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HHC > SEC Filings for HHC > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for HOWARD HUGHES CORP


9-Nov-2012

Quarterly Report


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

All references to numbered Notes are to specific footnotes to our Condensed Consolidated Financial Statements included in this Quarterly Report. The following discussion should be read in conjunction with such Condensed Consolidated Financial Statements and related Notes.

Forward-looking information

We may make forward-looking statements in this Quarterly Report and in other reports that we file with the SEC. In addition, our management may make forward-looking statements orally to analysts, investors, creditors, the media and others.

Forward-looking statements include:

Projections of our revenues, operating income, net income, earnings per share, REP EBT, capital expenditures, income tax, other contingent liabilities, dividends, leverage, capital structure or other financial items;

          Forecasts of our future economic performance; and

          Descriptions of assumptions underlying or relating to any of the
foregoing.

In this Quarterly Report, for example, we make forward-looking statements discussing our expectations about:

Capital required for our operations and development opportunities for the properties in our Strategic Developments segment;

Expected performance of our Master Planned Communities segment and other current income producing properties; and

Future liquidity, development opportunities, development spending and management plans.

Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements often include words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "should," "would," or similar expressions. Forward-looking statements should not be unduly relied upon. They give our expectations about the future and are not guarantees. Forward-looking statements speak only as of the date they are made, and we might not update them to reflect changes that occur after the date they are made.

There are several factors, many beyond our control, which could cause results to differ materially from our expectations. These factors are described in our Annual Report and are incorporated herein by reference. Any factor could, by itself, or together with one or more other factors, adversely affect our business, results of operations or financial condition. There may also be other factors that we have not described in this Quarterly Report or in our Annual Report that could cause results to differ from our expectations. These forward-looking statements present our estimates and assumptions only as of the date of this Quarterly Report. Except as may be required by law, we undertake no obligation to modify or revise any forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report.

Real Estate Property Earnings Before Taxes

We use a number of operating measures for assessing operating performance of our communities, assets, properties and projects within our segments, some of which may not be common among all three of our segments. We believe that investors may find some operating measures more useful than others when separately evaluating each segment. One common operating measure used to assess operating results for our business segments is Real Estate Property Earnings Before Taxes ("REP EBT"). Management believes that REP EBT provides useful information about our operating performance because it excludes certain non-recurring and non-cash items which we believe are not indicative of our core business.


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REP EBT, as it relates to our business, is defined as net income (loss) excluding general and administrative expenses, corporate interest income, corporate interest and depreciation expense, provision (benefit) for income taxes, warrant liability gain (loss), the reduction in tax indemnity receivable, equity in earnings from Real Estate Affiliates and Investment in Real Estate Affiliate basis adjustment. We present REP EBT because we use this measure, among others, internally to assess the core operating performance of our assets. We also present this measure because we believe certain investors use it as a measure of a company's historical operating performance and its ability to service and incur debt. We believe that the inclusion of certain adjustments to net income (loss) to calculate REP EBT is appropriate to provide additional information to investors.

REP EBT should not be considered as an alternative to GAAP net income (loss) attributable to common stockholders or GAAP net income (loss), as it has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of the limitations of this metric are that it:

does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

          does not reflect corporate general and administrative expenses;

          does not reflect income taxes that we may be required to pay;

          does not reflect any cash requirements for replacement of depreciated
or amortized assets or that these assets have different useful lives;

          does not reflect limitations on, or costs related to, transferring
earnings from our Real Estate Affiliates to us; and

          may be calculated differently by other companies in our industry,
limiting its usefulness as a comparative measure.

Operating Assets Net Operating Income

We believe that net operating income ("NOI") is a useful supplemental measure of the performance of our Operating Assets because it provides a performance measure that, when compared year over year, reflects the revenues and expenses directly associated with owning and operating real estate properties and the impact on operations from trends in occupancy rates, rental rates, and operating costs. We define NOI as property specific revenues (rental income, tenant recoveries and other income) less expenses (real estate taxes, repairs and maintenance, marketing and other property expenses). NOI also excludes straight line rents, property specific net interest expense, depreciation, ground rent and other amortization expenses and equity in earnings from real estate affiliates. We use NOI to evaluate our operating performance on a property-by-property basis because NOI allows us to evaluate the impact that factors such as lease structure, lease rates and tenant base, which vary by property, have on our operating results, gross margins and investment returns.

Although we believe that NOI provides useful information to the investors about the performance of our Operating Assets due to the exclusions noted above, NOI should only be used as an alternative measure of the financial performance of such assets and not as an alternative to GAAP operating income (loss) or net income (loss) available to common stockholders. For reference, and as an aid in understanding our computation of NOI, a reconciliation of NOI to REP EBT has been presented in the Operating Assets segment discussion below and a reconciliation of REP EBT to consolidated net income (loss) as computed in accordance with GAAP has been presented in Note 15.

Results of Operations

On July 1, 2011, we acquired our partner's economic interest in The Woodlands located near Houston, Texas. As a result of the acquisition, we now consolidate The Woodlands' operations in our condensed consolidated financial statements, and our condensed consolidated statements of operations and cash flows for the nine months ended September 30, 2012 are not comparable to the same period in 2011. Prior to such acquisition, we accounted for The Woodlands using the equity method.

Consolidated revenues for the three months ended September 30, 2012 increased $8.1 million or 9.4%, to $94.8 million from $86.7 million for the three months ended September 30, 2011. The increase in revenues is primarily due to a $6.7 million increase in land sales and builder price participation in the MPC segment, $5.2 million higher revenues in the Operating Assets segment of which $2.4 million is from the acquisition of


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Millennium Waterway Apartments and $0.9 million from The Woodlands Conference Center and Resort, partially offset by lower revenues from our Strategic Developments segment due to the absence of condominium unit sales at Nouvelle Natick of $9.1 million as a result of the sale of the last two units in the second quarter of 2012. The three months ended September 30, 2012 revenues also include $4.5 million of proceeds from the partial sale of Alameda Plaza.

Consolidated revenues for the nine months ended September 30, 2012 increased $77.9 million or 40.9%, to $268.5 million from $190.6 million for the nine months ended September 30, 2011. The increase in revenue is primarily due to the inclusion of $83.3 million from The Woodlands' operations for the first half of 2012 compared to no revenues for the same period in the prior year because The Woodlands was not consolidated in 2011, higher MPC revenues of $3.7 million, higher revenues in the Operating Assets segment of $9.0 million and higher revenues at the Resort and Conference Center of $1.1 million offset by lower Natick condominium unit sales of $19.2 million.

Net loss attributable to common stockholders was $49.4 million for the three months ended September 30, 2012, compared to net income attributable to common stockholders of $164.3 million for the same period in 2011. The $213.7 million decrease in net income attributable to common stockholders is primarily due to the $234.2 million increase in value of outstanding warrants, higher tax provision of $10.4 million, lower Nouvelle at Natick profit contribution of $3.6 million and the reduction in tax indemnity receivable of $2.9 million. The decrease in net income attributable to common stockholders was partially offset by an improved profit margin from the MPC business of $13.9 million, principally relating to The Woodlands lower land inventory value resulting from our acquisition in 2011, the improved profit margin from our operating asset business of $4.9 million and non-recurring charges in 2011 for the early extinguishment of debt of $11.3 million and the investment in real estate basis adjustment of $6.1 million.

Net loss attributable to common stockholders was $127.4 million for the nine months ended September 30, 2012, compared to net income attributable to common stockholders of $115.8 million in the same period for 2011. The $243.2 million decrease in net income attributable to common stockholders is primarily due to the $263.5 million increase in value of the warrants, higher income tax provision of $12.0 million, the reduction in tax indemnity receivable of $11.7 million, lower Nouvelle at Natick profit contribution of $5.6 million, lower equity in earnings from Real Estate Affiliates of $1.4 million and higher general and administrative expenses of $2.0 million. The decrease in net income attributable to common stockholders was partially offset by the inclusion in earnings of $15.6 million from The Woodlands compared to no earnings in the prior year because The Woodlands was not consolidated in 2011, higher MPC earnings of $15.0 million, higher earnings from our operating assets of $5.5 million and nonrecurring charges in 2011 for the early extinguishment of debt of $11.3 million and the investment in real estate basis adjustment of $6.1 million.

Segment Operations

See Note 15 for additional information including reconciliations of our segment basis results to generally accepted accounting principles ("GAAP") basis results.

Master Planned Communities Segment

MPC revenues vary between periods based on economic conditions and several factors such as location, development density and commercial or residential use, among others. Although our business does not involve the sale or resale of homes, we believe that net new home sales are an important indicator of future demand for lots; therefore, we use this statistic in the discussion of our MPCs below. Reported results may differ significantly from actual cash flows generated principally because cost of sales for GAAP purposes is derived from margins calculated using carrying values, projected future improvements and other capitalized costs in relation to projected future land sale revenues. Carrying values, generally, represent acquisition costs and improvements incurred in prior periods, and may also have been previously written down through impairment charges. Expenditures for improvements are capitalized and generally not reflected in the income statement of operations in the current year.


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MPC sales data for the three months ended September 30, 2012 and 2011 is summarized as follows:

                                        Land Sales         Acres Sold     Number of Lots/Units        Price per acre          Price per lot
                                                                         Three Months Ended September 30,
($ in thousands)                      2012       2011     2012    2011     2012          2011       2012        2011        2012       2011

Residential Land
Sales
Maryland -         Single family
Columbia           - detached       $      -   $    630       -    0.5           -             3   $    -    $     1,260   $    -    $     210
                   Townhomes               -      1,697       -    0.5           -            12        -              -        -          141

Bridgeland         Single family
                   - detached          6,170      5,149    22.2   20.3         104           103      278            254       59           50

Summerlin          Single family
                   - detached (1)      7,213          -    21.2      -          94             -      341              -       77            -
                   Custom lots           515          -     0.6      -           1             -      805              -      515            -

The Woodlands      Single family
                   - detached (2)     19,898     19,949    52.3   53.5         235           216      380            373       85           92
                   Single family
                   - attached              -        887       -    2.3           -            34        -            386        -           26
                   Subtotal           33,796     28,312    96.3   77.1         434           368

Commercial Land
Sales
Maryland -
Columbia           Apartments          5,300          -    18.7      -           -             -      284              -        -            -
Summerlin          Not-for-profit          -          -       -      -           -             -        -              -
                   Retail                  -          -       -      -           -             -        -              -

The Woodlands      Office and
                   other               1,330          -    10.4      -                                128              -
                   Retail                  -      2,001     1.2    5.0                                  -            400
                   Other                   -      1,839       -    5.3                                  -            347
                   Subtotal            6,630      3,840    30.3   10.3
Total acreage sales revenue           40,426     32,152

Deferred revenue                      (1,051 )    2,000
Special Improvement District
revenue                                  843          -
Total land sales - GAAP basis       $ 40,218   $ 34,152



(1) The Summerlin 2012 revenue per acre of $341,000 includes 41 single family finished lots that average $691,543 per acre and 53 super pad lots that average $230,000 per acre.

(2) The Woodlands 2011 lot sales revenues have been restated to include fixed price builder payments collected at lot closing to conform with the 2012 lot sales presentation.


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MPC sales data for the nine months ended September 30, 2012 and 2011 is summarized as follows:

                                MPC Sale Summary



                                         Land Sales         Acres Sold       Number of Lots/Units         Price per acre          Price per lot
                                                                           Nine Months Ended September 30,
($ in thousands)                      2012        2011     2012    2011       2012          2011       2012         2011        2012       2011

Residential Land
Sales
Maryland -         Single family
Columbia           - detached       $       -   $  1,480       -     1.4            -             7   $     -    $     1,057   $    -    $     211
                   Townhomes            4,156      3,311     1.2     1.0           28            24         -              -      148          138

Bridgeland         Single family
                   - detached          17,183     13,846    63.9    52.2          313           260       269            265       55           53

Summerlin          Single family
                   - detached (1)      23,773     25,504    71.6    62.4          353           312       332            409       67           82
                   Custom lots          3,761          -     4.8       -            9             -       784              -      418            -

The Woodlands      Single family
                   - detached (2)      55,459     55,523   151.0   149.8          598           610       367            371       93           91
                   Single family
                   - attached               -        887       -     2.3            -            34         -            386                    26
                   Subtotal           104,332    100,551   292.5   269.1        1,301         1,247

Commercial Land
Sales
Maryland -
Columbia           Apartments           5,300          -    18.7       -            -             -       284              -        -            -
Summerlin          Not-for-profit           -      3,615       -    16.0            -             -         -            226
                   Retail                 784          -     1.0       -            -             -       784              -

The Woodlands      Office and
                   other                6,437      1,800    10.4     3.2                                  619            563
                   Retail               1,250      5,115     1.2    10.5                                1,042            487
                   Other                   50      1,839     0.8     5.3                                   63            347
                   Subtotal            13,821     12,369    32.1    35.0
Total acreage sales revenue           118,153    112,920

Deferred revenue                       (1,870 )    5,516
Special Improvement District
revenue                                 3,952      4,028
Total segment land sales              120,235    122,464
The Woodlands acreage sales (3)             -    (46,772 )
Total land sales - GAAP basis       $ 120,235   $ 75,692



(1) The Summerlin 2012 revenue per acre of $332,000 includes 121 single family finished lots that average $688,516 per acre and 232 super pad lots that average $226,452 per acre.

(2) The Woodlands 2011 lot sales revenues have been restated to include fixed price builder payments collected at lot closing to conform with the 2012 lot sales presentation.

(3) The Woodlands acreage sales for the six months ended June 30, 2011 are deducted from total segment land sales revenue to derive Total land sale revenue
- GAAP basis because The Woodlands operating results were not consolidated during this period.

Total land sales increased $6.1 million for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. Residential land sales increased at Summerlin and Bridegeland by $8.7 million, offset by $2.3 million less land sales at Columbia. Commercial land sales increased by $2.8 million due to a $5.3 million land sale at Columbia for the development of an apartment complex offset by $2.5 million lower land sales


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at The Woodlands. In addition, Summerlin recognized $2.0 million of deferred revenue in 2011 which did not reoccur in 2012. Total segment land sales for the nine months ended September 30, 2012 decreased $2.2 million as compared to the nine months ended September 30, 2011 primarily due to $6.8 million of lower deferred revenue at The Woodlands related to our continuing involvement with a project requiring local government approval and a separate project requiring the construction of certain infrastructure partially offset by overall higher residential and commercial land sales of $3.8 million and $1.5 million, respectively, for the nine months ended September 30, 2012 compared to the same period in prior year. The increase in residential land sales is primarily due to increased land sales at Bridgeland of $3.3 million and Summerlin of $2.0 million due to improving market conditions, offset by lower residential land sales at The Woodlands and Columbia of $1.6 million due to less available inventory for sale.

In general, the lower the lot price, the lower the average price per acre. This relationship does not hold true for lower-priced, high-density lots that have a high price per acre. For large MPCs such as ours, sales prices on a per lot basis and per acre basis generally increase as the size of the developed lot grows. This is because smaller lots are more commodity-like and larger lots typically have more unique features. The average homebuyer will find more competition for new and resale homes on the lower end of the price range in the broader residential market. As lot sizes and prices increase, however, the potential customer and developer base decreases. Barring a softening in market conditions, when a MPC reaches the level whereby land is scarce, pricing begins to escalate markedly on a per lot and per acre basis due to a scarcity premium resulting from the market's realization that new home site inventory will be depleted.

The Woodlands and Bridgeland MPCs

The Woodlands residential land sales were $19.9 million and $55.5 million representing 235 lots and 598 lots sold during the three and nine months ended September 30, 2012, respectively, which was relatively flat compared to $20.8 million and $56.4 million of revenues representing 250 lots and 644 lots sold for the same periods in 2011. The price per acre for the three month period ended September 30, 2012 was higher than the same period in 2011 and lower for the nine month period ended September 30, 2012 than the same period in 2011. The average price per acre for three months ended September 30, 2012 was flat compared to the same period in 2011 due to stable pricing and higher volume of smaller lots sold which approximated the same acreage sold in 2011. The decrease in average lot sales price for the three months ended September 30, 2012, was due to higher sales volume of small sized lower priced production lots, compared to the same period in 2011. The average price per acre and the average lot price for the nine months ended September 2012 were flat compared to the same period in 2011 due to approximately the same volume and mix of lots sold in both periods. The Woodlands housing market continues to be extremely strong with 859 net home sales in the first nine months of 2012 compared to 755 net home sales in the first nine months of 2011, representing an increase of 13.8%. This strong housing market creates a higher demand for finished lots. We estimate that The Woodlands has four to five years of remaining lot sales based on current sales velocity, and our goal is to maximize value by finding the optimal pricing/volume relationship. In the third quarter of 2012, we restructured our production lot sales program to a bidding process that has generated a substantial increase in average lot prices. In August of 2012, we conducted an auction with home builders in The Woodlands for 375 lots in seven new sections. The auction generated an aggregate increase in price of approximately $16.7 million, or 49%, compared to selling prices prior to the auction. As these sales have not yet closed, these results are not included in our condensed consolidated financial statements. Scheduled closings for these lots are expected to occur during the fourth quarter of 2012 and the first two quarters of 2013. We plan to continue the bid process for future sections to ensure we maximize values.

Bridgeland's land sales revenues were $6.2 million and $17.2 million for the three and nine months ended September 30, 2012, respectively, a $1.0 million and $3.3 million increase for the same periods in 2011 due to the higher demand resulting from higher home sales. Bridgeland net new home sales increased 29.4% during the first nine months of 2012 with 352 net new home sales compared to 272 net new home sales for the same period in 2011. The increases in price for both the three and nine months ended September 30, 2012, in average price per acre and lot are due to price increases on all product types including premium amenity lots which was implemented during the second quarter of 2012.

ExxonMobil is constructing a large corporate campus on a 385-acre site just south of The Woodlands. The site is expected to include approximately three million square feet of space. According to several reports, ExxonMobil expects to begin relocating employees into this new location starting in 2014 and ending in 2015. We believe that the direct and indirect jobs related to this relocation will have a significant positive impact on The Woodlands and


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Bridgeland due to increased housing demand and commercial space needs for companies servicing ExxonMobil. Lastly, construction of the extension of the Grand Parkway to 1-45 is expected to commence in the near future and is anticipated to open by 2015. The new Parkway will have a very positive impact on travel patterns for residents living in The Woodlands and Bridgeland.

Summerlin MPC

Summerlin's residential land sales revenues increased by $7.7 million and $2.0 million, respectively, for the three months and nine months ended September 30, 2012 compared to the same periods in 2011. Summerlin sold 95 and 362 residential lots during the three and nine months ended September 30, 2012 compared to none and 312 residential lots during the three and nine months ended September 30, 2011. The decrease in average lot prices for nine months ended September 30, 2012 was due to the higher mix of super pad lot sales which are priced lower than single family finished lots. Summerlin net new home sales ended the third quarter of 2012 at 372, a 119% increase over the same period in 2011. Inventory . . .

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