and they are expensed as incurred.
Fair Value of Financial Instruments The carrying values of cash and cash equivalents, escrows, receivables, accounts payable, accrued expenses and other assets and liabilities are reasonable estimates of their fair values because of the short maturities of these instruments.
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FINANCIAL STATEMENTS FOOTNOTES | |
Derivative Instruments and Hedging Activities Derivative instruments and hedging activities require management to make judgments on the nature of its derivatives and their effectiveness as hedges. These judgments determine if the changes in fair value of the derivative instruments are reported as a component of Net Income in the Consolidated Statements of Operations or as a component of Comprehensive Income in the Equity on the Consolidated Balance Sheets. While management believes its judgments are reasonable, a change in a derivative’s effectiveness as a hedge could materially affect expenses, net income and equity. The Company accounts for the changes in the fair value of an effective hedge in other comprehensive income (loss) and subsequently reclassifies the balance from other comprehensive income (loss) to earnings over the term that the hedged transaction affects earnings. The Company accounts for the changes in the fair value of an ineffective hedge directly in earnings.
Stock-Based Compensation The Company applies the provisions of ASC 718 Stock Compensation which requires all share‑based payments to be recognized in the Consolidated Statements of Operations based on their fair values. The Company grants various types of stock-based awards including stock options, restricted stock awards and performance-based awards. The fair value of stock option awards is determined using the Black-Scholes option-pricing model. Restricted stock awards are valued using the market price of the Company’s common stock on the grant date. For performance-based awards, the fair value of the market-condition portion of the award is measured using a Monte Carlo simulation, and the performance-condition portion is measured at the market price of the Company’s common stock on the grant date. The Company records compensation cost for stock-based compensation awards over the requisite service period. If the requisite service period is satisfied, compensation cost is not adjusted unless the award contains a performance condition. If an award contains a performance condition, expense is recognized only for those shares that ultimately vest using the per-share fair value measured at the grant date. The Company recognizes forfeitures as they occur. See Note 11 - Stock-Based Compensation Plans for additional information.
Revenue Recognition and Related Matters
Condominium Rights and Unit Sales Revenue from the sale of an individual unit in a condominium project is recognized at a point in time (i.e., the closing) when HHC satisfies the single performance obligation to construct a condominium project and transfer control of a completed unit to a buyer. The transaction price, which is the amount of consideration the Company receives upon delivery of the completed condominium unit to the buyer, is allocated to this single obligation and is received at closing less any amounts previously paid on deposit.
The Company receives cash payments in the form of escrowed condominium deposits from customers who have contracted to purchase a condominium unit based on billing schedules established in HHC’s condominium purchase agreement contracts. The amounts are recorded in Restricted cash until released from escrow in accordance with the escrow agreement and on approval of HHC’s lender to fund construction costs of a project. A corresponding condominium contract deposit liability is established at the date of receipt, representing a portion of HHC’s unsatisfied performance obligation at each reporting date.
These deposits, along with the balance of the contract value, are recognized at closing upon satisfaction of HHC’s performance obligation and transfer of title to the buyer. Real estate project costs directly associated with a condominium project, which are HHC’s costs to fulfill contracts with condominium buyers, are capitalized while all other costs are expensed as incurred. Total estimated project costs include direct costs such as the carrying value of the land, site planning, architectural, construction and financing costs, as well as indirect cost allocations. The allocations include costs which clearly relate to the specific project, including certain infrastructure and amenity costs which benefit the project as well as others, and are based upon the relative sales value of the units. Furthermore, incremental costs incurred to obtain a contract to sell condominium units are evaluated for capitalization in accordance with ASC 340-40, with incremental costs to fulfill a contract only being capitalized if the costs relate directly to a specifically identified contract, enhance resources to satisfy performance obligations in the future and are expected to be recovered.
Master Planned Community Land Sales Revenues from land sales are recognized at a point in time when the land sale closing process is complete. The transaction price generally has both fixed and variable components, with the fixed price stipulated in the contract and representative of a single performance obligation. See Builder Price Participation (BPP) below for a discussion of the variable component. The fixed transaction price, which is the amount of consideration received in full upon transfer of the land title to the buyer, is allocated to this single obligation and is received at closing of the land sale less any amounts previously paid on deposit.
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FINANCIAL STATEMENTS FOOTNOTES | |
The Company receives cash payments in the form of land purchase deposits from homebuilders or other commercial buyers who have contracted to purchase land within the Company’s MPCs, and HHC holds any escrowed deposits in Restricted cash or Cash and cash equivalents based on the terms of the contract. In situations where the Company has completed the closing of a developed land parcel or superpad and consideration is paid in full, but a portion of HHC’s performance obligation relating to the enhancement of the land is still unsatisfied, revenue related to HHC’s obligation is recognized over time. The Company recognizes only the portion of the improved land sale where the improvements are fully satisfied based on a cost input method. The aggregate amount of the transaction price allocated to the unsatisfied obligation is recorded as deferred land sales and is presented in Accounts payable and accrued expenses. The Company measures HHC’s unsatisfied obligation based on the costs remaining relative to the total cost at the date of closing.
When residential or commercial land is sold, the cost of sales includes actual costs incurred and estimates of future development costs benefiting the property sold. In accordance with ASC 970-360-30-1, when land is sold, costs are allocated to each sold superpad or lot based upon the relative sales value. For purposes of allocating development costs, estimates of future revenues and development costs are re-evaluated throughout the year, with adjustments being allocated prospectively to the remaining parcels available for sale. For certain parcels of land, including acquired parcels that the Company does not intend to develop or for which development was complete at the date of acquisition, the specific identification method is used to determine the cost of sales.
Builder Price Participation BPP is the variable component of the transaction price for certain Master Planned Communities Land Sales. BPP is earned when a developer that acquired land from HHC develops and sells a home to an end user at a price higher than a predetermined breakpoint. The excess over the breakpoint is shared between HHC and the developer at the time of closing on the sale of the home based on a previously agreed-upon percentage. Generally, BPP is constrained, and accordingly, the Company does not recognize an estimate of variable consideration. The Company’s conclusion is based on the following factors:
–BPP is highly susceptible to factors outside HHC’s influence such as unemployment and interest rates
–the time between the sale of land to a homebuilder and closing on a completed home can take up to three years
–there is significant variability in home pricing from period to period
The Company evaluates contracts with homebuilders with respect to BPP at each reporting period to determine whether a change in facts and circumstances has eliminated the constraint and will record an estimate of BPP revenue, if applicable.
For Condominium Rights and Unit Sales, Master Planned Community Land Sales and Builder Price Participation the Company elected the practical expedient to not adjust promised amount of consideration for the effects of a significant financing component when the expected period between transfer of the promised asset and payment is one year or less.
Rental Revenues Revenue associated with the Company’s operating assets includes minimum rent, percentage rent in lieu of fixed minimum rent, tenant recoveries and overage rent.
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 Consolidated Statements of Operations also include amortization related to above and below‑market tenant leases on acquired properties.
Recoveries from tenants are stipulated in the leases, are generally computed based upon a formula related to real estate taxes, insurance and other real estate operating expenses, and are generally recognized as revenues in the period the related costs are incurred.
Overage rent is recognized on an accrual basis once tenant sales exceed contractual thresholds contained in the lease and is calculated by multiplying the tenant sales in excess of the minimum amount by a percentage defined in the lease.
If the lease provides for tenant improvements, the Company determines whether the tenant improvements are owned by the tenant or by HHC. When HHC is the owner of the tenant improvements, rental revenue begins when the improvements are substantially complete. When the tenant is the owner of the tenant improvements, any tenant allowance funded by the Company is treated as a lease incentive and amortized as an adjustment to rental revenue over the lease term.
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FINANCIAL STATEMENTS FOOTNOTES | |
Other Land, Rental and Property Revenues - Over Time and Point in Time Other land revenues recognized over time include ground maintenance revenue, homeowner association management fee revenue and revenue from providing exclusive cable and internet services at the Company’s MPCs for the benefit of the tenants and owners of the communities. These revenues are recognized over time, as time elapses. The amount of consideration and the duration are fixed, as stipulated in the related agreements, and represent a single performance obligation.
Other land revenues also include transfer fees on the secondary sales of homes in MPCs, forfeitures of earnest money deposits by buyers of HHC’s condominium units and other miscellaneous items. These items are recognized at a point in time when the real estate closing process is complete or HHC has a legal right to the respective fee or deposit.
Other rental and property revenues related to contracts with customers is generally comprised of baseball-related ticket sales, retail operations, food sales, advertising and sponsorships. Season ticket sales are recognized over time as games take place. Single tickets and total net sales from retail operations are recognized at a point in time, at the time of sale when payment is received and the customer takes possession of the merchandise. In all cases, the transaction prices are fixed, stipulated in the ticket, contract or product, and representative in each case of a single performance obligation. Events-related service revenue is recorded at the time the customer receives the benefit of the service.
Baseball-related and other sponsorships generally cover a season or contractual period of time, and the related revenue is generally recognized on a straight-line basis over time, as time elapses, unless a specific performance obligation exists within the sponsorship contract where point-in-time delivery occurs and recognition at a specific performance or delivery date is more appropriate. Advertising and sponsorship agreements that allow third parties to display their advertising and products at HHC’s venues for a certain amount of time relate to a single performance obligation, consideration terms for these services are fixed in each respective agreement, and HHC generally recognizes the related revenue on a straight-line basis over time, as time elapses.
Noncontrolling Interests As of December 31, 2022, Noncontrolling interests is primarily related to noncontrolling interest in Teravalis and the Ward Village Homeowners’ Associations (HOAs). See Note 3 - Acquisitions and Dispositions for additional information on Teravalis. As of December 31, 2021, Noncontrolling interest is primarily related to the HOAs. All revenues and expenses related to the HOAs are attributable to noncontrolling interests and do not impact net income attributable to common stockholders.
Redeemable Noncontrolling Interest As of December 31, 2021, Redeemable noncontrolling interest related to a local developer’s interest in 110 North Wacker. This noncontrolling interest holder had the put right to require the Company to purchase its interest if 110 North Wacker had not been sold or refinanced by a certain date. Upon sale of 110 North Wacker in 2022, the local developer’s put right lapsed and the local developer’s share of the sales proceeds were distributed resulting in no remaining Redeemable noncontrolling interest as of December 31, 2022. See Note 2 - Investments in Unconsolidated Ventures for additional information.
Recently Issued Accounting Standards The following is a summary of recently issued and other notable accounting pronouncements which relate to the Company’s business.
ASU 2020-04, Reference Rate Reform The amendments in this Update provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform when certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has applied certain optional expedients, that are retained through the end of the hedging relationship. The amendments in this Update are effective as of March 12, 2020, through December 31, 2022. On December 21, 2022, the FASB issued Accounting Standards Update (ASU) 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extends the period of time entities can utilize the reference rate reform relief guidance under ASU 2020-04, from December 31, 2022, to December 31, 2024. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedge transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur through the effective date of December 31, 2024, as extended by ASU 2022-6.
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FINANCIAL STATEMENTS FOOTNOTES | |
| | |
2. Investments in Unconsolidated Ventures |
In the normal course of business, the Company enters into partnerships and ventures with an emphasis on investments associated with the development and operation of real estate assets. As of December 31, 2022, the Company does not consolidate the investments below as it does not have a controlling financial interest in these ventures. As such, the Company primarily reports its interests in accordance with the equity method. As of December 31, 2022, these ventures had mortgage financing totaling $249.9 million, with the Company’s proportionate share of this debt totaling $125.2 million. All of this indebtedness is without recourse to the Company, with the exception of the collateral maintenance obligation for Floreo. See Note 10 - Commitments and Contingencies for additional information related to the Company’s collateral maintenance obligation.
Investments in unconsolidated ventures consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Ownership Interest (a) | | Carrying Value | | Share of Earnings/Dividends | |
| | December 31, | | December 31, | | December 31, | | December 31, | | Year Ended December 31, | |
| thousands except percentages | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2020 | |
| Equity Method Investments | | | | | | | | | | | | | | |
| Operating Assets | | | | | | | | | | | | | | |
| 110 North Wacker | — | % | | 23.0 | % | | $ | — | | | $ | 194,999 | | | $ | 4,910 | | | $ | (74,309) | | | $ | (13,896) | | |
| The Metropolitan Downtown Columbia (b) | 50.0 | % | | 50.0 | % | | — | | | — | | | 4,556 | | | 582 | | | 765 | | |
| Stewart Title of Montgomery County, TX | 50.0 | % | | 50.0 | % | | 4,217 | | | 4,185 | | | 1,294 | | | 1,860 | | | 1,250 | | |
| Woodlands Sarofim #1 | 20.0 | % | | 20.0 | % | | 3,029 | | | 3,215 | | | (13) | | | 96 | | | 125 | | |
| m.flats/TEN.M (c) | 50.0 | % | | 50.0 | % | | — | | | — | | | 6,878 | | | 974 | | | 666 | | |
| Master Planned Communities | | | | | | | | | | | | | | |
| The Summit (d) | 50.0 | % | | 50.0 | % | | 49,368 | | | 41,536 | | | (30) | | | 59,407 | | | 17,845 | | |
| Floreo (e) | 50.0 | % | | 50.0 | % | | 58,001 | | | 59,080 | | | (1,377) | | | (8) | | | — | | |
| Seaport | | | | | | | | | | | | | | |
| Mr. C Seaport | — | % | | — | % | | — | | | — | | | — | | | — | | | (6,900) | | |
| The Lawn Club (d) | 50.0 | % | | 50.0 | % | | 2,553 | | | 447 | | | — | | | — | | | — | | |
| Ssäm Bar (Momofuku) (d)(e) | 50.0 | % | | 50.0 | % | | 5,551 | | | 5,852 | | | (783) | | | (1,988) | | | (2,392) | | |
| Tin Building by Jean-Georges (d)(e) | 65.0 | % | | 65.0 | % | | 6,935 | | | — | | | (36,182) | | | — | | | — | | |
| Jean-Georges Restaurants | 25.0 | % | | — | % | | 45,626 | | | — | | | 692 | | | — | | | — | | |
| Strategic Developments | | | | | | | | | | | | | | |
| Circle T Ranch and Power Center | — | % | | — | % | | — | | | — | | | — | | | — | | | 2,463 | | |
| HHMK Development | 50.0 | % | | 50.0 | % | | 10 | | | 10 | | | — | | | — | | | — | | |
| KR Holdings | 50.0 | % | | 50.0 | % | | 485 | | | 127 | | | 797 | | | (221) | | | (69) | | |
| West End Alexandria (d) | 58.3 | % | | 58.3 | % | | 56,617 | | | 56,546 | | | 71 | | | — | | | — | | |
| 110 North Wacker | — | | | 23.0 | % | | — | | | — | | | — | | | — | | | 267,518 | | |
| | | | | 232,392 | | | 365,997 | | | (19,187) | | | (13,607) | | | 267,375 | | |
| Other equity investments (f) | | | | | 13,779 | | | 3,952 | | | 4,638 | | | 3,755 | | | 3,724 | | |
Investments in unconsolidated ventures | | | | | $ | 246,171 | | | $ | 369,949 | | | $ | (14,549) | | | $ | (9,852) | | | $ | 271,099 | | |
(a)Ownership interests presented reflect the Company’s stated ownership interest or if applicable, the Company’s final profit-sharing interest after receipt of any preferred returns based on the venture’s distribution priorities.
(b)The Metropolitan Downtown Columbia was in a deficit position of $9.0 million at December 31, 2022, and $11.3 million at December 31, 2021. These deficit balances are presented in Accounts payable and accrued expenses at December 31, 2022 and 2021.
(c)M.flats/TEN.M was in a deficit position of $1.8 million at December 31, 2022, and $6.0 million at December 31, 2021. The deficit balance is presented in Accounts payable and accrued expenses at December 31, 2022.
(d)For these equity method investments, various provisions in the venture operating agreements regarding distributions of cash flow based on capital account balances, allocations of profits and losses and preferred returns may result in the Company’s economic interest differing from its stated interest or final profit-sharing interest. For these investments, the Company recognizes income or loss based on the venture’s distribution priorities, which could fluctuate over time and may be different from its stated ownership or final profit-sharing interest.
(e)Classified as a VIE; however, the Company is not the primary beneficiary and accounts for its investment in accordance with the equity method. Refer to discussion below for additional information.
(f)Other equity investments represent investments not accounted for under the equity method. The Company elected the measurement alternative as these investments do not have readily determinable fair values. There were no impairments, or upward or downward adjustments to the carrying amounts of these securities either during 2022, or cumulatively. As of December 31, 2022, Other equity investments primarily includes $10.0 million of warrants, which represents cash paid by the Company for the option to acquire additional ownership interest in Jean-Georges Restaurants. Refer to discussion below for additional details.
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FINANCIAL STATEMENTS FOOTNOTES | |
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 through a separate legal entity (the Venture).
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 Consolidated Balance Sheets.
The Company concluded that the Venture was within the scope of the VIE model, and that it was the primary beneficiary of the Venture during the development phase of the project, 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 in the Operating Assets segment and recognized a gain on deconsolidation of $267.5 million in Equity in earnings (losses) from unconsolidated ventures in the Strategic Developments segment. 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 unconsolidated ventures in the Consolidated Statements of Operations. 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 the 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, the local developer’s redeemable noncontrolling interest in the Partnership, which represented its share of the sales proceeds was distributed in April 2022, and presented as cash outflows from financing activities on the Consolidated Statements of Cash Flows.
The following table presents changes in Redeemable noncontrolling interest:
| | | | | | | | |
| thousands | | Redeemable Noncontrolling Interest |
Balance as of December 31, 2020 | | $ | 29,114 | |
| | |
| Net income (loss) attributable to noncontrolling interest | | (7,431) | |
| Share of investee's other comprehensive income | | 817 | |
Balance as of December 31, 2021 | | $ | 22,500 | |
| | |
| Net income (loss) attributable to noncontrolling interest | | — | |
| Share of investee's other comprehensive income | | (407) | |
| Disposition of noncontrolling interest related to 110 North Wacker | | (22,093) | |
Balance as of December 31, 2022 | | $ | — | |
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 2023. 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 will recognize its share of income or loss based on the joint venture distribution priorities, which could fluctuate over time. Upon return of each member’s contributed capital and a preferred return to HHC, distributions and recognition of income or loss will be allocated to the Company based on its final profit-sharing interest. The Company also entered into a lease agreement with HHC Lawn Games, LLC to lease 20,000 square feet of the Fulton Market Building for this venture.
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FINANCIAL STATEMENTS FOOTNOTES | |
Ssäm Bar In 2016, the Company formed Pier 17 Restaurant C101, LLC (Ssäm Bar) with MomoPier, LLC (Momofuku) to construct and operate a restaurant and bar at Pier 17 in the Seaport, which opened in 2019. The Company recognizes its share of income or loss based on the joint venture’s distribution priorities, which could fluctuate over time. As of December 31, 2022 and 2021, Ssäm Bar is classified as a VIE because the equity holders, as a group, lack the characteristics of a controlling financial interest; however, the Company is not the primary beneficiary. As of December 31, 2022, the Company’s maximum exposure to loss as a result of this investment is limited to the $5.6 million aggregate carrying value of this investment as the Company has not provided any guarantees or otherwise made firm commitments to fund amounts on behalf of this VIE.
Tin Building by Jean-Georges In 2015, the Company, together with VS-Fulton Seafood Market, LLC (Fulton Partner), formed Fulton Seafood Market, LLC (Tin Building by Jean-Georges) to operate a 53,783 square foot culinary marketplace in the historic Tin Building. The Fulton Partner is a wholly owned subsidiary of Jean-Georges Restaurants. The Company purchased a 25% interest in Jean-George Restaurants in March 2022 as discussed below.
The Company owns 100% of the Tin Building and leased 100% of the space to the Tin Building by Jean-Georges joint venture. Throughout this report, references to the Tin Building relate to the Company’s 100% owned landlord operations and references to the Tin Building by Jean-Georges refer to the managed business in which the Company has an equity ownership interest. The Company, as landlord, funded 100% of the development and construction of the Tin Building. Under the terms of the Tin Building by Jean-Georges LLC agreement, the Company 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. The Tin Building was completed and placed in service during the third quarter of 2022 and the Tin Building by Jean-Georges culinary marketplace began operations in the third quarter of 2022. Based on capital contribution and distribution provisions for the Tin Building by Jean-Georges, HHC currently receives substantially all of the economic interest in the venture. Upon return of HHC’s contributed capital and a preferred return to HHC, distribution and recognition of income or loss will be allocated to the Company based on its final profit-sharing interest.
As of December 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. 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. The carrying value of the Tin Building by Jean-Georges as of December 31, 2022, is $6.9 million, which is comprised of $43.1 million of contributions made by the Company, partially offset by $36.2 million of equity losses for the year ended December 31, 2022, primarily related to pre-opening and start-up expenses.
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 accounts 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 stated ownership interest.
Concurrent with the Company’s acquisition of the 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 at a fixed exercise price per share subject to certain anti-dilution provisions. Should the warrant agreement be exercised by the Company, the $10.0 million will be credited against the aggregate exercise price of the warrants. Per the agreement, the $10.0 million is to be used for working capital of 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. As of December 31, 2022, this warrant has not been exercised. The Company elected the measurement alternative for this purchase option as the equity security does not have a readily determinable fair value. As such, the investment is 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 beverage 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 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.
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FINANCIAL STATEMENTS FOOTNOTES | |
The Summit During the first quarter of 2015, the Company formed DLV/HHPI Summerlin, LLC (The Summit) with Discovery Land Company (Discovery) to develop a custom home community in Summerlin.
Phase I 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 (losses) from unconsolidated ventures as The Summit sells lots. As of December 31, 2022, HHC has received its preferred return distributions and recognizes its share of income or loss for Phase I based on its final profit-sharing interest.
Phase II In July 2022, the Company contributed an additional 54 acres to The Summit (Phase II land) with a fair value of $21.5 million. The Company recognized an incremental equity method investment at the fair value of $21.5 million and recognized a gain of $13.5 million recorded in Equity in earnings (losses) from unconsolidated ventures. This gain is the result of marking the cost basis of the land contributed to its estimated fair value at the time of contribution. The Phase II land is adjacent to the existing Summit development and is currently planned for approximately 28 custom home sites that will be added to The Summit community. The Company will receive distributions and recognize its share of income or loss for Phase II based on the joint venture’s distribution priorities in the amended Summit LLC agreement, which could fluctuate over time. Upon receipt of preferred returns to HHC, distributions and recognition of income or loss will be allocated to the company based on its final profit-sharing interest.
Floreo (formerly named Trillium) In the fourth quarter of 2021, simultaneous with the Teravalis land acquisition, the Company closed on the acquisition of a 50% interest in Trillium Development Holding Company, LLC (Floreo), for $59.0 million and entered into a Limited Liability Company Agreement (LLC Agreement) with JDM Partners and El Dorado Holdings to develop the first village within the new Teravalis MPC on 3,029 acres of land in the greater Phoenix, Arizona area. The first Floreo land sales are expected to occur in the second half of 2023 subject to market conditions.
On October 25, 2022, Floreo closed on a $165.0 million financing, and at initial closing, outstanding borrowings were $57.5 million. The Company provided a guarantee on this financing in the form of a collateral maintenance obligation and received a guarantee fee of $5.0 million. The financing and related guarantee provided by the Company triggered a reconsideration event and as of December 31, 2022, Floreo is classified as a VIE. Due to rights held by other members, the Company does not have a controlling financial interest in Floreo and is not the primary beneficiary. As of December 31, 2022, the Company’s maximum exposure to loss as a result of this investment is limited to the $58.0 million aggregate carrying value as the Company has not made any other firm commitments to fund amounts on behalf of this VIE. See Note 10 - Commitments and Contingencies for additional information related to the Company’s collateral maintenance obligation.
West End Alexandria In the fourth quarter of 2021, the Company entered into an Asset Contribution Agreement with Landmark Land Holdings, LLC (West End Alexandria) to redevelop a 52-acre site previously known as Landmark Mall. Other equity owners include Foulger-Pratt Development, LLC (Foulger-Pratt) and Seritage SRC Finance (Seritage). 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 million to West End Alexandria in exchange for equity interest. Additionally, Foulger-Pratt agreed to contribute $10 million to West End Alexandria. 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. 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 include 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. Foulger-Pratt manages construction of the development. Demolition began in the second quarter of 2022, with completion of the first buildings expected in 2025.
The Company does not have the ability to control the activities that most impact the economic performance of the venture as Foulger-Pratt is the managing member and manages all development activities. As such, the Company accounts for its ownership interest in accordance with the equity method.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
Summarized Financial Information The following tables provide combined summarized financial statement information for the Company’s unconsolidated ventures. Financial statement information is included for each investment for all periods in which the Company’s ownership interest was accounted for as an equity method investment. Fluctuations in the amounts presented below are primarily related to 2022 activity, including the sale of the Company’s ownership interest in 110 North Wacker, partially offset by the Company’s acquisition of an ownership interest in Jean-Georges Restaurants and the additional contribution of Phase II land to The Summit.
| | | | | | | | | | | | | | |
| thousands | | December 31, 2022 | | December 31, 2021 |
| Balance Sheet | | | | |
| Total Assets | | $ | 878,546 | | | $ | 1,442,894 | |
| Total Liabilities | | 505,643 | | | 918,847 | |
| Total Equity | | 372,903 | | | 524,047 | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| thousands | | 2022 | | 2021 | | 2020 |
| Income Statement | | | | | | |
| Revenues | | $ | 232,786 | | | $ | 377,837 | | | $ | 190,605 | |
| Operating Income | | 9,815 | | | 145,471 | | | 42,964 | |
| Net income (loss) | | (2,646) | | | 69,904 | | | 24,908 | |
| | |
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 - Investments in Unconsolidated Ventures for additional information.
Teravalis (formerly named Douglas Ranch) In October 2021, the Company acquired Teravalis, 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 (Teravalis Property) 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 the Teravalis Property. The total repurchase price payable pursuant to the option was $270.5 million, which consisted 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 the Teravalis Property 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 the Teravalis Property for $50.0 million and up to a maximum purchase of a 50% interest for $270.5 million. On June 17, 2022, the seller’s assignee, JDM Member, exercised the minimum purchase option and purchased a 9.24% interest in the Teravalis Property for $50.0 million, inclusive of the $33.8 million previously held in escrow.
Immediately following the execution of the minimum purchase option, the Company entered into a Limited Liability Company Agreement (LLC Agreement) with JDM Member to form Douglas Ranch Development Holding Company (Teravalis). The Company and JDM Member then contributed their interests in the Teravalis Property to Teravalis in exchange for an equity interest, resulting in member equity interest of 90.76% for the Company and 9.24% for JDM Member. Teravalis was determined to be a VIE, and as the Company has the power to direct the activities that most significantly impact its economic performance, the Company is considered the primary beneficiary and HHC continued to consolidate Teravalis. Also in conjunction with the execution of the minimum purchase option, JDM Member paid $10.0 million for the option to repurchase up to the remaining 40.76% interest in Teravalis for $220.5 million on or before August 18, 2022.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
On August 18, 2022, JDM Member partially exercised the option and purchased an additional 2.78% interest in the Teravalis Property for $15.0 million, inclusive of the $10.0 million deposit previously received. JDM Member contributed their interest in the Teravalis Property to Teravalis in exchange for equity interest, resulting in member equity interest of 88.0% for the Company and 12.0% for JDM Member. As the exercise of this option did not change the rights of either the Company or JDM Member under LLC agreement, the Company will continue to consolidate Teravalis. The remaining purchase option expired upon partial purchase of this additional ownership interest.
Under the terms of the LLC agreement, cash distributions and the recognition of income-producing activities will be pro rata based on economic ownership interest. As of December 31, 2022, the Company’s Consolidated Balance Sheets include $541.2 million of Master Planned Community assets and $65.0 million of Noncontrolling interest related to Teravalis.
Floreo Simultaneous with the Teravalis land acquisition, the Company closed on the acquisition of a 50% interest in Trillium Development Holding Company, LLC (Floreo), for $59.0 million. Floreo owns approximately 3,029 acres of land in the greater Phoenix, Arizona area. See Note 2 - Investments in Unconsolidated Ventures for additional information.
Dispositions
Operating Assets On December 30, 2022, the Company completed the sale of Creekside Village Green, a 74,670-square-foot retail property in The Woodlands, Texas, for $28.4 million resulting in a gain of $13.4 million. 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.
On December 21, 2022, the Company completed the sale of Lake Woodlands Crossing, a 60,261-square-foot retail property in The Woodlands, Texas, for $22.5 million resulting in a gain of $12.2 million. 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. The Company retained the underlying land and simultaneously with the sale executed a 99-year ground lease with the buyer, which is classified as an operating lease.
On June 16, 2022, the Company completed the sale of the Outlet Collection at Riverwalk, a 264,080-square-foot outlet center located in downtown New Orleans, Louisiana, for $34.0 million resulting in a gain on sale of $4.0 million, inclusive of $0.5 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.
On March 30, 2022, the Company completed the sale of its ownership interest in 110 North Wacker for $208.6 million. See Note 2 - Investments in Unconsolidated Ventures for additional information.
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 March 13, 2020, the Company closed on the sale of its property at 100 Fellowship Drive, a 13.5-acre land parcel and 203,257-square-foot build-to-suit medical building with approximately 550 surface parking spaces in The Woodlands, Texas, for a total sales price of $115.0 million. The sale of 100 Fellowship Drive resulted in an additional gain of $38.3 million in the first quarter of 2020, which is included in Gain (loss) on sale or disposal of real estate and other assets, net on the Consolidated Statements of Operations. This gain was in addition to $13.5 million of Selling profit from the sales-type lease recognized on the Consolidated Statements of Operations as of December 31, 2019. The Company had previously entered into a lease agreement related to this property in November of 2019, and at lease commencement, the Company derecognized $63.7 million from Developments and recorded an initial net investment in lease receivable of $75.9 million on the Consolidated Balance Sheets.
The carrying value of the net investment in lease receivable related to 100 Fellowship Drive was approximately $76.1 million at the time of sale. Gain on sale is calculated as the difference between the purchase price of $115.0 million, and the asset’s carrying value, less related transaction costs of approximately $0.2 million. Contemporaneous with the sale, the Company credited to the buyer approximately $0.6 million for operating account funds and the buyer’s assumption of the related liabilities. After the sale, the Company had no continuing involvement in this lease. After repayment of debt associated with the property, the sale generated approximately $64.2 million in net proceeds, which are presented as cash inflows from operating activities in the Consolidated Statements of Cash Flows for the year ended December 31, 2020.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
Strategic Developments 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 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.
On December 18, 2020, the Company completed the sale to its joint venture partner of its 50% equity method investment in Circle T Ranch and Power Center, a joint venture with Westlake Retail Associates for $13.0 million. The carrying value of the asset at the time of sale was approximately $11.9 million and the Company recognized a gain on sale of $1.1 million which is included in Equity in earnings (losses) from unconsolidated ventures on the Consolidated Statements of Operations.
On November 20, 2020, the Company completed the sale of its Elk Grove asset, a 64-acre land parcel in the City of Elk Grove, California, for $24.6 million. The carrying value of the asset at the time of sale was approximately $10.8 million and the Company recognized a gain on sale of $13.7 million which is included in Gain (loss) on sale or disposal of real estate and other assets, net on the Consolidated Statements of Operations.
On June 29, 2020, the Company entered into an agreement terminating a participation right contained in the contract for the sale of West Windsor that occurred in October 2019. As consideration, the Company received an $8.0 million termination payment in 2020, which is included in Gain (loss) on sale or disposal of real estate and other assets, net on the Consolidated Statements of Operations for the year ended December 31, 2020.
Seaport On July 16, 2020, the Company completed the sale to its joint venture partner of its 35% equity investment in Mr. C Seaport, a 66-room boutique hotel located at 33 Peck Slip, New York, in close proximity to the Seaport, for $0.8 million. The carrying value at the time of sale approximated the sales price. Refer to Note 2 - Investments in Unconsolidated Ventures and Note 4 - Impairment for additional information.
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 impairment charges were recorded during the year ended December 31, 2022.
In 2021, the Company recorded a $13.1 million impairment charge for Century Park, a non-core asset acquired as part of the acquisition of The Woodlands Towers at The Waterway. The Century Park asset included both building and land components. The impairment related to the building component, while the land component was not impaired. The Company recognized an impairment due to decreases in estimated future cash flows and as a result of the impact of a shorter-than-anticipated holding term. The Company used weighted market and income valuation techniques to estimate the fair value of Century Park. Market valuation was based on recent sales of similar commercial properties in and around Houston, Texas. For the income approach, the Company utilized a capitalization rate of 8.75%, and probability-weighted scenarios assuming lease-up periods ranging from 24 months to 48 months, and management’s estimate of future lease income and carry costs. In December 2021, the Company completed the sale of Century Park.
In 2020, the Company recorded a $48.7 million impairment charge for Outlet Collection at Riverwalk. The Company recognized the impairment due to decreases in estimated future cash flows as a result of the impact of a shorter-than-anticipated holding term due to management’s plans to divest the non-core operating asset, decreased demand and reduced interest in brick and mortar retail due to the impact of COVID-19, as well as an increase in the capitalization rate used to evaluate future cash flows due to the impact of COVID-19. The Company used a discounted cash flow analysis using a capitalization rate of 10% to determine fair value. In June 2022, the Company completed the sale of the Outlet Collection at Riverwalk.
Each investment in an unconsolidated venture discussed in Note 2 - Investments in Unconsolidated Ventures is evaluated periodically for recoverability and valuation declines that are other-than-temporary. If the decrease in value of an investment is deemed to be other-than-temporary, the investment is reduced to its estimated fair value. No impairment charges were recorded during the year ended December 31, 2022.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
In 2021, the Company recorded a $17.7 million impairment of its equity investment in 110 North Wacker. The Company recognized the impairment due to a change in the anticipated holding period as the Company entered into a plan to sell its interest in 110 North Wacker. In March 2022, the Company completed the sale of its ownership interest in 110 North Wacker.
In 2020, the Company recorded a $6.0 million impairment of its equity investment in Mr. C Seaport. The Company recognized the impairment due to a change in the anticipated holding period as the Company entered into a plan to sell its 35% equity investment in Mr. C Seaport to its venture partners. In July 2020, the Company completed the sale of its interest in Mr. C Seaport.
For information regarding the asset sales discussed above, see Note 3 - Acquisitions and Dispositions.
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.
In addition to the impairments discussed above, the Company reduced the estimated net sales price of certain condominium units, including the remaining penthouse inventory, to better align the expected price with recent final sales prices, resulting in a loss of $2.3 million for the year ended December 31, 2021, and a loss of $7.6 million for the year ended December 31, 2020, included in Condominium rights and unit cost of sales.
The following table summarizes the pre-tax impacts of the items mentioned above on the Consolidated Statements of Operations for the years ended December 31, 2021, and 2020. There were no impairments in 2022.
| | | | | | | | | | | | | | |
| | |
| thousands | Statements of Operations Line Item | 2021 | | 2020 |
| Operating assets: | | | | |
| Outlet Collection at Riverwalk | Provision for impairment | $ | — | | | $ | 48,738 | |
| Century Park | Provision for impairment | 13,068 | | | — | |
| Equity Investments: | | | | |
| 110 North Wacker | Equity in earnings (losses) from unconsolidated ventures | 17,673 | | | — | |
| Mr. C Seaport | Equity in earnings (losses) from unconsolidated ventures | — | | | 6,000 | |
| Other Assets: | | | | |
| Condominium Inventory | Condominium rights and unit sales | 2,268 | | | 7,644 | |
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
| | |
5. Other Assets and Liabilities |
Prepaid Expenses and Other Assets The following table summarizes the significant components of Prepaid expenses and other assets as of December 31:
| | | | | | | | | | | | | |
| thousands | 2022 | | 2021 | | |
| Special Improvement District receivable | $ | 64,091 | | | $ | 86,165 | | | |
| Security, escrow and other deposits | 48,578 | | | 45,546 | | | |
| In-place leases | 39,696 | | | 44,225 | | | |
| Interest rate derivative assets | 30,860 | | | 1,257 | | | |
| Intangibles | 25,170 | | | 29,752 | | | |
| Condominium inventory | 22,452 | | | 57,507 | | | |
| Prepaid expenses | 18,806 | | | 21,370 | | | |
| Other | 11,683 | | | 6,617 | | | |
| Tenant incentives and other receivables | 8,252 | | | 6,623 | | | |
| TIF receivable | 1,893 | | | 855 | | | |
| Food and beverage and lifestyle inventory | 872 | | | 1,039 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Prepaid expenses and other assets, net | $ | 272,353 | | | $ | 300,956 | | | |
Accounts Payable and Accrued Expenses The following table summarizes the significant components of Accounts payable and accrued expenses as of December 31:
| | | | | | | | | | | | | |
| thousands | 2022 | | 2021 | | |
| Condominium deposit liabilities | $ | 390,253 | | | $ | 368,997 | | | |
| Construction payables | 260,257 | | | 284,384 | | | |
| Deferred income | 85,006 | | | 71,902 | | | |
| Accrued interest | 49,156 | | | 47,738 | | | |
| Accrued real estate taxes | 37,835 | | | 26,965 | | | |
| Accounts payable and accrued expenses | 36,174 | | | 72,828 | | | |
| Accrued payroll and other employee liabilities | 30,874 | | | 29,648 | | | |
| Other | 28,856 | | | 23,310 | | | |
| Tenant and other deposits | 26,100 | | | 30,943 | | | |
| Interest rate derivative liabilities | — | | | 26,452 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Accounts payable and accrued expenses | $ | 944,511 | | | $ | 983,167 | | | |
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
The following table summarizes the Company’s intangible assets and liabilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2022 | | As of December 31, 2021 |
| Gross Asset (Liability) | | Accumulated (Amortization)/ Accretion | | Net Carrying Amount | | Gross Asset (Liability) | | Accumulated (Amortization)/ Accretion | | Net Carrying Amount |
| | | | | | |
| thousands | | | | | |
| Intangible Assets: | | | | | | | | | | | |
| Other intangibles (a) | $ | 34,123 | | | $ | (9,110) | | | $ | 25,013 | | | $ | 34,123 | | | $ | (5,834) | | | $ | 28,289 | |
| Goodwill | — | | | — | | | — | | | 1,307 | | | — | | | 1,307 | |
| Indefinite lived intangibles | 157 | | | — | | | 157 | | | 157 | | | — | | | 157 | |
| | | | | | | | | | | |
| Tenant leases: | | | | | | | | | | | |
| In-place value | 57,087 | | | (17,391) | | | 39,696 | | | 63,249 | | | (19,024) | | | 44,225 | |
| Above-market | 500 | | | (446) | | | 54 | | | 1,951 | | | (1,790) | | | 161 | |
| Below-market | (4,255) | | | 3,512 | | | (743) | | | (4,729) | | | 3,539 | | | (1,190) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total indefinite lived intangibles | | | | | $ | 157 | | | | | | | $ | 1,464 | |
| Total amortizing intangibles | | | | | $ | 64,020 | | | | | | | $ | 71,485 | |
(a)Primarily associated with the Company’s Las Vegas Aviators Triple-A professional baseball team
The tenant in-place, above-market and below-market lease intangible assets resulted from real estate acquisitions. The in‑place value and above-market value of tenant leases are included in Prepaid expenses and other assets, net and are amortized over periods that approximate the related lease terms. The below‑market tenant leases are included in Accounts payable and accrued expenses and are amortized over the remaining non-cancelable terms of the respective leases. See Note 5 - Other Assets and Liabilities for additional information regarding Prepaid expenses and other assets, net and Accounts payable and accrued expenses.
Net amortization and accretion expense for these intangible assets and liabilities was $7.5 million in 2022, $7.5 million in 2021 and $5.8 million in 2020.
Future net amortization and accretion expense is estimated for each of the five succeeding years as shown below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| thousands | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | |
| Net amortization and accretion expense | $ | 7,076 | | | $ | 7,080 | | | $ | 7,240 | | | $ | 7,212 | | | $ | 6,933 | | | |
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
| | |
7. Mortgages, Notes and Loans Payable, Net |
Mortgages, Notes and Loans Payable Mortgages, notes and loans payable, net are summarized as follows:
| | | | | | | | |
| December 31, |
| thousands | 2022 | 2021 |
| Fixed-rate debt | | |
| Senior unsecured notes | $ | 2,050,000 | | $ | 2,050,000 | |
| Secured mortgages payable | 1,500,841 | | 1,006,428 | |
| Special Improvement District bonds | 59,777 | | 69,131 | |
| Variable-rate debt (a) | | |
| Secured Bridgeland Notes | 275,000 | | 275,000 | |
| Senior Secured Credit Facility | — | | 316,656 | |
| Secured mortgages payable | 916,570 | | 922,201 | |
| | |
| Unamortized deferred financing costs (b) | (55,005) | | (48,259) | |
| Mortgages, notes and loans payable, net | $ | 4,747,183 | | $ | 4,591,157 | |
(a)The Company has entered into derivative instruments to manage a portion of the variable interest rate exposure. See Note 9 - Derivative Instruments and Hedging Activities for additional information.
(b)Deferred financing costs are amortized to interest expense over the initial contractual term of the respective financing agreements using the effective interest method (or other methods which approximate the effective interest method).
As of December 31, 2022, land, buildings and equipment, developments and other collateral with an aggregate net book value of $4.4 billion have been pledged as collateral for HHC’s debt obligations. HHC’s senior notes totaling $2.1 billion and $87.6 million of Secured mortgages payable are recourse to the Company.
Senior Unsecured Notes During 2020 and 2021, the Company issued $2.1 billion of aggregate principal of senior unsecured notes. These notes have fixed rates of interest that are payable semi-annually and are interest only until maturity. These debt obligations are redeemable prior to the maturity date subject to a “make-whole” premium which decreases annually until 2026 at which time the redemption make-whole premium is no longer applicable. The following table summarizes the Company’s senior unsecured notes by issuance date:
| | | | | | | | | | | | | | | | | | | | |
| $ in thousands | | Principal | | Maturity Date | | Interest Rate |
| August 2020 | | $ | 750,000 | | | August 2028 | | 5.375% |
| February 2021 | | 650,000 | | | February 2029 | | 4.125% |
| February 2021 | | 650,000 | | | February 2031 | | 4.375% |
| Senior unsecured notes | | $ | 2,050,000 | | | | | |
Secured Mortgages Payable The Company’s outstanding mortgages are collateralized by certain of the Company’s real estate assets. Certain of the Company’s loans contain provisions that 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 a percentage of the loan balance. Construction loans related to the Company’s development properties are generally variable-rate, interest-only, and have maturities of 5 years or less. Debt obligations related to the Company’s operating properties generally require monthly installments of principal and interest over its contractual life.
The following table summarizes the Company’s Secured mortgages payable:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| $ in thousands | Principal | Range of Interest Rates | Weighted-average Interest Rate | Weighted-average Years to Maturity | | Principal | Range of Interest Rates | Weighted-average Interest Rate | Weighted-average Years to Maturity |
| Fixed rate (a) | $ | 1,500,841 | | 3.13% - 7.67% | 4.39 | % | 7.4 | | $ | 1,006,428 | | 3.13% - 4.92% | 3.92 | % | 8.7 |
| Variable rate (b) | 916,570 | | 6.05% - 9.39% | 7.36 | % | 2.6 | | 922,201 | | 1.70% - 5.10% | 2.99 | % | 1.9 |
| Secured mortgages payable | $ | 2,417,411 | | 3.13% - 9.39% | 5.51 | % | 5.6 | | $ | 1,928,629 | | 1.70% - 5.10% | 3.48 | % | 5.5 |
(a)Interest rates presented are based upon the coupon rates of the Company’s fixed-rate debt obligations.
(b)Interest rates presented are based on the applicable reference interest rates as of December 31, 2022 and 2021, excluding the effects of interest rate derivatives.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
The Company has entered into derivative instruments to manage a portion of the Company’s variable interest rate exposure. The weighted-average interest rate of the Company’s variable-rate mortgages payable, inclusive of interest rate hedges, was 5.91% as of December 31, 2022, and 3.71% as of December 31, 2021. See Note 9 - Derivative Instruments and Hedging Activities for additional information.
The Company’s secured mortgages mature over various terms through December 2039. On certain of its debt obligations, the Company has the option to exercise extension options, 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 identified covenants, the Company may be required to pay down a portion of the loan to exercise the extension option.
During 2022, the Company’s mortgage activity included new borrowings of $899.2 million (excluding undrawn amounts on new construction loans), draws on existing mortgages of $336.7 million, and repayments of $790.7 million. As of December 31, 2022, the Company’s secured mortgage loans had $934.1 million of undrawn lender commitment available to be drawn for property development, subject to certain restrictions.
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. These bonds bear interest at fixed rates ranging from 4.13% to 6.05% with maturities ranging from 2025 to 2051 as of December 31, 2022, and fixed rates ranging from 4.00% to 6.05% with maturities ranging from 2025 to 2051 as of December 31, 2021. For the year ended December 31, 2022, obligations of $7.8 million were assumed by buyers and no SID bonds were issued.
Secured Bridgeland Notes In September 2021, the Company closed on a $275.0 million financing with maturity in 2026. This financing is secured by MUD receivables and land in Bridgeland. The loan required a $27.5 million fully refundable deposit and has a net effective interest rate of 6.60%, based on the Secured Overnight Financing Rate (SOFR) of 4.30% at December 31, 2022. In December 2022, the borrowing capacity of this obligation was expanded from $275.0 million to $475.0 million, resulting in available capacity of $200.0 million as of December 31, 2022.
Senior Secured Credit Facility 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). There were no outstanding borrowings under the Revolver Loan in 2022. In the fourth quarter of 2022, the Company fully repaid the outstanding borrowings under the Term Loan and retired the Senior Secured Credit Facility. Prior to the repayment, any outstanding balances were swapped to a fixed interest rate of 4.61%.
Debt Compliance As of December 31, 2022, the Company was in compliance with all debt covenants with the exception of the debt service coverage ratios for three property-level debt instruments. As a result, the excess net cash flow after debt service from the underlying properties became restricted. While the restricted cash could not be used for general corporate purposes, it could be used to fund operations of the underlying assets and did not have a material impact on the Company’s liquidity or its ability to operate these assets.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
Scheduled Maturities The following table summarizes the contractual obligations relating to the Company’s mortgages, notes and loans payable as of December 31, 2022:
| | | | | | | | |
| thousands | Mortgages, notes and loans payable principal payments |
| 2023 | | $ | 166,062 | |
| 2024 | | 62,150 | |
| 2025 | | 386,314 | |
| 2026 | | 556,475 | |
| 2027 | | 298,458 | |
| Thereafter | | 3,332,729 | |
| Total principal payments | | 4,802,188 | |
| Unamortized deferred financing costs | | (55,005) | |
| Mortgages, notes and loans payable | | $ | 4,747,183 | |
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 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 | $ | 30,860 | | | $ | — | | | $ | 30,860 | | | $ | — | | | $ | 1,257 | | | $ | — | | | $ | 1,257 | | | $ | — | |
| Liabilities: | | | | | | | | | | | | | | | |
| Interest rate derivative liabilities | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 26,452 | | | $ | — | | | $ | 26,452 | | | $ | — | |
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.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
The estimated fair values of the Company’s financial instruments that are not measured at fair value on a recurring basis are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 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 | | $ | 1,098,937 | | | $ | 1,098,937 | | | $ | 1,216,637 | | | $ | 1,216,637 | |
| Accounts receivable, net (a) | Level 3 | | 103,437 | | | 103,437 | | | 86,388 | | | 86,388 | |
| Notes receivable, net (b) | Level 3 | | 3,339 | | | 3,339 | | | 7,561 | | | 7,561 | |
| | | | | | | | | |
| Liabilities: | | | | | | | | | |
| Fixed-rate debt (c) | Level 2 | | 3,610,618 | | | 3,298,859 | | | 3,125,559 | | | 3,186,139 | |
| Variable-rate debt (c) | Level 2 | | 1,191,570 | | | 1,191,570 | | | 1,513,857 | | | 1,513,857 | |
(a)Accounts receivable, net is shown net of an allowance of $8.9 million at December 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.
(b)Notes receivable, net is shown net of an allowance of $0.1 million at December 31, 2022, and $0.2 million at December 31, 2021.
(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. Refer to Note 7 - 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 a non-financial asset that was measured at fair value on a non-recurring basis resulting in the property 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 | $ | 32,000 | | | $ | — | | | $ | — | | | $ | 32,000 | | | |
(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.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
| | |
9. 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. Certain of the Company’s interest rate caps are not currently designated as hedges, and therefore, any gains or losses are recognized in current-period earnings within Interest expense on the Consolidated Statements of Operations. 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 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 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 derivative counterparty defaults as of December 31, 2022 and 2021.
If the derivative contracts are terminated prior to their maturity, the amounts previously recorded in AOCI are recognized in earnings over the period that the hedged transaction impacts earnings. During the years ended December 31, 2022 and 2021, there were no termination events. During the year ended December 31, 2022, the Company recorded an immaterial reduction in Interest expense related to the amortization of a previously terminated swap.
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, HHC estimates that $13.3 million of net gain 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. The Company reports derivative assets in Prepaid expenses and other assets, net and derivative liabilities in Accounts payable and accrued expenses.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Fair Value Asset (Liability) |
| | Notional | Fixed Interest | Effective | Maturity | | December 31, | | December 31, |
| thousands | | Amount | Rate (a) | Date | Date | | 2022 | | 2021 |
| Derivative instruments not designated as hedging instruments: (b) | | | | |
| Interest rate cap | | 285,000 | 2.00% | 3/12/2021 | 9/15/2023 | | $ | 5,748 | | | $ | 300 | |
| Interest rate cap | | 83,200 | 2.00% | 3/12/2021 | 9/15/2023 | | 1,677 | | | 87 | |
| Interest rate cap | | 75,000 | 2.50% | 10/12/2021 | 9/29/2025 | | 3,791 | | | 485 | |
| Interest rate cap | | 59,500 | 2.50% | 10/12/2021 | 9/29/2025 | | 3,007 | | | 385 | |
| | | | | | | | | |
| Derivative instruments designated as hedging instruments: | | | | |
| Interest rate swap | | 615,000 | 2.96% | 9/21/2018 | 9/18/2023 | | $ | 8,262 | | | $ | (23,477) | |
| Interest rate swap | | 200,000 | 3.69% | 1/3/2023 | 1/1/2027 | | 978 | | | — | |
| Interest rate cap | | 127,000 | 5.50% | 11/10/2022 | 11/7/2024 | | 378 | | | — | |
| Interest rate cap | | 75,000 | 5.00% | 12/22/2022 | 12/21/2025 | | 655 | | | — | |
| Interest rate swap | | 40,800 | 1.68% | 3/1/2022 | 2/18/2027 | | 3,321 | | | — | |
| Interest rate swap | | 35,296 | 4.89% | 11/1/2019 | 1/1/2032 | | 3,043 | | | (2,975) | |
| | | | | | | | | |
| Total fair value derivative assets | | | | | | $ | 30,860 | | | $ | 1,257 | |
| Total fair value derivative liabilities | | | | | | — | | | (26,452) | |
| Total fair value derivatives asset (liability), net | | | | | $ | 30,860 | | | $ | (25,195) | |
(a)These rates represent the swap rate and cap strike rate on HHC’s interest rate swaps and caps.
(b)Interest income related to these contracts was $13.0 million for the year ended December 31, 2022, and was not material in 2021.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| Derivatives in Cash Flow Hedging Relationships | Amount of Gain (Loss) Recognized in AOCI on Derivatives |
| thousands | 2022 | | 2021 | | 2020 |
| Interest rate derivatives | $ | 25,657 | | | $ | 5,300 | | | $ | (34,906) | |
| | | | | | | | | | | | | | | | | |
| Location of Gain (Loss) Reclassified from AOCI into Statements of Operations | Amount of Gain (Loss) Reclassified from AOCI into Statements of Operations |
| thousands | 2022 | | 2021 | | 2020 |
| Interest expense | $ | (6,041) | | | $ | (12,660) | | | $ | (11,836) | |
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. None of the Company’s derivatives which contain credit-risk-related features were in a net liability position as of December 31, 2022.
| | |
10. Commitments and Contingencies |
Litigation 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 are not expected to have a material effect on the Company’s consolidated financial position, results of operations or liquidity.
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. On August 9, 2022, the Court granted the Company’s summary judgment motions and dismissed the plaintiffs’ claims. On September 8, 2022, the plaintiffs filed a motion for a new trial. On October 21, 2022, the Court denied the motion for a new trial. On November 7, 2022, the Plaintiffs filed their notice of appeal. The Company will continue 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, and $2.7 million charged during 2022. These amounts were included in Condominium rights and unit cost of sales in the accompanying Consolidated Statements of Operations. As of December 31, 2022, a total of $35.2 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 Consolidated Balance Sheets.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
250 Water Street In 2021, the Company received the necessary approvals for its 250 Water Street development project, which includes a mixed-use development with affordable and market-rate apartments, community-oriented spaces and office space. In May 2021, the Company received approval from the New York City Landmarks Preservation Commission (LPC) on its proposed design for the 250 Water Street site. The Company received final approvals in December 2021 through the New York City Uniform Land Use Review Procedure known as ULURP, which allowed the necessary transfer of development rights to the parking lot site. The Company began initial foundation and voluntary site remediation work in the second quarter of 2022.
The Company has prevailed in various lawsuits filed in 2021 and 2022 challenging the zoning and development approvals in order to prevent construction of this project. In September 2021, the New York State Supreme Court dismissed on procedural grounds a lawsuit challenging the LPC approval. In February 2022, an additional lawsuit was filed in New York State Supreme Court by opponents of the project challenging the land use approvals for 250 Water Street previously granted to the Company under the ULURP, and in August 2022 the Court ruled in the Company’s favor, denying all claims of the petitioners. The same petitioners subsequently filed a request to reargue and renew the case, which the Court rejected in January 2023.
A separate lawsuit was filed in July 2022 again challenging the Landmarks Preservation Commission approval. In January 2023, a Court ruled in favor of the petitioners vacating the Certificate of Appropriateness (COA) issued by the LPC, and ordered construction to cease at 250 Water Street, absent further court order. The Company immediately appealed this decision. On January 19, 2023, an appellate court judge granted an interim stay of the trial court’s order, that allowed construction work, which resumed in February 2023, to continue unabated pending a full hearing by the Appellate Division on February 27, 2023. Although it is not possible to predict with certainty the outcome of the appeal, the Company believes that it has substantial legal and factual defenses to overturn on appeal the trial court’s verdict. The lawsuit is not seeking monetary damages as the petitioners are seeking to enjoin the Company from moving forward with the development of 250 Water Street. Because the Company believes that a potential loss is not probable or estimable, it has not recorded any reserves or contingencies related to this legal matter.
Letters of Credit and Surety Bonds As of December 31, 2022, the Company had outstanding letters of credit totaling $2.1 million and surety bonds totaling $346.3 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 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 Consolidated Balance Sheets. See Note 17 - Leases for further discussion. Contractual rental expense, including participation rent, was $5.6 million for the year ended December 31, 2022, $7.2 million for the year ended December 31, 2021, and $7.2 million for the year ended December 31, 2020. 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 October 2022, Floreo, the Company’s 50% owned joint venture in Teravalis, closed on a $165 million bond financing with Mizuho Capital Markets, LLC (Mizuho), and at initial closing, borrowed $57.5 million. A wholly owned subsidiary of the Company (HHC Member) provided a guarantee for the bond in the form of a collateral maintenance commitment under which it will post refundable cash collateral if the Loan-to-Value (LTV) ratio exceeds 50%. A separate wholly owned subsidiary of the Company also provided a backstop guarantee of up to $50 million of the cash collateral commitment in the event HHC Member fails to make necessary payments when due. The cash collateral becomes nonrefundable if Floreo defaults on the bond obligation. The Company received a fee of $5.0 million in exchange for providing this guarantee, which was recognized in Accounts payable and accrued expenses on the Consolidated Balance Sheets as of December 31, 2022. This liability amount will be recognized in Other income (loss), net in a manner that corresponds to the bond repayment by Floreo. The Company’s maximum exposure under this guarantee is equal to the cash collateral that the Company may be obligated to post. As of December 31, 2022, the Company has not posted any cash collateral. Given the existence of other collateral including the undeveloped land owned by Floreo, the entity’s extensive and discretionary development plan and its eligibility for reimbursement of a significant part of the development costs from the Community Facility District in Arizona, the Company does not expect to have to post collateral.
In conjunction with the execution of the ground lease for the Seaport, the Company executed a completion guarantee for the core and shell construction of the Tin Building. The core and shell construction was completed in the fourth quarter of 2021, and the remainder of construction was completed in the third quarter of 2022. The Company received the necessary approvals from the New York City Economic Development Corporation to relinquish the guarantee in early 2023.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
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 December 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 tower are included in the ‘A‘ali‘i tower. Units for Kō‘ula, Victoria Place, and The Park Ward Village will be satisfied with the construction of Ulana Ward Village, which is a second workforce tower fully earmarked to fulfill the remaining reserved housing guarantee in the community. Ulana Ward Village began construction in early 2023. 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, as of December 31, 2022, and 2021, there were no events requiring financial performance under these guarantees.
| | |
11. Stock-Based Compensation Plans |
On May 14, 2020, the Company’s shareholders approved The Howard Hughes Corporation 2020 Equity Incentive Plan (the 2020 Equity Plan). Pursuant to the 2020 Equity Plan, 1,350,000 shares of the Company’s common stock were reserved for issuance. The 2020 Equity Plan provides for grants of options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards (collectively, the Awards). Employees, directors and consultants of the Company are eligible for Awards. The 2020 Equity Incentive Plan is administered by the Compensation Committee of the Board of Directors.
Prior to the adoption of the 2020 Equity Plan, equity awards were issued under The Howard Hughes Corporation Amended and Restated 2010 Equity Incentive Plan (the 2010 Equity Plan). The adoption of the 2020 Equity Plan did not impact the administration of Awards issued under the 2010 Equity Plan but following adoption of the 2020 Equity Plan, equity awards will no longer be granted under the 2010 Equity Plan.
As of December 31, 2022, there were a maximum of 948,606 shares available for future grants under the Company’s 2020 Equity Plan.
The following summarizes stock-based compensation expense, net of amounts capitalized to development projects, for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| thousands | 2022 | | 2021 | | 2020 |
| Stock Options (a)(b) | $ | 250 | | | $ | 227 | | | $ | (1,892) | |
| Restricted Stock (c) | 6,860 | | | 7,332 | | | 6,520 | |
| Pre-tax stock-based compensation expense | $ | 7,110 | | | $ | 7,559 | | | $ | 4,628 | |
| Income tax benefit | $ | 636 | | | $ | 882 | | | $ | 167 | |
(a)Amounts shown are net of an immaterial amount capitalized to development projects in 2022, $0.1 million capitalized to development projects in 2021 and $0.2 million capitalized to development projects in 2020.
(b)The credit position for the year ended December 31, 2020, was due to significant forfeitures which exceeded the expense.
(c)Amounts shown are net of $4.8 million capitalized to development projects in 2022, $2.2 million capitalized to development projects in 2021 and $0.9 million capitalized to development projects in 2020.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
Stock Options The following table summarizes stock option activity:
| | | | | | | | | | | | | | | | | |
| | Stock Options | | Weighted-average Exercise Price | Weighted-average Remaining Contractual Term (years) | Aggregate Intrinsic Value |
Stock options outstanding at December 31, 2021 | 270,487 | | | $ | 112.61 | | | |
| Granted | 13,000 | | | $ | 65.99 | | | |
| Exercised (a) | (4,500) | | | 68.61 | | | |
| Forfeited | (11,900) | | | 126.67 | | | |
| Expired | (8,100) | | | 118.70 | | | |
Stock options outstanding at December 31, 2022 | 258,987 | | | $ | 110.20 | | 4.2 | $ | 240,858 | |
| | | | | |
Stock options vested and expected to vest at December 31, 2022 | 257,062 | | | $ | 110.45 | | 4.2 | $ | 231,823 | |
Stock options exercisable at December 31, 2022 | 179,150 | | | $ | 118.90 | | 2.8 | $ | — | |
(a)The total intrinsic value of stock options exercised was $0.1 million during 2022, $2.6 million during 2021, and $2.4 million during 2020, based on the difference between the market price at the exercise date and the exercise price.
Cash received from stock option exercises was $0.3 million in 2022, $4.1 million in 2021, and $4.6 million in 2020. The tax benefit from these exercises was immaterial.
The fair value of stock option awards is determined using the Black-Scholes option-pricing model with the following assumptions:
–Expected life—Based on the average of the time to vesting and full term of an option
–Risk-free interest rates—Based on the U.S. Treasury rate over the expected life of an option
–Expected volatility—Based on the average of implied and historical volatilities as of each of the grant dates
The fair value on the grant date and the significant assumptions used in the Black‑Scholes option‑pricing model are as follows:
| | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| Weighted-average grant date fair value | $ | 37.70 | | | $ | 41.52 | | | $ | 32.10 | |
| Assumptions | | | | | |
| Expected life of options (in years) | 7.5 | | 7.5 | | 7.5 |
| Risk-free interest rate | 3.4 | % | | 1.2 | % | | 0.7 | % |
| Expected volatility | 50.3 | % | | 36.5 | % | | 40.4 | % |
| Expected annual dividend per share | — | | | — | | | — | |
Generally, options granted vest over requisite service periods, expire ten years after the grant date and generally do not become exercisable until their restrictions on exercise lapse after the five-year anniversary of the grant date.
The balance of unamortized stock option expense as of December 31, 2022, is $1.4 million, which is expected to be recognized over a weighted‑average period of 3.3 years.
Restricted Stock Restricted stock awards issued under the 2020 Equity Plan provide that shares awarded may not be sold or otherwise transferred until restrictions have lapsed as established by the Committee. In addition to the granting of restricted stock to certain members of management, the Company awards restricted stock to non‑employee directors as part of their annual retainer. The management awards generally vest over a range of three to five years, and the restriction on the non‑employee director shares generally lapses on the date of the Company’s following annual meeting of shareholders, or June 1st of the year following the award year, whichever is earlier, in each case generally subject to continued service.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
The following table summarizes restricted stock activity:
| | | | | | | | | | | |
| | Restricted Stock | | Weighted-average Grant Date Fair Value |
| Restricted stock outstanding at December 31, 2021 | 405,966 | | $ | 72.20 | |
| Granted | 154,599 | | 88.19 | |
| Vested | (101,000) | | 103.48 | |
| Forfeited | (106,102) | | 55.96 | |
| Restricted stock outstanding at December 31, 2022 | 353,463 | | $ | 75.14 | |
The grant date fair value of restricted stock is based on the closing sales price of common stock on the grant date. For restricted stock awards that vest based on shareholder returns, the grant date fair values are calculated using a Monte-Carlo approach which simulates the Company’s stock price on the corresponding vesting dates and are reflected at the target level of performance in the table above.
The weighted-average grant-date fair value per share of restricted stock granted was $83.91 during 2021 and $71.48 during 2020. The fair value of restricted stock that vested was $8.0 million during 2022, $6.9 million during 2021, and $5.6 million during 2020, based on the market price at the vesting date.
The balance of unamortized restricted stock expense as of December 31, 2022, was $16.2 million, which is expected to be recognized over a weighted‑average period of 2.2 years.
Deferred income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities using enacted tax rates currently in effect. Deferred income taxes also reflect the impact of operating loss and tax credit carryforwards.
The following summarizes income tax expense (benefit) for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| thousands | 2022 | | 2021 | | 2020 |
| Current | $ | 18,478 | | | $ | 4,797 | | | $ | 826 | |
| Deferred | 42,022 | | | 10,356 | | | 10,827 | |
| Total | $ | 60,500 | | | $ | 15,153 | | | $ | 11,653 | |
Reconciliation of the Income tax expense (benefit) if computed at the U.S. federal statutory income tax rate to the Company’s reported Income tax expense (benefit) for the years ended December 31 is as follows:
| | | | | | | | | | | | | | | | | |
| thousands except percentages | 2022 | | 2021 | | 2020 |
| Income (loss) before income taxes | $ | 245,136 | | | $ | 64,077 | | | $ | 8,480 | |
| U.S. federal statutory tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| Tax computed at the U.S. federal statutory rate | $ | 51,479 | | | $ | 13,456 | | | $ | 1,781 | |
| Increase (decrease) in valuation allowance, net | 1,065 | | | 2,378 | | | 11,822 | |
| State income tax expense (benefit), net of federal income tax | 5,483 | | | (3,182) | | | (2,608) | |
| | | | | |
| Tax expense (benefit) from other change in rates, prior period adjustments and other permanent differences | 315 | | | (181) | | | 2,271 | |
| | | | | |
| Tax expense on compensation disallowance | 2,180 | | | 1,570 | | | 1,553 | |
| Net (income) loss attributable to noncontrolling interests (a) | (22) | | | 1,507 | | | (4,826) | |
| Tax expense (benefit) on tax credits | — | | | (395) | | | 1,660 | |
| | | | | |
| | | | | |
| | | | | |
| Income tax expense (benefit) | $ | 60,500 | | | $ | 15,153 | | | $ | 11,653 | |
| Effective tax rate | 24.7 | % | | 23.6 | % | | 137.4 | % |
(a)The Company deconsolidated 110 North Wacker in the third quarter of 2020. Refer to Note 2 - Investments in Unconsolidated Ventures for additional information.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
As of December 31, 2022, the amounts and expiration dates of operating loss carryforwards for tax purposes are as follows:
| | | | | | | |
| thousands | Amount | | |
| | | |
| Net operating loss carryforwards - Federal (a) | $ | 132,736 | | | |
| Net operating loss carryforwards - State (b) | 606,681 | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
(a)Federal net operating loss carryforwards have an indefinite carryforward period.
(b)State net operating loss carryforwards of $279.5 million have an indefinite carryforward period. The remaining $327.2 million of carryforwards have varying carryforward periods through 2042. A valuation allowance has been recorded against the deferred tax benefit related to a majority of the state net operating loss carryforwards.
The following summarizes tax effects of temporary differences and carryforwards included in the net deferred tax liabilities as of December 31:
| | | | | | | | | | | |
| thousands | 2022 | | 2021 |
| Deferred tax assets: | | | |
| Operating and Strategic Developments properties, primarily differences in basis of assets and liabilities | $ | 24,141 | | | $ | — | |
| | | |
| Operating loss and tax carryforwards | 65,829 | | | 119,884 | |
| Total deferred tax assets | 89,970 | | | 119,884 | |
| Valuation allowance | (39,478) | | | (40,477) | |
| Total net deferred tax assets | $ | 50,492 | | | $ | 79,407 | |
| Deferred tax liabilities: | | | |
| Property associated with MPCs, primarily differences in the tax basis of land assets and treatment of interest and other costs | $ | (214,045) | | | $ | (176,904) | |
| Operating and Strategic Developments properties, primarily differences in basis of assets and liabilities | — | | | (27,364) | |
| Deferred income | (90,783) | | | (79,976) | |
| Total deferred tax liabilities | (304,828) | | | (284,244) | |
| Total net deferred tax liabilities | $ | (254,336) | | | $ | (204,837) | |
The deferred tax liability associated with the Company’s MPCs is largely attributable to the difference between the basis and value determined as of the date of the acquisition by its predecessors adjusted for sales that have occurred since that time. The recognition of these deferred tax liabilities is dependent upon the timing and sales price of future land sales and the method of accounting used for income tax purposes. The deferred tax liability related to deferred income represents the difference between the income tax method of accounting and the financial statement method of accounting for prior sales of land in the Company’s MPCs.
Generally, the Company is currently open to audit under the statute of limitations by the Internal Revenue Service as well as state taxing authorities for the years ended December 31, 2019 through 2022. In the Company’s opinion, it has made adequate tax provisions for years subject to examination. However, the final determination of tax examinations and any related litigation could be different from what was reported on the returns.
The Company applies the generally accepted accounting principle related to accounting for uncertainty in income taxes, which prescribes a recognition threshold that a tax position is required to meet before recognition in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues.
The Company recognizes and reports interest and penalties related to unrecognized tax benefits, if applicable, within the provision for income tax expense. The Company had no unrecognized tax benefits for the years ended December 31, 2022, 2021 or 2020, and therefore did not recognize any interest expense or penalties on unrecognized tax benefits.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
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 the warrant, Mr. O’Reilly could 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, and expired on October 2, 2022, without being exercised.
On June 16, 2017, and October 4, 2017, the Company entered into warrant agreements with its Chief Executive Officer, David R. Weinreb, (Weinreb Warrant) and 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, were credited to Additional paid-in capital.
On October 21, 2019, Mr. Weinreb and Mr. Herlitz stepped down from their roles as Chief Executive Officer and President of the Company, respectively. The Company and each of Mr. Weinreb and Mr. Herlitz have agreed to treat their terminations of employment as terminations without cause under their respective employment and warrant agreements with the Company. Thus, effective October 21, 2019, the Weinreb Warrant and Herlitz Warrant became exercisable by the terms of their respective warrant agreements in connection with their respective terminations of employment. The warrant expiration dates remain unchanged. Neither of these warrants have been exercised as of December 31, 2022.
| | |
14. 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, 2019 | $ | (29,372) | |
| Other comprehensive income (loss) before reclassifications | (34,906) | |
| (Gain) loss reclassified from accumulated other comprehensive loss to net income | 11,836 | |
| Pension adjustment | (84) | |
| Share of investee’s other comprehensive income | 1,002 | |
| Deconsolidation of 110 North Wacker | 12,934 | |
| Net current-period other comprehensive income (loss) | (9,218) | |
| Balance at December 31, 2020 | $ | (38,590) | |
| Other comprehensive income (loss) before reclassifications | 5,300 | |
| (Gain) loss reclassified from accumulated other comprehensive loss to net income | 12,660 | |
| |
| Pension adjustment | 452 | |
| Share of investee's other comprehensive income | 5,721 | |
| |
| Net current-period other comprehensive income (loss) | 24,133 | |
| Balance at December 31, 2021 | $ | (14,457) | |
| Other comprehensive income (loss) before reclassifications | 25,657 | |
| (Gain) loss reclassified from accumulated other comprehensive loss to net income | 6,041 | |
| Pension adjustment | (183) | |
| Reclassification of the Company's share of previously deferred derivative gains to net income (a) | (6,723) | |
| |
| |
| Net current-period other comprehensive income (loss) | 24,792 | |
| Balance at December 31, 2022 | $ | 10,335 | |
(a)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 - Investments in Unconsolidated Ventures for additional information.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
The following table summarizes the amounts reclassified out of AOCI:
| | | | | | | | | | | | | | |
Accumulated Other Comprehensive Income (Loss) Components thousands | Amounts reclassified from
Accumulated other comprehensive income (loss) | |
| For the Year Ended | Affected line items in the Statements of Operations |
| 2022 | | 2021 |
| (Gains) losses on cash flow hedges | $ | 7,778 | | | $ | 16,221 | | Interest expense |
| Company's share of previously deferred derivative gains | (8,636) | | | — | | Equity in earnings (losses) from unconsolidated ventures |
| Income taxes on (gains) losses on cash flow hedges | 176 | | | (3,561) | | Income tax expense (benefit) |
| Total reclassifications of (income) loss for the period | $ | (682) | | | $ | 12,660 | | |
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 for the years ended December 31 as follows:
| | | | | | | | | | | | | | | | | |
| thousands except per share amounts | 2022 | | 2021 | | 2020 |
| Net income (loss) | | | | | |
| Net income (loss) | $ | 184,636 | | | $ | 48,924 | | | $ | (3,173) | |
| Net (income) loss attributable to noncontrolling interests | (103) | | | 7,176 | | | (22,981) | |
| Net income (loss) attributable to common stockholders | $ | 184,533 | | | $ | 56,100 | | | $ | (26,154) | |
| | | | | |
| Shares | | | | | |
| Weighted-average common shares outstanding - basic | 50,513 | | | 54,596 | | | 52,522 | |
| Restricted stock and stock options | 45 | | | 53 | | | — | |
| | | | | |
| Weighted-average common shares outstanding - diluted | 50,558 | | | 54,649 | | | 52,522 | |
| | | | | |
| Net income (loss) per common share | | | | | |
| Basic income (loss) per share | $ | 3.65 | | | $ | 1.03 | | | $ | (0.50) | |
| Diluted income (loss) per share | $ | 3.65 | | | $ | 1.03 | | | $ | (0.50) | |
The diluted EPS computation excludes 253,987 shares of stock options as of December 31, 2022, 255,987 shares as of December 31, 2021, and 372,736 shares as of December 31, 2020, because their effect is anti-dilutive. The diluted EPS computation also excludes 277,295 shares of restricted stock as of December 31, 2022, 299,506 shares as of December 31, 2021, and 409,110 shares as of December 31, 2020, because their effect is anti-dilutive.
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 plan.
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 2022, the Company repurchased 2,704,228 shares of its common stock under this program for approximately $235.0 million at an average price of $86.90 per share. All purchases were funded with cash on hand.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
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 for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| thousands | 2022 | | 2021 | | 2020 |
| Revenues from contracts with customers | | | | | |
| Recognized at a point in time | | | | | |
| Condominium rights and unit sales | $ | 677,078 | | | $ | 514,597 | | | $ | 1,143 | |
| Master Planned Communities land sales | 316,065 | | | 346,217 | | | 233,044 | |
| Builder price participation | 71,761 | | | 45,138 | | | 37,072 | |
| Total | 1,064,904 | | | 905,952 | | | 271,259 | |
| | | | | |
| Recognized at a point in time or over time | | | | | |
| Other land, rental and property revenues | 144,481 | | | 152,619 | | | 105,048 | |
| | | | | |
| | | | | |
| Rental and lease-related revenues | | | | | |
| Rental revenue | 399,103 | | | 369,330 | | | 323,182 | |
| Total revenues | $ | 1,608,488 | | | $ | 1,427,901 | | | $ | 699,489 | |
| | | | | |
| Revenues by segment | | | | | |
| Operating Assets revenues | $ | 431,834 | | | $ | 442,698 | | | $ | 372,057 | |
| Master Planned Communities revenues | 408,365 | | | 409,746 | | | 283,953 | |
| Seaport revenues | 88,468 | | | 55,008 | | | 23,814 | |
| Strategic Developments revenues | 679,763 | | | 520,109 | | | 19,407 | |
| Corporate revenues | 58 | | | 340 | | | 258 | |
| Total revenues | $ | 1,608,488 | | | $ | 1,427,901 | | | $ | 699,489 | |
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, 2020 | $ | 360,416 | |
| Consideration earned during the period | (584,115) | |
| Consideration received during the period | 654,876 | |
Balance as of December 31, 2021 | $ | 431,177 | |
| Consideration earned during the period | (799,401) | |
| Consideration received during the period | 826,055 | |
Balance as of December 31, 2022 | $ | 457,831 | |
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
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 non-cancelable 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 December 31, 2022, is $2.5 billion. The Company expects to recognize this amount as revenue over the following periods:
| | | | | | | | | | | | | | | | | | | | |
| thousands | Less than 1 year | | 1-2 years | 3 years and thereafter |
| Total remaining unsatisfied performance obligations | | $ | 82,078 | | | $ | 788,845 | | | $ | 1,650,684 | |
The Company’s remaining performance obligations are adjusted to reflect any known project cancellations, revisions to project scope and cost, and deferrals, as appropriate. These amounts exclude estimated amounts of variable consideration which are constrained, such as builder price participation.
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 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 December 31, 2022, or December 31, 2021.
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 less than one year to approximately 50 years, excluding extension options. 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.
In June 2022, the Company sold the Outlet Collection at Riverwalk, which was subject to a ground lease, resulting in a reduction in the Company’s operating lease right-of-use assets and obligations as well as future minimum lease payments. As of December 31, 2022, the Company’s operating leases primarily relate to properties in the Seaport.
The Company’s leased assets and liabilities are as follows:
| | | | | | | | | | | | | | | |
| thousands | | | | | 2022 | | 2021 |
| Assets | | | | | | | |
| | | | | | | |
| | | | | | | |
| Operating lease right-of-use assets, net | | | | | $ | 46,926 | | | $ | 57,022 | |
| | | | | | | |
| Liabilities | | | | | | | |
| Operating lease obligations | | | | | $ | 51,321 | | | $ | 69,363 | |
| | | | | | | |
The components of lease expense for the years ended December 31 are as follows:
| | | | | | | | | | | | | | | |
| thousands | | | | | 2022 | | 2021 |
| Operating lease cost | | | | | $ | 7,449 | | | $ | 8,495 | |
| Variable lease costs | | | | | 904 | | | 823 | |
| | | | | | | |
| Total lease cost | | | | | $ | 8,353 | | | $ | 9,318 | |
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
Future minimum lease payments as of December 31, 2022, are as follows:
| | | | | |
| thousands | Operating Leases |
| 2023 | $ | 4,834 | |
| 2024 | 4,878 | |
| 2025 | 3,493 | |
| 2026 | 3,269 | |
| 2027 | 3,336 | |
| Thereafter | 241,294 | |
| Total lease payments | 261,104 | |
| Less: imputed interest | (209,783) | |
| Present value of lease liabilities | $ | 51,321 | |
Other information related to the Company’s lessee agreements is as follows:
| | | | | | | | | | | |
| Supplemental Consolidated Statements of Cash Flows Information | Year ended December 31, |
| thousands | 2022 | | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows on operating leases | $ | 5,718 | | | $ | 6,930 | |
| | | | | | | | | | | |
| Other Information | 2022 | | 2021 |
| Weighted-average remaining lease term (years) | | | |
| Operating leases | 43.8 | | 38.7 |
| Weighted-average discount rate | | | |
| Operating leases | 7.7 | % | | 7.7 | % |
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 five 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 December 31, 2022, are as follows:
| | | | | | | | | | | |
| Year ended December 31, |
| thousands | 2022 | | 2021 |
| Total minimum rent payments | $ | 229,302 | | | $ | 223,138 | |
Total future minimum rents associated with operating leases are as follows:
| | | | | |
| thousands | Total Minimum Rent |
| 2023 | $ | 236,188 | |
| 2024 | 239,414 | |
| 2025 | 218,399 | |
| 2026 | 198,114 | |
| 2027 | 185,526 | |
| Thereafter | 802,060 | |
| Total | $ | 1,879,701 | |
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 Consolidated Statements of Operations also include amortization related to above and below‑market tenant leases on acquired properties.
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
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 7. 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.
–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.
–Seaport – consists of approximately 473,000 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 development, 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 |
| Year ended December 31, 2022 | | | | | | | |
| Total revenues | $ | 431,834 | | $ | 408,365 | | $ | 88,468 | | | $ | 679,763 | | | $ | 1,608,430 | |
| Total operating expenses | (194,496) | | (173,905) | | (104,393) | | | (504,036) | | | (976,830) | |
| Segment operating income (loss) | 237,338 | | 234,460 | | (15,925) | | | 175,727 | | | 631,600 | |
| Depreciation and amortization | (154,626) | | (394) | | (36,338) | | | (5,319) | | | (196,677) | |
| Interest income (expense), net | (89,959) | | 50,305 | | 3,902 | | | 17,073 | | | (18,679) | |
| Other income (loss), net | (1,140) | | 23 | | 245 | | | 1,799 | | | 927 | |
| Equity in earnings (losses) from unconsolidated ventures | 22,263 | | (1,407) | | (36,273) | | | 868 | | | (14,549) | |
| Gain (loss) on sale or disposal of real estate and other assets, net | 29,588 | | — | | — | | | 90 | | | 29,678 | |
| | | | | | | |
| | | | | | | |
| Gain (loss) on extinguishment of debt | (2,230) | | — | | — | | | — | | | (2,230) | |
| | | | | | | |
| Segment EBT | $ | 41,234 | | $ | 282,987 | | $ | (84,389) | | | $ | 190,238 | | | $ | 430,070 | |
| Corporate income, expenses and other items | | | | | | | (245,434) | |
| Net income (loss) | | | | | | | 184,636 | |
| Net (income) loss attributable to noncontrolling interests | | | | | | | (103) | |
| Net income (loss) attributable to common stockholders | | | | | | | $ | 184,533 | |
| | | | | | | |
| | | | | |
FINANCIAL STATEMENTS FOOTNOTES | |
| | | | | | | | | | | | | | | | | | | | | | | |
| thousands | Operating Assets Segment (a) | MPC Segment | Seaport Segment | | Strategic Developments Segment | | Total |
| Year Ended December 31, 2021 | | | | | | | |
| Total revenues | $ | 442,698 | | $ | 409,746 | | $ | 55,008 | | | $ | 520,109 | | | $ | 1,427,561 | |
| Total operating expenses | (209,020) | | (193,851) | | (77,198) | | | (436,698) | | | (916,767) | |
| Segment operating income (loss) | 233,678 | | 215,895 | | (22,190) | | | 83,411 | | | 510,794 | |
| Depreciation and amortization | (163,031) | | (366) | | (30,867) | | | (6,512) | | | (200,776) | |
| Interest income (expense), net | (75,391) | | 42,683 | | 357 | | | 3,701 | | | (28,650) | |
| Other income (loss), net | (10,746) | | — | | (3,730) | | | 2,536 | | | (11,940) | |
| Equity in earnings (losses) from unconsolidated ventures | (67,042) | | 59,399 | | (1,988) | | | (221) | | | (9,852) | |
| Gain (loss) on sale or disposal of real estate and other assets, net | 39,168 | | — | | — | | | 13,911 | | | 53,079 | |
| | | | | | | |
| | | | | | | |
| Gain (loss) on extinguishment of debt | (1,926) | | (1,004) | | — | | | — | | | (2,930) | |
| Provision for impairment | — | | — | | — | | | (13,068) | | | (13,068) | |
| Segment EBT | $ | (45,290) | | $ | 316,607 | | $ | (58,418) | | | $ | 83,758 | | | $ | 296,657 | |
| Corporate income, expenses and other items | | | | | | | (247,733) | |
| Net income (loss) | | | | | | | 48,924 | |
| Net (income) loss attributable to noncontrolling interests | | | | | | | 7,176 | |
| Net income (loss) attributable to common stockholders | | | | | | | $ | 56,100 | |
| | | | | | | |
| Year Ended December 31, 2020 | | | | | | | |
| Total revenues | $ | 372,057 | | $ | 283,953 | | $ | 23,814 | | | $ | 19,407 | | | $ | 699,231 | |
| Total operating expenses | (185,480) | | (128,597) | | (46,112) | | | (135,160) | | | (495,349) | |
| Segment operating income (loss) | 186,577 | | 155,356 | | (22,298) | | | (115,753) | | | 203,882 | |
| Depreciation and amortization | (162,324) | | (365) | | (41,602) | | | (6,545) | | | (210,836) | |
| Interest income (expense), net | (91,411) | | 36,587 | | (12,512) | | | 6,312 | | | (61,024) | |
| Other income (loss), net | 540 | | — | | (2,616) | | | 2,165 | | | 89 | |
| Equity in earnings (losses) from unconsolidated ventures | (7,366) | | 17,845 | | (9,292) | | | 269,912 | | | 271,099 | |
| Gain (loss) on sale or disposal of real estate and other assets, net | 38,232 | | — | | — | | | 21,710 | | | 59,942 | |
| | | | | | | |
| | | | | | | |
| Gain (loss) on extinguishment of debt | (1,521) | | — | | (11,648) | | | — | | | (13,169) | |
| Provision for impairment | (48,738) | | — | | — | | | — | | | (48,738) | |
| Segment EBT | $ | (86,011) | | $ | 209,423 | | $ | (99,968) | | | $ | 177,801 | | | $ | 201,245 | |
| Corporate income, expenses and other items | | | | | | | (204,418) | |
| Net income (loss) | | | | | | | (3,173) | |
| Net (income) loss attributable to noncontrolling interests | | | | | | | (22,981) | |
| Net income (loss) attributable to common stockholders | | | | | | | $ | (26,154) | |
(a)Total revenues includes hospitality revenues of $35.6 million for the year ended December 31, 2021, and $35.2 million for the year ended December 31, 2020. Total operating expenses includes hospitality operating costs of $30.5 million for the year ended December 31, 2021, and $32.3 million for the year ended December 31, 2020. In September 2021, the Company completed the sale of its three hospitality properties. Refer to Note 3 - Acquisitions and Dispositions for additional information.
The following represents assets by segment and the reconciliation of total segment assets to the total assets in the Consolidated Balance Sheets as of December 31:
| | | | | | | | | | | |
| thousands | 2022 | | 2021 |
| Operating Assets | $ | 3,448,823 | | | $ | 3,607,718 | |
| Master Planned Communities | 3,272,655 | | | 3,056,240 | |
| Seaport | 1,166,950 | | | 1,046,992 | |
| Strategic Developments | 1,359,180 | | | 1,193,549 | |
| Total segment assets | 9,247,608 | | | 8,904,499 | |
| Corporate | 355,855 | | | 677,195 | |
| Total assets | $ | 9,603,463 | | | $ | 9,581,694 | |
| | | | | |
FINANCIAL STATEMENT SCHEDULE
| |
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Initial Cost (b) | | Costs Capitalized Subsequent to Acquisition (c) | | Gross Amounts at Which Carried at Close of Period (d) | | | |
Name of Center thousands | Location | Center Type | Encumbrances (a) | Land | Buildings and Improvements | | Land (e) | Buildings and Improvements (e)(f) | | Land | Buildings and Improvements (f) | Total | Accumulated Depreciation (f) | Date of Construction | Date Acquired / Completed |
| Bridgeland | | | | | | | | | | | | | | | |
| Bridgeland | Cypress, TX | MPC | $ | 275,000 | | $ | 260,223 | | $ | — | | | $ | 278,701 | | $ | 1,580 | | | $ | 538,924 | | $ | 1,580 | | $ | 540,504 | | $ | (757) | | | 2004 |
| Bridgeland Predevelopment | Cypress, TX | Development | — | | — | | 3,051 | | | — | | — | | | — | | 3,051 | | 3,051 | | — | | | |
| Lakeland Village Center at Bridgeland | Cypress, TX | Retail | — | | 2,404 | | 11,135 | | | — | | 3,456 | | | 2,404 | | 14,591 | | 16,995 | | (2,814) | | 2015 | 2016 |
| Lakeside Row | Cypress, TX | Multi-family | 35,500 | | 812 | | 42,875 | | | — | | 428 | | | 812 | | 43,303 | | 44,115 | | (5,611) | | 2018 | 2019 |
| Starling at Bridgeland | Cypress, TX | Multi-family | 31,155 | | 1,511 | | 55,117 | | | — | | — | | | 1,511 | | 55,117 | | 56,628 | | (271) | | 2021 | 2022 |
| Wingspan | Cypress, TX | Development | 1 | | — | | 18,604 | | | — | | — | | | — | | 18,604 | | 18,604 | | — | | 2022 | |
| Columbia | | | | | | | | | | | | | | | |
| Columbia | Columbia, MD | MPC | — | | 457,552 | | — | | | (440,927) | | — | | | 16,625 | | — | | 16,625 | | — | | | 2004 |
| Columbia Predevelopment | Columbia, MD | Development | — | | — | | 9,410 | | | — | | — | | | — | | 9,410 | | 9,410 | | — | | | |
| 10 - 70 Columbia Corporate Center | Columbia, MD | Office | 58,941 | | 24,685 | | 94,824 | | | — | | 46,813 | | | 24,685 | | 141,637 | | 166,322 | | (35,027) | | | 2012 / 2014 |
| Columbia Office Properties | Columbia, MD | Office | — | | 1,175 | | 14,913 | | | — | | (1,403) | | | 1,175 | | 13,510 | | 14,685 | | (6,443) | | | 2004 / 2007 |
| Columbia Regional Building | Columbia, MD | Retail | 23,345 | | — | | 28,865 | | | — | | 2,977 | | | — | | 31,842 | | 31,842 | | (8,129) | | 2013 | 2014 |
| Juniper Apartments | Columbia, MD | Multi-family | 117,000 | | 3,923 | | 112,435 | | | — | | 2,414 | | | 3,923 | | 114,849 | | 118,772 | | (11,604) | | 2018 | 2020 |
| Lakefront District | Columbia, MD | Development | — | | 400 | | 80,053 | | | (400) | | (47,539) | | | — | | 32,514 | | 32,514 | | — | | | Various |
| Marlow | Columbia, MD | Multi-family | 50,881 | | 4,088 | | 120,882 | | | — | | — | | | 4,088 | | 120,882 | | 124,970 | | (154) | | 2021 | 2022 |
| Merriweather District | Columbia, MD | Development | — | | — | | 76,808 | | | — | | 546 | | | — | | 77,354 | | 77,354 | | — | | | 2015 |
| Merriweather District Area 3 Retail | Columbia, MD | Retail | — | | 337 | | 6,945 | | | 10 | | 2,028 | | | 347 | | 8,973 | | 9,320 | | (449) | | 2019 | 2020 |
| One Mall North | Columbia, MD | Office | 16,059 | | 7,822 | | 10,818 | | | — | | 1,922 | | | 7,822 | | 12,740 | | 20,562 | | (2,389) | | | 2016 |
| One Merriweather | Columbia, MD | Office | 49,800 | | 1,433 | | 72,745 | | | — | | 1,617 | | | 1,433 | | 74,362 | | 75,795 | | (14,610) | | 2015 | 2017 |
| Two Merriweather | Columbia, MD | Office | 25,600 | | 1,019 | | 33,016 | | | — | | 5,838 | | | 1,019 | | 38,854 | | 39,873 | | (7,171) | | 2016 | 2017 |
| 6100 Merriweather | Columbia, MD | Office | 76,000 | | 2,550 | | 112,669 | | | — | | 2,059 | | | 2,550 | | 114,728 | | 117,278 | | (11,741) | | 2018 | 2019 |
| South Lake Medical Office Building | Columbia, MD | Development | — | | — | | 4,711 | | | — | | — | | | — | | 4,711 | | 4,711 | | — | | 2022 | |
| Teravalis | | | | | | | | | | | | | | | |
| Teravalis | Phoenix, AZ | MPC | — | | 544,546 | | 312 | | | — | | — | | | 544,546 | | 312 | | 544,858 | | (17) | | | 2021 |
| Seaport | | | | | | | | | | | | | | | |
| 85 South Street | New York, NY | Multi-family | — | | 15,913 | | 8,137 | | | — | | 3,468 | | | 15,913 | | 11,605 | | 27,518 | | (5,541) | | | 2014 |
| Seaport Predevelopment | New York, NY | Development | — | | — | | 11,224 | | | — | | — | | | — | | 11,224 | | 11,224 | | — | | 2013 | |
| Tin Building | New York, NY | Retail | — | | — | | 200,401 | | | — | | — | | | — | | 200,401 | | 200,401 | | (4,315) | | 2017 | 2022 |
| Pier 17 | New York, NY | Retail | — | | — | | 468,476 | | | — | | 31,980 | | | — | | 500,456 | | 500,456 | | (89,988) | | 2013 | 2018 |
| Historic District Area / Uplands | New York, NY | Retail | — | | — | | 7,884 | | | — | | 119,564 | | | — | | 127,448 | | 127,448 | | (26,425) | | 2013 | 2016 |
| 250 Water Street | New York, NY | Development | 100,000 | | — | | 179,471 | | | — | | 63,055 | | | — | | 242,526 | | 242,526 | | — | | | 2018 |
| Summerlin | | | | | | | | | | | | | | | |
| 1700 Pavilion (g) | Las Vegas, NV | Office | 38,128 | | 1,700 | | 89,311 | | | — | | — | | | 1,700 | | 89,311 | | 91,011 | | (215) | | 2021 | 2022 |
| Aristocrat | Las Vegas, NV | Office | 35,060 | | 5,004 | | 34,588 | | | — | | 152 | | | 5,004 | | 34,740 | | 39,744 | | (5,489) | | 2017 | 2018 |
| Constellation Apartments | Las Vegas, NV | Multi-family | 24,200 | | 3,069 | | 39,759 | | | — | | 1,691 | | | 3,069 | | 41,450 | | 44,519 | | (7,784) | | | 2017 |
| Downtown Summerlin (g)(h) | Las Vegas, NV | Retail/Office | 1,933 | | 30,855 | | 364,100 | | | — | | 27,315 | | | 30,855 | | 391,415 | | 422,270 | | (113,520) | | 2013 | 2014 / 2015 |
| Hockey Ground Lease (g) | Las Vegas, NV | Other | 180 | | — | | — | | | 6,705 | | 2,198 | | | 6,705 | | 2,198 | | 8,903 | | (293) | | | 2017 |
| Las Vegas Ballpark (i) | Las Vegas, NV | Other | 44,802 | | 5,318 | | 124,391 | | | — | | 1,064 | | | 5,318 | | 125,455 | | 130,773 | | (24,161) | | 2018 | 2019 |
| Summerlin South Office | Las Vegas, NV | Development | — | | — | | 10,386 | | | — | | — | | | — | | 10,386 | | 10,386 | | — | | 2022 | |
| | | | | |
FINANCIAL STATEMENT SCHEDULE
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Initial Cost (b) | | Costs Capitalized Subsequent to Acquisition (c) | | Gross Amounts at Which Carried at Close of Period (d) | | | |
Name of Center thousands | Location | Center Type | Encumbrances (a) | Land | Buildings and Improvements | | Land (e) | Buildings and Improvements (e)(f) | | Land | Buildings and Improvements (f) | Total | Accumulated Depreciation (f) | Date of Construction | Date Acquired / Completed |
| Two Summerlin (g) | Las Vegas, NV | Office | 40,873 | | 3,037 | | 47,104 | | | — | | 1,908 | | | 3,037 | | 49,012 | | 52,049 | | (8,488) | | 2017 | 2018 |
| Summerlin (g) | Las Vegas, NV | MPC | 57,328 | | 990,179 | | — | | | 24,332 | | 884 | | | 1,014,511 | | 884 | | 1,015,395 | | (489) | | | 2004 |
| Summerlin Predevelopment | Las Vegas, NV | Development | — | | — | | 10,697 | | | — | | — | | | — | | 10,697 | | 10,697 | | — | | | |
| Tanager Apartments (g) | Las Vegas, NV | Multi-family | 58,648 | | 7,331 | | 53,978 | | | — | | 87 | | | 7,331 | | 54,065 | | 61,396 | | (7,195) | | 2017 | 2019 |
| Tanager Echo (g) | Las Vegas, NV | Development | 31,552 | | — | | 68,341 | | | — | | — | | | — | | 68,341 | | 68,341 | | — | | 2021 | |
| The Woodlands | | | | | | | | | | | | | | | |
| Creekside Park Apartments | The Woodlands, TX | Multi-family | 37,730 | | 729 | | 40,116 | | | — | | 578 | | | 729 | | 40,694 | | 41,423 | | (6,668) | | 2017 | 2018 |
| Creekside Park Medical Plaza | The Woodlands, TX | Office | 2,845 | | 306 | | 6,912 | | | — | | — | | | 306 | | 6,912 | | 7,218 | | (15) | | 2022 | 2022 |
| Creekside Park The Grove | The Woodlands, TX | Multi-family | 57,000 | | 1,876 | | 52,382 | | | — | | — | | | 1,876 | | 52,382 | | 54,258 | | (3,399) | | 2019 | 2021 |
| Creekside Park West | The Woodlands, TX | Retail | 15,869 | | 1,228 | | 17,922 | | | — | | 549 | | | 1,228 | | 18,471 | | 19,699 | | (1,924) | | 2018 | 2019 |
| HHC 242 Self-Storage | The Woodlands, TX | Other | — | | 878 | | 6,802 | | | — | | 1,123 | | | 878 | | 7,925 | | 8,803 | | (1,218) | | 2015 | 2017 |
| HHC 2978 Self-Storage | The Woodlands, TX | Other | — | | 124 | | 5,498 | | | — | | 2,065 | | | 124 | | 7,563 | | 7,687 | | (1,130) | | 2016 | 2017 |
| Houston Ground Leases | The Woodlands, TX | Other | — | | 15,762 | | 1,989 | | | — | | — | | | 15,762 | | 1,989 | | 17,751 | | (125) | | | Various |
| One Hughes Landing | The Woodlands, TX | Office | 48,286 | | 1,678 | | 34,761 | | | — | | (3,940) | | | 1,678 | | 30,821 | | 32,499 | | (9,880) | | 2012 | 2013 |
| Two Hughes Landing | The Woodlands, TX | Office | 46,332 | | 1,269 | | 34,950 | | | — | | (3,618) | | | 1,269 | | 31,332 | | 32,601 | | (10,138) | | 2013 | 2014 |
| Three Hughes Landing | The Woodlands, TX | Office | 70,000 | | 2,626 | | 46,372 | | | — | | 32,701 | | | 2,626 | | 79,073 | | 81,699 | | (19,843) | | 2014 | 2016 |
| 1725 Hughes Landing Boulevard | The Woodlands, TX | Office | 61,207 | | 1,351 | | 36,764 | | | — | | 38,203 | | | 1,351 | | 74,967 | | 76,318 | | (26,798) | | 2013 | 2015 |
| 1735 Hughes Landing Boulevard | The Woodlands, TX | Office | 59,006 | | 3,709 | | 97,651 | | | — | | (305) | | | 3,709 | | 97,346 | | 101,055 | | (30,541) | | 2013 | 2015 |
| Hughes Landing Daycare | The Woodlands, TX | Other | — | | 138 | | — | | | — | | — | | | 138 | | — | | 138 | | — | | 2018 | 2019 |
| Hughes Landing Retail | The Woodlands, TX | Retail | 32,912 | | 5,184 | | 32,562 | | | — | | (36) | | | 5,184 | | 32,526 | | 37,710 | | (9,643) | | 2013 | 2015 |
| 1701 Lake Robbins | The Woodlands, TX | Retail | — | | 1,663 | | 3,725 | | | — | | 459 | | | 1,663 | | 4,184 | | 5,847 | | (996) | | | 2014 |
| 2201 Lake Woodlands Drive | The Woodlands, TX | Office | — | | 3,755 | | — | | | — | | 1,210 | | | 3,755 | | 1,210 | | 4,965 | | (535) | | | 2011 |
| Lakefront North | The Woodlands, TX | Office | 50,000 | | 10,260 | | 39,357 | | | — | | 15,544 | | | 10,260 | | 54,901 | | 65,161 | | (7,932) | | | 2018 |
| One Lakes Edge | The Woodlands, TX | Multi-family | 67,535 | | 1,057 | | 81,768 | | | — | | 597 | | | 1,057 | | 82,365 | | 83,422 | | (19,645) | | 2013 | 2015 |
| Two Lakes Edge | The Woodlands, TX | Multi-family | 105,000 | | 1,870 | | 96,349 | | | — | | 460 | | | 1,870 | | 96,809 | | 98,679 | | (10,560) | | 2018 | 2020 |
| The Lane at Waterway | The Woodlands, TX | Multi-family | 37,500 | | 2,029 | | 40,033 | | | — | | 352 | | | 2,029 | | 40,385 | | 42,414 | | (3,478) | | 2019 | 2020 |
| Memorial Hermann Medical Office Building | The Woodlands, TX | Office | 2,769 | | 586 | | 4,091 | | | — | | — | | | 586 | | 4,091 | | 4,677 | | (59) | | 2021 | 2022 |
| Millennium Six Pines Apartments | The Woodlands, TX | Multi-family | 42,500 | | 4,000 | | 54,624 | | | 7,225 | | 893 | | | 11,225 | | 55,517 | | 66,742 | | (13,294) | | | 2016 |
| Millennium Waterway Apartments | The Woodlands, TX | Multi-family | 51,000 | | 15,917 | | 56,002 | | | — | | 2,471 | | | 15,917 | | 58,473 | | 74,390 | | (23,237) | | | 2012 |
| 8770 New Trails | The Woodlands, TX | Office | 35,296 | | 2,204 | | 35,033 | | | — | | 80 | | | 2,204 | | 35,113 | | 37,317 | | (4,731) | | 2019 | 2020 |
| 9303 New Trails | The Woodlands, TX | Office | 9,830 | | 1,929 | | 11,915 | | | — | | 1,448 | | | 1,929 | | 13,363 | | 15,292 | | (3,884) | | | 2011 |
| 3831 Technology Forest Drive | The Woodlands, TX | Office | 19,712 | | 514 | | 14,194 | | | — | | 1,813 | | | 514 | | 16,007 | | 16,521 | | (6,447) | | 2014 | 2014 |
| 20/25 Waterway Avenue | The Woodlands, TX | Retail | 14,500 | | 2,346 | | 8,871 | | | — | | 65 | | | 2,346 | | 8,936 | | 11,282 | | (2,826) | | | 2011 |
| Waterway Garage Retail | The Woodlands, TX | Retail | — | | 1,341 | | 4,255 | | | — | | 1,284 | | | 1,341 | | 5,539 | | 6,880 | | (1,599) | | | 2011 |
| 3 Waterway Square | The Woodlands, TX | Office | 43,209 | | 748 | | 42,214 | | | — | | (2,767) | | | 748 | | 39,447 | | 40,195 | | (14,907) | | 2012 | 2013 |
| 4 Waterway Square | The Woodlands, TX | Office | 28,786 | | 1,430 | | 51,553 | | | — | | 7,199 | | | 1,430 | | 58,752 | | 60,182 | | (21,529) | | | 2011 |
| The Woodlands | The Woodlands, TX | MPC | — | | 269,411 | | 9,814 | | | (84,054) | | (9,744) | | | 185,357 | | 70 | | 185,427 | | (70) | | | 2011 |
| The Woodlands Predevelopment | The Woodlands, TX | Development | — | | — | | 36,647 | | | — | | — | | | — | | 36,647 | | 36,647 | | (611) | | | |
| The Woodlands Parking Garages | The Woodlands, TX | Other | — | | 5,857 | | — | | | 2,496 | | 14,967 | | | 8,353 | | 14,967 | | 23,320 | | (3,391) | | | 2011 / 2013 |
| 2000 Woodlands Parkway | The Woodlands, TX | Retail | — | | — | | — | | | — | | 655 | | | — | | 655 | | 655 | | (225) | | | 2016 |
| The Woodlands Towers at the Waterway (j) | The Woodlands, TX | Office | 347,446 | | 11,044 | | 437,561 | | | (1) | | 24,894 | | | 11,043 | | 462,455 | | 473,498 | | (45,425) | | | 2019 |
| The Woodlands Warehouse | The Woodlands, TX | Other | 13,700 | | 4,480 | | 4,389 | | | — | | — | | | 4,480 | | 4,389 | | 8,869 | | (538) | | | 2019 |
| 1400 Woodloch Forest | The Woodlands, TX | Office | — | | 1,570 | | 13,023 | | | — | | 4,962 | | | 1,570 | | 17,985 | | 19,555 | | (6,311) | | | 2011 |
| | | | | | | | | | | | | | | |
| | | | | |
FINANCIAL STATEMENT SCHEDULE
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Initial Cost (b) | | Costs Capitalized Subsequent to Acquisition (c) | | Gross Amounts at Which Carried at Close of Period (d) | | | |
Name of Center thousands | Location | Center Type | Encumbrances (a) | Land | Buildings and Improvements | | Land (e) | Buildings and Improvements (e) | | Land | Buildings and Improvements | Total | Accumulated Depreciation (f) | Date of Construction | Date Acquired / Completed |
| The Woodlands Hills | | | | | | | | | | | | | | | |
| The Woodlands Hills | Conroe, TX | MPC | — | | 99,284 | | — | | | 12,280 | | 43 | | | 111,564 | | 43 | | 111,607 | | (16) | | | 2014 |
| Ward Village | | | | | | | | | | | | | | | |
| ‘A‘ali‘i | Honolulu, HI | Condominium | — | | — | | 714 | | | — | | 1,046 | | | — | | 1,760 | | 1,760 | | (26) | | 2018 | 2021 |
| Ae‘o | Honolulu, HI | Condominium | — | | — | | 1,162 | | | — | | — | | | — | | 1,162 | | 1,162 | | (116) | | 2016 | 2018 |
| Anaha | Honolulu, HI | Condominium | — | | — | | 1,097 | | | — | | — | | | — | | 1,097 | | 1,097 | | (139) | | 2014 | 2017 |
| Ke Kilohana | Honolulu, HI | Condominium | — | | — | | 656 | | | — | | — | | | — | | 656 | | 656 | | (60) | | 2016 | 2019 |
| Kewalo Basin Harbor | Honolulu, HI | Other | 11,232 | | — | | 24,116 | | | — | | 22 | | | — | | 24,138 | | 24,138 | | (4,794) | | 2017 | 2019 |
| Kō‘ula | Honolulu, HI | Condominium | — | | — | | 29,726 | | | — | | — | | | — | | 29,726 | | 29,726 | | (10) | | 2019 | 2022 |
| The Park Ward Village | Honolulu, HI | Development | — | | — | | 52,066 | | | — | | — | | | — | | 52,066 | | 52,066 | | (2,047) | | 2022 | |
| Victoria Place | Honolulu, HI | Development | 47,155 | | — | | 208,168 | | | — | | — | | | — | | 208,168 | | 208,168 | | (6,208) | | 2021 | |
| Waiea | Honolulu, HI | Condominium | — | | — | | 1,206 | | | — | | 365 | | | — | | 1,571 | | 1,571 | | (211) | | 2014 | 2017 |
| Ward Predevelopment | Honolulu, HI | Development | 1,845 | | — | | 135,068 | | | — | | — | | | — | | 135,068 | | 135,068 | | (6,116) | | 2013 | |
| Ward Village Retail | Honolulu, HI | Retail | 200,000 | | 164,007 | | 89,321 | | | (103,657) | | 307,414 | | | 60,350 | | 396,735 | | 457,085 | | (119,245) | | | Various |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total excluding Corporate and Deferred financing costs | 2,752,188 | | 3,021,046 | | 4,631,835 | | | (297,290) | | 719,154 | | | 2,723,756 | | 5,350,989 | | 8,074,745 | | (853,630) | | | |
| Corporate | Various | | 2,050,000 | | 885 | | 1,027 | | | (885) | | 19,400 | | | — | | 20,427 | | 20,427 | | (14,070) | | | |
| | | | | | | | | | | | | | | |
| Deferred financing costs | N/A | | (55,005) | | — | | — | | | — | | — | | | | | — | | | | |
| | Total | $ | 4,747,183 | | $ | 3,021,931 | | $ | 4,632,862 | | | $ | (298,175) | | $ | 738,554 | | | $ | 2,723,756 | | $ | 5,371,416 | | $ | 8,095,172 | | $ | (867,700) | | | |
(a)Refer to Note 7 - Mortgages, Notes and Loans Payable, Net in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K for additional information.
(b)Initial cost for projects undergoing development or redevelopment is cost through the end of first complete calendar year subsequent to the asset being placed in service.
(c)For retail and other properties, costs capitalized subsequent to acquisitions is net of cost of disposals or other property write‑downs. For MPCs, costs capitalized subsequent to acquisitions are net of the cost of land sales.
(d)The aggregate cost of land, building and improvements for federal income tax purposes is approximately $7.2 billion.
(e)Reductions in Land reflect transfers to Buildings and Improvements for projects which the Company is internally developing.
(f)Depreciation is based upon the useful lives in Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
(g)Encumbrances balance either represents or is inclusive of SIDs.
(h)Downtown Summerlin includes the One Summerlin office property, which was placed in service in 2015.
(i)Includes the Las Vegas Aviators.
(j)The Woodlands Towers at the Waterway includes 1201 Lake Robbins and 9950 Woodloch Forest.
| | | | | | | | | | | | | | | | | | | | |
| Reconciliation of Real Estate |
| thousands | | 2022 | | 2021 | | 2020 |
| Balance as of January 1 | | $ | 7,776,555 | | | $ | 7,319,133 | | | $ | 7,268,288 | |
| Change in land | | 396,125 | | | 896,508 | | | 228,402 | |
| Additions | | 750,610 | | | 657,760 | | | 716,614 | |
| Impairments | | — | | | (13,068) | | | (48,738) | |
| Dispositions and write-offs and land and condominium costs of sales | | (828,118) | | | (1,083,778) | | | (845,433) | |
| Balance as of December 31 | | $ | 8,095,172 | | | $ | 7,776,555 | | | $ | 7,319,133 | |
| | | | | |
FINANCIAL STATEMENT SCHEDULE
| |
| | | | | | | | | | | | | | | | | | | | |
| Reconciliation of Accumulated Depreciation |
| thousands | | 2022 | | 2021 | | 2020 |
| Balance as of January 1 | | $ | 743,311 | | | $ | 634,064 | | | $ | 507,933 | |
| Depreciation Expense | | 180,201 | | | 185,418 | | | 198,556 | |
| Dispositions and write-offs | | (55,812) | | | (76,171) | | | (72,425) | |
| Balance as of December 31 | | $ | 867,700 | | | $ | 743,311 | | | $ | 634,064 | |
