Then
When Howard Hughes assumed control of the family business in 1924,
he was well-positioned for success with a nearly debt-free portfolio
of assets. With the benefit of his acumen and vision, he created
one of the great American empires of the Twentieth Century. While
Hughes’ passion for aviation and the silver screen are legendary, it
was his visionary investments in real estate that form the bedrock
of the company today. As we publicly launch The Howard Hughes
Corporation, the story is much the same. We are well capitalized and
own some of the most sought after properties in the nation.
Now
The Howard Hughes Corporation owns, manages and develops
commercial, residential and mixed-use real estate throughout the
country. Our company is comprised of 34 assets including master
planned communities, operating properties, strategic developments
and other unique assets spanning 18 states from New York to Hawaii.
We have approximately 180 employees and are headquartered
in Dallas, Texas. The company is traded on the New York Stock
Exchange as HHC.
Thirty-four assets. Eighteen states.
Coast-to-coast-to-coast.
Directors
Master Planned Communities
Operating Properties
Strategic Developments
Master Planned CoMMunities
Four Communities with over 14,000
acres of land remaining.
• Summerlin - Las Vegas, NV
• Bridgeland - Houston, TX
• Maryland - Columbia, MD
• The Woodlands - Houston, TX
oPerating ProPerties
Eight Properties located in some of the
country’s most dynamic markets.
• Ward Centers - Honolulu, HI
• South Street Seaport - New York, NY
• Landmark Mall - Alexandria, VA
• Park West - Peoria, AZ
• Rio West - Gallup, NM
• River Walk Marketplace - New Orleans, LA
• Columbia Office Buildings - Columbia, MD
• Cottonwood Square - Salt Lake City, UT
strategiC develoPMents
An exciting and diverse pipeline of strategic opportunities
for near, mid and long-term development.
• Ala Moana Tower - Honolulu, HI
• Shops at Summerlin Centre - Las Vegas, NV
• Cottonwood - Salt Lake City, UT
• Elk Grove Promenade - Sacramento, CA
• The Bridges at Mint Hill - Charlotte, NC
• Fashion Show Air Rights - Las Vegas, NV
• Century Plaza - Birmingham, AL
• West Windsor - Princeton, NJ
• 110 N Wacker Drive - Chicago, IL
• Nouvelle at Natick - Boston, MA
• Volo Land - Chicago, IL
• Kendall Town Center - Miami, FL
• Redlands Mall & Promenade - Redlands, CA
• Circle T Ranch - Dallas–Fort Worth, TX
• Alameda Plaza - Pocatello, ID
• AllenTowne - Allen, TX
Thirty-four assets. Eighteen states.
Coast-to-coast-to-coast.
Master Planned Communities
Strategic Developments
Operating Properties
Four Communities with over 14,000
acres of land remaining.
• Summerlin - Las Vegas, NV
• Bridgeland - Houston, TX
• Maryland - Columbia, MD
• The Woodlands - Houston, TX
Master Planned CoMMunities
oPerating ProPerties
strategiC develoPMents
Eight Properties located in some of the
country’s most dynamic markets.
An exciting and diverse pipeline of strategic opportunities
for near, mid and long-term development.
• Ward Centers - Honolulu, HI
• South Street Seaport - New York, NY
• Landmark Mall - Alexandria, VA
• Park West - Peoria, AZ
• Rio West - Gallup, NM
• River Walk Marketplace - New Orleans, LA
• Columbia Office Buildings - Columbia, MD
• Cottonwood Square - Salt Lake City, UT
• Ala Moana Tower - Honolulu, HI
• Shops at Summerlin Centre - Las Vegas, NV
• Cottonwood - Salt Lake City, UT
• Elk Grove Promenade - Sacramento, CA
• The Bridges at Mint Hill - Charlotte, NC
• Fashion Show Air Rights - Las Vegas, NV
• Century Plaza - Birmingham, AL
• West Windsor - Princeton, NJ
• 110 N Wacker Drive - Chicago, IL
• Nouvelle at Natick - Boston, MA
• Volo Land - Chicago, IL
• Kendall Town Center - Miami, FL
• Redlands Mall & Promenade - Redlands, CA
• Circle T Ranch - Dallas–Fort Worth, TX
• Alameda Plaza - Pocatello, ID
• AllenTowne - Allen, TX
Directors
William A. Ackman
Chairman of the Board
David D. Arthur
Adam R. Flatto
Jeffrey D. Furber
Gary A. Krow
Allen J. Model
R. Scot Sellers
Steven H. Shepsman
David R. Weinreb
Corporate Officers
David R. Weinreb
Chief Executive Officer
Grant D. Herlitz
President
Andrew C. Richardson
Chief Financial Officer
Peter F. Riley
General Counsel
Headquarters
Dallas, Texas 75240
Phone: 214-741-7744
Fax: 214-741-3021
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, Illinois 60606-4301
Phone: 312-486-1000
Fax: 312-486-1486
Annual Meeting
June 22, 2011
The Westin Galleria Dallas
13340 Dallas Parkway
Dallas, Texas 75240
One Galleria Tower, 13355 Noel Road, Suite 950
Registrar and Transfer Agent
BNY Mellon
480 Washington Boulevard
Jersey City, New Jersey 07310-1900
Phone 866-354-3668
Independent Registered Public Accounting Firm
The Company’s Annual Meeting of Stockholders is scheduled for 9:00 a.m.,
Mission Statement
Our goal is to be the preeminent United
States developer and operator of master
planned communities and long-term
mixed-use properties. We will create
developments that inspire local communities
while driving sustainable, long-term growth
and value for our shareholders.
April 7, 2011
To the Shareholders of The Howard Hughes
Corporation from the Chairman of the Board:
The Howard Hughes Corporation (‘HHC’) began its existence as a public company when it was spun
off from General Growth Properties Inc. (‘GGP’) when it emerged from bankruptcy on November 9th
of last year. Having joined the board of GGP shortly after the company filed for bankruptcy, my first
priority was to work with the other directors of GGP to stabilize the company, extend the maturity of its
debts and raise sufficient capital to emerge from bankruptcy as an independent publicly traded real
estate investment trust. During that process, as I learned more about the disparate assets of GGP, I
considered the idea of creating a new company to own certain assets hidden within GGP whose value
would not likely be realized while these properties remained at GGP.
While the REIT structure is an excellent corporate form with which to own stabilized income producing
assets like GGP’s mall properties, it is less than ideal for owning development assets, master planned
communities (‘MPCs’), and other assets whose current cash flows are not reflective of their long-term
potential. This is due to REIT ownership limitations on assets held for sale in the ordinary course of
business, the large amount of capital and time required for development assets, and the fact that
investors principally value REITs based on their distributable free cash flow.
We decided to set up a new company to own these assets so we could realize their long-term potential
while maximizing the value of GGP in the short term. While the short term is not usually a time period
that most public company executives are willing to acknowledge that they even consider, in this case
it was critical for GGP shareholders to create value in the short term so we could participate in value
creation over the long term. GGP was subject to a series of takeover bids from Simon Properties that
undervalued the company and had material risk of transaction failure because of antitrust issues. By
creating and then committing to spin off HHC, we were able to create about $7 per share in value for
GGP shareholders for a total combined value of approximately $22 per pre-bankruptcy GGP share.
Once we had selected the assets that were to be contributed to HHC and negotiated the separation
arrangements with GGP, our highest priority was identifying the senior management team that would
run the company. Typically, such a process involves hiring a search firm, which then attempts to
recruit executives at competitors with relevant experience. In this case, there are few truly comparable
companies to HHC and a less than obvious pool of candidates to select from. While there are
a number of publicly traded non-REIT real estate corporations (so-called C corporations) that own
development assets in some cases that are similar to HHC, their track records in creating shareholder
value leave much to be desired.
While I believed that so-called real estate opportunity fund managers had the experience to oversee
HHC’s assets, I had no interest in hiring an external manager on a 2% and 20% basis to run the
company, particularly in light of the ongoing conflicts they would have with other investments in their
portfolios. The key criteria we used to find senior management were: character, energy, intelligence,
and experience profitably investing in a diverse collection of real estate assets. In addition, I wanted
someone who had made money already, without having lost any of the passion and drive to succeed,
and without significant outside interests and assets that would compete for his or her attention.
We found our leader in David Weinreb, a Dallas-based real estate entrepreneur, whom I had known
(but not well) since high school, but only in recent years gotten to know in a business and personal
context. David had contacted me a year or so ago for advice on raising a real estate opportunity fund
about which we had an ongoing dialogue. He had been investing and developing real estate assets
largely on his own since leaving college (just like Bill Gates but in real estate) more than 25 years ago
and had sold or monetized the vast majority of his assets before the recent downturn in the markets.
While over the last 10 or so years
he had largely been investing
his own capital in real estate
and investment securities with his
partner, Grant Herlitz, and a team
based in Dallas, Houston and Los
Angeles, David was considering
raising a larger pool of capital to
participate in opportunities created
by the credit crisis. It was in this
context that I mentioned the assets
that would become HHC, and David and Grant were intrigued. They spent the next 30 or so days
inspecting the properties that would be contributed to HHC. They then worked on spec to assist
Pershing Square in negotiating the best possible deal for old GGP shareholders in setting up HHC.
As we worked together on the HHC portfolio and negotiated arrangements for the company’s eventual
spinoff, it became clear to us that these were the right partners to oversee the company going forward.
David and Grant are moneymakers with a clear understanding of risk and reward. While there are real
estate executives with more public company experience, more master planned community experience,
and/or more development experience, we were principally interested in selecting a management team
we trusted with relevant experience, who would think of the corporation’s capital as their own, and who
were willing to invest a meaningful amount of their own money alongside shareholders.
To date, David, Grant, and our new CFO Andy Richardson have
committed $19 million of their own capital to purchase long-term
warrants on HHC at their fair value at the time of purchase. Under
the terms of the warrants, they cannot be sold or hedged for the
first six years of their seven-year life, a provision which meaningfully
reduces their value compared with warrants without liquidity or
hedging restrictions. In light of the long-term nature of the company’s
assets, I cannot think of a better way to align the interests of and
incentivize our management team to create value for shareholders.
If the stock price stays flat from the time they joined the company,
they will lose their entire investment in the warrants. If the stock price
makes a sustained increase in value over the next seven years,
management will participate to a leveraged extent in the increase
in the stock price. Other than the warrants, our senior management receives relatively modest cash
compensation particularly when compared with real estate private equity compensation levels.
While on the subject of compensation and alignment of incentives, I thought it worth mentioning that
the funds that I manage currently own a 23.6% fully diluted economic interest in HHC including stock,
total return swaps, and seven-year warrants that we received in exchange for our backstop commitment
to HHC. I receive no salary for serving as your chairman, and I have waived all board compensation.
As a result, you can be comfortable that my interests are aligned with yours. That is not a guarantee of
success, but rather it will ensure that we will succeed or fail together. In a partnership, getting the right
team in place with the right incentives puts you on good footing for future success. On this basis, we
are off to a good start.
Now you might ask how one should calculate the value of HHC and judge our future progress. While
these are two critical questions for any investor, in the case of HHC, the answers are not nearly as
straightforward as in a more typical real estate or other public company.
With respect to the valuation of
HHC, the easy answer is that you
should calculate the value of our
assets – cash, real estate, and tax
attributes – subtract our liabilities and
then divide by fully diluted shares
outstanding. The difficulty is that the
real estate assets owned by HHC
are notoriously difficult to value. First,
you should consider that their long-
term value – the value that can be
achieved by a long-term owner – is, in my opinion, materially higher than their liquidation value. Some,
albeit not ideal, evidence of this is to compare the value of GGP just before the spinoff of HHC to the
value of the combined companies today. Approximately $7 per GGP share in value has been created
by the contribution of the properties to an entity that has the capability to hold these assets forever.
For our MPC assets, one can make assumptions about the timing and number of future lot sales and then
discount back these cash flows over the 30-or-so-year life of the project at a discount rate you deem
appropriate. The problem with such an approach is that small changes in assumptions on discount rates,
lot pricing and selling velocity, inflation, etc. can have an enormous impact on fair value.
For our development assets, one needs to make assumptions about what will be built, when it will it be
built, to whom it will be leased, what rents it will achieve, what expenses it will incur, and what multiple
an investor will place on these cash flows. Again, even highly sophisticated real estate investors will
assign substantially divergent values to the same assets when using their own assumptions.
Some investors look at book value, but book values, particularly for HHC are in most cases largely
unreliable measures of value. For example, South Street Seaport, one of our more valuable assets,
is carried on the books of HHC at $3.1 million. Last year, it generated more than $5 million in cash
net operating income, and this number meaningfully understates the potential future cash generating
potential of this property as GGP generally discontinued granting long-term leases to tenants as it
prepared the property for a major redevelopment. Even using the $5 million NOI number, one can get
to values approaching $100 million using cap rates appropriate for New York City retail assets, and
we would likely leave a lot of money on the table if we sold it for this price.
We could attempt to calculate net asset value and publish a number as some public real estate companies
have done. I am not a huge fan of this approach because of the widely diverging estimate of values that
even the most informed, best-intentioned evaluators will generate. So therefore, the best we can do is
to give you as much information as we can provide (bearing in mind that there is some information that
we will elect to withhold for competitive reasons) so that you can form your own conclusion. While we
have just begun the public reporting process and we are still learning that art, you can expect over time
that we will release more information to assist you in forming your own assessment.
With respect to judging our business progress going
forward, the usual metrics like net income, operating cash
flow, EBITDA, AFFO, earnings per share, etc. are not
going to offer much help. (By the way, when you read this
sentence in the annual letter of a typical company, you
should usually take your money elsewhere.) Our reported
net income and cash flows will largely depend on gains
and losses from sales of assets and the book value of
those assets on our balance sheet. We could generate
large amounts of income for example by selling South
Street Seaport and other assets for which book value is
less than market value. While this would generate material accounting gains and require us to pay
large amounts of taxes, we might be destroying long-term shareholder value by doing so, particularly if
we believe materially more value can be created through redeveloping and releasing these assets over
time. We will also generate larger profits from our Summerlin MPC as a result of the more than $300
million write down the company recognized at year end, but this should not make you feel richer as a
result.
Simply put, I will judge our progress based on our management’s ability to move each of our assets
closer to the point at which it can generate its maximum potential cash as an operating asset, and
to manage our MPCs to once again begin to generate material amounts of cash from sales of lots to
builders and the development or sale of their commercial parcels.
Because of (1) the large number of
assets we own, (2) the large amounts
of capital required to redevelop these
properties to enable them to achieve
their full potential, (3) our relatively
limited cash
(4) our
aversion to the use of large amounts of
recourse leverage, (5) our high return
requirements for our own capital, and
(6) the availability of large amounts
of lower-cost real estate equity capital
for developments like the ones owned by HHC, you should expect that we will raise outside capital
and/or joint venture many of our properties with other investors, operators, and/or developers. This
approach should enable us to manage risk and increase our return on invested capital.
resources,
We will do our best to keep you informed as to our progress with each asset in the portfolio as we
obtain necessary approvals, design and build projects, lease space, and generate cash flows. Over
time, our goal will be to turn each of our non- or modestly income-producing assets into an income-
generating property, while selectively monetizing assets when we believe a sale will generate more
value for HHC on a present value basis than holding the asset for the long term.
In light of the complexity of our asset base and the inadequacy of GAAP accounting to track our
progress, you should now understand how important it is to get the right management team in place
with the right incentives. Furthermore, while most public company boards are comprised of experienced
executives with typically minimal expertise in the business of the company on whose board they sit, HHC’s
board is largely comprised of real estate experts with broad expertise in MPC and retail development,
residential and office ownership and development, institutional investment in real estate, and other real
estate disciplines relevant to HHC.
Importantly, our directors do not need their director fees to pay their rent, and have chosen to participate
for the experience, reputational benefits, and camaraderie from working to create value for our
shareholders. We will act in your best interests to the best of our ability and look forward to the
opportunity to impress you with HHC’s success over the coming years.
Lastly, in a world where investors are concerned about the future value of paper money and inflation that
have caused many investors to turn to gold to hedge that risk, I am quite comforted by the assets of HHC.
We own the gold and blue white diamonds of the real estate business, assets that have traditionally
performed well in inflationary environments.
Welcome aboard. Sincerely,
William A. Ackman
Chairman
April 7, 2011
To the Shareholders of The Howard Hughes
Corporation from the Chief Executive Officer:
When Howard Hughes assumed control of the family business in 1924, he was well-positioned for
success with a nearly debt-free portfolio of assets. While Howard Hughes’ passions for aviation and
the silver screen are legendary, it was his visionary investments in real estate that form the bedrock of
our company today. With the benefit of his acumen and vision, he created one of the great American
empires of the Twentieth Century. As we publicly launch The Howard Hughes Corporation, the story
is much the same. We are well capitalized and own some of the most sought after properties in the
nation.
The Howard Hughes Corporation was re-born on November 9, 2010 as an independent, publicly
traded real estate company with an irreplaceable collection of assets and a talented team of
professionals. Our assets span 18 states from New York to Hawaii. They include best-in-class master
planned communities, operating properties with tremendous potential, and a diverse pipeline of
strategic development opportunities in some of the country’s most desirable locations. I am honored to
have the opportunity to lead a team of more than 175 employees who are committed to making this
company a top performing owner and developer of real estate in our industry.
Because I strongly believe in the quality of our people and assets, I have made a substantial personal
investment in the company. Throughout my career in real estate, I have always invested my own
capital. This commitment to having “skin in the game” is at the core of my investment philosophy and
has been critical to my past success. Grant Herlitz, our President, shares this philosophy. It was clear
to Grant and me that the only way we could properly lead this company was to make substantial,
long-term personal investments. In doing so, we affirmed our belief in the business and our commitment
to creating long-term stockholder value. You can be certain that Grant and I will treat your money as
if it is our own.
This culture of ownership is further augmented by our board of directors, many of whom have made
personal investments in the company. The directors and the companies they represent, along with
senior management have invested a combined $269 million of new capital. On a fully diluted basis,
this group owns over 43.5% of the company. We are fortunate to have a board of directors with
the passion, good judgment, and substantial real estate expertise that will contribute materially to our
success.
The Howard Hughes name is synonymous with the relentless pursuit of achievement. We are inspired
by that legacy and are systematically assessing and strategically positioning our portfolio. While we
are at the start of a long journey together, we look forward to earning your trust as we confront the
many challenges ahead.
Pre-Emergence Preparation
While Grant and I were not appointed as President and Chief Executive Officer until November 22,
2010, we gained considerable experience while serving as the company’s interim management.
Since early August 2010, our team has tirelessly focused on preparing the company to emerge from
the bankruptcy of our parent as an independent entity. We methodically worked to understand all
operational facets of the organization, assessed the current and potential value of the assets, and
established the infrastructure necessary for future success.
Through this “total immersion” process, we gained a deep knowledge of the assets and the
infrastructure, and positioned ourselves to successfully transition the company. I am proud of what
our team accomplished and grateful to everyone who helped to make the spin-off a success. Spin-
off related initiatives included negotiating the agreements required for a successful separation from
GGP; assuming control of development, leasing and asset management; assembling teams in key
functions including accounting, human resources, legal and information technology; engaging in an
open dialogue with cities, partners and consultants to assess the status of each project; and creating
a strong brand identity.
Successfully completing these initiatives made it possible for us to be here today. However, we also
understand that these accomplishments are in the past and significant work remains. Since the spin-off,
our team has embraced new objectives and is sharply focused on the future.
Team Howard
Ninety-four members of our 177 person team
are dedicated to the company’s master planned
community business, 51 work with our operating
assets, and 32 are at corporate. Those employees
dedicated to the master planned community and
operating assets have significant tenure. Their
history and understanding of the assets have
allowed us to achieve a seamless transition.
Our executive team comes from an entrepreneurial
culture. While focused on creating value for
the company as quickly as possible, we also
recognize the importance of process and systems
required to efficiently manage the company.
Our goal is to balance these disciplines while
staying flexible enough to take advantage of
opportunities as they arise.
Recently, Andrew Richardson joined HHC as CFO. Andy has also made a substantial, long-term
personal investment in the company. I believe our continued practice of substantial investments by
corporate officers further strengthens our commitment to the company’s long-term success
Master Planned Communities
With over 14,000 acres of land remaining to be sold in some of the country’s most dynamic markets,
our master planned communities (“MPC’s”) are the core of our current business. This business consists
of the ownership, development and sale of property at four communities including three wholly owned
MPC’s: Summerlin in Las Vegas, Bridgeland in Houston, and the Maryland region, based in Columbia.
The company also owns a substantial ownership interest in The Woodlands in Houston.
The collapse of the national housing market had a significant impact on land sales in our MPC’s. As
the market recovers, our communities are well positioned to capitalize. Excessive leverage and lower
quality offerings caused many of our competitors to suffer during the downturn. Both the quality of our
product and the strength of our balance sheet put our MPC’s in a position to benefit when demand for
new homes begins returning to historical norms.
Although the recession has hit the Las Vegas market particularly hard, we are confident that growth
will return and absorption will accelerate. To the casual observer, Las Vegas appears to have unlimited
land available. In reality, this market is supply constrained due to the topography of the surrounding
mountains, land set aside for conservation and recreational purposes, and the federal government’s
ownership of the majority of the land surrounding the city. With over 7,000 acres of land remaining,
Summerlin is the dominant land owner in the market. Going forward we are well positioned to capture
additional market share. Even a modest increase in pricing could result in large increases in revenue
compared to historical performance.
Summerlin
Total Revenue vs. Home Closings
1996-2010
s
d
n
a
s
u
o
h
T
$
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
3,500
3,000
2,500
2,000
1,500
1,000
500
0
l
s
g
n
i
s
o
C
e
m
o
H
1996
1998
2000
2002
2004
2006
2008
2010
Year
Summerlin Revenues
Summerlin Closings
Long-term, the MPC’s have the potential to generate the cash flow necessary to accelerate the growth
of the company’s strategic development segment. Furthermore, each community possesses additional
opportunities for vertical development. We will not only focus on selling land, but will also look for
opportunities to joint venture retail, residential and commercial developments with the potential to create
recurring income.
Operating Assets
The company’s operating assets are primarily retail properties including South Street Seaport (Manhattan,
NY), Ward Centers (Honolulu, HI), various properties in Columbia Town Center (Columbia, MD),
Landmark Mall (Alexandria, VA), Riverwalk Marketplace (New Orleans, LA), Rio West Mall (Gallup,
NM), Cottonwood Square (Holladay, UT) and Park West (Peoria, AZ).
We are focused on the operational performance of each of these assets, and have hired an experienced
and passionate group of leasing professionals to drive income. To date, we have seen significant
interest across the portfolio from many national and local retailers for both operating properties and
our strategic developments. We are working with our tenants and their customers to ensure that they
are receiving the best experience possible when they visit a Howard Hughes property. We are in the
process of reducing costs by re-bidding every vendor contract and reviewing every line item in the
budget in addition to appealing the property tax value of each asset. These appeals have achieved
positive results with reductions to date totaling over $100 million in assessed value.
Strategic Developments
Our Company has a substantial portfolio of large and small-scale developments in our pipeline. These
strategic developments provide opportunities
for near, mid and long-term value creation.
Senior management and the development
team are currently assessing the feasibility
of each strategic development, and as
this occurs, we are beginning to prioritize
the greatest
those opportunities with
development potential. Ward Centers
and South Street Seaport are operating
properties, but also represent substantial
redevelopment
opportunities. Notable
strategic developments include projects such as Summerlin Centre in Las Vegas, Cottonwood in Salt
Lake City, and Ala Moana Tower in Honolulu.
Ward Centers is just one example of the untapped value within our portfolio. Today, this 60-acre
property contains 1.1 million square feet of retail, office and industrial space in the heart of urban
Honolulu. The company has land use approvals to redevelop the property with up to 9.3 million
square feet of mixed-use development. This future development has the potential to expand upon and
materially enhance the property’s retail presence.
It also presents an opportunity to develop thousands of residential units with unobstructed ocean views
in one of the market’s most desirable residential locations.
The Columbia Town Center master plan is another important example of the potential for value creation
within the portfolio. While currently a part of our MPC segment, Columbia Town Center has an
approved master plan to develop up to 5,500 new residential units, approximately one million square
feet of retail, approximately five million square feet of commercial office space and 640 hotel rooms.
Columbia Town Center, located in Howard County, Maryland between Baltimore and Washington
D.C., has over 261,000 people living within a seven-mile radius with an average annual household
income exceeding $120,000.
Depending on the scale, complexity and capital requirements of each asset, we will either develop
assets internally or seek joint venture capital or operating partners. We recognize that development
projects of significant scale have long-lead times and require a substantial investment of both time and
capital. Rest assured that we are being thorough in our due diligence and thoughtful in our analysis
so that those projects that are prioritized for development will be structured and financed to maximize
value for the company and minimize our risk.
The Future of Howard Hughes
As we look to the future of The Howard Hughes Corporation, there are two simple maxims that apply
to our portfolio. First, we recognize the importance of location and quality. South Street Seaport is one
of the top five most visited sites in New York
City, Ward Centers is 60 acres of fee simple
oceanfront land in the heart of Honolulu, and
Summerlin Centre is arguably one of the best
regional mall sites in the country. When the
US economy recovers, those assets that are
best located will be primed for development.
Second, we understand that down cycles
don’t last forever. Current revenue from our
Summerlin MPC is well below its long-term average. Even a gradual return to this long-term average will
generate significant cash flow for the company.
As a largely unlevered company we have the time and resources
to maximize the value of our portfolio. As of December 31,
2010, we held over $285 million in cash versus approximately
$318 million of asset-specific, limited recourse debt excluding our
proportionate share of The Woodlands debt. With over $3 billion
in total assets, the health of our balance sheet allows for flexibility
in making investment decisions. Therefore, we will be pragmatic in
pursuing only those investments that meet our high return thresholds.
While we are only in our fifth month of existence as a company,
we possess a powerful brand, an irreplaceable collection of assets
and a sound corporate infrastructure. We have implemented the
backbone that has allowed the company to immediately focus on
the continued development and execution of its strategic plan.
As we pursue our goal of becoming the preeminent developer of master planned communities and
mixed-use properties in the country, we acknowledge that many challenges lie ahead. As with any
great endeavor, we know that achieving our goal will take significant time and effort. I am grateful for
the hard work and steadfast dedication our team has given thus far.
With exceptional people, irreplaceable assets, and a collective commitment to excellence, The Howard
Hughes Corporation is well positioned for success.
David R. Weinreb
Chief Executive Officer
Summerlin
Las Vegas, NV
Total Acres 22,500
Remaining Acres 6,901
Current Population 100,000
Anticipated Completion Date 2039
Both an early prototype as well as a template for future master planned
communities, Summerlin is one of the most successful MPCs in the country.
Spanning the western rim of the Las Vegas Valley and located about 7.5 miles
from the Strip, the 22,500-acre community offers the best of two worlds: suburban
living with all the amenities that create a superior quality of life; and accessibility
to world-class dining, shopping and dazzling entertainment on the Las Vegas
Strip. Now home to nearly 100,000 residents, Summerlin is comprised of hundreds
of neighborhoods and dozens of villages – all connected by a 150-mile-long trail
system and nearly 150 parks.
Summerlin is adjacent to Red Rock Canyon National Conservation Area, the most
treasured natural landmark in southern Nevada and world-renowned as a hiking
and rock-climbing destination. With 26 public and private schools, four institutions
of higher learning, nine golf courses, major health and medical centers, business
parks, shopping centers, cultural facilities and more than a dozen houses of
worship, Summerlin is a multi-generational and fully integrated community. Since
its inception in the early 1990s, Summerlin has consistently ranked in the Robert
Charles Lesser annual poll of Top Ten Master Planned Communities in the nation.
Encompassing more than 11,400 acres, the award-winning Bridgeland
conceptual plan includes a carefully designed network of trails totaling over 60
miles that will provide pedestrian connectivity to distinct residential villages.
The community will also feature over 3000 acres of unique waterways, lakes,
trails, parks and open space, as well as an expansive town center with room
for employment, retail, educational and entertainment facilities.
Bridgeland’s first four communities, The Shores, First Bend, The Cove and
Water Haven offer a unique home buying experience:
Bridgeland
Houston, TX
Total Acres 11,400
Remaining Acres 5,089
Current Population 3,750
Anticipated Completion Date 2036
• One convenient model home park showcasing 12 models by nine of Hous-
•
ton’s top builders
Three custom builders showcasing homes in a private enclave in First Bend,
all with spectacular views of water
• Homes designed not to back busy thoroughfares
• Neighborhoods include buried power lines to maximize the views of open
space and water
• Residents enjoy fiber optic technology direct to each home
• All home sites offer brick lined terraced walkways to each front porch
• Home designs incorporate brick, stone and timber architecture
• Prices range from the mid $100’s to over $1 million
Maryland
Columbia, MD
Total Acres 16,450
Remaining Acres 209
Current Population 104,300
Anticipated Completion Date 2035
The Maryland Communities of Columbia, Emerson and Fairwood combined account
for more than 16,000 acres and represent the finest in community master planning.
COLUMBIA
Situated midway between Baltimore, Maryland and Washington, D.C., Columbia is an
internationally acclaimed model of a successful master-planned community with rich
culture and history. The community is currently home to almost 100,000 people.
Columbia is embarking on a new phase in its growth with the launch of a 30-year
Master Plan development of downtown Columbia. Columbia Town Center has an
approved master plan to create up to 13 million square feet of mixed-use development.
The plan includes up to 5,500 residential units, approximately one million square feet
of retail, five million square feet of commercial office space and 640 hotel rooms.
EMERSON
Just down the road and conveniently located to I-95, only minutes from Columbia,
Baltimore, Washington, D.C. and Fort Meade, Emerson offers a variety of upscale
single family home and town home choices by some of the region’s premier home
builders. The community is ideal for first-time homebuyers, for Base Realignment and
Closure relocations or families interested in finding good schools.
FAIRWOOD
Fairwood is a 1,098-acre master-planned community located in Prince George’s
County, Maryland. Upon completion, Fairwood will contain more than 1,800 residential
units and amenities that include 350 acres of open space and community parks, miles
and miles of pathways, a community center with two swimming pools, tennis courts
and a shopping center.
The Woodlands is a 28,400-acre master planned community located 27 miles north of
downtown Houston off I-45. The Woodlands encompasses nine residential villages;
Town Center, home of The Woodlands Waterway and Waterway Square; a resort and
conference center; a luxury hotel and convention center; educational opportunities
for all ages; hospitals and health care facilities.
The Woodlands is known for its exceptional golf courses and outdoor recreational
amenities, plus shopping, dining and entertainment venues. The population of The
Woodlands is currently more than 90,000 and there are more than 1,650 businesses
providing employment for 45,380 people. The Woodlands was planned to be a self-
sustaining community where people can live, work, play and learn in harmony with
nature. Since 1990, The Woodlands has been the number one community in Texas in
terms of new home sales, and is currently ranked fourth in the nation.
The Woodlands is owned in a partnership with Morgan Stanley. This community has
independent management that reports to a board of directors that contains three
seats appointed by The Howard Hughes Corporation.
The Woodlands
Houston, TX
Total Acres 28,400
Remaining Acres 1,986
Current Population 97,000
Anticipated Completion Date 2022
Ward Centers
Honolulu, HI
Ward Centers is comprised of approximately 60 acres situated along Ala Moana
Beach Park and is within one mile of Waikiki and downtown Honolulu. It is also
a ten minute walk from Ala Moana Center. Ward Centers currently includes a
550,000 square foot shopping district containing six specialty centers and over
135 unique shops, a variety of restaurants and an entertainment center which
includes a 16 screen movie theater. In January 2009, the Hawaii Community
Development Authority approved a 15-year master plan, which entitles a mixed-
use development encompassing a maximum of 9.3 million square feet, including
up to 7.6 million square feet of residential (4,300 units), five million square feet of
retail and four million square feet of office, commercial and other uses.
South Street Seaport
New York, NY
South Street Seaport is comprised of three historic buildings and one pavilion
shopping mall, which is located at Pier 17 on the East River in lower Manhattan.
The property includes 298,759 square feet of retail space. Cobblestone streets, gas
lamps, sailing ships and a museum make the South Street Seaport a moment-in-
time experience in New York City. Our redevelopment plan for South Street Seaport
may ultimately include hotels, residential units, retail space and restaurants.
Currently anchored by Macy’s and Sears, Landmark Mall is an 879,262 square foot
shopping mall located in affluent Alexandria, Virginia. This mall is located just nine
miles west of Washington, D.C. and the Pentagon, and is within approximately one
mile of public rail service on D.C.’s metro blue line. As a result of a successful
re-zoning effort that allows for the development of up to 5.5 million square feet,
Landmark Mall has the potential to be developed into a dynamic destination for
shopping, dining, working and living.
Landmark Mall
Alexandria, VA
Park West is a 249,168 square foot open-air shopping, dining and entertainment
destination in Peoria, Arizona on Northern Avenue at the northwest corner of
Loop 101. Park West is approximately one mile northwest of the Arizona Cardinals
football stadium and the Phoenix Coyote’s hockey arena. Park West has an
additional 100,000 square feet of available development rights for the following
permitted uses: retail, restaurant and hotels as permitted uses.
Park West
Peoria, AZ
Rio West
Gallup, NM
Rio West Mall is located in Gallup, New Mexico. This 514,023 square foot shopping
center is the only enclosed regional shopping center within a 125 mile radius, and
is easily accessed from I-40 and historic Route 66.
Riverwalk
Marketplace
New Orleans, LA
Riverwalk Marketplace is located along the Mississippi River in downtown New
Orleans. The 194,452 square foot shopping center is comprised of more than
100 local and national retail shops, restaurants and entertainment venues. It
is adjacent to the New Orleans Memorial Convention Center and the Audubon
Aquarium of the Americas.
The Howard Hughes Corporation owns five office buildings with approximately
300,000 square feet in the heart of downtown Columbia including the American
City Building, the Columbia Association Building, the Columbia Exhibit Building,
the Ridgley Building and the Columbia Regional Building. Columbia is located 14
miles from the Baltimore Beltway and 17 miles from the Washington Beltway.
Columbia
Office Buildings
Columbia, MD
Cottonwood Square is currently a 77,079 square foot community center located
in Salt Lake City, Utah. The center is located in a high traffic area and sits across
from our Cottonwood Mall, providing an opportunity for development synergies.
Cottonwood Square
Salt Lake City, UT
Ala Moana
Tower Condo Project
Honolulu, HI
The Howard Hughes Corporation owns the rights to develop a residential
condominium tower over a parking structure at Ala Moana Center, one of the most
visited shopping centers in the world. Ideally located between downtown Honolulu
and the world-famous Waikiki Beach, Ala Moana hosts more than 42 million visitors
each year. The parking structure is designed to accommodate the construction of a
condominium tower and is located adjacent to Nordstrom.
Cottonwood Mall
Salt Lake City, UT
Located 7.5 miles from downtown Salt Lake City, in the city of Holladay, Utah,
Cottonwood Mall is a unique infill development opportunity. In 2008, work began on a
complete redevelopment of the 54-acre site, but development was delayed due to the
changing economic environment. The original mall was completely demolished with
the exception of Macy’s, a tenant which continues to operate as a stand-alone store
on the site. The project is entitled for 575,000 square feet of retail, 195,000 square feet
of office and 614 residential units.
Construction of The Shops at Summerlin Centre began in 2008 but was delayed due to
changing market conditions. The development project fronts Interstate 215 between
Sahara Drive and Charleston Boulevard approximately nine miles west of the Las
Vegas Strip. Originally planned for approximately 1.5 million square feet of retail and
office development, the 106 acre parcel is part of a 1,300 acre mixed-use town center
for the Summerlin master planned community. The project has the potential to be
developed with retail, office, hotel and multifamily residential. Plans for the future of
this redevelopment project are being evaluated in light of evolving market conditions.
The Shops at
Summerlin Centre
Las Vegas, NV
Elk Grove Promenade was originally planned as a 1.1 million square foot outdoor
shopping center on approximately 100 acres. Construction of the site began in 2007,
but was delayed due to changing market conditions. Located approximately 17 miles
southeast of Sacramento, the location affords easy access and visibility from State
Highway 99 at Grant Line Road. Plans for the site are being evaluated in light of
evolving market conditions.
Elk Grove
Promenade
Sacramento, CA
Bridges at Mint Hill
Charlotte, NC
Construction of The Bridges at Mint Hill began in 2008, but was delayed due to
changing market conditions. Located at the intersection of Interstate 485 and Lawyers
Road it enjoys prime placement in the underserved southeast corner of the thriving
Charlotte metropolitan area. The parcel is approximately 162 acres and consists of
120 developable acres and is currently zoned for approximately 997,000 square feet of
retail, hotel and commercial development.
Fashion Show
Air Rights
Las Vegas, NV
The Howard Hughes Corporation has the right to acquire an 80% interest, with
General Growth Properties owning the remaining 20%, in the air rights above The
Fashion Show Mall. Located at the heart of the world famous Las Vegas Strip,
across the street from The Wynn Las Vegas, the Wynn Encore, the Palazzo, the
Venetian resort and Treasure Island, Fashion Show Mall is anchored by Nordstrom,
Neiman Marcus, Saks Fifth Avenue, Macy’s, Bloomingdale’s Home, and Dillards,
and features nearly 1.9 million square feet of retail space.
Century Plaza is located on the eastern side of Birmingham, Alabama, on U.S.
Route 78 (Crestwood Blvd.) near Interstate 20, across from Eastwood Village.
In May 2009, the mall was shuttered. The only active use on the site is a 16,706
square foot grocery store that is operating on an outparcel. The site consists of
approximately 63 acres with 169,072 of GLA.
Century Plaza
Birmingham, AL
West Windsor is a former Wyeth Agricultural Research & Development Campus
on Quakerbridge Road and U.S. Route One near Princeton, New Jersey. The land
consists of 658 total acres comprised of two large parcels which are bisected by
Clarksville Meadows Road and a third smaller parcel. Zoning, environmental and
other development factors are currently being addressed in conjunction with a
feasibility study of the site.
West Windsor
Princeton, NJ
Kendall Town Center
Kendall, FL
Kendall Town Center is part of a 158-acre site located at the intersection of North
Kendall Drive and SW 157th, approximately 18 miles southwest of downtown
Miami. A 31 acre parcel was sold to Baptist Hospital in March 2008, and a 282,000
square foot hospital with 134 beds along with a 62,600 square foot medical office
building opened in April, 2011. Other parcels have been sold and are expected to
include a mix of hotel, office, retail and senior housing. We own the remaining 91
acres, which is currently entitled for 621,300 square feet of retail, 60,000 square
feet of office space, and a 50,000 square foot community center.
Redlands Mall
and Promenade
Redlands, CA
Redlands Promenade is a ten acre site located at Eureka and the I-10 freeway
off ramp in Redlands, California. The project is entitled for 125,000 square feet of
retail development.
Located at the intersection of Texas highways 114 and 170, Circle T Ranch
is 20 miles north of downtown Fort Worth, in Westlake, Texas. The property is
approximately 279 total acres on two parcels. The Circle T Ranch parcel contains
128 acres while the Circle T Power Center parcel contains 151 acres. We maintain
a 50% joint venture ownership interest with a local developer.
Circle T Ranch and
Circle T Power Center
Dallas–Fort Worth, TX
AllenTowne consists of 238 acres located at the high-traffic intersection of
Highway 121 and U.S. Highway 75 in Allen, Texas, 27 miles northeast of downtown
Dallas. We are considering plans to best position the property for the opportunities
presented by evolving market conditions.
AllenTowne
Allen, TX
110 N. Wacker
Chicago, IL
110 N. Wacker is a 226,000 square foot office building in the heart of the Chicago.
Since the mid-1990s, it has served as the corporate headquarters of General
Growth Properties and is fully occupied with a long-term lease in place. The
Howard Hughes Corporation owns a 99% joint venture interest in an entity that
has a ground leasehold interest in the land.
Alameda Plaza
Pocatello, ID
Alameda Plaza is located in Pocatello, Idaho at the intersection of Yellowstone Park
Highway and Alameda Road. The 22-acre site contains 190,341 square feet of mostly
vacant retail space. Redevelopment options are currently under consideration.
Nouvelle at Natick is a full service luxury condominium community comprised of
215 residences located in the Natick Collection in the Boston suburb of Natick,
Massachusetts. Nouvelle at Natick’s amenities include a 4,000 square foot
private club, a 2,800 square foot fitness center and a 1.2-acre rooftop garden with
winding boardwalks, native grasses, flowers and trees. As of December 31, 2010,
159 of the 215 units have been sold and closed, and an additional seven units are
under contract for sale, leaving a remaining inventory of 49.
Nouvelle at
Natick Condominium
Natick, MA
This 40-acre vacant land parcel is located on Route 12 which is located 50 miles
north of Chicago in a growing suburb. The project has no utilities in place, but is
located near two planned regional centers.
Lakemoor
(Volo) Land
Lakemoor, IL
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
(cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2010
or
For the transition period from to
Commission File Number 1-11656
The Howard Hughes Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
13355 Noel Road, Suite 950, Dallas, Texas
(Address of principal executive offices)
36-4673192
(I.R.S. Employer
Identification Number)
75240
(Zip Code)
Securities Registered Pursuant to Section 12(b) of the Act:
(214) 741-7744
(Registrant’s telephone number, including area code)
Title of Each Class:
Common Stock, $.01 par value
Name of Each Exchange on Which Registered:
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES (cid:3) NO (cid:2)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES (cid:3) NO (cid:2)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. YES (cid:2) NO (cid:3)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). YES (cid:3) NO (cid:3)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (cid:2)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:3)
Non-accelerated filer (cid:2)
(Do not check if a smaller reporting company)
Accelerated filer (cid:3)
Smaller reporting company (cid:3)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES (cid:3) NO (cid:2)
The registrant commenced operations on November 9, 2010. Accordingly, there was no public market for the registrant’s common stock as of June 30, 2010, the
last day of the registrant’s most recently completed fiscal quarter.
As of April 4, 2011, there were 37,904,506 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement relating to its 2011 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12 13 and 14 of Part III
of this Annual Report of Form 10-K. The registrant intends to file this proxy statement with the Securities and Exchange Commission within 120 days of the end of
the fiscal year to which this Annual Report on Form 10-K relates.
Item No.
Page Number
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Reserved
Part I
Part II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Part III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
1.
1A.
1B.
2.
3.
4.
5.
6.
7.
7A.
8.
9.
9A.
9B.
10.
11.
12.
13.
14.
15.
Exhibits and Financial Statement Schedules
Part IV
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i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of
historical fact included in this Annual Report on Form 10-K are forward-looking statements. Forward-looking
statements give our current expectations relating to our financial condition, results of operations, plans, objectives,
future performance and business. You can identify forward-looking statements by the fact that they do not relate
strictly to current or historical facts. These statements may include words such as “anticipate,” “estimate,” “expect,”
“project,” “forecast,” “plan,” “intend,” “believe,” “may,” “should,” “would, “likely” and other words of similar
expression. Forward-looking statements should not be unduly relied upon. They give our expectations about the
future and are not guarantees. These statements involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance and achievements to materially differ from any future results,
performance and achievements expressed or implied by such forward-looking statements. We caution you not to
rely on these forward-looking statements.
Factors that could cause actual results to differ materially from those expressed or implied by forward-looking
statements include:
(cid:129) our history of losses;
(cid:129) our lack of operating history as an independent company;
(cid:129) our inability to obtain operating and development capital;
(cid:129) our inability to establish our own financial, administrative and other support functions to operate as a stand-
alone business;
(cid:129) our new directors and officers may change our long-range plans;
(cid:129) our new directors may be involved or have interests in other businesses, including real estate activities and
investments;
(cid:129) a prolonged recession in the national economy and adverse economic conditions in the retail sector;
(cid:129) our inability to compete effectively;
(cid:129) potential conflicts with GGP (as defined below) arising from agreements with GGP with respect to certain of
our assets;
(cid:129) our inability to control certain of our properties due to the joint ownership of such property and our inability
to successfully attract desirable strategic partners;
(cid:129) risks associated with our spin-off from GGP not qualifying as a tax-free distribution for U.S. federal income
tax purposes;
(cid:129) substantial stockholders having influence over us, whose interests may be adverse to ours or other
stockholders; and
(cid:129) the other risks described in Item 1A. “Risk Factors.”
These forward-looking statements present our estimates and assumptions only as of the date of this Annual Report
on Form 10-K. 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 report.
ii
Throughout this Annual Report on Form 10-K, references to the “Company,” “we” and “our” refer to The Howard
Hughes Corporation and its consolidated subsidiaries, unless the context requires otherwise.
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a real estate company created to specialize in the development of master planned communities, the
redevelopment or repositioning of real estate assets currently generating revenues, also called operating assets, and
other strategic real estate opportunities in the form of entitled and unentitled land and other development rights, also
called strategic developments. Our assets are located across the United States, and our goal is to create sustainable,
long-term growth and value for our stockholders. As of December 31, 2010, our debt equaled approximately 10.5%
of our total assets, which excludes our $158.2 million proportionate share of the $372.2 million of debt of our non-
consolidated Real Estate Affiliates (as defined below). Our master planned communities have won numerous
awards for, among other things, design and community contribution. We expect the competitive position and
desirable location of our assets (which collectively comprise millions of square feet and thousands of acres of
developable land), combined with their operations and long-term opportunity through entitlements, land and home
site sales and project developments, to drive our long-term growth. We also expect to pursue development
opportunities for a number of our assets that were previously postponed due to lack of liquidity resulting from
deteriorating economic conditions, the credit market collapse and the bankruptcy filing of our predecessors (as
described below), and to develop plans for other assets for which no plans had been developed. We are in the
process of assessing the opportunities for these assets, which are currently in various stages of development, to
determine how to finance their completion and how to maximize their long-term value potential.
We currently operate our business in three segments: Master Planned Communities, Operating Assets and Strategic
Developments. Unlike most real estate companies which are limited in their activities because they have elected to
be taxed as a real estate investment trust, we have no restrictions on our operating activities or types of services that
we can offer. We believe our structure provides the greatest flexibility for maximizing the value of our real estate
portfolio. Financial information about each of our segments is presented in Note 15 to our audited financial
statements included elsewhere in this Annual Report on Form 10-K.
We completed our spin-off from GGP, Inc., formerly known as General Growth Properties, Inc. (“GGP”), on
November 9, 2010 in connection with GGP’s emergence from bankruptcy. The Howard Hughes Corporation was
incorporated in Delaware in 2010 to receive certain assets and liabilities of GGP and its subsidiaries (collectively,
our “predecessors”). In connection with the spin-off, we issued 32.5 million shares of our common stock. In
addition, we issued 5.25 million shares of our common stock and warrants to purchase an additional 8.0 million
shares of our common stock for an aggregate price of $250 million. GGP no longer holds any interest in our
company.
We believe that our company name, which is identified with quality, excellence and success, can be more broadly
utilized to increase value.
Overview of Business Segments
Master Planned Communities. Our Master Planned Communities segment primarily consists of the development
and sale of residential and commercial land, primarily in large-scale projects. We own 100% of three master
planned communities (Summerlin, Bridgeland and Maryland) and have an unconsolidated 52.5% economic interest
in another, The Woodlands. Our master planned community in Maryland includes four separate communities that
are commonly and collectively referred to as the “Maryland Communities.”
The Master Planned Communities include over 14,000 acres of land remaining to be sold. Residential sales, which
are made primarily to home builders, include standard and custom parcels and high density (i.e., condominium, town
homes and apartments) parcels designated for detached and attached single- and multi-family homes, ranging from
entry-level to luxury homes. Commercial parcels include land designated for retail, office, resort, services and other
for-profit activities, as well as those parcels designated for use by government, schools and other not-for-profit
entities.
1
Operating Assets. Our Operating Assets segment consists primarily of commercial mixed use and retail properties
currently generating revenues, for many of which we believe there are opportunities to redevelop or reposition the
assets to increase operating performance. These opportunities will require new capital investment and vary in
complexity and scale. The redevelopment opportunities range from minimal disruption to the property during
repositioning to partial or full demolition of existing structures for new construction. We have 13 assets included in
our Operating Assets segment. The assets include seven retail properties, two office properties (one of which
includes several buildings) and four other assets.
Strategic Developments. Our Strategic Developments segment is made up of near, medium and long-term real
estate properties and development projects. At present, these 17 assets generally share the fundamental
characteristic of requiring substantial future development to achieve their highest and best use. As discussed
elsewhere in this Annual Report on Form 10-K, our new board of directors and management are in the process of
creating strategic plans for each of these assets based on market conditions and availability of capital which plans
may differ significantly from our predecessors. To be able to realize a development plan for any of these assets, in
addition to the permitting and approval process attendant to almost all large-scale real estate development of this
nature, we may need to obtain financing.
The chart below presents our assets by reportable segment.
We own non-controlling interests in The Woodlands through various partnerships (the “Woodlands Partnerships”)
and Circle T Ranch and Power Center. The Woodlands Partnerships own The Woodlands master planned
community and certain office and other properties, including a conference center. We collectively refer to these
investments as our “Real Estate Affiliates.”
Master Planned Communities
Our Master Planned Communities segment consists of the development and sale of residential and commercial land,
primarily in large-scale projects in and around Las Vegas, Nevada; Houston, Texas; and Columbia, Maryland.
Certain of the communities are additionally divided into regions or projects as described below in each of the
separate community narratives. Revenues are derived primarily from the sale of finished lots and undeveloped pads
to both residential and commercial developers. Additional revenues are earned through participations with builders
in their sales of finished homes to homebuyers. Revenues and net income are affected by factors such as: (1) the
availability to purchasers of construction and permanent mortgage financing at acceptable interest rates; (2)
consumer and business confidence; (3) regional economic conditions in the areas surrounding the projects; (4)
employment levels; (5) levels of homebuilder inventory; (6) other factors generally affecting the homebuilder
business and sales of residential properties; (7) availability of saleable land for particular uses; and (8) our decisions
to sell, develop or retain land.
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Summerlin (Las Vegas, Nevada)
Spanning the western rim of the Las Vegas Valley and located approximately nine miles from downtown Las Vegas,
our 22,500-acre Summerlin master planned community is comprised of planned and developed villages and offers
suburban living with accessibility to the Las Vegas Strip. For the last decade, Summerlin has consistently ranked in
the Robert Charles Lesser annual poll of Top Ten Master Planned Communities in the nation. With 25 public and
private schools, five institutions of higher learning, nine golf courses, and cultural facilities, Summerlin is a fully
integrated community. The first residents moved into their homes in 1991. As of December 31, 2010, there were
approximately 40,000 homes occupied by approximately 100,000 residents.
Summerlin is comprised of hundreds of neighborhoods located in 19 developed villages with nearly 150
neighborhood and village parks, all connected by a 150-mile long trail system. Summerlin is located adjacent to
Red Rock Canyon National Conservation Area, a landmark in southern Nevada, which has become a world-class
hiking and rock climbing destination and is in close proximity to our Shops at Summerlin Centre development site.
Summerlin contains approximately 1.7 million square feet of developed retail space, 3.2 million square feet of
developed office space, three hotel properties containing approximately 1,400 hotel rooms, as well as health and
medical centers, including Summerlin Hospital and the Nevada Cancer Institute.
Summerlin is divided generally into three separate regions or projects known as Summerlin North, Summerlin West
and Summerlin South. Summerlin North is fully developed. In Summerlin South, we are entitled to develop 740
acres of commercial property with no square footage restrictions, 338 acres of which are owned by third parties or
already committed to commercial development. We are also entitled to develop 32,600 residential units in
Summerlin South. In Summerlin West, we are entitled to develop 5,850,000 square feet of commercial space on up
to 508 acres of which 100,000 square feet have already been developed through the construction of a grocery store
anchored shopping center. We are also entitled to develop 30,000 residential units in Summerlin West. As of
December 31, 2010, Summerlin had approximately 5,995 residential acres and 906 commercial acres remaining to
be sold. Summerlin’s population upon completion of the project is expected to be approximately 220,000 residents.
On May 10, 2010, we entered into purchase agreements with two residential lot purchasers, Richmond American
Homes of Nevada, Inc. (“Richmond”) and PN II, Inc., d/b/a Pulte Homes of Nevada (“Pulte”), for the sale of certain
lots in our Summerlin master planned community. The purchase agreement with Richmond is for 115 and 117 lots
for aggregate purchase prices of $9.7 million and $12.5 million, respectively. The purchase agreement with Pulte is
for 109 and 162 lots for aggregate purchase prices of $9.0 million and $14.0 million, respectively. Both purchase
agreements provide for closings of the remaining lots in stages through 2012. As of December 31, 2010, we have
closed transactions for the sale of 45 finished lots sold to Richmond for $4.7 million and 50 finished lots to Pulte for
$4.2 million.
Bridgeland (Houston, Texas)
Bridgeland is a master planned community near Houston, Texas consisting of approximately 11,400 acres, and was
voted by The National Association of Home Builders as the “Master Planned Community of the Year” in 2009. The
first residents moved into their homes in June 2006. There were approximately 950 homes occupied by
approximately 3,750 residents as of December 31, 2010. Bridgeland’s conceptual plan includes four villages-
Lakeland Village, Parkland Village, Prairieland Village and Creekland Village-plus a town center mixed-use district
as well as a carefully designed network of trails totaling over 60 miles that will provide pedestrian connectivity to
distinct residential villages and neighborhoods. Bridgeland’s first four neighborhoods are located in Lakeland
Village. These neighborhoods offer a unique home buying experience that includes one convenient model home
park showcasing 13 models by ten of Houston’s top builders. Many home sites in Bridgeland enjoy views of water,
buried power lines to maximize the views of open space and water, fiber-optic technology, brick-lined terrace
walkways and brick, stone and timber architecture. The prices of the homes range from approximately $150,000 to
more than $1 million. Lakeland Village is approximately 30% completed. The Lakeland Activity Center, the first
of several planned activity complexes to be constructed as development progresses and more residents move to
Bridgeland, opened in May 2007. The complex is anchored by a 6,000 square foot community center and features a
water park with three swimming pools, two lighted tennis courts and a state-of-the-art fitness room. A grand
promenade wrapping around Lake Bridgeland offers a boat dock, canoes, kayaks, sailboats and paddleboats. An
4
extensive lake and trail system is planned to link villages and neighborhoods with recreational, educational, cultural,
employment, retail, religious and other offerings. Bridgeland is also expected to feature more than 3,000 acres of
waterways, lakes, trails, parks and open spaces, as well as an expansive town center with room for employment,
retail, educational and entertainment facilities.
Bridgeland’s conceptual plan includes a 900-acre town center mixed-use district. The conceptual plan contemplates
that the town center will be located adjacent to The Grand Parkway Section E, which will provide residents with
direct access to US 290 (three miles), Interstate 10 (11 miles) and the Energy Corridor Employment Center on
Interstate 10. A construction date has not yet been established for this highway segment. The commencement of
construction of this segment of the highway will trigger a final $7 million payment from the Company to the former
owner of certain parcels of land that are now included in Bridgeland.
We anticipate that the Bridgeland community will one day accommodate more than 20,000 homes and 65,000
residents and we believe that it is poised to be one of the top master planned communities in the nation. As of
December 31, 2010, Bridgeland had approximately 3,863 residential acres and 1,226 commercial acres remaining to
be sold.
Maryland Communities
Our Maryland communities consist of four distinct projects:
(cid:129) Columbia Town Center;
(cid:129) Gateway;
(cid:129) Emerson; and
(cid:129) Fairwood.
Columbia Town Center
Columbia Town Center, located in Howard County, Maryland, is an internationally recognized model of a
successful master planned community developed in the 1960’s. Situated only 11 miles from Fort Meade, Columbia
Town Center is expected to benefit from the positive economic impact of the Base Realignment and Closure
Program underway by the Department of Defense. It is expected that 22,000 new jobs will come to Fort Meade in
the next five to seven years. Columbia Town Center is a community offering a wide variety of living, business and
recreational opportunities.
As of December 31, 2010, Columbia Town Center was home to approximately 100,000 people. Columbia Town
Center’s full range of housing options are located in ten distinct, self-contained villages. Each village is comprised
of several neighborhoods, a shopping center and community and recreational facilities. In Columbia Town Center’s
downtown, 1.6 million square feet of office space is located close to shopping, restaurants and entertainment venues.
We own approximately 40 net acres of land in Columbia Town Center which we expect to develop. The land
currently consists of raw land and subdivided land parcels readily available for new development. In addition we
also own existing operating assets (including our Columbia regional office), surface and structured parking and
dedicated open space. We will have the opportunity to redevelop this portion of the master planned community in
the future. Columbia Town Center recently received entitlements to develop up to 5,500 new residential units,
approximately one million square feet of retail, approximately five million square feet of commercial office space
and 640 hotel rooms.
We entered into development agreements with GGP that clarifies the division of properties between us and GGP in
an area within the mall ring road adjacent to The Mall in Columbia which is owned by GGP. The development
agreements contain the key terms, conditions, responsibilities and obligations with respect to the future development
of this area within the greater Downtown Columbia Redevelopment District. The agreements designate us as the
preferred residential and commercial developer and provides us with a five-year right of first offer and a subsequent
six-month purchase option to acquire seven office buildings and associated parking lots, totaling approximately 22
acres.
5
Gateway
Gateway is a 630-acre premier master planned corporate community located in a high traffic area in Howard
County, Maryland. Gateway offers quality office space in a campus setting with approximately 121 commercial
acres remaining to be sold as of December 31, 2010.
Emerson
Emerson is a substantially completed master planned community located in Howard County, Maryland and consists
of approximately 520 acres. The first residents moved into their homes in 2002. There were approximately 850
homes occupied by approximately 2,000 residents as of December 31, 2010.
Emerson offers a wide assortment of single-family and townhome housing opportunities by some of the region’s top
homebuilders, and is located in one of Maryland’s top-performing public school districts. As of December 31, 2010,
we had approximately nine residential acres and 68 commercial acres remaining to be sold. The remaining land is
fully entitled for build-out, subject to meeting local requirements for subdivision and land development permits. In
addition, 86 of our townhouse lots are under contract to builders and scheduled to close in stages through 2013. As
of December 31, 2010, we have sold 29 townhouse lots for an aggregate price of $2.7 million.
Fairwood
Fairwood is a fully developed master planned community located in Prince George’s County, Maryland, consisting
of approximately 1,100 acres. As of December 31, 2010, 11 commercial acres were available for sale. The first
residents moved into their single-family homes in 2002. There were approximately 1,000 homes occupied by
approximately 2,300 residents on December 31, 2010. Fairwood consists of single-family and townhouse lots, as
well as undedicated open space and two historic houses. In addition to the commercial acres remaining to be sold,
we own a few undedicated open space parcels, and 24 acres of unsubdivided land which cannot be developed as
long as the nearby airport is operating.
The Woodlands (Houston, Texas)
We have a 52.5% economic interest in The Woodlands, currently one of the best-selling master planned
communities in Texas. The Woodlands is managed jointly with our venture partner. The Woodlands is a mixed-use
master planned community situated 27 miles north of Houston and consists of 28,400 acres. The Woodlands is a
self-contained community that integrates recreational amenities, residential neighborhoods, commercial office space,
retail shops and entertainment venues. Home site sales began in 1974. As of December 31, 2010, there were
approximately 40,000 homes occupied by approximately 97,000 residents and more than 1,500 businesses providing
employment for approximately 43,000 people. Approximately 28% of The Woodlands is dedicated to green space,
including parks, pathways, open spaces, golf courses and forest preserves. The population of The Woodlands is
projected to be approximately 130,000 by 2020.
The Woodlands includes a waterway, outdoor art and an open-air performance pavilion, a resort and conference
center, a luxury hotel and convention center, educational opportunities for all ages, hospitals and health care
facilities and office space. The Fountains at Waterway Square located on The Woodlands Waterway connects the
projects to the community via a water taxi system serving the community.
We also have interest in commercial office buildings, as well as a resort and conference center and two golf courses
through our investment in the Woodlands Partnerships.
As of December 31, 2010, we had approximately 1,013 residential acres and 973 commercial acres remaining to be
sold at The Woodlands.
6
Operating Assets
We own 13 assets, consisting primarily of commercial mixed use and retail properties, currently generating
revenues. We believe, based on a variety of factors, that there are opportunities to redevelop or reposition several of
these assets to improve their operating performance. These factors include, but are not limited to, the following: (1)
existing and forecasted demographics surrounding the property; (2) competition related to existing and/or alternative
uses; (3) existing entitlements of the property and our ability to change them, compatibility of the physical site with
proposed uses; and (4) environmental considerations, traffic patterns and access to the properties. We believe that,
subject to obtaining all necessary consents and approvals, these assets have the potential for future growth by means
of an improved tenant mix, additional gross leasable area (“GLA”), or repositioning of the asset for alternative use.
This segment includes approximately 2.6 million total square feet of GLA in the aggregate. As of December 31,
2010, redevelopment plans for these assets may include office, retail or residential space, shopping centers, movie
theaters, parking complexes and open space. Any future redevelopment will require the receipt of permits, licenses,
consents and waivers from various parties and may include a reclassification of the asset to the Strategic
Developments segment.
The following table summarizes our retail operating assets as of December 31, 2010:
Asset
Location
Existing
Gross
Leasable
Area
Size
(Acres)
Net Book
Value
(Millions)
Acquisition
Year
Ward Centers
Honolulu, HI
1,000,817(a)
60 $
336.3
South Street Seaport
New York, NY
Landmark Mall
Alexandria, VA
Park West
Rio West Mall
Peoria, AZ
Gallup, NM
Riverwalk Marketplace New Orleans, LA
Cottonwood Square
Salt Lake City, UT
298,759(b)
440,325(c)
249,168
333,077(b)(d)
194,452(b)
77,079(b)
11
22
48
50
11
21
3.1
23.5
82.0
11.4
11.7
5.2
2002
2004
2004
2006
1981(e)
2004
2002
Total
___________________________
2,593,677
223 $
473.2
(a) Excludes 153,928 SF related to ground leases of which we are the lessor.
(b) All of the project is on a ground lease where we are the ground lessee.
(c) Excludes 438,937 SF in project that is owned and occupied by Sears and Macy’s.
(d) Excludes 180,946 SF of outparcel improvements in project currently owned by tenant.
(e) Reflects the year that Rio West Mall opened.
The following is a description of our retail operating assets.
Ward Centers (Honolulu, Hawaii)
Ward Centers is comprised of approximately 60 acres situated along Ala Moana Beach Park and is within one mile
of Waikiki and downtown Honolulu. It is also a ten minute walk from Ala Moana Center. Ward Centers currently
includes a 550,000 square foot shopping district containing six specialty centers and over 135 unique shops, a
variety of restaurants and an entertainment center which includes a 16 screen movie theater. We are nearing
completion of construction of a 732 stall parking deck that is expected to facilitate the leasing of additional space at
Ward Centers. In January 2009, the Hawaii Community Development Authority approved a 15-year master plan,
which entitles a mixed-use development encompassing a maximum of 9.3 million square feet, including up to 7.6
million square feet of residential (4,300 units), five million square feet of retail and four million square feet of
office, commercial and other uses.
7
South Street Seaport (New York, New York)
South Street Seaport is comprised of three historic buildings and one pavilion shopping mall, which is located at Pier
17 on the East River in lower Manhattan. The property is subject to two ground leases with the city of New York.
The property includes 298,759 square feet of retail space. Cobblestone streets, gas lamps, sailing ships and a
museum make the South Street Seaport a moment-in-time experience in New York City. Our redevelopment plan
for South Street Seaport may ultimately include hotels, residential units, retail space and restaurants. The
implementation of any redevelopment plan would require numerous permits and approvals, including the approval
of our ground lessor, the City of New York.
Landmark Mall (Alexandria, Virginia)
Currently anchored by Macy’s and Sears, Landmark Mall is an 879,262 square foot shopping mall located in
affluent Alexandria, Virginia. This mall is located just nine miles west of Washington, D.C. and the Pentagon, and is
within approximately one mile of public rail service on D.C.’s metro blue line. Following a re-zoning effort that
allows for the development of up to 5.5 million square feet, Landmark Mall has the potential to be developed into a
dynamic destination for shopping, dining, working and living. Any redevelopment of Landmark Mall will be
dependent upon the Company reaching agreements with existing anchor tenants.
Park West (Peoria, Arizona)
Park West is a 249,168 square foot open-air shopping, dining and entertainment destination in Peoria, Arizona on
Northern Avenue at the northwest corner of Loop 101. Park West is approximately one mile northwest of the
Arizona Cardinals football stadium and the Phoenix Coyote’s hockey arena. Park West has an additional 100,000
square feet of available development rights for retail, restaurant and hotel as permitted uses.
Rio West Mall (Gallup, New Mexico)
Rio West Mall is located in Gallup, New Mexico. This 514,023 square foot shopping center is the only enclosed
regional shopping center within a 125 mile radius, and is easily accessed from I-40 and historic Route 66.
Riverwalk Marketplace (New Orleans, Louisiana)
Riverwalk Marketplace is located along the Mississippi River in downtown New Orleans. The 194,452 square foot
shopping center is comprised of more than 100 local and national retail shops, restaurants and entertainment venues.
It is adjacent to the New Orleans Memorial Convention Center and the Audubon Aquarium of the Americas.
Cottonwood Square (Salt Lake City, Utah)
Cottonwood Square is currently a 77,079 square foot community center located in Salt Lake City, Utah. The center
is located in a high traffic area and sits across from our Cottonwood Mall, providing an opportunity for development
synergies.
The following is a description of our office operating assets and other ownership interests.
110 N. Wacker (Chicago, Illinois)
We own a 99% joint venture interest in an entity that has, through 2055, a ground leasehold interest in the land
underlying an office building at 110 N. Wacker Drive in downtown Chicago. The building is approximately 226,000
square feet, and is currently the corporate headquarters of GGP. The land and the building are currently subleased to
a subsidiary of GGP through October 2019. GGP has multiple options to extend the sublease through the duration of
the ground lease. We have the right to terminate the lease with six months’ notice following the expiration of the
initial term in 2019. We receive 100% of the annual lease payment made by GGP, which is approximately $6.1
million. As part of our joint venture agreement, we remit a monthly amount of $31,250 to our partner through May
1, 2013.
8
Columbia Office Properties (Columbia, Maryland)
We own five office buildings with approximately 300,000 square feet in the heart of downtown Columbia including:
(1) the American City Building; (2) the Columbia Association Building; (3) the Columbia Exhibit Building; (4) the
Ridgley Building; and (5) the Columbia Regional Building. Columbia, Maryland is located 14 miles from the
Baltimore Beltway and 17 miles from the Washington Beltway.
Minority Ownership Interest in Head Acquisition (Hexalon)
We own 100% of the ownership interests in Hexalon Real Estate, LLC (“Hexalon”). Hexalon owns a 1.42% interest
in Head Acquisition, LP, a joint venture between GGP, Simon Property Group, L.P. and Westfield Group. The
partnership owns certain retail mall interests. Hexalon receives a quarterly preferred interest distribution from Head
Acquisition, L.P. which totaled approximately $64,000 in 2010. The entity possesses significant tax attributes that
we expect to be able to utilize in the future. These attributes are expected reduce our tax liability by approximately
$76.8 million (net of a valuation allowance as of December 31, 2010), subject to potential offset provided in the Tax
Matters Agreement between us and GGP. Our annual taxable income will determine how our tax liability is reduced
each year. This tax attribute carries over indefinitely until it is fully utilized.
Minority Ownership Interest in Summerlin Hospital Medical Center (Las Vegas, Nevada)
We have an indirect ownership interest of approximately 6.8% in the Summerlin Hospital Medical Center. This
property is a 450-bed hospital located on a 32-acre medical campus near Las Vegas. The ownership structure
entitles us to a pro-rata share of the cumulative undistributed profit in the hospital. As of December 31, 2010, our
share of the current undistributed profit was approximately $3.9 million, all of which has been collected as of April
4, 2011. Summerlin Hospital Medical Center is located in our Summerlin master planned community. It is an acute
care facility with adjoining outpatient services for surgery, laboratory and radiology, as well as two medical office
buildings. The hospital completed a major renovation in 2009 that expanded the hospital to 450 beds (from 281
beds) and added a new six-story patient tower, an expanded emergency room, a four-story, 80,000 square foot
medical office building and a 600-space parking garage.
The property’s majority owner and operator is a subsidiary of Universal Health Services, Inc. (“UHS”), one of the
largest healthcare management companies in the nation. UHS and our predecessors formed a joint venture to build
and manage the hospital. Our predecessor contributed the land and UHS provided the funds to build the hospital.
Note Approximating Office Lease Payments (Phoenix, Arizona)
We receive payments approximating the capital lease revenue that GGP receives from the Arizona 2 Office in
Phoenix, Arizona. These payments total approximately $6.9 million per year through the end of 2015. The
underlying real property interests in the Arizona 2 Office will continue to be owned by GGP and we will not own or
obtain any real property interest therein or have any rights to receive payments after 2015. The right to receive these
payments is evidenced in the form of a promissory note issued by a subsidiary of GGP.
Profit Interest in Golf Courses at Summerlin and TPC Las Vegas, located in the Summerlin Master Planned
Community (Las Vegas, Nevada)
We are entitled to receive residual payments from the Professional Golfers’ Association of America (the “PGA”)
with respect to two golf courses, the TPC Summerlin and the TPC Las Vegas, through October 31, 2021. We
receive 75% of the net operating profits and 90% of all profits from membership sales at TPC Summerlin until such
time as the original investment in the courses of $23.5 million has been recouped, which is projected to occur no
sooner than 2015. As of December 31, 2010, the remaining balance on our return on investment is approximately
$7.4 million. Once we have received payments from the PGA totaling $23.5 million, we are entitled to receive 20%
of all net operating profits from the two courses through October 31, 2021, the termination date of the agreement
with the PGA. The TPC Summerlin is an 18-hole private championship course designed by golf course architect
Bobby Weed with player consultant Fuzzy Zoeller. TPC Las Vegas is an 18-hole public championship course
designed by golf course architect Bobby Weed with player consultant Raymond Floyd. These represent the only two
golf courses in Nevada that are owned and operated by the PGA Tour.
9
Strategic Developments
Our Strategic Developments segment is made up of near, medium and long-term real estate properties and
development projects. At present, these assets generally share the fundamental characteristic of requiring substantial
future development to achieve their highest and best use. As discussed elsewhere in this Annual Report on Form
10-K, our new board of directors and management are in the process of creating strategic plans for each of these
assets based on market conditions and availability of capital which plans may differ significantly from our
predecessors. To be able to realize a development plan for any of these assets, in addition to the permitting and
approval process attendant to almost all large-scale real estate development of this nature, we may need to obtain
financing.
The following table summarizes our strategic development projects as of December 31, 2010:
Asset
Location
GLA
Bridges at Mint Hill
Charlotte, NC
Circle T Ranch and Power Center (a) Dallas/Ft. Worth, TX
Elk Grove Promenade
Elk Grove, CA
The Shops at Summerlin Centre
Las Vegas, NV
Ala Moana Condo Project
AllenTowne
Cottonwood Mall
Kendall Town Center
West Windsor
Fashion Show Air Rights
Alameda Plaza
Century Plaza
Village at Redlands
Redlands Promenade
Lakemoor (Volo) Land
Maui Ranch Land
Nouvelle at Natick
Total
Honolulu, HI
Allen, TX
Holladay, UT
Kendall, FL
Princeton, NJ
Las Vegas, NV
Pocatello, ID
Birmingham, AL
Redlands, CA
Redlands, CA
Lakemoor, IL
Maui, HI
Natick, MA
—
—
—
—
—
—
6,600
—
—
—
190,341
169,072(b)
—
—
—
—
—
Size
(Acres)
162 $
279
100
106
—
238
54
91
658
—
22
63
5
10
40
10
—
Net Book
Value
(Millions)
Acquisition
Year
12.4
9.0
10.7
35.6
22.8
25.4
20.3
18.6
20.6
—
2.4
4.5
6.9
2.8
0.3
—
13.4
205.7
2007
2005
2003
2004
2002(c)
2006
2002
2004
2004
2004
2002
1997
2004
2004
1995
2002
2007(c)
366,013
1,838 $
__________________________
(a) Represents our 50% interest in these two development projects.
(b) Operating tenant space totals 16,706 square feet.
(c) Represents date of initial construction.
Bridges at Mint Hill (Charlotte, North Carolina)
This property consists of vacant land located southeast of Charlotte, North Carolina, in the middle of some of the
fastest growing areas in the Charlotte region. The parcel is approximately 162 acres and consists of 120 developable
acres and is currently zoned for approximately 997,000 square feet of retail, hotel and commercial development.
The land is divided by a small stream known as Goose Creek. The current zoning plan contemplates connecting the
two resulting parcels with two bridges over the creek. Development will require construction of internal roadways,
connecting bridges, expansion of roads and an installation of a force main (offsite) and pump station (onsite) for
sewer utility.
10
The Mint Hill parcel is adjacent to a 52-acre parcel owned by Charlotte-based regional developer. The developer
parcel has been approved for up to 270,000 square feet of space and is expected to be anchored by three to five
junior box retailers.
Circle T Ranch and Circle T Power Center (Dallas-Fort Worth, Texas)
Located at the intersection of Texas highways 114 and 170, Circle T Ranch is 20 miles north of downtown Fort
Worth, in Westlake, Texas. The property is approximately 279 total acres on two parcels. The Circle T Ranch parcel
contains 128 acres while the Circle T Power Center parcel contains 151 acres. We maintain a 50% joint venture
ownership interest with a local developer.
Elk Grove Promenade (Elk Grove, California)
Elk Grove Promenade was originally planned as a 1.1 million square foot outdoor shopping center on approximately
100 acres. Construction of the site began in 2007, but was delayed due to changing market conditions. Located
approximately 17 miles southeast of Sacramento, the location affords easy access and visibility from State Highway
99 at Grant Line Road. Plans for the site are being evaluated in light of evolving market conditions.
The Shops at Summerlin Centre (Las Vegas, Nevada)
Construction of The Shops at Summerlin Centre began in 2008 but was delayed due to changing market conditions.
The development project fronts Interstate 215 between Sahara Drive and Charleston Boulevard approximately nine
miles west of the Las Vegas Strip. Originally planned for approximately 1.5 million square feet of retail and office
development, the 106 acre parcel is part of a 1,300 acre mixed-use town center for the Summerlin master planned
community. The project has the potential to be developed with retail, office, hotel and multifamily residential.
Plans for the future of this project are being evaluated in light of evolving market conditions.
Ala Moana Tower Condo Project (Honolulu, Hawaii)
We own the rights to develop a residential condominium tower over a parking structure at Ala Moana Center in
Honolulu, Hawaii pursuant to a condominium declaration. The declaration permits the construction of a first-class
residential tower with up to 18 stories, and requires, among other things, that the scope of work for the residential
tower project will include certain street-level improvements and a sewer line. The plans and specifications for the
residential tower project will be subject to GGP’s review and approval per the declaration.
AllenTowne (Allen, Texas)
AllenTowne consists of 238 acres located at the high-traffic intersection of Highway 121 and U.S. Highway 75 in
Allen, Texas, 27 miles northeast of downtown Dallas. We are considering plans to best position the property for the
opportunities presented by evolving market conditions.
Cottonwood Mall (Holladay, Utah)
Located 7.5 miles from downtown Salt Lake City, in the city of Holladay, Utah, Cottonwood Mall is a unique infill
development opportunity. In 2008, work began on a complete redevelopment of the 54-acre site, but development
was delayed due to the changing economic environment. The original mall was completely demolished with the
exception of Macy’s, a tenant which continues to operate as a stand-alone store on the site. The project is entitled for
575,000 square feet of retail, 195,000 square feet of office and 614 residential units.
Kendall Town Center (Kendall, Florida)
Kendall Town Center is part of a 158-acre site located at the intersection of North Kendall Drive and SW 157th,
approximately 18 miles southwest of downtown Miami. A 31 acre parcel was sold to Baptist Hospital in March
2008, and a 282,000 square foot hospital with 134 beds along with a 62,600 square foot medical office building are
scheduled to open in 2011. Two separate 12 and six-acre parcels have also been sold. One parcel is expected to
include a 120 room hotel with ancillary office and retail, while the other parcel is expected to house office space and
a senior housing development. We own the remaining 91 acres, which is currently entitled for 621,300 square feet
of retail, 60,000 square feet of office space, and a 50,000 square foot community center.
11
West Windsor (Princeton, New Jersey)
West Windsor is a former Wyeth Agricultural Research & Development Campus on Quakerbridge Road and U.S.
Route One near Princeton, New Jersey. The land consists of 658 total acres comprised of two large parcels which
are bisected by Clarksville Meadows Road and a third smaller parcel. Zoning, environmental and other
development factors are currently being addressed in conjunction with a feasibility study of the site.
Fashion Show Air Rights (Las Vegas, Nevada)
We entered into a binding set of core principles with GGP pursuant to which we will have the right to acquire for
nominal consideration an 80% ownership interest in the air rights above the portions of Fashion Show Mall located
on the Las Vegas Strip. This right is contingent upon the satisfaction of a number of conditions and will not become
effective unless and until the existing loans and guaranties of Fashion Show Mall and The Shoppes at the Palazzo
are satisfied in full. This is currently scheduled to occur in May 2017.
Alameda Plaza (Pocatello, Idaho)
Alameda Plaza is located in Pocatello, Idaho at the intersection of Yellowstone Park Highway and Alameda Road.
The 22-acre site contains 190,341 square feet of mostly vacant retail space. Redevelopment options are currently
under consideration.
Century Plaza (Birmingham, Alabama)
Century Plaza is located on the eastern side of Birmingham, Alabama, on U.S. Route 78 (Crestwood Blvd.) near
Interstate 20, across from Eastwood Village. In May 2009, the mall was shuttered. The only active use on the site is
a 16,706 square foot grocery store that is operating on an outparcel. The site consists of approximately 63 acres with
169,072 of GLA.
Village at Redlands (Redlands, California)
The Redlands Mall is a single-level, 174,787 square foot enclosed shopping center at the intersection of Redlands
Boulevard and Orange Street. Currently anchored by CVS, Denny’s and Union Bank, the site is located in
downtown Redlands two blocks south of the Redlands Promenade site. The interior portion of the mall closed in
September 2010. Originally envisioned as a mixed-use retail and residential redevelopment, plans for the future of
Redlands Mall are being evaluated in light of evolving market conditions.
Redlands Promenade (Redlands, California)
Redlands Promenade is a ten acre site located at Eureka and the I-10 freeway off ramp in Redlands, California. The
project is entitled for 125,000 square feet of retail development.
Lakemoor (Volo) Land (Lakemoor, Illinois)
This 40-acre vacant land parcel is located on Route 12 which is located 50 miles north of Chicago in a growing
suburb. The project has no utilities in place, but is located near two planned regional centers.
Maui Ranch Land (Maui, Hawaii)
This site consists of two, non-adjacent, ten-acre undeveloped land-locked parcels located near the Kula Forest
Preserve on the island of Maui, Hawaii. The land currently is zoned for native vegetation. There is no ground right
of way access to the land and there is no infrastructure or utilities currently in the surrounding area. Accordingly,
only a nominal value was ascribed to these parcels when they were acquired by our predecessors in conjunction with
the purchase of Ward Centers.
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Nouvelle at Natick Condominium (Natick, Massachusetts)
Nouvelle at Natick is a full service luxury condominium community comprised of 215 residences located in the
Natick Collection in the Boston suburb of Natick, Massachusetts. Nouvelle at Natick’s amenities include a 4,000
square foot private club, a 2,800 square foot fitness center and a 1.2-acre rooftop garden with winding boardwalks,
native grasses, flowers and trees. As of December 31, 2010, 159 of the 215 units have been sold and closed, and an
additional seven units are under contract for sale, leaving a remaining inventory of 49.
Competition
The nature and extent of the competition we face depends on the type of property involved. With respect to our
master planned communities, we compete with other landholders and residential and commercial property
developers in the development of properties within Las Vegas, Nevada and Houston, Texas and the
Baltimore/Washington, D.C. markets. Significant factors which we believe allow us to compete effectively in this
business include:
(cid:129) the size and scope of our master planned communities;
(cid:129) the recreational and cultural amenities available within the communities;
(cid:129) the commercial centers in the communities, including those retail properties that we own and/or operate or
may develop;
(cid:129) our relationships with homebuilders;
(cid:129) our level of debt relative to total assets; and
(cid:129) the proximity of our developments to major metropolitan areas.
We primarily compete for retail and office tenants within our operating assets. We believe the principal factors that
retailers consider in making their leasing decisions include: (1) consumer demographics; (2) quality, design and
location of properties; (3) neighboring real estate projects that have been developed by our predecessors or that we,
in the future, may develop; (4) diversity of retailers and anchor tenants at shopping center locations; (5) management
and operational expertise; and (6) rental rates.
With respect to malls and development projects, our direct competitors include other commercial property
developers, retail mall development and operating companies and other owners of retail real estate that engage in
similar businesses. With respect to our mixed-use development projects, we also will be required to compete for
financing.
Environmental Matters
Under various federal, state and local laws and regulations, an owner of real estate is liable for the costs of removal
or remediation of certain hazardous or toxic substances on such real estate. These laws often impose such liability
without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic
substances. The costs of remediation or removal of such substances may be substantial, and the presence of such
substances, or the failure to promptly remediate such substances, may adversely affect the owner’s ability to sell
such real estate or to borrow using such real estate as collateral. In connection with our ownership and operation of
our properties, we, or the relevant joint venture through which the property is owned, may be potentially liable for
such costs.
Substantially all of our properties have been subject to Phase I environmental assessments, which are intended to
evaluate the environmental condition of the surveyed and surrounding properties. Phase I environmental
assessments typically include a historical review, a public records review, a site visit and interviews, but do not
include soil sampling or subsurface investigations. To date, the assessments have not revealed any known
environmental liability that we believe would have a material adverse effect on our overall business, financial
condition or results of operations. Nevertheless, it is possible that these assessments do not reveal all environmental
liabilities or that conditions have changed since the assessments were prepared (typically at the time the property
was purchased or developed). Moreover, no assurances can be given that future laws, ordinances or regulations will
not impose any material environmental liability on us, or the current environmental condition of our properties will
not be adversely affected by tenants and occupants of the properties, by the condition of properties in the vicinity of
our properties (such as the presence on such properties of underground storage tanks) or by third parties unrelated to
us.
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Future development opportunities may require additional capital and other expenditures to comply with federal, state
and local statutes and regulations relating to the protection of the environment. In addition, there is a risk when
redeveloping sites, that we might encounter previously unknown issues that require remediation or residual
contamination warranting special handling or disposal, which could affect the speed of redevelopment. In addition,
where redevelopment involves renovating or demolishing existing facilities, we may be required to undertake
abatement and/or the removal and disposal of building materials or other remediation or cleanup activities that
contain hazardous materials. We may not have sufficient liquidity to comply with such statutes and regulations or to
address such conditions and may be required to halt or defer such development projects. We cannot predict with
any certainty the magnitude of any such expenditures or the long-range effect, if any, on our operations.
Compliance with such laws has not had a material adverse effect on our predecessors’ operating results or
competitive position in the past but could have such an effect in the future.
Employees
As of December 31, 2010, we had approximately 155 employees, 110 of whom were leased temporarily from our
predecessors under an employee leasing agreement. Effective January 1, 2011, the leased employees became our
direct employees and now devote all of their time to us and have ceased providing services to our predecessors.
Available Information
We maintain an internet website at www.howardhughes.com. Our Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K and amendments to those reports are available and may be accessed
free of charge through the Investors section of our internet website under the SEC Filings subsection, as soon as
reasonably practicable after those documents are filed with, or furnished to, the SEC. Our internet website and
included or linked information on the website are not intended to be incorporated into this Annual Report on Form
10-K.
ITEM 1A. RISK FACTORS
An investment in our common stock involves various risks. Before deciding to purchase, hold or sell our common
stock, you should carefully consider the risks described below in addition to the other cautionary statements and
risks described elsewhere in this Annual Report on Form 10-K and in the documents incorporated by reference
herein and therein. The risks and uncertainties described below are those that we deem currently to be material,
and do not represent all of the risks that we face. Additional risks and uncertainties not presently known to us or
that we currently do not consider material may in the future become material and impair our business operations. If
any of the following risks actually occur, our business could be materially harmed, and our financial condition and
results of operations could be materially and adversely affected. As a result, the trading price of our securities could
decline, and you may lose all or part of your investment. You should also refer to the other information contained in
this Annual Report on Form 10-K, including our financial statements and the related notes, and in our other
periodic filings with the SEC. Our business, prospects, financial condition or results of operations could be
materially and adversely affected by the following:
Risks Related to our Business
We have a history of losses and may not be profitable in the future.
Prior to November 9, 2010, our historical combined financial data was carved-out from the financial information of
GGP. This data shows that had we been a stand-alone company, we would have had a history of losses. We cannot
assure you that we will achieve sustained profitability going forward. For the years ended December 31, 2009 and
2008, we incurred losses from continuing operations of $702.9 million and $17.9 million, respectively. Further, we
have incurred losses from continuing operations subsequent to our spin-off from GGP due to significant impairment
losses (due to revised operating strategies for certain of our assets) and warrant liability expenses related to the plan
to emerge from bankruptcy and our new management team. In addition, for the years ended December 31, 2010,
2009 and 2008, net cash used in operating activities was $67.9 million, $17.9 million and $50.7 million,
respectively. If we cannot improve our profitability or generate positive cash from our operating activities, the
trading value of our common stock may decline.
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We have minimal operating history as an independent company upon which investors can evaluate our
performance, and accordingly, our prospects must be considered in light of the risks that any newly independent
public company encounters.
We completed our spin-off from GGP on November 9, 2010, and have minimal experience operating as an
independent public company and performing various corporate functions, including human resources, tax
administration, legal (including compliance with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and
with the periodic reporting obligations of the Securities Exchange Act of 1934, (the “Exchange Act”), treasury
administration, investor relations, internal audit, insurance, information technology and telecommunications
services, as well as the accounting for items such as equity compensation and income taxes. Our business is subject
to the substantial risks inherent in the commencement of a new business enterprise in an intensely competitive
industry. Our prospects must be considered in light of the risks, expenses and difficulties encountered by companies
in the early stages of independent business operations, particularly companies that are heavily affected by economic
conditions and operate in highly competitive environments.
We may face potential difficulties in obtaining operating and development capital.
The successful execution of our business strategy will require us to obtain substantial amounts of operating and
development capital. Sources of such capital could include bank borrowings, public and private offerings of debt or
equity, sale of certain assets and joint ventures with one or more third parties. In recent years, it has been difficult
for companies with substantial profitable operating histories to source capital for real estate development and
acquisition projects, as well as basic working capital needs. We may find it difficult or impossible to acquire cost-
effective capital to implement our business strategy because of our limited operating history as a stand-alone
company and poor economic conditions.
Our ability to operate our business effectively may suffer if we do not establish our own financial, administrative
and other support functions to operate as a stand-alone company.
Prior to our spin-off from GGP, we relied on the financial, administrative and other support functions of GGP to
operate our business and we continue to rely on GGP for these and other vital services on a transitional basis
pursuant to the Transition Services Agreement that we entered into with GGP in connection with the spin-off.
We also needed to rapidly establish our own accounting policies and internal controls over financial accounting. As
a result of our spin-off, we became subject to the reporting requirements of the Exchange Act and the Sarbanes-
Oxley Act and are required to prepare our financial statements in accordance with GAAP for filing with the SEC. In
addition, the Exchange Act requires that we file annual, quarterly and current reports. Our failure to prepare and
disclose this information in a timely manner could subject us to penalties under federal securities laws, expose us to
lawsuits and restrict our ability to access financing. The Sarbanes-Oxley Act requires that we, among other things,
establish and maintain effective internal controls and procedures for financial reporting and disclosure purposes. We
may not be successful in identifying and establishing the requisite controls and procedures. In addition, establishing
and monitoring these controls could result in significant costs to us and require us to divert substantial resources,
including management time, from other activities. Any failure in our own financial or administrative policies and
systems could impact our financial performance and could materially harm our business and financial performance.
We may be unable to develop and expand our properties in our Strategic Developments segment.
Our business objective in our Strategic Developments segment is to develop and redevelop our properties, which we
may be unable to do if we do not have or cannot obtain sufficient capital to proceed with planned development,
redevelopment or expansion activities. In addition, the construction costs of a project, including labor and materials
may exceed original estimates or available financings. We may be unable to obtain zoning, governmental permits
and authorizations or anchor store, mortgage lender and property partner approvals that are required for any such
development, redevelopment or expansion. We may abandon redevelopment or expansion activities already under
way which we are unable to complete, which may result in additional cost recognition. In addition, if
redevelopment, expansion or reinvestment projects are unsuccessful, the investment in such project may not be fully
recoverable from future operations or sale.
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In connection with the spin-off we entered into several agreements with GGP with respect to certain of our assets
and we may have conflicts with GGP which could adversely affect our business.
In connection with the spin-off, we entered into several agreements with GGP that govern our respective rights and
obligations with respect to several of our assets. We may have economic or business interests that are divergent from
GGP’s in relation to a particular asset, and we may have disagreements with GGP with respect to how these assets
are managed and developed in the future.
A prolonged recession in the national economy, or a further downturn in national or regional economic
conditions, could adversely impact our business.
The collapse of the housing market, together with the recent crisis in the credit markets, have resulted in a recession
in the national economy with high unemployment, a lower gross domestic product and reduced consumer spending.
During such times, potential customers often defer or avoid real estate purchases due to the substantial costs
involved, causing land and other real estate prices to significantly decline. Significantly tighter lending standards
for borrowers are also having a significant negative effect on demand. A record number of homes in foreclosure and
forced sales by homeowners under distressed economic conditions are significantly contributing to the high levels of
inventories of lots available for sale in some of our master planned communities.
The housing market and the demand from builders for lots is local and can be very volatile, and projected lot sales
used in our feasibility analysis may not be met. In addition, the success of our master planned communities business
is heavily dependent on local housing markets in Las Vegas, Nevada, Houston, Texas and Baltimore,
Maryland/Washington, D.C., which in turn are dependent on the health and growth of the economies and availability
of credit in these regions.
We do not know how long the downturn in the residential and commercial real estate markets will last or when real
estate markets will return to more normal conditions. High unemployment, lack of consumer confidence and other
adverse conditions in the current economic recession could significantly delay a recovery in real estate markets. Our
business will suffer until market conditions improve. If market conditions were to worsen, the demand for our real
estate products could further decline, negatively impacting our earnings, cash flow and liquidity. A prolonged
recession could have a material adverse effect on our business, results of operations and financial condition.
Some of our directors are involved in other businesses including real estate activities and public and/or private
investments and, therefore, may have competing or conflicting interests with us.
Certain of our directors have and may in the future have interests in other real estate business activities, including in
GGP, and may have control or influence over these activities or may serve as investment advisors, directors or
officers. These interests and activities, and any duties to third parties arising from such interests and activities, could
divert the attention of such directors from our operations. Additionally, certain of our directors are engaged in
investment and other activities in which they may learn of real estate and other related opportunities in their non-
director capacities. Our Code of Business Conduct and Ethics applicable to our directors expressly provides, as
permitted by Section 122(17) of the Delaware General Corporation Law (the “DGCL”), that our non-employee
directors are not obligated to limit their interests or activities in their non-director capacities or to notify us of any
opportunities that may arise in connection therewith, even if the opportunities are complementary to or in
competition with our businesses. Accordingly, we have, and investors in our common stock should have, no
expectation that we will be able to learn of or participate in such opportunities. If any potential business opportunity
is expressly presented to a director exclusively in his or her director capacity, the director will not be permitted to
pursue the opportunity, directly or indirectly through a controlled affiliate in which the director has an ownership
interest, without the approval of the independent members of our board of directors.
We may face potential successor liability.
We may be subject to successor liability based on previous actions of our predecessors. Such liability may arise in a
number of circumstances, such as: (1) if a creditor of our predecessors did not receive proper notice of the pendency
of the GGP bankruptcy proceedings or the deadline for filing claims; (2) the injury giving rise to, or source of, a
creditor’s claim did not manifest itself in time for the creditor to file the creditor’s claim; (3) a creditor did not
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timely file the creditor’s claim in such bankruptcy case due to excusable neglect; (4) we are found liable for our
predecessors’ tax liabilities under a federal and/or state theory of successor liability; or (5) the order of confirmation
for the GGP bankruptcy plan is found to be procured by fraud. If we should become subject to such successor
liability, it could materially adversely affect our business, financial condition and results of operations.
Significant competition could have an adverse effect on our business.
The nature and extent of the competition we face depends on the type of property involved. With respect to our
master planned communities, we compete with other landholders and residential and commercial property
developers in the development of properties within the Las Vegas, Nevada, Houston, Texas and
Baltimore/Washington, D.C. markets. A number of residential and commercial developers, some with greater
financial and other resources, compete with us in seeking resources for development and prospective purchasers and
tenants. Competition from other real estate developers may adversely affect our ability to attract purchasers and sell
residential and commercial real estate; sell undeveloped rural land, attract and retain experienced real estate
development personnel or obtain construction materials and labor. These competitive conditions can make it
difficult to sell land at desirable prices and can adversely affect operations, financial condition or results of
operations.
There are numerous shopping facilities that compete with our operating retail properties in attracting retailers to
lease space. In addition, retailers at these properties face continued competition from other retailers, including
retailers at other regional shopping centers, whether owned by GGP or otherwise, outlet malls and other discount
shopping centers, discount shopping clubs, catalog companies, internet sales and telemarketing. Competition of this
type could adversely affect our results of operations and financial condition.
In addition, we will compete with other major real estate investors with significant capital for attractive investment
and development opportunities. These competitors include REITs, such as GGP, investment banking firms and
private institutional investors.
Our results of operations in our Operating Assets and Strategic Developments segments are subject to significant
fluctuation by various factors that are beyond our control.
Our results of operations in our Operating Assets and Strategic Developments segments are subject to significant
fluctuations by various factors that are beyond our control. Fluctuations in these factors may decrease or eliminate
the income generated by a property, and include:
(cid:129) the regional and local economy, which may be negatively impacted by plant closings, industry slowdowns,
increased unemployment, lack of availability of consumer credit, levels of consumer debt, housing market
conditions, adverse weather conditions, natural disasters and other factors;
(cid:129) local real estate conditions, such as an oversupply of, or a reduction in demand for, retail space or retail
goods, and the availability and creditworthiness of current and prospective tenants;
(cid:129) perceptions by retailers or shoppers of the safety, convenience and attractiveness of the retail property;
(cid:129) the convenience and quality of competing retail properties and other retailing options such as the internet;
(cid:129) our ability to lease space, collect rent and attract new tenants; and
(cid:129) tenant rent prices, which may decline for a variety of reasons, including the impact of co-tenancy provisions
in lease agreements with certain tenants.
A decline in our results of operations in our Operating Assets and Strategic Developments segments could have a
negative impact on the trading price of our common stock.
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If the recoverable values of our remaining inventory of real estate assets were to drop below the book value of
those properties, we would be required to write-down the book value of those properties, which would have an
adverse affect on our balance sheet and our earnings.
Some of our projects have expensive amenities, such as pools, golf courses and clubs, or feature elaborate
commercial areas requiring significant capital expenditures. Many of these costs are capitalized as part of the book
value of the project. Adverse market conditions, in certain circumstances, may require the book value of real estate
assets to be decreased, often referred to as a “write-down” or “impairment.” A write-down of an asset would
decrease the value of the asset on our balance sheet and would reduce our earnings for the period in which the write-
down is recorded.
We recorded impairment charges of $503.4 million, $680.3 million and $52.5 million for the years ended December
31, 2010, 2009 and 2008, respectively. If market conditions were to continue to deteriorate, and the recoverable
values for our real estate inventory and other project land were to fall below the book value of these assets, we could
be required to take additional write-downs of the book value of those assets and such write-downs could be material.
We are a holding company and depend on our subsidiaries for cash.
We are a holding company, with no operations of our own. In general, we depend on our subsidiaries for cash and
our operations are conducted almost entirely through our subsidiaries. Our ability to generate cash to pay our
operating expenses is dependent on the earnings of and the receipt of funds from subsidiaries through dividends,
distributions or intercompany loans. The ability of our subsidiaries to pay any dividends or distributions is limited
by their responsibilities to satisfy their own obligations, if any, to their creditors and preferred stockholders before
making any dividends or distributions to their parent holding companies. In addition, Delaware law imposes
requirements that may restrict the ability to pay dividends to holders of our common stock.
Our business model includes entering into joint venture arrangements with strategic partners. This model may
not be successful and our business could be adversely affected if we are not able to successfully attract desirable
strategic partners or complete agreements with strategic partners.
We currently have and intend to enter into further joint venture partnerships. These joint venture partners may bring
development experience, industry expertise, financial resources, financing capabilities, brand recognition and
credibility or other competitive assets. We cannot assure you, however, that we will have sufficient resources,
experience and/or skills to locate desirable partners. We also may not be able to attract partners who want to
conduct business in the locations where our properties are, and who have the assets, reputation or other
characteristics that would optimize our development opportunities.
While we generally participate in making decisions for our jointly owned properties and assets, we might not always
have the same objectives as the partner in relation to a particular asset, and we might not be able to formally resolve
any issues that arise. For example, the Woodlands master planned community is jointly owned and we make
decisions with our joint venture partner. We cannot control the ultimate outcome of any decision made, which may
be to the detriment to holders of our common stock. Some of our interests, such as the Summerlin Medical Hospital
Center, are controlled entirely by our partners.
The bankruptcy of one of the other investors in any of our properties could materially and adversely affect the
relevant property or properties. If this occurred, we would be precluded from taking some actions affecting the
estate of the other investor without prior court approval which would, in most cases, entail prior notice to other
parties and a hearing. At a minimum, the requirement to obtain court approval may delay the actions we would or
might want to take. If the relevant joint venture through which we have invested in a property has incurred recourse
obligations, the discharge in bankruptcy of one of the other investors might result in our ultimate liability for a
greater portion of those obligations than would otherwise be required.
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Possible terrorist activity or other acts of violence could adversely affect our financial condition and results of
operations.
Future terrorist attacks in the United States or other acts of violence may result in declining economic activity,
which could harm the demand for goods and services offered by tenants and the value of our properties and might
adversely affect the value of an investment in our securities. Such a resulting decrease in retail demand could make
it difficult to renew or re-lease properties at lease rates equal to or above historical rates. Terrorist activities or
violence also could directly affect the value of our properties through damage, destruction or loss, and the
availability of insurance for such acts, or of insurance generally, might be lower or cost more, which could increase
our operating expenses and adversely affect our financial condition and results of operations. To the extent that
tenants are affected by future attacks, their businesses similarly could be adversely affected, including their ability to
continue to meet obligations under their existing leases. These acts might erode business and consumer confidence
and spending and might result in increased volatility in national and international financial markets and economies.
Any one of these events might decrease demand for real estate, decrease or delay the occupancy of new or
redeveloped properties, and limit access to capital or increase the cost of capital.
Some of our properties are subject to potential natural or other disasters.
A number of our properties are located in areas which are subject to natural or other disasters, including hurricanes,
earthquakes and oil spills. Some of our properties are located in coastal regions, and would therefore be affected by
increases in sea levels, the frequency or severity of hurricanes and tropical storms, or environmental disasters such
as the oil spill in the Gulf of Mexico, whether such events are caused by global climate changes or other factors.
Some potential losses are not insured.
We carry comprehensive liability, fire, flood, earthquake, terrorism, extended coverage and rental loss insurance on
all of our properties. We believe the policy specifications and insured limits of these policies are adequate and
appropriate. There are some types of losses, including lease and other contract claims, which generally are not
insured. If an uninsured loss or a loss in excess of insured limits occurs, we could lose all or a portion of the capital
invested in a property, as well as the anticipated future revenue from the property. If this happens, we might remain
obligated for any mortgage debt or other financial obligations related to the property.
We may be subject to potential costs to comply with environmental laws.
Under various federal, state or local laws, ordinances and regulations, a current or previous owner or operator of real
estate may be required to investigate and clean up hazardous or toxic substances released at a property and may be
held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation
and clean-up costs incurred by the parties in connection with the contamination. These laws often impose liability
without regard to whether the owner or operator knew of, or was responsible for, the release of the hazardous or
toxic substances. The presence of contamination or the failure to remediate contamination may adversely affect the
owner’s ability to sell or lease real estate or to borrow using the real estate as collateral. Other federal, state and
local laws, ordinances and regulations require abatement or removal of asbestos-containing materials in the event of
demolition or certain renovations or remodeling, the cost of which may be substantial for certain redevelopments,
and also govern emissions of and exposure to asbestos fibers in the air. Federal and state laws also regulate the
operation and removal of underground storage tanks. In connection with the ownership, operation and management
of certain properties, we could be held liable for the costs of remedial action with respect to these regulated
substances or tanks or related claims.
Inflation may adversely affect our financial condition and results of operations.
Should inflation increase in the future, we may experience any or all of the following:
(cid:129) tenant sales may be impacted;
(cid:129) difficulty replacing or renewing expiring leases with new leases at higher base and/or overage rent;
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(cid:129) an inability to receive reimbursement from tenants for their share of certain operating expenses, including
common area maintenance, real estate taxes and insurance; and
(cid:129) difficulty marketing and selling land for development of residential real estate properties.
Inflation also poses a potential risk due to the probability of future increases in interest rates. Such increases would
adversely impact outstanding variable-rate debt as well as result in higher interest rates on new debt.
Indebtedness could have an adverse impact on our financial condition and operating flexibility.
As of December 31, 2010, our consolidated debt was approximately $318.7 million of which approximately $7.0
million is recourse. Approximately $7.0 million of our consolidated debt is expected to require repayment in 2011.
In addition, as of December 31, 2010, our share of the debt of our Real Estate Affiliates was approximately $158.2
million and such debt was scheduled to mature in 2011. In March 2011, the Woodlands Partnerships refinanced their
debt by entering into a $270 million facility which expires in 2014 and a $36.1 million facility which expires in
2012. After the refinancings, our share of the debt of our Real Estate Affiliates is approximately $141.0 million.
Our indebtedness, particularly if increased over time, could have important consequences on the value of our
common stock including:
(cid:129) limiting our ability to borrow additional amounts for working capital, capital expenditures, debt service
requirements, execution of business strategy or other purposes;
(cid:129) limiting our ability to use operating cash flow in other areas of the business or to pay dividends;
(cid:129) increasing our vulnerability to general adverse economic and industry conditions, including increases in
interest rates, particularly given that certain indebtedness bears interest at variable rates;
(cid:129) limiting our ability to capitalize on business opportunities, reinvest in and develop their properties, and to
react to competitive pressures and adverse changes in government regulation;
(cid:129) limiting our ability, or increasing the costs, to refinance indebtedness; and
(cid:129) giving secured lenders the ability to foreclose on assets.
Risks Related to Spin-off.
We may be required to pay substantial U.S. federal income taxes related to certain prior sales of assets in our
Master Planned Communities segment.
In connection with the spin-off, GGP has agreed to indemnify us from and against 93.75% of any losses, claims,
damages, liabilities and reasonable expenses to which we become subject, in each case solely to the extent
attributable to certain taxes related to sales of certain assets in our Master Planned Communities segment prior to
March 31, 2010, in an amount equal to a maximum of $303.8 million, plus applicable interest. We will be
responsible for the remainder of any such taxes. GGP may not have sufficient cash to reimburse us for its share of
these taxes described above. We have ongoing IRS audits related to the foregoing taxes that, whether resolved by
litigation or otherwise, could impact the timing of the items subject to indemnification by GGP. In addition, if the
IRS were successful in litigation with respect to such audits, we may be required to change our method of tax
accounting for certain transactions, which could affect the timing of our future tax payments, increasing our tax
payments in the short term relative to our current tax cost projections.
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If the spin-off does not qualify as a tax-free distribution under Section 355 of the Internal Revenue Code, then
GGP and its subsidiaries may be required to pay substantial U.S. federal income taxes, and we may be obligated
to indemnify GGP and its subsidiaries for such taxes.
In connection with our spin-off, GGP received a private letter ruling from the IRS to the effect that the spin-off
transactions qualified as tax-free to GGP and its subsidiaries for U.S. federal income tax purposes. A private letter
ruling from the IRS generally is binding on the IRS. Such IRS ruling does not establish that the spin-off satisfied
every requirement for a tax-free spinoff, and the parties have relied solely on the advice of counsel for comfort that
such additional requirements are satisfied.
The IRS ruling is based on, among other things, certain representations and assumptions as to factual matters made
by GGP. The failure of any factual representation or assumption to be true, correct and complete in all material
respects could adversely affect the validity of the IRS ruling at the time of and subsequent to the spin-off. In
addition, the IRS ruling is based on current law and cannot be relied upon if current law changes with retroactive
effect. If the spin-off were to be treated as taxable, GGP and holders of GGP common stock may be faced with
significant tax liability with respect to the spin-off.
We entered into a Tax Matters Agreement with GGP, pursuant to which GGP may be held liable for the cost of the
failure of the spin-off to qualify as a tax-free distribution if GGP caused such failure, whether by an action taken
before or after the spin-off. If we caused such failure, whether by an action taken before or after the spin-off, we
could be liable for such costs. If the cause for the failure cannot be determined or was not caused by a single party,
then we and GGP will share such liability based on relative market capitalization. Moreover, although we have
agreed to share certain tax liabilities with GGP, we may be liable at law to a taxing authority for some of these tax
liabilities and, if GGP were to default on their obligations to us, we would be responsible for the entire amount of
these liabilities.
There is a risk of investor influence over our company that may be adverse to our best interests and those of our
other stockholders.
M.B. Capital Partners and certain of its affiliates (collectively, “M.B. Capital”), Pershing Square Capital
Management, L.P. (“Pershing Square”) and Brookfield Retail Holdings LLC (“Brookfield”) beneficially own
17.4%, 9.5% and 6.4%, respectively, of our outstanding common stock (excluding shares issuable upon the exercise
of warrants). Under the terms of our stockholder agreements, Pershing Square currently has the ability to designate
three members of our board of directors, and Brookfield currently has the ability to designate one member.
Although Pershing Square has entered into a standstill agreement to limit its influence over us, the concentration of
ownership of our outstanding common stock held by M.B. Capital, Pershing Square, Brookfield and other
substantial stockholders may make some transactions more difficult or impossible without the support of these
stockholders, or more likely with the support of these stockholders. The interests of our substantial stockholders
could conflict with or differ from the interests of our other stockholders. For example, the concentration of
ownership held by M.B. Capital, Pershing Square and Brookfield, even if these stockholders are not acting in a
coordinated manner, could allow M.B. Capital, Pershing Square and Brookfield to influence our policies and
strategy and could delay, defer or prevent a change of control or impede a merger, takeover or other business
combination that may otherwise be favorable to us and our other stockholders.
Certain of our directors have interests in GGP that may be adverse to our interests, limiting how we conduct
business with GGP.
Brookfield and Pershing Square, both of whom have representatives on our board, hold material economic interests
in GGP. Accordingly, we expect that a number of our directors may have, or appear to have, conflicting interests
relating to us and GGP. It may be important for us to do business with GGP in the future or to supplement or amend
the initial agreements between us and reorganized GGP as circumstances change. Actual or perceived conflicts of
interest may decrease the effectiveness of our board of directors in dealing with GGP. For example, directors with
helpful expertise may be required or decide to recuse themselves from deliberation or voting on matters involving
GGP, and certain transactions in our best interests may not be pursued at all because of the risk of an appearance of
a conflict or other considerations.
21
We will be exposed to risks relating to evaluations of our internal control over financial reporting required by
Section 404 of the Sarbanes-Oxley Act of 2002.
We are in the process of evaluating our internal control systems to allow management to report on, and our
independent auditors to assess, our internal control over financial reporting. We will be performing the system and
process evaluation and testing (and any necessary remediation) required to comply with the management
certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We are required to
comply with Section 404 by no later than December 31, 2011. We cannot be certain as to the timing of the
completion of our evaluation, testing and remediation actions or the impact of the same on our operations.
Furthermore, upon completion of this process, we may identify control deficiencies of varying degrees of severity
under applicable SEC and Public Company Accounting Oversight Board rules and regulations that remain
unremediated. As a public company, we are required to report, among other things, control deficiencies that
constitute a “material weakness” or changes in internal control that materially affect, or are reasonably likely to
materially affect, internal controls over financial reporting. A “material weakness” is a significant deficiency, or
combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of
the annual or interim financial statements will not be prevented or detected. If we fail to implement the
requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory
agencies such as the SEC. In addition, failure to comply with Section 404 or the report by us of a material weakness
may cause investors to lose confidence in our financial statements and the trading price of our common stock may
decline. If we fail to remedy any material weakness, our financial statements may be inaccurate, our access to the
capital markets may be restricted and the trading price of our common stock may decline.
Risks Related to Our Common Stock
The trading price of our common stock may fluctuate widely.
We cannot predict the prices at which our common stock may trade. The market price of our common stock may
fluctuate widely, depending upon many factors, some of which may be beyond our control, including:
(cid:129) our quarterly or annual earnings, or those of other comparable companies;
(cid:129) actual or anticipated fluctuations in our operating results and other factors related to our business;
(cid:129) announcements by us or our competitors of significant acquisitions or dispositions;
(cid:129) the failure of securities analysts to cover our common stock;
(cid:129) changes in earnings estimates by securities analysts or our ability to meet those estimates;
(cid:129) the operating and stock price performance of other comparable companies;
(cid:129) our ability to implement our business strategy;
(cid:129) our tax payments;
(cid:129) our ability to raise capital;
(cid:129) overall market fluctuations; and
(cid:129) general economic conditions.
Further, M.B. Capital, Pershing Square and Brookfield currently beneficially own 17.4%, 9.5%, and 6.4%,
respectively, of our common stock (excluding shares issuable upon exercise of the warrants). The principal holders
of our common stock may hold their investments for an extended period of time, thereby decreasing the number of
shares available in the market and creating artificially low supply for, and trading prices of our common stock.
22
Provisions in our certificate of incorporation, our by-laws, Delaware law and certain of the agreements we
entered into as part of our spin-off may prevent or delay an acquisition of us, which could decrease the trading
price of our common stock.
Our certificate of incorporation and bylaws contain the following limitations:
(cid:129) the inability of our stockholders to act by written consent;
(cid:129) restrictions on the ability of stockholders to call a special meeting without 15% of more of the voting power
of the issued and outstanding shares entitled to vote generally in the election of our directors;
(cid:129) rules regarding how stockholders may present proposals or nominate directors for election at stockholder
meetings; and
(cid:129) the right of our board of directors to issue preferred stock without stockholder approval.
Additionally, our certificate of incorporation imposes certain restrictions on the direct or indirect transferability of
our securities to assist in the preservation of our valuable tax attributes (generally consisting of (1) approximately
$400 million of suspended federal income tax deductions and (2) a relatively high federal income tax basis in our
assets), including, subject to certain exceptions, that until such time as our board of directors determines that it is no
longer in our best interests to continue to impose such restrictions (i) no person or entity may acquire or accumulate
the Threshold Percentage (as defined below) or more (as determined under tax law principles governing the
application of section 382 of the Internal Revenue Code) of our securities, and (ii) no person owning directly or
indirectly (as determined under such tax law principles) on the date of our spin-off, after giving effect to the spin-off
plan, the Threshold Percentage or more of our securities may acquire additional securities of ours. Notwithstanding
the restrictions in our certificate of incorporation, no assurance can be given regarding our ability to preserve our tax
attributes. Threshold Percentage means, in the case of (i) our common stock, 4.99% of the number of outstanding
shares of our common stock and (ii) any other class of our equity, 4.99% of each such class.
There may be dilution of our common stock from the exercise of outstanding warrants, which may materially
adversely affect the market price of our common stock and negatively impact a holder’s investments.
The exercise of some or all of the outstanding warrants to purchase shares of our common stock would materially
dilute the ownership interest of our existing stockholders. Likewise, any additional issuances of common stock,
through The Howard Hughes Corporation 2010 Equity Incentive Plan or otherwise, will dilute the ownership
interests of our existing stockholders. Any sales in the public market of such additional common stock could
adversely affect prevailing market prices of the outstanding shares of our common stock. In addition, the existence
of our outstanding warrants may encourage short selling or arbitrage trading activity by market participants because
the exercise of our warrants could depress the price of our common stock.
Additional issuances and sales of our capital stock or securities convertible into or exchangeable for our capital
stock, or the perception that such issuances and sales could occur, may cause prevailing market prices for our
common stock to decline and may adversely affect our ability to raise additional capital in the financial markets
at a favorable time and price.
Brookfield is subject to restrictions on its ability to sell our common stock and its warrants to acquire our common
stock. After these restrictions expire, shares held by Brookfield may be sold in the public markets. The price of our
common stock may drop significantly when such restrictions expire. In addition, certain of our substantial
stockholders, including Brookfield and Pershing Square, have the right to purchase the number of our shares as
necessary to allow the stockholder to maintain its proportionate ownership interests on a fully diluted basis, for so
long as the stockholder beneficially owns at least 5% of our outstanding common stock on a fully-diluted basis
In most circumstances, stockholders will not be entitled to vote on whether or not additional capital stock or
securities convertible into or exchangeable for our capital stock is issued. In addition, depending on the terms and
pricing of an additional offering of common stock or securities convertible into or exchangeable for our capital
stock, and the value of our properties, stockholders may experience dilution in both the book value and the market
value of their shares.
23
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive offices are located in Dallas, Texas where we lease approximately 4,927 square feet under
an arrangement that expires on October 31, 2012. In January of 2011, we entered into a month-to-month lease for an
additional 3,598 square feet at our current location. We have reached an agreement in principle with our current
lessor to lease approximately 21,000 square feet beginning in June 2011 at the same location. At that time, we will
be released from our obligations under our current leases. We believe that our facilities are adequate to meet our
current needs and that the new lease will not have a material impact on our financial condition.
Our Master Planned Communities and our Strategic Developments assets are described above in Note 1. The leases
we have with our tenants at our retail operating asset locations within our Operating Assets segment generally
include base rent and common area maintenance charges. The table below summarizes certain metrics of such
properties as of December 31, 2010. Each column should be read on a stand alone basis. You may not be able to
derive conclusions by calculating data from more than one column.
Property
Location
Honolulu, HI
New York, NY
Alexandria, VA
Peoria, AZ
Gallup, NM
Ward Centers
South Street Seaport
Landmark Mall
Park West
Rio West
Riverwalk Marketplace New Orleans, LA
Cottonwood Square
Total
Salt Lake City, UT
Mall and
Freestanding
GLA (a)
Average
Annual
Tenant Sales
per Square
Foot (b)
Mall and
Other
Rental NOI
(000) (c)
Average Sum of
Rent and
Recoverable
Common Area
Costs per Square
Foot (d)
Occupancy
Cost (j)
NOI
Margin
(k)
Year Ended December 31, 2010
$
1,000,817(e)
298,759(f)
440,325(g)
249,168
333,077(f)(h)
194,452(f)
77,079(f)
2,593,677
406 $
537
138
205
147
261
170
$
$
22,980
5,096(i)
1,519
366
1,899
955
484
33,299
42
67
17
22
15
30
17
10%
8%
8%
10%
10%
9%
10%
55%
26%
25%
7%
40%
45%
36%
_________________________
(a) Includes the gross leaseable area of freestanding retail locations that are not attached to primary complex of
buildings that comprise a shopping center.
(b) Tenant sales per square foot is calculated as a sum of the comparable sales for the year ended December 31,
2010 for tenants that track sales, divided by the comparable square footage for the same period. We include in our
calculations of comparable sales and comparable square footage properties that have been owned and operated for
the entire time during the twelve month period and exclude properties at which significant physical or
merchandising changes have been made.
(c) NOI includes revenue and expenses according to U.S. GAAP, excluding straight-line rent, market lease
amortization, depreciation and other amortization expense.
(d) Includes $12.69 of common area maintenance charges per square foot. Calculated as base rent and common area
maintenance charges divided by the square footage occupied by mall tenants. The calculation includes the terms of
each lease in effect at the time of the calculation, including any tenant concessions such as rent abatements,
allowances or other concessions, that may have been granted. Calculations exclude rent, charges and square footage
for temporary tenants (leases less than one year). Excludes anchor stores.
(e) Excludes 153,928 SF related to ground leases of which we are the lessor.
(f) All of the project is on a ground lease where HHC is the ground lessee.
(g) Excludes 438,937 SF in project that is owned and occupied by Sears and Macy’s.
(h) Excludes 180,946 SF of outparcel improvements in project currently owned by tenant.
(i) Excludes a provision for bad debt of $1.2 million related to a single tenant.
(j) Occupancy cost is calculated by dividing average annual tenant sales by average sum of rent and common area
costs.
(k) NOI margin is calculated by dividing NOI by the product of GLA and the average sum of rent and recoverable
common area costs per square foot.
24
The following table sets forth the occupancy rates, excluding anchor stores, for each of the last five years for our
Retail Operating Assets:
Ward Centers
South Street Seaport
Landmark Mall (a)
Park West (b)
Rio West
Riverwalk Marketplace
Cottonwood Square (c)
________________________
n.a. - not available
2010
2009
2008
2007
2006
95.0%
89.7%
76.0%
62.5%
91.8%
87.9%
78.2%
93.5%
91.3%
85.5%
63.6%
92.4%
84.5%
73.8%
91.5%
92.6%
87.9%
85.4%
96.3%
69.3%
91.6%
93.9%
91.9%
80.6%
59.9%
92.5%
53.5%
95.7%
95.0%
76.0%
80.0%
n.a.
89.2%
65.6%
98.3%
(a) Loss of permanent and specialty tenants in 2010 due to potential redevelopment.
(b) Partially opened in 2007, the 2008 occupancy rate reflects a lower GLA due to the timing of space
added on-line. Full GLA was achieved in 2009.
(c) Includes 41,612 square feet of retail space leased through March 2013 that is currently unoccupied.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of our business, we are from time to time involved in legal proceedings related to the
ownership and operations of our properties. Neither we nor any of our Real Estate Affiliates is currently involved in
any legal or administrative proceedings that we believe are likely to have a materially adverse effect on our business,
results of operations or financial condition.
ITEM 4. [RESERVED]
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange (the “NYSE”) under the symbol “HHC.” The
following table presents the high and low sales prices for our common stock on the NYSE since November 5, 2010,
the date that our common stock began “when-issued” trading on the NYSE.
2010:
Fourth Quarter (Since November 5, 2010)
Stock Price
High
Low
$
56.25
$
31.00
As of April 4, 2011, there were 2,820 holders of record of our common stock.
There were no dividends declared or paid from the date of our spin-off from GGP through December 31, 2010. Any
future determination related to our dividend policy will be made at the discretion of our board of directors and will
depend on a number of factors, including future earnings, capital requirements, financial condition and future
prospects and other factors the board of directors may deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the selected consolidated and combined financial and other data of our business for
the most recent five years. We were formed in 2010 to receive certain assets and liabilities of our predecessors in
connection with their emergence from bankruptcy. We did not conduct any business and did not have any material
assets or liabilities until our spin-off was completed on November 9, 2010. The selected historical financial data set
forth below as of December 31, 2010 and 2009 and for the years ended December 31, 2010, 2009, and 2008 has
been derived from our audited consolidated and combined financial statements, which are included elsewhere in this
25
Annual Report on Form 10-K. The selected historical combined financial data as of December 31, 2008 was
derived from our audited combined financial statements which are not included in this Annual Report on Form 10-
K. The selected historical combined financial as of December 31, 2007 and 2006 and for the years ended December
31, 2007 and 2006 were derived from our unaudited combined financial statements which are not included in this
Annual Report on Form 10-K. Our spin-off did not change the carrying value of our assets and liabilities, and
operations for 2010 have been presented as the aggregation of the combined results from January 1, 2010 to
November 9, 2010 and the consolidated results from November 10, 2010 to December 31, 2010.
Prior to the spin-off, our combined financial statements were carved out from the financial books and records of
GGP at a carrying value reflective of historical cost in GGP’s records. Our historical financial results for these
periods reflect allocations for certain corporate costs, and we believe such allocations are reasonable. Such results do
not reflect what our expenses would have been had the Company been operating as a separate stand-alone publicly
traded company. The historical combined financial information presented for periods prior to our separation from
GGP will not be indicative of the results of operations, financial position or cash flows that would have been
obtained if we had been an independent, stand-alone entity during such periods.
The historical results set forth below do not indicate results expected for any future periods. The selected financial
data set forth below are qualified in their entirety by, and should be read in conjunction with, Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial
statements and related notes thereto included elsewhere in this Annual Report.
Year Ended December 31,
2010
2009
2008
(In thousands, except per share amounts)
2007
2006
$
142,719
(16,563)
(503,356)
(134,667)
(2,053)
(57,282)
(140,900)
$
136,348
(19,841)
(680,349)
(128,833)
712
(6,674)
—
$
172,507 $ 260,498 $
(22,995)
(18,421)
(125,879)
(52,511)
(196,121)
(141,392)
1,504
1,105
—
—
—
—
548,714
(21,362)
(90)
(408,084)
1,737
—
—
633,459
23,969
(2,703)
10,643
(83,782)
9,413
(28,209)
23,506
68,451
28,051
(69,230)
(702,877)
(17,909)
(3,899)
65,184
—
(69,230)
(201)
(939)
(703,816)
204
—
(17,909)
(100)
—
(3,899)
(101)
—
65,184
(2,265)
$
(69,431)
$ (703,612)
$
(18,009) $
(4,000) $
62,919
Operating Data:
Revenues
Depreciation and amortization
Provisions for impairment
Other operating expenses
Interest (expense) income, net
Reorganization items
Warrant liability expense
Benefit from (provision for) income
taxes
Equity in income (loss) of Real Estate
Affiliates
Income (loss) from continuing
operations
Discontinued operations- loss on
dispositions
Net income (loss)
Allocation to noncontrolling interests
Net income (loss) attributable to
common stockholders
Basic and Diluted Income (Loss) Per
Share:
Continuing operations
Discontinued operations
Total basic and diluted income (loss)
per share
$
(1.84)
$
(18.66)
$
(0.48) $
(0.11) $
$
(1.84) $
—
(18.64) $
(0.02)
(0.48) $
—
(0.11) $
—
1.69
—
1.69
Cash Flow Data:
Operating activities
Investing activities
Financing activities
$
(67,899) $
(111,829)
461,206
(17,870) $
(21,432)
37,543
(50,699) $
(300,201)
348,424
(52,041) $
(146,208)
183,073
190,036
(163,903)
(13,538)
26
Balance Sheet Data:
Investments in real estate - cost
Total assets
Total debt
Total equity
2010
2009
2008
2007
2006
As of December 31,
(In thousands)
$ 2,317,576 $ 2,827,814 $ 3,376,321 $ 2,935,919 $ 2,761,275
2,882,493
417,011
1,365,238
3,024,827
373,036
1,610,672
3,022,707
318,660
2,179,107
3,443,956
358,467
1,985,815
2,905,227
342,833
1,503,520
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and the related
notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements
that involve risks, uncertainties, assumptions and other factors, including those described in Part I, “Item 1A. Risk
Factors” and elsewhere in this Annual Report on Form 10-K. These factors could cause our actual results in 2011
and beyond to differ materially from those expressed in, or implied by, those forward-looking statements. You are
cautioned not to place undue reliance on this information which speaks only as of the date of this report. We are not
obligated to update this information, whether as a result of new information, future events or otherwise, except to
the extent we are required to do so in connection with our obligation to file periodic reports with the SEC.
All references to numbered Notes are to specific footnotes to our Consolidated and Combined Financial Statements
included in this Annual Report on Form 10-K and which descriptions are incorporated into the applicable response
by reference. The following discussion should be read in conjunctions with such Consolidated and Combined
Financial Statements and related Notes. Capitalized terms used, but not defined, in this Management’s Discussion
and Analysis of Financial Condition and Results of Operation (“MD&A”) have the same meanings as in such
Notes.
Overview
We are a real estate company created to specialize in the development of master planned communities, the
redevelopment or repositioning of real estate assets currently generating revenues, also called operating assets, and
other strategic real estate opportunities in the form of entitled and unentitled land and other development rights. Our
assets are located across the United States and our goal is to create sustainable, long-term growth and value for our
stockholders. We expect the competitive position and desirable location of certain of our assets (which collectively
comprise millions of square feet and thousands of acres of developable land), combined with their operations and
long-term opportunity through entitlements, land and home site sales and project developments, to drive our income
and growth.
We designated a new board of directors and management team in connection with our spin-off from GGP on
November 9, 2010. Our asset composition and business strategy differs from GGP because we are primarily
focused on development assets and commercial properties that require re-positioning to maximize their value. The
performance of such assets has a greater effect on us than GGP because GGP’s business consists of operating
stabilized, cash-flowing retail properties. We are focused on maximizing value from our assets and our new board
of directors and management team continues to develop and refine business plans to achieve that goal.
We expect to pursue development opportunities for a number of our assets that were previously postponed due to
lack of liquidity resulting from deteriorating economic conditions, the credit market collapse and the bankruptcy
filing of our predecessors, and to develop plans for other assets for which no plans had been developed. We are in
the process of assessing the opportunities for these assets, which currently are in various stages of completion, to
determine how to finance their completion and how to maximize their long-term value potential, which may include
entering into joint venture arrangements.
27
We operate our business in three segments: Master Planned Communities, Operating Assets and Strategic
Developments. Certain assets have been reclassified between segments, for all periods presented, from the
presentation of such segments by our predecessor due to changes in 2010 in our management team as discussed
above and in Note 15. Unlike most real estate companies which are limited in their activities because they have
elected to be taxed as a real estate investment trusts, we have no restrictions on our operating activities or types of
services that we can offer, which we believe provide the most flexibility for maximizing the value of our real estate
portfolio.
Results of Operations
Our revenues primarily are derived from the sale of individual lots at our master planned communities to home
builders and from tenants at our operating assets in the form of fixed minimum rents, overage rent and recoveries of
operating expenses. We have presented the following discussion of our results of operations on a segment basis
under the proportionate share method. Under the proportionate share method, our share of the revenues and
expenses of the properties owned by our Real Estate Affiliates is combined with the revenues and expenses of the
Combined Properties. See Note 15 for additional information including our discussion of our three reportable
segments as well as reconciliations of our segment basis results to GAAP basis results.
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 (“EBT”). Management believes that EBT provides useful information about our operating
performance.
EBT is defined as net income (loss) from continuing operations plus: (1) reorganization items (2) income tax
provision (benefit); (3) warrant liability expense; (4) strategic initiatives; (5) general and administrative costs; and
(6) the items above of unconsolidated Real Estate Affiliates. We present 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. We believe that the
inclusion of certain adjustments to net income (loss) from continuing operations to calculate EBT is appropriate to
provide additional information to investors because EBT therefore excludes certain non-recurring and non-cash
items, including reorganization items related to the bankruptcy, which we believe are not indicative of our core
operating performance.
EBT should not be considered as an alternative to GAAP net income (loss) attributable to common stockholders or
GAAP net income (loss) from continuing operations, 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:
(cid:129) does not reflect our cash expenditures, or future requirements for capital expenditures or contractual
commitments;
(cid:129) does not reflect cash income taxes that we may be required to pay;
(cid:129) does not reflect any cash requirements for replacement of depreciated or amortized assets or that these assets
have different useful lives;
(cid:129) does not reflect limitations on, or costs related to, transferring earnings from our subsidiaries to us; and
(cid:129) may be calculated differently by other companies in our industry, limiting its usefulness as a comparative
measure.
As described in the overview section above, we commenced separate operations on November 9, 2010 as a spin-off
from GGP. Accordingly, our consolidated operations after our spin-off may not be comparable to the operations of
our assets, presented on a carve-out basis, prior to our spin-off or in previous years. In addition, our operations were
significantly impacted by transactions that related to the spin-off and other events integral to GGP’s emergence as
described in Notes 1 and 2. Finally, our businesses were operated prior to spin-off through subsidiaries of GGP,
which operated as a real estate investment trust (“REIT”). We operate as a taxable corporation, except for our
investment in Victoria Ward, Limited, which is treated as a REIT.
28
Impairments
We evaluate our real estate assets for impairment whenever events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable. Recoverability in this context means that the expected
cumulative undiscounted future cash flows of an asset are less than its carrying value. The recoverability analysis, as
an accounting concept, considers hold periods, but ignores when the future cash flows are expected to be received
within that hold period and whether we currently expect to receive an above or below market rate of return over our
anticipated holding period. If expected cumulative undiscounted cash flows are less than carrying value, then we are
required to write down the asset to its fair value. The process for deriving fair value involves discounting the
expected future cash flows at a rate of return that we believe an investor would require based on the risk profile of
the cash flows and returns available in the market for other investments having similar risk. We may also use other
inputs such as appraisals and recent transactions for comparable properties, if appropriate. Book value for assets
that have been recently impaired from an accounting perspective may more likely reflect market value than book
values of assets that have not been impaired; consequently, unimpaired assets may be expected to generate above or
below market returns relative to their respective book values. The lower book basis resulting from an impairment
charge increases reported profitability from the asset in future periods, but has no impact on cash flow. Our
impairment testing resulted in a $503.4 million impairment charge for the year ended December 31, 2010.
We are focused on maximizing value for stockholders. To achieve this, we seek to implement strategies that
increase the fair value of an asset, not necessarily the aggregate of its future undiscounted cash flows. As such, a
given strategy may result in an accounting impairment charge even though we believe that such strategy will
maximize the value of the asset.
Master Planned Communities Impairments
Impairment charges to our master planned communities totaled $405.3 million for the year ended December 31,
2010. Large master planned community assets by their nature have characteristics that may create a wider range of
outcomes in an impairment analysis compared to other types of real estate such as office, retail and industrial
facilities. Unlike operating real estate, master planned community assets have extended life cycles that may last 20
to 40 years and have few long-term contractual cash flows (such as operating lease revenue). Further, master
planned community assets generally have minimal to no residual values because of their liquidating characteristics
and 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.
Our master planned communities comprise thousands of acres that include distinct communities. Our management
team may implement different development strategies for those communities. Such strategies vary from those of our
predecessors and may warrant separate impairment evaluation for regions or projects within a single master planned
community if we believe the cash flows for those assets are independent from other regions or projects within the
community. Separating master planned communities into multiple entities for impairment testing may result in a
different accounting conclusion than if the community was evaluated as a whole; however, the accounting has no
impact on economic value or fair value.
Our two remaining developable Summerlin regions (South and West) are separated for impairment testing because
their characteristics and future business plans are distinct. We have recently modified our business plans for
Summerlin South based on our expectation to: (1) replace high density product with low density product; (2) change
the strategy from developing and selling finished lots to the sale of undeveloped pads; and (3) reduce saleable acre
assumptions for a high-end village having significant topography and development challenges. As a result,
projected undiscounted future cash flows for Summerlin South were less than its then carrying value and this asset
was impaired as of December 31, 2010. We recorded a $345.9 million pre-tax charge to write down Summerlin
South to its estimated $203.3 million fair value at December 31, 2010. We expect this asset to generate
approximately $512 million of aggregate future cash flows over the next 28 years and used a 20% discount rate for
deriving fair value, which we believe is an appropriate, risk-adjusted rate of return.
29
We also recorded $56.8 million and $2.6 million pre-tax impairment charges for the Columbia and Gateway,
Maryland properties, respectively, at December 31, 2010. Columbia was written down to a $34.8 million fair value
based on a ten-year land sale program for the future mixed-use development of 4.9 million square feet. Estimated
aggregate future cash flows for Columbia totaled approximately $82.7 million and were discounted at 20% to derive
fair value, which we believe is an appropriate, risk-adjusted rate of return.
Operating Assets Impairments
Operating property pre-tax impairments within our Operating Assets segment totaled $80.4 million for the year
ended December 31, 2010. Riverwalk Marketplace (New Orleans, LA) and Landmark (Alexandria, VA) properties
were impaired by $56.0 million and $24.4 million, respectively, and their estimated fair values are $10.2 million and
$23.8 million, respectively, as of December 31, 2010. Riverwalk was evaluated based on our current plan to
reposition and hold the asset for an 11-year period, and we applied a 8.5% discount rate to the estimated future cash
flows and derived a residual value on the leasehold interest using a 8.5% capitalization rate. The Landmark property
impairment is based on an appraisal which incorporates many factors including, but not limited to, physical
condition, location, demographics and retail market condition. We do not currently have a specific re-development
plan for this asset.
Strategic Developments Impairments
Strategic Developments properties pre-tax impairments within our Strategic Developments segment totaled $17.0
million for the year ended December 31, 2010. Century Plaza Mall (Birmingham, AL) and Nouvelle at Natick
(Natick, MA) properties were impaired by $12.9 million and $4.1 million, respectively, and their estimated fair
values are $4.5 million and $13.4 million, respectively, as of December 31, 2010. Century Plaza Mall is a vacant
property for which we do not currently have a re-development plan, and the impairment is based upon our best
estimates utilizing, among other things, a broker’s opinion of value. Nouvelle is a condominium development for
which the estimated fair value is based on discounted cash flow analysis of the remaining units available for sale.
Master Planned Communities Sales Subsequent to December 31, 2010
Subsequent to December 31, 2010, we have closed on the sale of lots in our Summerlin master planned
communities. We sold: (1) 50 lots to Pulte for an aggregate purchase price of $4.2 million; (2) 55 lots to Richmond
for an aggregate purchase price of $4.7 million; (3) 17 lots to Toll Brothers, Inc. for an aggregate purchase price of
$1.5 million; and (4) 17 lots to Woodside Homes for an aggregate purchase price of $1.5 million. In addition, we
sold a 9.4-acre parcel to KB Home and a 16.1-acre parcel to a private school for purchase prices of $2.3 million and
$3.6 million, respectively. The sales to Pulte and Richmond are part of the purchase contracts described in our
description of the Summerlin master planned community in “Item 1. Business.”
Operating Assets Net Operating Income (NOI”)
The Company believes that NOI is a useful supplemental measure of the performance of our Operating Assets. 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) and excluding the operations of
properties held for disposition. NOI also excludes straight line rents, market lease amortization, impairments,
depreciation and other amortization expense. Other real estate companies may use different methodologies for
calculating NOI, and accordingly, the NOI of our Operating Assets may not be comparable to other real estate
companies.
Because NOI excludes general and administrative expenses, interest expense, impairments, depreciation and
amortization, gains and losses from property dispositions, allocations to non-controlling interests, reorganization
items, strategic initiatives, provision for income taxes, discontinued operations and extraordinary items, the
Company believes that 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. This measure thereby provides an operating perspective
not immediately apparent from GAAP continuing operations or net income attributable to common stockholders.
The Company uses NOI to evaluate its operating performance on a property-by-property basis because NOI allows
the Company to evaluate the impact that factors such as lease structure, lease rates and tenant base, which vary by
property, have on the Company’s operating results, gross margins and investment returns.
30
In addition, management believes that NOI provides useful information to the investment community about the
performance of our Operating Assets. However, 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
management’s computation of NOI, a reconciliation of NOI to EBT has been presented in the Operating Assets
segment discussion below and a reconciliation of EBT to consolidated operating income (loss) from continuing
operations as computed in accordance with GAAP has been presented in Note 15.
Year Ended December 31, 2010 and 2009
Master Planned Communities Segment
MPC revenues vary between years based on economic conditions and several factors such as location, development
density and commercial or residential use, among others. Reported results may differ significantly from actual cash
flows generated principally because cost of sales is based on our carrying value of land, a majority of which was
acquired in prior years and may also have also have been written down through impairment charges in prior years.
Current year expenditures for improvements are capitalized and therefore would not be reflected in the income
statement in the current year unless the related land was also sold.
MPC Sales Summary
Land Sales
Acres Sold
Number of Lots/Units
Price per acre
Price per lot
Year Ended December 31,
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
Columbia
Single Family - detached
$
2,400 $
4 $
1,275 $
531 $
200 $
125
Townhomes
High/Mid Apartments
Single Family - detached (Fairwood)
3,031
500
3,006
—
—
3,125
15,000
Bridgeland
Single Family - detached
15,123
10,239
Summerlin
Single Family - detached
Custom Lots
Single Family - detached
Single Family - attached
Woodlands
Subtotal
Commercial Land Sales
Summerlin
Retail
8,909
2,252
—
550
988
—
97,933
80,337
—
4,564
Bridgeland
Not-for-Profit
1,600
741
($ in thousands)
2
2
—
—
58
17
2
1
2
8
239
41
—
0
4
266
—
20
—
426
4
15
65,230
47,917
181
135
Woodlands
Office and other
10,597
3,603
21
49
Apartments and assisted living
Retail
Hotel
4,879
5,843
2,331
7,150
674
3,379
12
20
3
19
3
5
25,250
20,111
76
95
123,183
100,448
3,994
(3,409)
749
248
(42,687)
(29,794)
$ 85,239 $
67,493
Subtotal
Total acreage sales
revenues
Deferred revenue
SID
Venture partner’s share of
The Woodlands
Partnerships acreage
sales
Total segment Land sales
revenue
12
29
—
—
33
164
636
1,832
1,775
—
—
379
63
105
—
—
289
204
259
251
52
95
4
737
52
—
1
557
—
519
—
1,204
1,618
360
279
354
—
1,218
1,599
—
—
—
—
—
—
—
—
—
—
—
—
—
1,047
80
50
496
392
290
719
74
370
261
672
94
563
89
19
—
—
—
—
—
—
91
19
24
50
—
550
86
—
—
—
—
—
—
—
Land sales increased $17.7 million for the year ended December 31, 2010 as land sales improved $32.7 million in
the combined Summerlin, Bridgeland, Columbia (excluding Fairwood) and the Woodlands communities. This
increase was partially offset by a $15.0 million reduction in Fairwood which experienced no sales for the year.
31
In 2010 we sold 266 residential acres as compared to 426 acres in 2009. The majority of the acres sold were from
our Woodlands and Bridgeland communities. Variances in residential selling prices per lot and per acre are
principally caused by type of lot sold, its location and intended development density. Fewer transactions, such as in
2010 and 2009, also create move variability in per acre and per lot comparisons. Additionally, we sold 77
commercial acres in 2010 as compared to 95 acres in 2009. The change in price per acre and price per lot is largely
attributable to selling of certain product types in different locations.
Percentage Change in Major Items of Revenues and Expenses
Master Planned Communities (*)
Land sales
Other land sales revenues
Other rental and property revenues
Total revenues
Cost of sales - land
Land sales operations
Rental property operations
Provisions for impairments
Depreciation and amortization
Interest, net
Total expenses
MPC EBT
_________________________
Year Ended December 31,
2010
2009
$ Increase
(Decrease)
% Increase
(Decrease)
(In thousands)
$
$
85,239
11,477
16,920
113,636
49,504
37,232
14,618
405,331
4,481
(12,288)
498,878
(385,242)
$
$
$
67,493
16,497
16,302
100,292
40,164
42,291
13,054
63,367
5,639
(8,814)
155,701
(55,409) $
17,746
(5,020)
618
13,344
9,340
(5,059)
1,564
341,964
(1,158)
(3,474)
343,177
(329,833)
26.3%
(30.4)
3.8
13.3
23.3
(12.0)
12.0
539.7
(20.5)
(39.4)
220.4
(595.3)%
(*) Our master planned communities segment includes revenues and expenses related to The Woodlands
Partnerships, one of our non-consolidated Real Estate Affiliates (Note 1). For a detailed breakdown of EBT,
refer to Note 15.
Land sales increased $17.7 million for the year ended December 31, 2010 as compared to the year ended December
31, 2009 due to the factors described more fully above.
Other land sales revenues includes builder price participation and other fee revenues related to lot sales (Note 2).
The decrease in 2010 is primarily due to reduced operations at the Woodlands Partnerships.
Other rental and property revenue primarily includes income associated with home owner association fees and
transfer fees from Summerlin, ground maintenance fees from The Woodlands, advertising fees, interest income and
ground rent.
The Cost of land sales increase of $9.3 million for the year ended December 31, 2010 is directly related to our
increase in land sales. This Item is based on our carrying values of the lots sold and may vary based upon our
historical purchase price of the land, the amount of any impairments recorded on the land, and amount of
improvements we made to the land.
Land sales operations primarily include payroll and overhead, marketing and other land sale related costs, including
real estate taxes. The decline of $5.1 million reflects management’s efforts to reduce these costs during a sluggish
economy and a reduction in real estate taxes in Summerlin as a result of a successful tax appeal.
Rental property operations costs increased $1.6 million for the year ended December 31, 2010 due to an increase in
grounds maintenance costs and costs necessary to operate our golf facilities at The Woodlands.
32
Master Planned Communities provisions for impairment increased by $342.0 million for the year ended December
31, 2010 as compared to the year ended December 31, 2009 primarily due to additional impairment provisions
recognized at Summerlin South as described above.
In addition to EBT for the Master Planned Communities, management believes that certain members of the
investment community measure the value of the assets in this segment to the Company based on a computation of
their annual contribution to liquidity and capital available for investment. Accordingly, the following table showing
MPC Net Contribution for 2010 and 2009 is presented. MPC Net Contribution is defined as MPC EBT, plus MPC
cost of sales, provisions for impairment and depreciation and amortization, and reduced by MPC development and
acquisitions expenditures. The improvement in MPC Net Contribution during 2010 compared to 2009 is primarily
attributable to increased land sales, the results of efforts to reduce operational costs and lower development and
acquisition expenditures. Although MPC Net Contribution can be computed from GAAP elements of income and
cash flows, it is not a GAAP based operational metric and should not be used to measure operating performance of
the MPC assets as a substitute for GAAP measures of such performance.
MPC Net Contribution
Year Ended December 31,
2010
2009
$ Increase
(Decrease)
% Increase
(Decrease)
$
(385,242) $
(55,409) $
(329,833)
(595.3)%
(In thousands)
49,504
405,331
4,481
40,164
63,367
5,639
9,340
341,964
(1,158)
57,138
16,936
$
61,226
(7,465) $
(4,088)
24,401
$
23.3
539.7
(20.5)
(6.7)
326.9%
MPC EBT (*)
Plus:
Cost of sales - land
Provisions for impairments
Depreciation and amortization
Less:
MPC land/residential development and
acquisitions expenditures
MPC Net Contribution
____________________
(*) Our master planned communities segment includes revenues and expenses related to The Woodlands
Partnerships, one of our non-consolidated Real Estate Affiliates (Note 1). For a detailed breakdown of EBT,
refer to Note 15.
Operating Assets Segment
We view net operating income as an important measure of the operating performance of our Operating Assets.
These assets typically generate rental revenues sufficient to cover their operating costs, and variances between years
in net operating income typically results from changes in occupancy, tenant mix and operating expenses. The
following reconciles Operating Assets NOI to EBT.
Operating Assets NOI and EBT
Operating Assets
Ward Centers
110 N. Wacker
South Street Seaport
Columbia Office Properties
Rio West Mall
Landmark Mall
Riverwalk Marketplace
Cottonwood Square
Park West
Net Operating Income (NOI)
Year Ended December 31,
2010
2009
(In thousands)
$ Increase
(Decrease)
% Increase
(Decrease)
$
22,980 $
6,628
3,898*
2,765
1,899
1,519
955
484
366
22,152 $
4,988
4,524
2,880
2,040
2,372
868
507
138
828
1,640
(626)
(115)
(141)
(853)
87
(23)
228
3.7%
32.9
(13.8)
(4.0)
(6.9)
(36.0)
10.0
(4.5)
165.2
33
Other properties
Total operating assets NOI
Straight-line and market lease amortization rent
Provisions for impairment
Depreciation and amortization
Interest, net
Operating Assets EBT
____________
*
Net Operating Income (NOI)
Year Ended December 31,
2010
2009
(In thousands)
1,667
42,136 $
(199)
(50,964)
(17,367)
(13,957)
(40,351) $
1,058
42,552 $
(142)
(80,923)
(16,017)
(16,145)
(70,675) $
$
$
$ Increase
(Decrease)
% Increase
(Decrease)
(609)
416
57
(29,959)
1,350
(2,188)
(30,324)
(36.5)
1.0
28.6
(58.8)
7.8
(15.7)
(75.2)%
Includes a provision for bad debt of $1.2 million related to a single tenant.
The increase in NOI of $0.8 million from Ward Centers is primarily due to new specialty leasing tenants taking
occupancy in late 2009 and early 2010. The $1.6 million NOI increase at 110 N. Wacker was caused by an increase
in the tenant’s rental rate effective in November 2009. The $0.9 million decrease in NOI relating to Landmark Mall
resulted from a decrease in occupancy as a result of one of the mall’s anchor tenants vacating during 2009.
Percentage Change in Major Items of Revenues and Expenses
Operating Assets (*)
Minimum rents
Other rental and property revenues
Total revenues
Rental property real estate taxes
Rental property maintenance costs
Other property operating costs
Provision for doubtful accounts
Provision for impairment
Depreciation and amortization
Interest, net
Total expenses
Operating Assets EBT
____________
Year Ended December 31,
2010
2009
$ Increase
(Decrease)
% Increase
(Decrease)
(In thousands)
63,962 $
25,574
89,536
9,764
5,582
30,174
1,606
80,923
16,017
16,145
160,211
(70,675) $
61,460 $
26,158
87,618
9,710
4,577
29,205
2,189
50,964
17,367
13,957
127,969
(40,351) $
$
$
2,502
(584)
1,918
54
1,005
969
(583)
29,959
(1,350)
2,188
32,242
(30,324)
4.1%
(2.2)
2.2
0.6
22.0
3.3
(26.6)
58.8
(7.8)
15.7
25.2
(75.2)%
(*) For a detailed breakdown of our Operating Assets segment EBT, refer to Note 15.
Minimum rents increased by $2.5 million for the year ended December 31, 2010 largely as a result of increased
leasing revenue at 110 Wacker, Ward Centers and Riverwalk Marketplace.
Rental property maintenance costs increased by $1.0 million for the year ended December 31, 2010 primarily as a
result of increases at South Street Seaport and Landmark Mall.
Other property operating costs increased by $1.0 million for the year ended December 31, 2010 largely as a result of
increases at Ward Centers and Riverwalk Marketplace.
Provision for doubtful accounts decreased by $0.6 million due to improved rent collections at Ward Centers and
Landmark Mall.
34
Operating Assets provisions for impairment increased $30 million for the year ended December 31, 2010 as
compared to the year ended December 31, 2009 primarily due to significant impairment provisions recognized 2010
at Riverwalk Marketplace ($56.0 million) and Landmark ($24.4 million) (Note 3) as described above.
Strategic Developments Segment
Our Strategic Development assets generally require substantial future development to achieve their highest and best
use, and most of the properties in this segment generate no revenues. Our expenses relating to these assets are
primarily related to carrying costs, such as property taxes and insurance and other ongoing costs relating to
maintaining the assets in their current condition. If we decide to redevelop a Strategic Development asset, we would
expect that, upon completion of redevelopment, that the asset would be reclassified to the Operating Assets segment
and NOI would become an important measure of its operating performance.
Percentage Change in Major Items of Revenues and Expenses
Strategic Developments (*)
Minimum rents
Other rental and property revenues
Total revenues
Rental property operations
Provisions for impairment
Depreciation and amortization
Interest, net
Total expenses
Strategic Developments EBT
____________
Year Ended December 31,
2010
2009
$ Increase
(Decrease)
% Increase
(Decrease)
(In thousands)
$
$
1,015 $
1,669
2,684
11,794
17,102
212
34
29,142
(26,458) $
1,902
(2,263)
(361)
8,403
595,659
2,103
(2,724)
603,441
(603,802) $
(887)
3,932
3,045
3,391
(578,557)
(1,891)
2,758
(574,299)
577,344
(46.6)%
173.8
843.5
40.4
(97.1)
(89.9)
101.2
(95.2)
95.6%
(*) Our strategic developments segment includes revenue and expenses related to certain non-consolidated Real
Estate Affiliates. For a detailed breakdown of EBT, refer to Note 15.
Minimum rents decreased $0.9 million for the year ended December 31, 2010 as certain properties within our
Strategic Developments segment with tenants had leases expire which were either not renewed or were re-leased to
new or existing at lower rental rates.
Other rental and property revenue improved $3.9 million. Included in this line item are condominium sales from our
Nouvelle at Natick project, vending, parking, marketing and promotion and gain (loss) on disposition of assets. In
2009, Kendall Town Center sold land parcels at a $3.9 million loss. This loss was partially offset by other income
from various Strategic Developments properties.
Rental property operations increased $3.4 million as certain costs like overhead that were previously capitalized
were expensed as development effort on all of the properties in our Strategic Developments segment were
postponed.
Strategic Developments provisions for impairment decreased $578.6 million for the year ended December 31, 2010
as compared to the year ended December 31, 2009 primarily due to significant impairment provisions recognized in
2009 at Elk Grove Promenade ($175.3 million) and the Shops at Summerlin ($176.1 million) as well as certain other
projects as detailed in Note 3.
35
Certain Significant Consolidated and Combined Revenues and Expenses
The following table contains certain significant revenues and expenses on a consolidated and combined basis.
Variances related to revenues and expenses included in NOI are explained within the segment variance discussion
contained within this Item 7 using the combined consolidated and proportionate share of our non-consolidated Real
Estate Affiliates revenues and expenses associated with the related segment. Significant variances for combined
revenues and expenses not included in NOI are described below.
$
(In thousands)
Minimum rents
Tenant recoveries
Master Planned Community land sales
Builder price participation
Other land sales revenues
Other rental and property revenues
Master Planned Community cost of sales
Master Planned Community land sales operations
Rental property real estate taxes
Rental property maintenance costs
Other property operating costs
Provision for doubtful accounts
General and administrative
Provisions for impairment
Depreciation and amortization
Interest income
Interest expense
Warrant liability expense
Benefit from income taxes
Equity in income (loss) of Real Estate Affiliates
Reorganization items
Discontinued operations - loss on dispositions
Net income (loss)
$
Year Ended December 31,
2010
2009
$ Increase
(Decrease)
% Increase
(Decrease)
$
66,926
18,567
38,058
4,124
5,384
9,660
(23,388)
(29,041)
(14,530)
(6,495)
(37,893)
(1,782)
(21,538)
(503,356)
(16,563)
369
(2,422)
(140,900)
633,459
9,413
(57,282)
—
(69,230) $
$
65,653
19,642
34,563
5,687
5,747
5,056
(22,020)
(27,042)
(13,813)
(5,586)
(34,810)
(2,539)
(23,023)
(680,349)
(19,841)
1,689
(977)
—
23,969
(28,209)
(6,674)
(939)
(703,816) $
1,273
(1,075)
3,495
(1,563)
(363)
4,604
1,368
1,999
717
909
3,083
(757)
(1,485)
(176,993)
(3,278)
(1,320)
1,445
140,900
609,490
37,622
50,608
(939)
634,586
1.9%
(5.5)
10.1
(27.5)
(6.3)
91.0
6.2
7.4
5.2
16.3
8.9
(29.8)
(6.4)
(26.0)
(16.5)
(78.1)
147.9
n/a
2,542.8
133.4
758.3
(100.0)
90.2%
Emergence initiatives, included in general and administrative costs, for the year ended December 31, 2009 consist of
professional fees for restructuring that were incurred prior to the filing for protection under the Bankruptcy Code of
certain of our subsidiaries. Similar costs incurred after filing for protection under the Bankruptcy Code are recorded
as reorganization items.
We recognized impairment charges of $503.4 million for the year ended December 31, 2010 and $680.3 million for
the year ended December 31, 2009 as described above and in Note 3.
The impairment charges recognized in 2010 were as follows:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
$2.6 million to the Gateway Master Planned Community in Columbia, Maryland;
$56.8 million to the Columbia Master Planned Community in Columbia, Maryland;
$345.9 million to the Summerlin South Master Planned Community in Las Vegas, Nevada;
$24.4 million to the Landmark mall development in Alexandria, Virginia;
$56.0 million to the Riverwalk Marketplace development in New Orleans, Louisiana;
$12.9 million to the Century Plaza Mall development in Birmingham, Alabama;
$4.1 million to the Nouvelle at Natick project located in Boston, Massachusetts;
$0.6 million related to the write down of various pre-development costs that were determined to be non-
recoverable due to the termination of associated projects.
36
The impairment charges recognized in 2009 were as follows:
(cid:129) $52.8 million to the Fairwood Master Planned Community in Columbia, Maryland;
(cid:129) $27.3 million to the Landmark Mall development in Alexandria, Virginia;
(cid:129) $29.1 million to the Allen development in Allen, Texas;
(cid:129) $50.8 million to the Cottonwood Mall development in Holladay, Utah;
(cid:129) $35.1 million to the Kendall development in Miami, Florida;
(cid:129) $22.3 million to the West Windsor development in Princeton, New Jersey;
(cid:129) $16.6 million to the Bridges at Mint Hill development in Charlotte, North Carolina;
(cid:129) $175.3 million to the Elk Grove Promenade development in Elk Grove, California;
(cid:129) $176.1 million to the Shops at Summerlin Center development in Las Vegas, Nevada,
(cid:129) $6.7 million to the Redlands Promenade development in Redlands, California;
(cid:129) $5.5 million to the Village at Redlands in Redlands, California;
(cid:129) $55.9 million related to the Nouvelle at Natick project located in Boston, Massachusetts; and
(cid:129) $26.9 million related to the write down of various pre-development costs that were determined to be non-
recoverable due to the termination of associated projects.
In addition, four regions or projects within our Master Planned Communities had impairment indicators and carrying
values in excess of estimated fair value at December 31, 2010. Aggregate undiscounted cash flows for such master
planned communities projects significantly exceeded their respective aggregate book values and therefore no further
impairment provisions were required with respect to such projects at December 31, 2010. The significant
assumptions in our Master Planned Communities segment relate to future sales prices of land and future
development costs needed to prepare land for sale, over the planned life of the project, which are based, in part, on
assumptions regarding sales pace, timing of related development costs, and the impact of inflation and other market
factors. With respect to operating properties within our Operating Assets segment at December 31, 2010, beyond the
properties with impairment provisions listed above, there were an additional four operating properties which had
impairment indicators and carrying values in excess of estimated fair value. The undiscounted cash flow for such
four operating properties exceeded their book values by 132%. The significant assumption for three of these
operating properties is our future revenue assumption and for one of these operating properties is net operating
income. The combined book value of the four properties is $102.6 million. A 10% reduction in revenues for the
three properties and a 10% reduction in NOI for the other would reduce the 132% of excess of cash flow over book
value to approximately 120%.
The decrease in depreciation and amortization for the year ended December 31, 2010 primarily resulted from the
decrease in buildings and equipment due to the impairment charges recorded in fiscal year 2009.
Interest expense increased during the year ended December 31, 2010 primarily due to a $1.9 million increase in the
amortization of debt market rate adjustments partially offset by a $0.4 million decrease in the amortization of
deferred finance costs.
The increase in the benefit for income taxes for the year ended December 31, 2010 was primarily attributable to the
creation of certain deferred tax assets prior to the Separation as a result of the transfer of certain of our predecessors’
REIT assets to taxable entities (Note 8) and decrease in deferred tax liabilities due to our impairments, partially
offset by a significant increase in valuation allowances compared to the year ended December 31, 2009.
The $37.6 million increase in our equity in income (loss) of Real Estate Affiliates in 2010 is primarily due to the
2009 recognition of $10.6 million of impairment on our investment in Circle T as well as the recognition in 2009 by
the Circle T venture of impairment of $38.1 million, of which our share was $19.0 million. (Note 6)
Reorganization items under the bankruptcy filings are expense or income items that were incurred or realized by our
predecessors as a result of their bankruptcy. These items include professional fees and similar types of expenses
incurred directly related to the bankruptcy filings, gains or losses resulting from activities of the reorganization
process, including gains related to recording the mortgage debt at fair value upon emergence from bankruptcy and
interest earned on cash accumulated by the our predecessors. See Note 2—Reorganization Items for additional
detail.
37
As described in Note 1, our net income in 2010 reflects our operations prior to and subsequent to the spin-off from
GGP. Income for the period prior to the spin-off, as detailed in the accompanying Statement of Equity, was
attributable to GGP and reflects significant income tax benefits from restructuring (Note 8). The loss subsequent to
the spin-off of $528.5 million is primarily attributable to the impairment charges and warrant liability expense
described above.
Year Ended December 31, 2009 and 2008
Master Planned Communities Segment
MPC revenues vary between years based on economic conditions and several factors such as location, development
density and commercial or residential use, among others. Reported results may differ significantly from actual cash
flows generated principally because cost of sales is based on our carrying value of land, a majority of which was
acquired in prior years and may also have also have been written down through impairment charges in prior years.
Current year expenditures for improvements are capitalized and therefore would not be reflected in the income
statement in the current year unless the related land was also sold.
MPC Sales Summary
Land Sales
Acres Sold
Number of Lots/Units
Price per acre
Price per lot
Year Ended December 31,
2009
2008
2009
2008
2009
2008
2009
2008
2009
2008
($ in thousands)
Residential Land Sales
Columbia
Bridgeland
Summerlin
Woodlands
Subtotal
Commercial Land Sales
Columbia
Summerlin
Bridgeland
Woodlands
Single Family - detached
Townhomes
High/Mid Apartments
Single Family - detached (Fairwood)
$
500 $
3,006
3,125
15,000
5,513
—
—
345
Single Family - detached
10,239
10,020
Custom Lots
550
8,043
Single Family - detached
Single Family - attached
47,917
—
80,337
78,509
6,966
109,396
Warehouse
Office
Retail
Not-for-Profit
Office and other
Apartments and assisted living
Retail
Hotel
13,250
240
—
—
4,564
741
674
3,603
7,150
6,725
15,685
5,024
1,052
41,976
151,372
393
124
(54,131)
$ 67,493 $ 97,758
3,379
20,111
100,448
(3,409)
248
(29,794)
Subtotal
Total acreage sales revenues
Deferred revenue
SID
Venture partner’s share of The Woodlands Partnerships acreage sales
Total segment Land sale revenue
1
2
8
239
41
0
135
—
426
4
15
49
19
3
5
95
7
—
—
1
39
4
210
12
273
39
21
11
7
2
80
4
33
164
636
204
1
28 $
3
531 $
1,775
—
—
780 $
—
—
442
125 $
91
—
—
177
251
259
50
197
—
—
115
57
8
1,618
1,828
550
1,005
557
—
1,599
680
187
1,083
354
—
374
—
86
—
115
—
5
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
50
—
74
370
261
672
319
1,403
761
523
—
—
—
—
—
—
—
—
—
—
—
—
The decrease in land sales in 2009 was the result of a significant reduction in sales volume at our Summerlin,
Bridgeland and The Woodlands residential communities. These volume decreases were partially offset by the bulk
sale in 2009 of the majority of the remaining single-family lots in our Fairwood community (reported as part of our
Columbia, Maryland property) at considerably lower margins than previous Fairwood sales and by the sale of a
residential parcel for use in the development of luxury apartments and town homes, in our Maryland communities.
38
In 2009, we sold 426 residential acres compared to 273 acres in 2008, including 239 acres in the bulk Fairwood
sales discussed above. Variances in residential selling prices per lot and per acre are principally caused by type of
lot sold, its location and intended development density. Fewer transactions, such as in 2009 and 2008, also created
more variability in per acce and per lot comparisons. Although we sold 95 acres of commercial lots in 2009
compared to 85 acres in 2008, average prices for lots declined as compared to 2008.
Percentage Change in Major Items of Revenues and Expenses
Master Planned Communities (*)
Land sales
Other land sales revenues
Other rental and property revenues
Total revenues
Cost of sales - land
Land sales operations
Rental property operations
Provisions for impairments
Depreciation and amortization
Interest, net
Total expenses
MPC EBT
_______________________
$
$
Year Ended December 31,
2009
2008
$ Increase
(Decrease)
% Increase
(Decrease)
(In thousands)
67,493 $
16,497
16,302
100,292
40,164
42,291
13,054
63,367
5,639
(8,814)
155,701
(55,409) $
97,758 $
40,988
11,406
150,152
54,075
55,272
13,854
—
4,574
(6,071)
121,704
28,448 $
(30,265)
(24,491)
4,896
(49,860)
(13,911)
(12,981)
(800)
63,367
1,065
(2,743)
33,997
(83,857)
(31.0)%
(59.8)
42.9
(33.2)
(25.7)
(23.5)
(5.8)
100.0
23.3
(45.2)
27.9
(294.8)%
(*) Our master planned communities segment includes revenues and expenses related to The Woodlands
Partnerships, one of our non-consolidated Real Estate Affiliates (Note 1). For a detailed breakdown of EBT, refer
to Note 15.
Land sales decreased $30.3 million for the year ended December 31, 2009 as compared to the year ended December
31, 2008 due to the factors described more fully above.
Other land sale revenues decreased $24.5 million for the year ended December 31, 2009 primarily as a result of a
reduction in other revenue at our Summerlin community as forfeited land sales deposits and profit participation on a
prior land sale that was received in 2008, was not received in 2009.
Other rental and property revenues increased in 2009 by approximately $4.9 million due to increased rental and
property revenues at the Woodlands Partnerships.
Cost of land sales decreased $13.9 million for the year ended December 31, 2009 related to the decrease in land
sales. This item is based on our carrying value of the lots sold and may vary based open our historical purchase price
of the land, the amount of any impairments recorded on the land, and amount of improvements we made to the land.
Land sales operations includes payroll and overhead, marketing and other land sale related costs as well as a
reduction in CSA participation expense (Note 2). CSA participation expense changed $7.5 million from the previous
year. At the end of December 31, 2009, the Company was due $5.3 million from the heirs of Howard Hughes which
represented their share of negative income as defined in the Contingent Stock Agreement. In 2008 we owed the
heirs of Howard Hughes $2.1 million which represented their share of net income as defined in the Contingent Stock
Agreement. In 2010, GGP settled and paid all remaining obligations under the Contingent Stock Agreement. The
remaining decline was due to our efforts to decrease costs associated with payroll and marketing due to the sluggish
economy. Sales operations costs were also reduced as a result of reduced settlement costs.
39
Rental property operations declined $0.8 million for the year ended December 31, 2009 primarily as a result of
reduced play at our golf operations and the reduction of operating costs associated with certain office properties.
In addition to EBT for the Master Planned Communities, management believes that certain members of the
investment community measure the value of the assets in this segment to the Company based on a computation of
their annual contribution to liquidity and capital available for investment. Accordingly, the following table showing
MPC Net Contribution for 2009 and 2008 is presented. MPC Net Contribution is defined as MPC EBT, plus MPC
cost of sales, provisions for impairment and depreciation and amortization, and reduced by MPC development and
acquisitions expenditures. The improvement in MPC Net Contribution during 2009 compared to 2008 is primarily
attributable to lower development and acquisitions expenditures. Although MPC Net Contribution can be computed
from GAAP elements of income and cash flows, it is not a GAAP based operational metric and should not be used
to measure operating performance of the MPC assets as a substitute for GAAP measures of such performance.
MPC Net Contribution
2009
Year Ended December 31,
2008
(In thousands)
$ Increase
(Decrease)
% Increase
(Decrease)
$
(55,409) $
28,448
$
(83,857)
(294.8)%
40,164
63,367
5,639
54,075
—
4,574
(13,911)
63,367
1,065
(25.7)
n.a.
23.3
MPC EBT (*)
Plus:
Cost of sales - land
Provisions for impairments
Depreciation and amortization
Less:
MPC land/residential development
and acquisitions expenditures
MPC Net Contribution
$
____________________
61,226
(7,465) $
147,757
(60,660) $
(86,531)
53,195
(58.6)
87.7%
(*) Our master planned communities segment includes revenues and expenses related to The Woodlands
Partnerships, one of our non-consolidated Real Estate Affiliates (Note 1). For a detailed breakdown of EBT, refer
to Note 15.
Operating Assets Segment
We view net operating income as an importance measure of the operating performance of our Operating Assets.
These assets typically generate rental revenues sufficient to cover their operating costs, and variances between years
in net operating income typically results from changes in occupancy, tenant mix and operating expenses. The
following reconciles Operating Assets NOI to EBT.
Operating Assets
Ward Centers
110 N. Wacker
South Street Seaport
Columbia Office Properties
Rio West Mall
Landmark Mall
Riverwalk Marketplace
Cottonwood Square
Operating Assets NOI and EBT
Net Operating Income (NOI)
Year Ended December 31,
2009
2008
(In thousands)
$ Increase
(Decrease)
% Increase
(Decrease)
$
25,908
4,762
3,441
2,918
2,167
3,713
(225)
694
(3,756)
226
1,083
(38)
(127)
(1,341)
1,093
(187)
(14.5)%
4.7
31.5
(1.3)
(5.9)
(36.1)
485.8
(26.9)
$
22,152
4,988
4,524
2,880
2,040
2,372
868
507
$
40
Park West
Other properties
Total operating assets NOI
$
138
1,667
42,136
Net Operating Income (NOI)
Year Ended December 31,
2009
2008
(In thousands)
460
1,081
44,919
$
Straight-line and market lease
amortization rent
Provisions for impairment
Depreciation and amortization
Interest, net
Operating Assets EBT
___________________
n.m. - not meaningful
(199)
(50,964)
(17,367)
(13,957)
(40,351)
$
50
(37)
(15,390)
(12,810)
16,732
$
$ Increase
(Decrease)
% Increase
(Decrease)
(322)
586
(2,783)
(249)
(50,927)
(1,977)
(1,147)
(57,083)
$
$
(70.0)
54.2
(6.2)
(498.0)
n.m.
(12.8)
(9.0)
(341.2)%
NOI decreased at Ward Centers by $3.8 million principally due to rental abatements, decreases in overage rent, and
increases in bad debt expense as a result of tenants struggling from the economic downturn. In addition, specialty
leasing revenue decreased due to the conversion of specialty leasing tenants to long-term leases and the expiration of
a license agreement in the first quarter of 2009 in which the space remained vacant for the remainder of the year.
The $1.3 million decrease in NOI at Landmark Mall relates to decreased occupancy as a result of one of the mall’s
anchor tenants vacating during 2009. Riverwalk Marketplace experienced an increase of $1.0 million in NOI
primarily due to the expiration of rental relief provided to mall tenants after Hurricane Katrina and other tenant-
related ancillary revenue that was not received in 2008.
The $1.4 million decrease in ground rent expense resulted from a decrease in ground rent participation relating to the
Riverwalk Marketplace due to lower rental revenue.
Percentage Change in Major Items of Revenues and Expenses
Year Ended December 31,
2008
2009
(In thousands)
$ Increase
(Decrease)
% Increase
(Decrease)
Operating Assets (*)
Minimum rents
Other rental and property revenues
$
Total revenues
Rental property real estate taxes
Rental property maintenance costs
Other property operating costs
Provision for doubtful accounts
Provision for impairment
Depreciation and amortization
Interrest, net
Total expenses
Operating Assets EBT
$
61,460
26,158
87,618
9,710
4,577
29,205
2,189
50,964
17,367
13,957
127,969
(40,351) $
62,767
30,201
92,968
7,864
5,147
34,063
925
37
15,390
12,810
76,236
16,732
$
$
(1,307)
(4,043)
(5,350)
1,846
(570)
(4,858)
1,264
50,927
1,977
1,147
51,733
(57,083)
(2.1)%
(13.4)
(5.8)
23.5
(11.1)
(14.3)
136.6
n.m.
12.8
9.0
67.9
(341.2)%
__________________
(*) For a detailed breakdown of our Operating Assets segment EBT, see Note 15. n.m. - not meaningful
41
Minimum rents decreased by $1.3 million for the year ended December 31, 2009 largely as a result of decreases at
Ward Centers and Landmark Mall. Improvements at Riverwalk Marketplace and Park West partially offset these
decreases.
Other rental and property revenues decreased by $4.0 million for the year ended December 31, 2009 primarily as a
result of a decreases at Ward Centers, Riverwalk Marketplace and South Street Seaport.
Rental property real estate taxes of $9.7 million during the year ended December 31, 2009 were $1.8 million greater
than year ended 2008 largely due to increased real estate tax expense for Park West Mall which coincided with the
opening of the shopping center.
Rental property maintenance costs decreased by $0.6 million for the year ended December 31, 2009 primarily as a
result of savings at South Street Seaport and Ward Centers.
Other property operating costs decreased by $4.9 million for the year ended December 31, 2009 largely as a result of
decreases at Ward Centers and South Street Seaport.
Provision for doubtful accounts increased by $1.3 million largely due to an increase at Ward Centers and Landmark
Mall.
Provision for impairment for the Operating Assets segment increased $50.9 million for the year ended December 31,
2009 as compared to the year ended December 31, 2008 primarily due to an impairment recognized in 2009 at
Landmark Mall ($27.3 million) as well as certain other pre-development projects (Note 3).
Strategic Developments Segment
Our Strategic Development assets generally require substantial future development to achieve their highest and best
use, and most of the properties in this segment generate no revenues. Our expenses relating to these assets are
primarily related to carrying costs, such as property taxes and insurance and other ongoing costs relating to
maintaining the assets in their current condition. If we decide to redevelop a Strategic Development asset, we would
expect that, upon completion of redevelopment, that the asset would be reclassified to the Operating Assets segment
and NOI would become an important measure of its operating performance.
Percentage Change in Major Items of Revenues and Expenses
Year Ended December 31,
2009
2008
(In thousands)
$ Increase
(Decrease)
% Increase
(Decrease)
Strategic Developments (*)
Minimum rents
Other rental and property revenues
$
Total revenues
Rental property operations
Provisions for impairment
Depreciation and amortization
Interest, net
Total expenses
Strategic Developments EBT
$
1,902
(2,263)
(361)
8,403
595,659
2,103
(2,724)
603,441
(603,802)
$
$
3,389
6,085
9,474
5,492
52,474
2,469
(6,284)
54,151
(44,677)
$
$
(1,487)
(8,348)
(9,835)
2,911
543,185
(366)
3,560
549,290
(559,125)
(43.9)%
(137.2)
(103.8)
53.0
1035.2
(14.8)
56.7
1014.4
(1251.5)%
__________________
(*) Our strategic developments segment includes revenue and expenses related to certain non-consolidated Real
Estate Affiliates. For a detailed breakdown of EBT, refer to Note 15.
42
Minimum rents decreased $1.5 million for the year ended December 31, 2009 as certain properties within our
Strategic Development segment with tenants had leases expire which were either not renewed or were re-leased at
lower rental rates.
Other rental and property revenues include revenue from vending, parking, gains or losses on disposition of certain
properties, sponsorship and advertising revenues. The decrease was primarily attributable to dispositions of land
parcels at Kendall Town Center that resulted in a $3.9 million loss on sale of land in 2009 as compared to a $4.3
million gain on sale of land in 2008. The loss on sale in 2009 was partially offset by other income from all of our
other properties in our Strategic Developments segment.
Rental property operations increased $2.9 million as certain costs that were previously being capitalized, were
expensed at some point during 2009 as development effort on many of the properties in our Strategic Developments
segment was postponed.
Provisions for impairment within the Strategic Development segment increased in 2009 as compared to 2008 by
$543.2 million primarily due to provisions for impairment recognized in 2009 at Elk Grove Promenade ($175.3
million) and the Shops at Summerlin ($176.1 million) as well as certain other projects as detailed in Note 3.
Certain Significant Consolidated and Combined Revenues and Expenses
The following table contains certain significant revenues and expenses on a consolidated and combined basis.
Variances related to revenues and expenses included in NOI are explained within the segment variance discussion
contained within this Item 7 using the combined consolidated and proportionate share of our non-consolidated Real
Estate Affiliates revenues and expenses associated with the related segment. Significant variances for combined
revenues and expenses not included in NOI are described below.
$
(In thousands)
Minimum rents
Tenant recoveries
Master Planned Community land sales
Builder price participation
Other land sales revenues
Other rental and property revenues
Master Planned Community cost of sales
Master Planned Community land sales
operations
Rental propery real estate taxes
Rental property maintenance costs
Other property operating costs
Provision for doubtful accounts
General and administrative
Provisions for impairment
Depreciation and amortization
Interest income
Interest expense
Benefit from (provision for) income taxes
Equity in income (loss) of Real Estate
Affiliates
Reorganization items
Discontinued operations - loss on
Year Ended December 31,
2008
2009
$ Increase
(Decrease)
% Increase
(Decrease)
$
65,653
19,642
34,563
5,687
5,747
5,056
(22,020)
(27,042)
(13,813)
(5,586)
(34,810)
(2,539)
(23,023)
(680,349)
(19,841)
1,689
(977)
23,969
(28,209)
(6,674)
$
68,441
21,592
37,928
10,658
17,971
15,917
(24,517)
(38,904)
(10,418)
(6,113)
(38,114)
(1,174)
(22,152)
(52,511)
(18,421)
1,914
(809)
(2,703)
23,506
—
(2,788)
(1,950)
(3,365)
(4,971)
(12,224)
(10,861)
(2,497)
(11,862)
3,396
(527)
(3,304)
1,365
871
627,838
1,420
(225)
168
26,672
(51,715)
6,674
(4.1)%
(9.0)
(8.9)
(46.6)
(68.0)
(68.2)
(10.2)
(30.5)
32.6
(8.6)
(8.7)
116.3
3.9
1,195.6
7.7
(11.7)
20.8
986.8
(220.0)
n/a
dispositions
Net income (loss)
(939)
(703,816) $
$
—
(17,909) $
939
(685,907)
n/a
(3830.0)%
43
Based on the results of our evaluations for impairment (Note 3), we recognized non-cash impairment charges of
$680.3 million in 2009 compared to $52.5 million in 2008. The most significant impairment charges in 2009 were in
our Strategic Development segment related to The Shops at Summerlin Centre and Elk Grove Promenade totaling
$176.1 and $175.3 million, respectively. We also recognized provisions for impairment in both 2009 and 2008
related to Nouvelle at Natick totaling $55.9 and $40.3 million, respectively, to reflect the continued weak demand
and the incremental costs associated with the likely extension of the period required to complete all unit sales at this
residential condominium project.
Finally, in the Master Planned Communities segment we recognized provisions for impairment related to our
Fairwood Community in Maryland totaling $52.8 million in 2009 reflecting lower sales prices at that property. See
Note 3 for additional descriptions of the provisions for impairment that we recognized in 2009 and 2008.
The benefit from income taxes in 2009 was primarily attributable to tax benefit related to the provisions for
impairment of $35.1 million related to our Kendall Town Center development, $52.8 million related to our Fairwood
master planned community and $55.9 million related to our Nouvelle at Natick condominium project. The benefit
from income taxes was partially offset by an increase in the valuation allowances on our deferred tax assets due to
the impact of our ongoing bankruptcy cases in 2009.
The decrease in equity in income (loss) of Real Estate Affiliates is primarily due to a significant decrease in land
sales at The Woodlands master planned community joint venture in 2009 compared to 2008 as well as the
recognition in 2009 of impairments by our Circle T venture and on our investment in such venture (Note 6).
Reorganization items are expense or income items that were incurred or realized by our predecessors as a result of
their bankruptcy. These items include professional fees and similar types of expenses incurred directly related to the
bankruptcy filings, loss accruals or gains or losses resulting from activities of the reorganization process and interest
earned on cash accumulated by certain of our subsidiaries. See Note 2—Reorganization Items for additional detail.
Liquidity and Capital Resources
Our primary sources of cash for 2010 included cash flow from land sales in our Master Planned Communities
segment, cash generated from our operating assets, the net proceeds from the sale of $250.0 million of our common
stock and warrants to purchase common stock in connection with our spin-off, and warrants to purchase common
stock purchased by our Chief Executive Officer and President in November 2010 prior to the effective date of their
appointments to those positions. We believe that these sources will provide sufficient cash to meet our existing
contractual obligations and anticipated ordinary course operating expenses for at least the next twelve months. The
negative operating cash flows reflected in the periods presented in this Annual Report on Form 10-K primarily were
the result of reorganization items paid of $60.0 million and $2.4 million for the years ended December 31, 2010 and
2009, respectively, as well as costs associated with land/residential development and acquisitions expenditures in
our Master Planned Communities segment of $57.1 million, $61.2 million and $147.8 million for the years ended
December 31, 2010, 2009 and 2008, respectively. The funds for these expenditures came from GGP and are
reflected in our consolidated and combined statement of cash flows in change in GGP investment, net.
Our primary uses of cash include working capital, overhead, debt repayment, land development costs in our Master
Planned Communities segment and, with respect to our Operating Assets and Strategic Developments segments, we
incur operating expense for the operating assets and overhead costs such as taxes and insurance relating to the non-
income producing properties.
To pursue development and redevelopment opportunities in our Operating Assets and Strategic Developments
segments, we will require significant additional capital. We intend to raise this additional capital with a mix of
construction, bridge and long-term financings and by entering into joint venture arrangements.
44
As of December 31, 2010, our consolidated debt was approximately $318.7 million of which approximately $7.0
million is recourse. Approximately $7.0 million of our consolidated debt is expected to require repayment in 2011.
In addition, as of December 31, 2010, our share of the debt of our Real Estate Affiliates was approximately $158.2
million and such debt was scheduled to mature in 2011. In March 2011, the Woodlands Partnerships refinanced their
debt by entering into a $270 million facility which expires in 2014 and a $36.1 million facility which expires in
2012. After the refinancings, our share of the debt of our Real Estate Affiliates is approximately $141.0 million.
Our capital sources may include cash flow from operations, net proceeds from asset sales, borrowings under
revolving credit facilities, first mortgage financings secured by our assets, and issuances of common stock. We
believe that these sources should be adequate to address or allow the refinancing of existing indebtedness and other
obligations when due.
As another illustration of our liquidity, the following table summarizes our Net Debt on a segment basis. Net Debt is
defined as our share of mortgages, notes and loans payable, at our ownership share, reduced by short-term liquidity
sources to satisfy such obligations such as our ownership share of cash and cash equivalents and Special
Improvement District receivable. Although Net Debt is not a recognized GAAP financial measure, it is readily
computable from existing GAAP information and we believe, as with our other non-GAAP measures, that such
information is useful to our investors and other users of our financial statements.
Master
Planned
Communities
Operating
Assets
(In thousands)
Strategic
Developments
Segment
Totals
Non-
Segment
Amounts
Total
243,970(b)(d)
227,873
5,011
476,854
— 476,854
60,851(c)(d)
41,233
—
102,084
225,000
327,084
Segment Basis (a)
Mortgages, notes and loans
payable
Less: Cash and cash
equivalents
Special Improvement
District receivable
46,250
136,869
—
—
46,250
5,011 $ 328,520 $ (225,000) $ 103,520
46,250
—
$
$ 186,640 $
Net debt
___________________
(a) Refer to Note 15 - Segments to the Consolidated and Combined Financial Statements.
Includes our $158.2 million share of debt of our unconsolidated Real Estate Affiliates.
(b)
Includes our $42.4 million share of cash and cash equivalents of our unconsolidated Real Estate Affiliates.
(c)
In March, 2011 the Woodlands Partnerships refinanced a $306.5 million outstanding amount of its credit
(d)
facility with a partial cash paydown and a new credit facility of $270 million. The Woodlands Partnerships
also extended the 2011 maturity (to 2012) of a $40 million loan secured by the convention center. After such
refinancing, our share of debt from the Woodlands Partnerships was approximately $141.0 million and our
share of cash was reduced by approximately $15.8 million.
Cash Flows from Operating Activities
Net cash used in operating activities was $67.9 million for the year ended December 31, 2010, $17.9 million for the
year ended December 31, 2009 and $50.7 million for the year ended December 31, 2008.
Cash used for land/residential development and acquisitions expenditures was $57.1 million for the year ended
December 31, 2010, a decrease from $61.2 million for the year ended December 31, 2009 and $147.8 million for the
year ended December 31, 2008.
Net cash provided by certain assets and liabilities, including accounts and notes receivable, prepaid expense and
other assets, deferred expenses, and accounts payable and accrued expenses totaled $17.2 million, $22.5 million and
$41.7 million for the years ended December 31, 2010, 2009 and 2008, respectively.
45
Cash Flows from Investing Activities
Net cash used in investing activities was $111.8 million, $21.4 million and $300.2 million for the years ended
December 31, 2010, 2009 and 2008, respectively. Cash used for development of real estate and property
additions/improvements was $111.8 million for the year ended December 31, 2010, $27.7 million for the year ended
December 31, 2009 and $314.1 million for the year ended December 31, 2008.
Cash Flows from Financing Activities
Net cash provided by financing activities was $461.2 million for the year ended December 31, 2010 compared to
$37.5 million for the year ended December 31, 2009 and $348.4 million for the year ended December 31, 2008.
Principal payments on mortgages, notes and loans payable were $22.1 million for the year ended December 31,
2010, $10.5 million for the year ended December 31, 2009 and $15.5 million for the year ended December 31, 2008.
In addition, we received contributions from GGP of $216.5 million for the year ended December 31, 2010, $50.9
million for the year ended December 31, 2009 and $374.2 million for the year ended December 31, 2008.
Contractual Cash Obligations and Commitments
The following table aggregates our contractual cash obligations and commitments as of December 31, 2010:
2011
2012
2013
2014
(In thousands)
2015
Subsequent /
Other (d)
Total
$ 13,100 $
12,585
4,142
18,933
6,360 $
12,503
4,150
—
8,085 $
12,600
4,166
—
83,637 $
10,317
4,134
—
5,386 $ 214,824 $ 331,392
70,851
13,747
9,099
198,077
4,134 177,351
18,933
—
—
Long-term debt-principal (a)
Interest payments (b)
Ground lease payments
Purchase obligations
Uncertainty in income taxes,
including interest
Other long-term liabilities (c)
Total
$ 48,760 $
—
—
—
—
23,013 $
—
—
24,851 $
—
—
98,088 $
— 140,076
—
—
140,076
—
18,619 $ 545,998 $ 759,329
____________________
(a) Excludes non-cash market rate adjustments of $12.7 million at December 31, 2010.
(b) Excludes interest expense related to amortization of market rate adjustments and interest payments on special
improvements district bonds.
(c) Other long-term liabilities related to ongoing real estate taxes have not been included in the table as such
amounts depend upon future applicable real estate tax rates. Real estate tax expense was $14.5 million in 2010,
$13.8 million in 2009, and $10.4 million in 2008.
(d) The remaining uncertainty in income tax liability for which reasonable estimates about timing of payments
cannot be made is disclosed within the Subsequent / Other column.
We lease land or buildings at certain properties from third parties. The leases generally provide us with a right of
first refusal in the event of a proposed sale of the property by the landlord. Rental payments are expensed as
incurred and have been, to the extent applicable, straight-lined over the term of the lease. Contractual rental
expense, including participation rent, was $3.5 million in 2010, $3.5 million in 2009 and $3.7 million in 2008. The
same rent expense excluding amortization of above and below-market ground leases and straight-line rents, as
presented in our consolidated and combined financial statements, was $3.7 million in 2010, $3.6 million in 2009 and
$3.8 million in 2008.
Off-Balance Sheet Financing Arrangements
We do not have any off-balance sheet financing arrangements.
46
REIT Requirements
In order for Victoria Ward, Limited to remain qualified as a REIT for federal and state income tax purposes, Ward
must distribute or pay tax on 100% of its capital gains and distribute at least 90% of its ordinary taxable income to
its stockholders, including us. See Note 8 for more detail on this entity’s ability to remain qualified as a REIT.
Seasonality
Revenues from development, redevelopment or sale of property in our Master Planned Communities segment and
Strategic Developments segment are not subject to seasonal variations. Rental income recognized, including
overage rent, is higher during the second half of the year for some of our operating assets. As a result, rental revenue
production in the Operating Assets segment is generally highest in the fourth quarter of each year. Additionally
some of the retail properties in our Operating Assets segment are subject to seasonal variations, with a significant
portion of their sales and earnings occurring during the last two months of the year.
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 and 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 period. For example, significant estimates and assumptions have been made with
respect to the fair value of assets for measuring impairment; valuation of debt of emerged entities; useful lives of
assets; capitalization of development and leasing costs; provision for income taxes; recoverable amounts of
receivables and deferred taxes; initial valuations and related amortization periods of deferred costs and intangibles;
and cost ratios and completion percentages used for land sales. Actual results could differ from those estimates.
Critical Accounting Policies
Critical accounting policies are those that are both significant to the overall presentation of our financial condition
and results of operations and require management to make difficult, complex or subjective judgments. Our critical
accounting policies are those applicable to the following:
Impairment — Properties, developments in progress and Master Planned Communities Assets
We review our real estate assets, including operating assets, land held for development and sale and developments in
progress, for potential impairment indicators whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. The preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and 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.
Significant estimates and assumptions have been made with respect to impairment of long-lived assets. Actual
results could differ from these assumptions and estimates.
Impairment indicators for our Master Planned Communities segment are assessed separately for each community
and in certain circumstances, regions or projects within the community, and include, but are not limited to,
significant decreases in sales pace and decreasing average selling prices. We also monitor local economic
conditions and other factors that may relieve demand expectation.
Impairment indicators for pre-development costs, which are typically costs incurred during the beginning stages of a
potential development, and developments in progress 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 and the
feasibility of development projects.
47
Impairment indicators for our Operating Assets and Strategic Developments segments are assessed separately for
each property and include, but are not limited to, significant decreases in real estate property net operating income
and significant occupancy percentage changes.
If an indicator of potential impairment exists, the asset is tested for recoverability by comparing its carrying amount
to the estimated future undiscounted cash flow. Significant assumptions used in the estimation of future
undiscounted cash flow include, for the master planned communities, estimates of future lot sales, costs to complete
and sales pace, and for properties in our Operating segment and Strategic Developments segment, future market
rents, renewals and capital expenditures. Historical experience in such matters and future economic projections were
used to establish such factors. These factors are subject to uncertainty. A real estate asset is considered to be
impaired when its carrying amount cannot 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 is allocated proportionately to adjust the carrying
amount of the asset. The adjusted carrying amount for operating assets, which represents the new cost basis of the
asset, is depreciated over the remaining useful life of the asset. The adjusted carrying amount for master planned
communities is recovered through future land sales.
Recoverable amounts of receivables and deferred tax assets
We make periodic assessments of the collectibility of receivables (including those resulting from the difference
between rental revenue recognized and rents currently due from tenants) and the recoverability of deferred taxes
based on a specific review of the risk of loss on specific accounts or amounts. The receivable analysis places
particular emphasis on past-due accounts and considers the nature and age of the receivables, the payment history
and financial condition of the payee, the basis for any disputes or negotiations with the payee and other information
which may impact collectibility. For straight-line rents receivable, the analysis considers the probability of
collection of the unbilled deferred rent receivable given our experience regarding such amounts. For deferred tax
assets, an assessment of the recoverability of the tax asset considers the current expiration periods of the prior net
operating loss carryforwards or other asset and our estimated future taxable income. The resulting estimates of any
allowance or reserve related to the recovery of these items is subject to revision as these factors change and is
sensitive to the effects of economic and market conditions on such payees.
Capitalization of development and leasing costs
We capitalize the costs of development and leasing activities of our properties. These costs are incurred both at the
property location and at the regional and corporate office levels. The amount of capitalization depends, in part, on
the identification and justifiable allocation of certain activities to specific projects and leases. Differences in
methodologies of cost identification and documentation, as well as differing assumptions as to the time incurred on
projects, can yield significant differences in the amounts capitalized and, as a result, the amount of depreciation
recognized.
Revenue recognition and related matters
Revenues from land sales are recognized using the full accrual method provided that various criteria relating to the
terms of the transactions and our subsequent involvement with the land sold are met. Revenues relating to
transactions that do not meet the established criteria are deferred and recognized when the criteria are met or using
the installment or cost recovery methods, as appropriate, in the circumstances. In addition, in certain land sale
transactions, we also share in a percentage of the builders’ furnished home sales revenue, which we term builder’s
price participation. For land sale transactions in which we are required to perform additional services and incur
significant costs after title has passed, revenues and cost of sales are recognized on a percentage of completion basis.
Cost ratios for land sales are determined as a specified percentage of land sales revenues recognized for each master
planned community project. The cost ratios used are based on actual costs incurred and estimates of development
costs and sales revenues for completion of each project. The ratios are reviewed regularly and revised for changes
48
in sales and cost estimates or development plans. Significant changes in these estimates or development plans,
whether due to changes in market conditions or other factors, could result in changes to the cost ratio used for a
specific project. The specific identification method is used to determine cost of sales for certain parcels of land,
including acquired parcels we do not intend to develop or for which development is complete at the date of
acquisition.
Minimum rent revenues are recognized on a straight-lined basis over the terms of the related leases. Minimum rent
revenues also include amounts collected from tenants to allow the termination of their leases prior to their scheduled
termination dates and accretion related to above and below-market tenant leases on acquired properties. Straight-
line rents receivable represent the current net cumulative rents recognized prior to when billed and collectible as
provided by the terms of the leases. Overage rent is recognized on an accrual basis once tenant sales exceed
contractual tenant lease thresholds. Recoveries from tenants are established in the leases or computed based upon a
formula related to real estate taxes, insurance and other shopping center operating expenses and are generally
recognized as revenues in the period the related costs are incurred.
Recently Issued Accounting Pronouncements and Developments
As described in Note 14 to the consolidated and combined financial statements, new accounting pronouncements
have been issued which impact or could impact the prior, current or subsequent years.
Inflation
Revenue from our operating assets may be impacted by inflation. In addition, materials and labor costs relating to
our development activities may significantly increase in an inflationary environment. Finally, inflation poses a risk
to us due to the possibility of future increases in interest rates in context of loan refinancing.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2010, our consolidated debt was approximately $318.7 million of which approximately $7.0
million is recourse. In addition to principal amortization, approximately $7.0 million of our consolidated debt is
expected to require repayment in 2011. In addition, as of December 31, 2010, our share of the debt of our Real
Estate Affiliates was approximately $158.2 million and such debt was scheduled to mature in 2011. In March 2011,
the Woodlands Partnerships refinanced their debt by entering into a $270 million facility which expires in 2014 and
a $36.1 million facility which expires in 2012. After the refinancing, our share of the debt of our Real Estate
Affiliates is approximately $141.0 million.
We are subject to interest rate risk with respect to our fixed-rate financing in that changes in interest rates will
impact the fair value of our fixed-rate financing. For additional information concerning our debt, and management’s
estimation process to arrive at a fair value of our debt as required by GAAP, reference is made to Item 7, the
Liquidity and Capital Resources discussion above and to Notes 2 and 7.
The following table summarizes principal cash flows on our debt obligations and related weighted-average interest
rates by expected maturity dates as of December 31, 2010:
Contractual Maturity Date
2011
2012
2013
2014
(In thousands)
2015
Thereafter
Total
Estimated
Fair
Value
Mortgages, notes and
loans payable
$ 13,100
$ 6,360
$
8,085
$ 83,637
$
5,386
$
202,092
$ 318,660 $ 330,631
Weighted-average
interest rate
4.61%
4.81%
4.78%
4.59%
5.07%
5.43%
5.14%
We have not entered into any transactions using derivative commodity instruments.
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this Item is set forth beginning page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are
designed to provide reasonable assurance that information required to be disclosed in our reports to the SEC is
recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and
that such information is accumulated and communicated to our management, including our principal executive
officer and our principal financial and accounting officer, as appropriate, to allow timely decisions regarding
required disclosure.
As required by SEC rules, we carried out an evaluation, under the supervision and with the participation of our
management, including our principal executive officer and our principal financial and accounting officer, of the
effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2010, the
end of the period covered by this report. Based on the foregoing, our principal executive officer and principal
financial and accounting officer concluded that our disclosure controls and procedures were effective as of
December 31, 2010.
Internal Controls over Financial Reporting
There have been no changes in our internal controls during our most recently completed fiscal quarter that have
materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control
over financial reporting or an attestation report of our registered public accounting firm due to a transition period
established by rules of the SEC for newly public companies.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated by reference to the relevant information included in our proxy
statement for our 2011 annual meeting of stockholders.
50
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the relevant information included in our proxy
statement for our 2011 annual meeting of stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated by reference to the relevant information included in our proxy
statement for our 2011 annual meeting of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by Item 13 is incorporated by reference to the relevant information included in our proxy
statement for our 2011 annual meeting of stockholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is incorporated by reference to the relevant information included in our proxy
statement for our 2011 annual meeting of stockholders.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Financial Statement Schedules.
The consolidated and combined financial statements and schedule listed in the accompanying Index to
Consolidated and Combined Financial Statements and Consolidated and Combined Financial Statement
Schedule are filed as part of this Annual Report.
We own a 52.5% economic interest in The Woodlands Partnerships. We have included as an exhibit to this
Annual Report the consolidated financial statements of TWLDC Holdings, L.P., as such partnership, either
through majority ownership or as primary beneficiary of variable interest entities, consolidates all of The
Woodlands Partnerships, and the operations of The Woodlands Partnerships are significant to our operations
for the fiscal year ending December 31, 2010. The Woodlands Partnerships include the venture developing the
master planned community known as The Woodlands (whose operations are in the Master Planned
Communities segment) and also hold the beneficial interests in other commercial real estate within the
Woodlands community, including the conference center, all located near Houston, Texas. The remaining
47.5% economic interest in The Woodlands Partnerships is owned by Morgan Stanley Real Estate Fund, L.P.
which provides all the management services for The Woodlands Partnerships.
(b) Exhibits.
(c) Separate financial statements.
51
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
THE HOWARD HUGHES CORPORATION
/s/ David R. Weinreb
David R. Weinreb
Chief Executive Officer
April 7, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
*
William Ackman
/s/ David R. Weinreb
David R. Weinreb
Chairman of the Board and Director
April 7, 2011
Director and Chief Executive Officer
(Principal Executive Officer)
April 7, 2011
/s/ Andrew C. Richardson
Andrew C. Richardson
Chief Financial Officer (Principal
Financial and Accounting Officer)
April 7, 2011
April 7, 2011
April 7, 2011
April 7, 2011
April 7, 2011
April 7, 2011
April 7, 2011
April 7, 2011
*
David Arthur
*
Adam Flatto
*
Jeffrey Furber
*
Gary Krow
*
Allen Model
*
R. Scot Sellers
*
Steven Shepsman
* /s/ David R. Weinreb
David R. Weinreb,
Attorney-in-Fact
Director
Director
Director
Director
Director
Director
Director
52
THE HOWARD HUGHES CORPORATION
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
AND CONSOLIDATED AND COMBINED FINANCIAL STATEMENT SCHEDULE
The following consolidated and combined financial statements and consolidated and combined financial statement
schedule are included in Item 8 of this Annual Report on Form 10-K:
Consolidated and Combined Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated and Combined Balance Sheets as of December 31, 2010 and 2009
Consolidated and Combined Statements of Loss and Comprehensive Loss for the years ended
December 31, 2010, 2009 and 2008
Consolidated and Combined Statements of Equity for the years ended December 31, 2010, 2009 and
2008
Consolidated and Combined Statements of Cash Flows for the years ended December 31, 2010, 2009
and 2008
Notes to Consolidated and Combined Financial Statements:
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10
Note 11
Note 12
Note 13
Note 14
Note 15
Note 16
Organization
Summary of Significant Accounting Policies
Impairment
Intangibles
Discontinued Operations and Loss on Disposition of interest in Property
Real Estate Affiliates
Mortgages, Notes and Loans Payable
Income Taxes
Rentals under Operating Leases
Transactions with GGP and other GGP subsidiaries
Stock Based Plans
Other Assets and Liabilities
Commitments and Contingencies
Recently Issued Accounting Pronouncements
Segments
Quarterly Financial Information (Unaudited)
Consolidated Financial Statement Schedule
Schedule III - Real Estate and Accumulated Depreciation
Page
Number
F-2
F-3
F-4
F-5
F-6
F-7
F-10
F-21
F-23
F-23
F-24
F-26
F-27
F-31
F-31
F-32
F-34
F-34
F-35
F-35
F-41
F-42
All other schedules are omitted since the required information is either not present in any amounts, is not present in
amounts sufficient to require submission of the schedule or because the information required is included in the
consolidated and combined financial statements and related notes.
F-1
THE HOWARD HUGHES CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Howard Hughes Corporation
Dallas, Texas
We have audited the accompanying consolidated balance sheet of The Howard Hughes Corporation and subsidiaries
(the “Company”) as of December 31, 2010, the combined balance sheet of certain entities that were transferred from
General Growth Properties, Inc. to the Company on November 9, 2010 (the “HHC Businesses”) as of December 31,
2009, and the related consolidated and combined statements of loss and comprehensive loss, equity, and cash flows
for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement
schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements
and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated and combined financial statements present fairly, in all material respects, the
financial position of The Howard Hughes Corporation and subsidiaries and the HHC Businesses as of December 31,
2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated and
combined financial statements taken as a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 2 to the financial statements, the combined financial statements of the HHC Businesses include
allocations of certain operating expenses from General Growth Properties, Inc. until the entities were transferred to
the Company on November 9, 2010. These costs may not be reflective of the actual level of costs which would have
been incurred had the HHC Businesses operated as an independent, stand-alone entity separate from General
Growth Properties, Inc.
As discussed in Note 1 to the financial statements, on October 21, 2010, the Bankruptcy Court entered an order
confirming the plan of reorganization which became effective after the close of business on November 9, 2010.
/s/ Deloitte & Touche LLP
Chicago, Illinois
April 7, 2011
F-2
THE HOWARD HUGHES CORPORATION
CONSOLIDATED AND COMBINED BALANCE SHEETS
Assets:
Investment in real estate:
Master Planned Community assets
Land
Buildings and equipment
Less accumulated depreciation
Developments in progress
Net property and equipment
Investment in and loans to/from Real Estate Affiliates
Net investment in real estate
Cash and cash equivalents
Accounts receivable, net
Notes receivable
Tax indemnity receivable, including interest
Deferred expenses, net
Prepaid expenses and other assets
Total assets
Liabilities:
Liabilities not subject to compromise:
Mortgages, notes and loans payable
Deferred tax liabilities
Warrant liability
Uncertain tax position liability
Accounts payable and accrued expenses
Liabilities not subject to compromise
Liabilities subject to compromise
Total liabilities
Commitments and Contingencies (see Note 13)
Equity:
Common stock: $.01 par value; 100,000,000 shares authorized, 37,904,506
shares issued as of December 31, 2010
Additional paid-in capital
GGP equity
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Noncontrolling interests in consolidated ventures
Total equity
Total liabilities and equity
December 31,
2010
(Consolidated)
2009
(Combined)
(In thousands)
$
$
$
$
1,350,648 $
180,976
343,006
(83,390)
293,403
2,084,643
149,543
2,234,186
284,682
8,154
38,954
323,525
6,619
126,587
3,022,707
$
1,742,226
193,130
451,279
(85,639)
300,621
2,601,617
140,558
2,742,175
3,204
9,145
8,214
—
7,444
135,045
2,905,227
318,660 $
78,680
227,348
140,076
78,836
843,600
—
843,600
208,860
782,817
—
66,129
68,062
1,125,868
275,839
1,401,707
379
2,708,036
—
(528,505)
(1,627)
2,178,283
824
2,179,107
3,022,707
$
—
—
1,504,364
—
(1,744)
1,502,620
900
1,503,520
2,905,227
The accompanying notes are an integral part of these consolidated and combined financial statements.
F-3
THE HOWARD HUGHES CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
Revenues:
Minimum rents
Tenant recoveries
Master Planned Community land sales
Builder price participation
Other land sale revenues
Other rental and property revenues
Total revenues
Expenses:
Master Planned Community cost of sales
Master Planned Community land sales operations
Rental property real estate taxes
Rental property maintenance costs
Other property operating costs
Provision for doubtful accounts
General and administrative
Provisions for impairment
Depreciation and amortization
Total expenses
Operating loss
Interest income
Interest expense
Warrant liability expense
Loss before income taxes, equity in income (loss) from Real Estate Affiliates,
reorganization items and noncontrolling interests
Benefit from (provision for) income taxes
Equity in income (loss) from Real Estate Affiliates
Reorganization items
Loss from continuing operations
Discontinued operations - loss on dispositions
Net loss
Allocation to noncontrolling interests
Net loss attributable to common stockholders
Basic and Diluted Income (Loss) Per Share:
Continuing operations
Discontinued operations
Total basic and diluted income (loss) per share
Comprehensive Income (loss), Net:
Net loss
Other comprehensive income (loss)
Comprehensive income (loss)
Comprehensive (loss) income allocated to noncontrolling interests
Comprehensive income (loss) attributable to common stockholders
Years Ended December 31,
2010
2009
(In thousands)
2008
$
66,926 $
18,567
38,058
4,124
5,384
9,660
142,719
65,653 $
19,642
34,563
5,687
5,747
5,056
136,348
68,441
21,592
37,928
10,658
17,971
15,917
172,507
23,388
29,041
14,530
6,495
37,893
1,782
21,538
503,356
16,563
654,586
(511,867)
369
(2,422)
(140,900)
22,020
27,042
13,813
5,586
34,810
2,539
23,023
680,349
19,841
829,023
(692,675)
1,689
(977)
—
(654,820)
633,459
9,413
(57,282)
(69,230)
—
(69,230)
(201)
(69,431) $
(691,963)
23,969
(28,209)
(6,674)
(702,877)
(939)
(703,816)
204
(703,612) $
24,517
38,904
10,418
6,113
38,114
1,174
22,152
52,511
18,421
212,324
(39,817)
1,914
(809)
—
(38,712)
(2,703)
23,506
—
(17,909)
—
(17,909)
(100)
(18,009)
(1.84) $
—
(1.84) $
(18.64) $
(0.02)
(18.66) $
(0.48)
—
(0.48)
(69,230) $
117
(69,113)
(201)
(69,314) $
(703,816) $
1,182
(702,634)
204
(702,430) $
(17,909)
(1,956)
(19,865)
(100)
(19,965)
$
$
$
$
$
The accompanying notes are an integral part of these consolidated and combined financial statements.
F-4
THE HOWARD HUGHES CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
(Accumulated
Deficit)
GGP
Equity
Accumulated
Other
Comprehensive
Income (Loss)
Noncontrolling
Interests in
Consolidated
Ventures
Total
Equity
(In thousands)
Balance, January 1, 2008
$
— $
— $
— $
1,609,708 $
(970) $
1,934 $
1,610,672
Net (loss) income
Distributions to noncontrolling interests
Other comprehensive loss
Contributions from GGP, net
—
—
—
—
—
—
—
—
—
—
—
—
(18,009)
—
—
395,239
—
—
(1,956)
—
100
(231)
—
—
(17,909)
(231)
(1,956)
395,239
Balance, December 31, 2008
$
— $
— $
— $
1,986,938 $
(2,926) $
1,803 $
1,985,815
Net loss
Distributions to noncontrolling interests
Other comprehensive income
Contributions from GGP, net
—
—
—
—
—
—
—
—
—
—
—
—
(703,612)
—
—
221,038
—
—
1,182
—
(204)
(699)
—
—
(703,816)
(699)
1,182
221,038
Balance, December 31, 2009
$
— $
— $
— $
1,504,364 $
(1,744) $
900 $
1,503,520
Net (loss) income
Distributions to noncontrolling interests
Other comprehensive income
Issuance of common stock (37,896,259
shares)
Issuance of restricted stock, net of
expense (8,247 shares)
Contributions from GGP prior to the
Separation
Transfer from GGP on Effective Date
—
—
—
—
—
—
(528,505)
—
—
459,074
—
—
379
182,284
—
—
—
85
—
2,525,667
—
—
—
—
—
—
562,229
(2,525,667)
—
—
117
—
—
—
—
201
(277)
—
—
—
—
—
(69,230)
(277)
117
182,663
85
562,229
—
Balance, December 31, 2010
$
379 $
2,708,036 $
(528,505) $
— $
(1,627) $
824 $
2,179,107
The accompanying notes are an integral part of these consolidated and combined financial statements.
F-5
THE HOWARD HUGHES CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating
activities:
Equity in (income) loss of Real Estate Affiliates (including
provisions for impairment in 2009)
Provision for doubtful accounts
Distributions received from Real Estate Affiliates
Depreciation
Amortization
Amortization (accretion) of deferred financing costs and debt
market rate adjustments
Amortization of intangibles other than in-place leases
Straight-line rent amortization
Deferred income taxes including tax restructuring benefit
Non-cash expense on warrant liability
Loss on dispositions
Provisions for impairment
Land/residential development and acquisitions expenditures
Cost of land sales
Reorganization items - finance costs related to emerged entities
Non-cash reorganization items
Net changes:
Accounts and notes receivable
Prepaid expenses and other assets
Deferred expenses
Accounts payable and accrued expenses
Other, net
Net cash used in operating activities
Cash Flows from Investing Activities:
Development of real estate and property additions/improvements,
primarily previously accrued
Proceeds from sales of investment properties
Decrease (increase) in investments in Real Estate Affiliates
Decrease (increase) in restricted cash
Net cash used in investing activities
Cash Flows from Financing Activities:
Change in GGP investment, net (Notes 1 and 2)
Principal payments on mortgages, notes and loans payable
Finance costs related to emerged entities
Cash distributions paid to preferred stockholders of Victoria Ward,
Ltd.
Cash distributions paid to common stockholders of Victoria Ward,
Ltd.
F-6
Years Ended
December 31,
2009
(In thousands)
2008
2010
$
(69,230) $ (703,816) $
(17,909)
(9,413)
1,782
—
14,582
1,981
1,260
174
(151)
(636,117)
140,900
—
503,356
(57,138)
24,388
1,311
(2,724)
534
18,686
(2,110)
112
(82)
(67,899)
28,209
2,539
1,406
17,145
2,696
978
220
(49)
(23,120)
—
939
680,349
(61,226)
22,019
2,158
(11,835)
(2,487)
24,867
(1,850)
1,941
1,047
(17,870)
(23,506)
1,174
2,478
15,637
2,784
810
268
(306)
(6,811)
—
—
52,511
(147,757)
24,516
—
—
3,215
26,387
(3,516)
15,658
3,668
(50,699)
(111,832)
—
3
—
(111,829)
(27,738)
6,392
(288)
202
(21,432)
(314,103)
14,821
(717)
(202)
(300,201)
216,518
(22,109)
(1,311)
50,865
(10,465)
(2,158)
374,154
(15,509)
—
—
—
(12)
(12)
—
(9,990)
THE HOWARD HUGHES CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
Years Ended
December 31,
Proceeds from issuance of common stock and warrants to Plan
Sponsors
Proceeds from issuance of common stock warrants
Distributions to noncontrolling interests
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental Disclosure of Cash Flow Information:
Interest paid
Interest capitalized
Reorganization items paid
Non-Cash Transactions:
Change in accrued capital expenditures included in accounts payable
and accrued expenses
Change in Contingent Stock Agreement liability
Mortgage debt market rate adjustment related to emerged entities
Contribution of tax indemnity receivable plus interest from GGP
Settlement/conversion to equity of intercompany payables to GGP
Contribution of note receivable from GGP
Other non-cash GGP equity transactions
Recognition of note payable in conjunction with land held for
development and sale
Non-cash dividends
$
$
$
2010
2009
(In thousands)
2008
251,385
17,000
(277)
461,206
281,478
3,204
284,682
21,225
19,139
60,007
$
$
—
—
(687)
37,543
(1,759)
4,963
3,204 $
—
—
(219)
348,424
(2,476)
7,439
4,963
48,100 $
46,976
2,384
38,200
36,088
—
(89,514) $
(15,000)
2,749
323,525
37,328
31,386
(46,528)
(15,222) $
178,130
11,723
—
—
—
2,612
81,376
(13,031)
—
—
—
—
44,106
—
—
6,520
—
—
67,817
The accompanying notes are an integral part of these consolidated and combined financial statements.
F-7
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE 1
ORGANIZATION
General
The Howard Hughes Corporation (“HHC” or the “Company”) was incorporated in 2010 to hold certain assets and
liabilities of GGP, Inc. formerly known as General Growth Properties, Inc. (“GGP”), and its subsidiaries
(collectively, our “predecessors”). We are a real estate company and specialize in the development and operation of
master planned communities and other strategic real estate opportunities across the United States.
On April 16, 2009 and April 22, 2009 (collectively, the “Petition Date”), GGP and certain of its subsidiaries (the
“Debtors”) filed voluntary petitions under Chapter 11 of Title 11 of the United States Code (the ‘‘Chapter 11
Cases’’) with the Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). On October
21, 2010, the Bankruptcy Court entered an order confirming the plan of reorganization (the “Plan”). Pursuant to the
Plan, GGP emerged from bankruptcy and HHC received certain of the assets and liabilities of our predecessors (the
‘‘Separation’’), which we refer to as our business or “the HHC Businesses”. Certain of the HHC Businesses were
included in the entities that emerged from bankruptcy on the Effective Date pursuant to the Plan. The Company
spun-off from GGP on November 9, 2010 (such time of completion being referred to as the “Effective Date”) as
described in “Transactions on the Effective Date”, below.
The operations of the business is presented as if the transferred business was our business for all historical periods
described and at the historical cost carrying value of such assets and liabilities reflected in GGP’s books and records.
Unless the context otherwise requires, references to “we,” “us” and “our” refer to HHC and its subsidiaries after
giving effect to the transfer of assets and liabilities from our predecessors.
As of December 31, 2010, our assets consisted of the following:
(cid:129)
(cid:129)
(cid:129)
four master planned communities;
thirteen operating assets; and
seventeen strategic developments.
Our ownership interests in properties in which we own a majority or controlling interest are combined for the period
from January 1, 2008 through November 9, 2010 and consolidated for the period from November 10, 2010 through
December 31, 2010 under accounting principles generally accepted in the United States of America (“GAAP”), with
the non-controlling interests in such consolidated or combined ventures reflected as components of equity. Our
interests in TWCPC Holdings, L.P., (“The Woodlands Commercial”), the Woodlands Operating Company, L.P.
(“The Woodlands Operating”) and the Woodlands Land Development Company, L.P. (“The Woodlands MPC”), all
located in Houston, Texas and, collectively, the “Woodlands Partnerships”, and our interests in Westlake Retail
Associates, Ltd (“Circle T Ranch”) and 170 Retail Associates Ltd (“Circle T Power Center”) and, together with
Circle T Ranch, “Circle T”, located in Dallas/Fort Worth, Texas, are held through joint venture entities in which we
own non-controlling interests and are unconsolidated and accounted for on the equity method. The Woodlands
Partnerships, Circle T and certain cost method investments (see Note 6) are collectively referred to in this report as
our “Real Estate Affiliates”.
Transactions related to the Plan
On the Effective Date, approximately 32.5 million shares of common stock of HHC were distributed to the common
and preferred unit holders of GGPLP (representing 0.0983 shares of HHC for each GGP share, with no fractional
shares being issued), which includes GGP, and then GGP distributed its portion of such shares pro-rata to holders of
GGP common stock (the “Distribution”). GGP has not retained any ownership interest in HHC. The Plan generally
provided for the payment/settlement or reinstatement of claims against our predecessors, funded with new capital
provided by investors sponsoring the Plan (the “Plan Sponsors”). As part of the Plan, approximately 5.25 million
shares of our common stock and 8.0 million warrants were purchased by certain of the investors sponsoring the Plan
for $250 million.
F-8
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
On the Effective Date, we issued warrants to purchase up to approximately 8.0 million shares of our common stock
to the Plan Sponsors (the “Sponsors Warrants”) with an estimated initial value of approximately $69.5 million. The
warrants have an initial exercise price of $50.00 per share and will be subject to adjustment for future stock
dividends, splits or reverse splits of our common stock or certain other events. Approximately 6.08 million warrants
are immediately exercisable and approximately 1.92 million warrants are exercisable upon 90 days prior notice for
the first 6.5 years after issuance and exercisable without notice any time thereafter. Each warrant has a term of seven
years from the Effective Date.
In addition to the investment by the Plan Sponsors, the following transactions relating to the Plan also occurred prior
to or on the Effective Date:
(cid:129) GGP withdrew all permitted cash or cash equivalents balances from the Company’s accounts totaling $2.5
million, excluding $6.1 million of net proceeds from sales at the Summerlin Master Planned Community
which closed in October, 2010;
(cid:129)
(cid:129)
(cid:129)
the Company received a note receivable from GGP totaling $31.4 million of principal plus interest at 4.41%
through December 1, 2015 in accordance with the Plan;
the Tax Indemnity Cap (as defined in Note 8) of $303.8 million was established, along with the obligation of
GGP to pay interest, and penalties, if any, on such obligations and to pay up to $5.0 million of pre-petition
liabilities;
the reclassification of $64.0 million of mortgages, notes and loans payable and $74.1 million of accounts
payable and accrued expenses subject to compromise to the appropriate categories of liabilities not subject to
compromise (the reclassification also eliminates approximately $9.0 million of pre-petition mechanics and
materialmens’ liens payable included in the historical combined balance sheet because any remaining
amounts due relating to these liabilities as of the Effective Date were retained by GGP in accordance with the
Plan);
(cid:129)
the prepayment on October 21, 2010 of a portion of the loan obligation on the 110 N. Wacker property
totaling $16.0 million by GGP;
(cid:129) an adjustment of $491.3 million for the re-measurement of the deferred tax liability utilizing the carrying
amount of the Company’s assets and liabilities and the current taxable and non-taxable entities held by the
Company (See Note 8); and
(cid:129)
the settlement/conversion to equity of approximately $37.3 million of net intercompany payables in
accordance with a separation agreement between the Company and GGP.
In addition, on November 22, 2010, the Company entered into warrant agreements with David R. Weinreb, our
Chief Executive Officer, and Grant Herlitz, our President and from January 31, 2011 through March 28, 2011, our
Interim Chief Financial Officer (the “Management Warrants”), in each case prior to his appointment to such
position, pursuant to which: (a) Mr. Weinreb purchased a warrant to acquire 2,367,958 shares of Company common
stock for a purchase price of $15.0 million; and (b) Mr. Herlitz purchased a warrant to acquire 315,731 shares of
Company common stock for a purchase price of $2.0 million, both of which purchase prices were determined to be
at the Warrants then current fair value. The Management Warrants have an exercise price of $42.23 per share and
will, excluding certain specific circumstances, become exercisable in November 2016 and will expire in November
2017.
On February 25, 2011, the Company also entered into a warrant agreement with Andrew C. Richardson, our Chief
Financial Officer effective as of March 28, 2011, prior to his appointment to such position, pursuant to which Mr.
Richardson purchased a warrant to acquire 178,971 shares of company common stock for a purchase price of $2.0
million, which purchase price was determined to be at current fair value. The warrant has an exercise price of
$54.40 per share and will generally become exercisable in February 2017 and will expire in February 2018.
F-9
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The estimated $181.7 million fair value of the Sponsors Warrants as of December 31, 2010, respectively, and $45.6
million fair value of the Management Warrants as of December 31, 2010 has been recorded as a liability because the
holders of the warrants could require HHC to settle such warrants in cash due to a subsequent change of control.
Such fair values were estimated using an option pricing model and level 3 inputs due to the unavailability of
comparable market data (Note 2). Subsequent to the Effective Date, changes in fair value of the Sponsors Warrants,
the Management Warrants and Mr. Richardson’s warrant have been and will continue to be recognized in earnings
and, accordingly, warrant liability expense of approximately $140.9 million was recognized for the year ended
December 31, 2010, all of which is applicable to the period subsequent to the Effective Date.
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination and Basis of Presentation
The accompanying consolidated balance sheet at December 31, 2010 reflects the consolidation of the HHC
Businesses with HHC, as of such date, with all intercompany balances and transactions between the HHC
Businesses eliminated. The accompanying combined financial statements for the periods prior to the Separation
have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) on a
carve-out basis from the consolidated financial statements of GGP using the historical results of operations and
bases of the assets and liabilities of the transferred businesses and including allocations from GGP. This
presentation incorporates the same principles used when preparing consolidated financial statements, including
elimination of intercompany transactions. The presentation also includes the accounts of the HHC Businesses in
which we have a controlling interest. The noncontrolling equity holders’ share of the assets, liabilities and
operations are reflected in noncontrolling interests within permanent equity of the Company. All intercompany
balances and transactions between the HHC Businesses have been eliminated. Accordingly, the results presented for
the year ended December 31, 2010 reflect the aggregate of operations and changes in cash flows and equity on a
carved-out basis for the period from January 1, 2010 through November 9, 2010 and on a consolidated basis for the
period from November 10, 2010 through December 31, 2010.
As discussed in Note 1, we were formed for the purpose of receiving, via a tax-free distribution, certain assets and
assuming certain liabilities of our predecessors pursuant to the Plan. We conducted no business and had no separate
material assets or liabilities until the Separation was consummated. No previous historical financial statements for
the HHC Businesses have been prepared and, accordingly, our combined financial statements are derived from the
books and records of GGP and were carved-out from GGP at a carrying value reflective of such historical cost in
such GGP records. Our historical financial results reflect allocations for certain corporate expenses which include,
but are not limited to, costs related to property management, human resources, security, payroll and benefits, legal,
corporate communications, information services and restructuring and reorganizations. Costs of the services
(approximately $8.4, $9.9 and $12.4 million for 2010, 2009 and 2008, respectively) that were allocated or charged to
us were based on either actual costs incurred or a proportion of costs estimated to be applicable to us based on a
number of factors, most significantly the Company’s percentage of GGP’s adjusted revenue and assets and the
number of properties. We believe these allocations are reasonable; however, these results do not reflect what our
expenses would have been had the Company been operating as a separate, stand-alone public company. In addition,
the HHC Businesses were operated as subsidiaries of GGP, which operates as a real estate investment trust
(“REIT”). We will operate as a taxable corporation. The historical combined financial information presented
through the Effective Date will therefore not be indicative of the results of operations, financial position or cash
flows that would have been obtained if we had been an independent, stand-alone entity during the periods shown or
of our future performance as an independent, stand-alone entity.
Classification of Liabilities Not Subject to Compromise
As certain of the HHC Businesses had filed for bankruptcy protection in 2009 as described above, these entities
present their liabilities as subject to compromise at December 31, 2009. Liabilities not subject to compromise at
December 31, 2009 include: (1) liabilities of the HHC subsidiaries that were not debtors under GGP’s bankruptcy;
(2) liabilities incurred after the Petition Date; (3) pre-petition liabilities that certain subsidiaries of HHC which have
emerged from bankruptcy at December 31, 2009 expect to pay in full; and (4) liabilities related to pre-petition
contracts that affirmatively have not been rejected.
F-10
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
All liabilities incurred prior to the Petition Date other than those specified immediately above were considered
liabilities subject to compromise. The amounts of the various categories of liabilities that were subject to
compromise are set forth below. These amounts represented the then estimates of known or potential pre-Petition
Date claims likely to be resolved in connection with the Chapter 11 Cases. Although such claims remained subject
to future adjustments at December 31, 2009, due to further negotiations and actions of the Bankruptcy Court
including the emergence from bankruptcy of all remaining Debtors on or before the Effective Date pursuant to the
plans of reorganization providing for, in general, full payment of allowed claims, substantially all recorded liabilities
at December 31, 2009 were settled, reinstated or retained by GGP in 2010. The amounts subject to compromise
consisted of the following items:
Mortgages and secured notes
Accounts payable and accrued liabilities
Total liabilities subject to compromise
December 31, 2009
(In thousands)
$
$
133,973
141,866
275,839
The classification of liabilities “not subject to compromise” versus liabilities “subject to compromise” at December
31, 2009 was based on then available information and analysis. In addition, GGP has agreed that it will reimburse
HHC for pre-petition liability claims up to $5.0 million, substantially all of which is unpaid as of December 31,
2010.
Reorganization Items
Reorganization items are expense or income items that were incurred or realized by certain of our subsidiaries as a
result of the Chapter 11 Cases and are presented separately in the Consolidated and Combined Statements of Loss
and Comprehensive Loss. These items include professional fees and similar types of expenses and gains and interest
earned on cash accumulated by certain of our subsidiaries, all as a result of the Chapter 11 Cases. Reorganization
items specific to the HHC Businesses have been allocated to us and have been reflected in our combined financial
statements and in the tables presented below.
The key employee incentive program (the “KEIP”) was intended to retain certain key employees of GGP during the
pendency of the Chapter 11 Cases and provided for payment (in two installments) to these GGP employees upon
successful emergence from bankruptcy. The first KEIP payment was made by GGP on November 12, 2010. As
certain of these employees became our employees on the Effective Date, a portion of the KEIP was deemed to relate
to us and therefore, we recognized our KEIP expense in the period from the date the KEIP was approved by the
Bankruptcy Court (October 2009) to the Effective Date, in reorganization items on the Combined Statements of
Loss and Comprehensive Loss in the amount of $13.5 million and $2.3 million for the years ended December 31,
2010 and 2009, respectively. The second and final KEIP installment was paid by GGP in February 2011 in
accordance with the Employee Matters Agreement we executed with GGP at Separation.
Reorganization items are as follows:
Reorganization Items
Year Ended December 31,
2009
2010
Gains on liabilities subject to compromise - vendors (a)
Gains on liabilities subject to compromise, net - mortgage debt (b)
Interest income (c)
U.S. Trustee fees (d)
Restructuring costs (e)
Total reorganization items
$
$
F-11
(In thousands)
(791) $
(2,749)
(16)
571
60,267
57,282 $
(99)
(11,723)
(4)
226
18,274
6,674
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
____________
(a) This amount includes gains from repudiation, rejection or termination of contracts or guarantee of
obligations. Such gains reflect agreements reached with certain critical vendors, which were authorized by
the Bankruptcy Court and for which payments on a
(b) Such net gains include the Fair Value adjustments of mortgage debt relating to entities that emerged from
bankruptcy.
(c) Interest income primarily reflects amounts earned on cash accumulated as a result of our Chapter 11 cases.
(d) Estimate of fees due remains subject to confirmation and review by the Office of the United States Trustee
(“U.S. Trustee”).
(e) Restructuring costs primarily include professional fees incurred related to the bankruptcy filings, our
allocated share of the KEIP payment, finance costs incurred by debtors upon emergence from bankruptcy
and any associated write off of unamortized defer
Properties
Real estate assets are stated at cost less any provisions for impairments. Construction and improvement costs
incurred in connection with the development of new properties or the redevelopment of existing properties are
capitalized. Real estate taxes and interest costs incurred during construction periods are also capitalized. Capitalized
interest costs are based on qualified expenditures and interest rates in place during the construction period. For these
costs, amounts related to the Master Planned Communities are reflected in Master Planned Community assets and in
Buildings and equipment for the operating retail properties and Developments in progress for our Strategic
Developments assets.
Pre-development costs, which generally include legal and professional fees and other directly-related third-party
costs, are capitalized as part of the property being developed. In the event that management does not have the
ability or intent to complete a development, the costs previously capitalized are expensed (see also our impairment
policies in this Note 2 below). Such costs are reflected in Master Planned Community assets for the Master Planned
Communities and in Developments in Progress for the Strategic Developments properties.
With respect to the operating retail properties, tenant improvements, either paid directly or in the form of
construction allowances paid to tenants, are capitalized and depreciated over the applicable lease term. Maintenance
and repairs are charged to expense when incurred. Expenditures for significant betterments and improvements are
capitalized.
Depreciation or amortization expense is computed using the straight-line method based upon the following
estimated useful lives:
Asset Type
Buildings and improvements
Equipment, tenant improvements and fixtures
Years
40-45
5-10
Acquisitions of Properties
Certain of the HHC Businesses, particularly certain properties in our Master Planned Communities segment, were
purchased by our predecessors rather than developed. Accordingly, the acquisitions of such properties were
accounted for utilizing the acquisition method. Estimates of future cash flows and other valuation techniques were
used to allocate the purchase price of acquired property between land, buildings and improvements, equipment, debt
liabilities assumed and identifiable intangible assets and liabilities such as amounts related to in-place at-market
tenant leases, acquired above and below-market tenant and ground leases and tenant relationships.
F-12
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Investments in Real Estate Affiliates
We account for investments in joint ventures where we own a non-controlling participating interest using the equity
method and, investments in joint ventures where we have virtually no influence on the joint venture’s operating and
financial policies, on the cost method. Under the equity method, the cost of our investment is adjusted for our share
of the equity in earnings (losses) of such Real Estate Affiliates from the date of acquisition and reduced by
distributions received. Generally, the operating agreements with respect to our Real Estate Affiliates provide that
assets, liabilities and funding obligations are shared in accordance with our ownership percentages. We generally
also share in the profit and losses, cash flows and other matters relating to our Real Estate Affiliates in accordance
with our respective ownership percentages. Differences between the carrying amount of our investment in the Real
Estate Affiliates and our share of the underlying equity of such Real Estate Affiliates are amortized over lives
ranging from five to forty-five years. For cost method investments, we recognize earnings to the extent of
distributions received from such investments.
Contingent Stock Agreement
In conjunction with GGP’s acquisition of The Rouse Company (“TRC”) in November 2004, GGP assumed TRC’s
obligations under the Contingent Stock Agreement, (the “CSA”). TRC entered into the CSA in 1996 when it
acquired The Hughes Corporation (“Hughes”). This acquisition included various assets, including Summerlin (the
“CSA Assets”), a development in our Master Planned Communities segment. The CSA was an unsecured
obligation of GGP and therefore GGP’s obligations to the former Hughes owners or their successors (the
“Beneficiaries”) under the CSA was subject to treatment in accordance with the Plan.
The CSA provided that the Beneficiaries receive a share of the cash flow and income from the development or sale
of the CSA assets and a final payment representing their share of the valuation of the CSA Assets as of December
31, 2009. Accordingly, a recovery of approximately $5.3 million and expense of approximately $2.1 million was
recognized for 2009 and 2008, respectively. In addition, net of previously accrued but not then currently payable
amounts for such participation expense, the recognition of the $245.0 million estimated final payment to the
Beneficiaries increased the carrying amount of the CSA Assets by approximately $178.0 million as of December 31,
2009. The Plan provided that the final payment and settlement of all other claims under the CSA was $230 million
(down from the $245 million estimate at December 31, 2009), and such amount was distributed by GGP after the
Effective Date. Accordingly, during 2010, we reduced our carrying value of the CSA assets, and the related GGP
equity, by $15 million for this revised estimate.
Impairment
The generally accepted accounting principles related to accounting for the impairment or disposal of long-lived
assets require that if impairment indicators exist and the undiscounted cash flows expected to be generated by an
asset are less than its carrying amount, an impairment provision should be recorded to write down the carrying
amount of such asset to its fair value. The impairment analysis does not consider the timing of future cash flows and
whether the asset is expected to earn an above or below market rate of return. We review our real estate assets
(including those held by our Real Estate Affiliates), including operating assets, land held for development and sale
and developments in progress, for potential impairment indicators whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable.
Impairment indicators for our assets, regions or projects within our Master Planned Communities segment 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. Master Planned Community assets have extended life cycles that may last 20 to 40 years
and have few long-term contractual cash flows (such as operating lease revenue). Further, master planned
community assets generally have minimal to no residual values because of their liquidating characteristics. Master
planned community 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.
F-13
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Impairment indicators for our Operating Assets segment are assessed separately for each property and include, but
are not limited to significant decreases in Adjusted EBITDA, significant decreases in occupancy or low occupancy
and significant net operating losses.
Impairment indicators for our Strategic Developments segment are assessed separately for each property and
include, but are not limited to, significant decreases in comparable property sale prices.
Impairment indicators for pre-development costs, which are typically costs incurred during the beginning stages of a
potential development, and developments in progress 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 and
sustainability of development projects.
If an indicator of potential impairment exists, the asset is tested for recoverability by comparing its carrying amount
to the estimated future undiscounted cash flow. 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 Master Planned
Communities, 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, but the impairment will have no impact on cash flow.
With respect to our investment in the Real Estate Affiliates, a series of operating losses of an asset or other factors
may indicate that a decrease in value has occurred which is other-than-temporary. The investment in each of the
Real Estate Affiliates is evaluated periodically and as deemed necessary for recoverability and valuation declines
that are other-than-temporary. If the decrease in value of our investment in a Real Estate Affiliate is deemed to be
other than temporary, our investment in such Real Estate Affiliate is reduced to its estimated fair value.
Accordingly, in addition to the property-specific impairment analysis that we perform on the investment properties,
land held for development and sale and developments in progress owned by such joint ventures (as part of our
investment property impairment process described above), we also considered the ownership and distribution
preferences and limitations and rights to sell and repurchase our ownership interests.
Cash and Cash Equivalents
Highly-liquid investments with maturities at dates of purchase of three months or less are classified as cash
equivalents.
Notes Receivable
Notes receivable includes amounts due from builders for previous sales of lots, primarily at our Maryland master
planned community and, at December 31, 2010, a note from GGP. This note has a balance of $30.9 million at
December 31, 2010, represents cash payments of approximately $6.9 million per year through the end of 2015 and is
due from GGP.
Deferred Expenses
Deferred expenses consist principally of financing fees and leasing costs and commissions. Deferred financing fees
are amortized to interest expense using the effective interest method (or other methods which approximate the
effective interest method) over the terms of the respective financing agreements. Deferred leasing costs and
commissions are amortized using the straight-line method over periods that approximate the related lease terms.
Deferred expenses in our consolidated and combined balance sheets are shown at cost, net of accumulated
amortization, of $6.6 million as of December 31, 2010 and $7.4 million as of December 31, 2009.
F-14
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Revenue Recognition and Related Matters
Minimum rent revenues are recognized on a straight-line basis over the terms of the related leases. Minimum rent
revenues also include amounts collected from tenants to allow the termination of their leases prior to their scheduled
termination dates and accretion related to above and below-market tenant leases on acquired properties.
Straight-line rent receivables, which represent the current net cumulative rents recognized prior to when billed and
collectible as provided by the terms of the leases, of $2.0 million as of December 31, 2010 and $3.2 million as of
December 31, 2009, are included in Accounts and notes receivable, net in our financial statements.
Percentage rent in lieu of fixed minimum rent received from tenants for the years ended December 31, 2010, 2009
and 2008 was $3.9 million, $3.0 million and $3.7 million, respectively, and is included in Minimum rents in our
financial statements.
Overage rent (of approximately $3.4 million, $2.7 million and $3.5 million for 2010, 2009 and 2008, respectively),
also included in minimum rents, is paid by a tenant when its sales exceed an agreed upon minimum amount.
Overage Rent is calculated by multiplying the sales in excess of the minimum amount by a percentage defined in the
lease. Overage Rent is recognized on an accrual basis once tenant sales exceed contractual tenant lease thresholds.
Recoveries from tenants are established in the leases or computed based upon a formula related to real estate taxes,
insurance and other shopping center operating expenses and are generally recognized as revenues in the period the
related costs are incurred.
We provide an allowance for doubtful accounts against the portion of accounts receivable, including straight-line
rents, which is estimated to be uncollectible. Such allowances are reviewed periodically based upon our recovery
experience. We also evaluate the probability of collecting future rent which is recognized currently under a straight-
line methodology. This analysis considers the long-term nature of our leases, as a certain portion of the straight-line
rent currently recognizable will not be billed to the tenant until future periods. Our experience relative to unbilled
deferred rent receivable is that a certain portion of the amounts recorded as straight-line rental revenue are never
collected from (or billed to) tenants due to early lease terminations. For that portion of the otherwise recognizable
deferred rent that is not deemed to be probable of collection, an allowance for doubtful accounts has been provided.
Accounts receivable in our consolidated and combined balance sheets are shown net of an allowance for doubtful
accounts of $16.3 million as of December 31, 2010 and $16.8 million as of December 31, 2009. The following table
summarizes the changes in allowance for doubtful accounts:
Balance as of January 1
Provision
Write-offs
2010
2009
(In thousands)
2008
$ 16,812 $
21,712 $ 22,041
1,782
(2,317)
2,539
(7,439)
1,174
(1,503)
Balance as of December 31
$ 16,277 $
16,812 $ 21,712
Revenues from land sales are recognized using the full accrual method if various criteria provided by GAAP relating
to the terms of the transactions and our subsequent involvement with the land sold are met. Revenues relating to
transactions that do not meet the established criteria are deferred and recognized when the criteria are met or using
the installment or cost recovery methods, as appropriate in the circumstances. In addition, we recognize revenue
related to our right to participate in the ultimate home sale proceeds of the builders we sell our lots to as such
amounts are collected.
F-15
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Cost of land sales is determined as a specified percentage of land sales revenues recognized for each community
development project. These cost ratios used are based on actual costs incurred and estimates of future development
costs and sales revenues to completion of each project. The ratios are reviewed regularly and revised for changes in
sales and cost estimates or development plans. Significant changes in these estimates or development plans,
whether due to changes in market conditions or other factors, could result in changes to the cost ratio used for a
specific project. The specific identification method is used to determine cost of sales for certain parcels of land,
including acquired parcels we do not intend to develop or for which development was complete at the date of
acquisition.
Nouvelle at Natick is a 215 unit residential condominium project, located in Natick, Massachusetts. Pursuant to the
Plan, only the unsold units at Nouvelle at Natick on the Effective Date were distributed to us and no deferred
revenue or sales proceeds from unit closings prior to the Effective Date was allocated to us. As of December 31,
2010, 49 units were unsold at Nouvelle at Natick. Income related to unit sales subsequent to the Effective Date is
accounted for on a unit-by-unit full accrual method.
Income Taxes
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 bases of assets and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Deferred income taxes also reflect the impact of operating loss and tax credit
carryforwards. A valuation allowance is provided if we believe it is more likely than not that all or some portion of
the deferred tax asset will not be realized. An increase or decrease in the valuation allowance that results from a
change in circumstances, and which causes a change in our judgment about the realizability of the related deferred
tax asset, is included in the current deferred tax provision. There are events or circumstances that could occur in the
future that could limit the benefit of deferred tax assets. In addition, we recognize and report interest and penalties,
if necessary, related to uncertain tax positions within our provision for income tax expense.
In many of our Master Planned Communities, gains with respect to sales of land for commercial use are reported for
tax purposes on the percentage of completion method. Under the percentage of completion method, gain is
recognized for tax purposes as costs are incurred in satisfaction of contractual obligations. The method used for
determining the percentage complete for income tax purposes is different than that used for financial statement
purposes. In addition, gains with respect to sales of land for single family residences are reported for tax purposes
under the completed contract method. Under the completed contract method, gain is recognized for tax purposes
when 95% of the costs of our contractual obligations are incurred or the contractual obligation is transferred.
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the
weighted-average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator
and denominator of the basic EPS computation for the effects of all potentially dilutive common shares. The
dilutive effect of options and warrants (including fixed awards and nonvested stock issued under stock-based
compensation plans) is computed using the “treasury stock” method.
Diluted EPS excludes options where the exercise price was higher than the average market price of our common
stock and options for which vesting requirements were not satisfied. Such options totaled 138,581 shares as of
December 31, 2010. In addition, the effect of all 164,138 options and 10.7 million shares represented by our
outstanding warrants were excluded from diluted EPS as the effect of such items were anti-dilutive due to net losses
recognized for all periods presented. The weighted average number of shares reflecting the earnings per share
impact of these potentially dilutive securities totaled 3,433 and 27,850 shares for options and warrants, respectively.
F-16
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
As discussed in Note 1, in connection with the Separation, on November 9, 2010, GGP distributed to its
stockholders 32.5 million shares of our common stock and approximately 5.25 million shares were purchased by
certain investors sponsoring the Plan. This share amount is being utilized for the calculation of basic and diluted
EPS for all periods presented prior to the Separation as our common stock was not traded prior to November 9, 2010
and there were no dilutive securities in the prior periods.
Information related to our EPS calculations is summarized as follows:
Basic and Diluted
Years Ended December 31,
2009
2008
2010
Numerators:
Income (loss) from continuing operations
Allocation to noncontrolling interests
Income (loss) from continuing operations - net of
(In thousands)
$ (69,230) $ (702,877) $ (17,909)
(100)
204
(201)
noncontrolling interests
$ (69,431) $ (702,673) $ (18,009)
Discontinued operations - loss on disposition
— $
(939)
—
Net income (loss)
Allocation to noncontrolling interests
Net income (loss) attributable to common
stockholders
Denominators:
$ (69,230) $ (703,816) $ (17,909)
(100)
204
(201)
$ (69,431) $ (703,612) $ (18,009)
Weighted average number of common shares
outstanding - basic
Effect of dilutive securities
Weighted average number of common shares
outstanding - diluted
37,726
—
37,716
—
37,716
—
37,726
37,716
37,716
Fair Value Measurements
We adopted the generally accepted accounting principles related to fair value measurements as of January 1, 2008
for our financial assets and liabilities and as of January 1, 2009 for our non-financial assets and liabilities. The
Company is required to estimate the fair value of its long-lived assets, such as its real estate investments, that it
determines are impaired. Accordingly, those assets which were impaired in 2009 and 2010 were recorded at their
estimated fair value in the year in which impairment occurred.
The accounting principles for fair value measurements establish a three-tier fair value hierarchy, which prioritizes
the inputs used in measuring fair value. These tiers include:
(cid:129) Level 1 - defined as observable inputs such as quoted prices for identical assets or liabilities in active
markets;
(cid:129) Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly
observable; and
(cid:129) Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity
to develop its own assumptions.
The asset or liability fair value measurement level within the fair value hierarchy is based on the lowest level of any
input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of
F-17
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
observable inputs and minimize the use of unobservable inputs. Any fair values utilized or disclosed in our
combined financial statements were developed for the purpose of complying with the accounting principles
established for fair value measurements.
The following table summarizes our assets and liabilities that are measured at fair value on a nonrecurring basis and
therefore, the Sponsor and Management Warrants are excluded, Note 1:
2010
Master Planned Communities:
Maryland - Columbia (a)
Maryland - Gateway (a)
Summerlin South (a)
Operating Assets:
Landmark Mall (b)
Riverwalk Marketplace (c)
Strategic Developments:
Century Plaza Mall (b)
Nouvelle at Natick (d)
Total investments in real estate
Debt
Fair value of emerged entity
mortgage debt (e)
Total liabilities
Total Fair
Value
Measurement
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(In thousands)
Significant
Unobservable
Inputs
(Level 3)
Total (Loss)
Gain - Year
Ended
December
31, 2010
$
34,823 $
1,649
203,325
— $
—
—
— $
—
—
34,823 $
1,649
203,325
(56,798)
(2,613)
(345,920)
23,750
10,179
—
—
—
—
23,750
10,179
(24,434)
(55,975)
4,500
13,413
291,639 $
—
—
— $
—
—
— $
4,500
13,413
(12,899)
(4,135)
291,639 $ (502,774)
65,753 $
65,753 $
— $
— $
— $
— $
65,753 $
65,753 $
2,749
2,749
$
$
$
____________
(a) The fair value was calculated based on a discounted cash flow analysis using a property specific discount rate of
20.0%.
(b) The fair value is based on estimated sales value.
(c) The fair value was calculated based on a discounted cash flow analysis using a property specific discount rate
and a residual capitalization rate of 8.5% for both computations.
(d) The fair value was calculated based on a discounted cash flow analysis using a property specific discount rate of
20%.
(e) The fair value of debt relates to properties that emerged from bankruptcy in 2010.
F-18
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Total Fair
Value
Measurement
Quoted Prices in
Active Markets
Significant
Other
for Identical
Assets (Level 1)
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Total (Loss)
Gain Year
Ended
December
31, 2009
(In thousands)
2009
Master Planned Communities:
Maryland - Fairwood
$
12,629
$
— $
12,629 $
— $
(52,767)
Operating Assets:
Landmark Mall (a)
Strategic Developments:
The Bridges at Mint Hill
Elk Grove Promenade
The Shops At Summerlin
Center
Kendall Town Center (b)
AllenTowne
Cottonwood Mall (a)
Princeton Land East, LLC
Princeton Land LLC
Village At Redlands
Redlands Promenade
Nouvelle at Natick (b)
Total investments in real estate
$
49,501
14,100
21,900
46,300
13,931
25,900
21,500
8,802
11,948
7,545
6,727
64,661
305,444
$
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
49,501
(27,323)
14,100
21,900
46,300
—
25,900
—
8,802
11,948
—
—
—
141,579 $
—
—
(16,636)
(175,280)
—
13,931
—
21,500
—
—
7,545
6,727
64,661
(176,141)
(35,089)
(29,063)
(50,768)
(8,904)
(13,356)
(5,537)
(6,667)
(55,923)
163,865 $ (653,454)
Debt
Fair value of emerged entity
mortgage debt (c)
$
$
134,089
134,089
$
$
— $
— $
— $
— $
134,089 $
134,089 $
11,723
11,723
Total Liabilities
____________
(a) The fair value was calculated based on a discounted cash flows analysis using property specific discount rates
ranging from 9.25% to 12.00% and residual capitalization rates ranging from 8.50% to 11.50%.
(b) The fair value is based on estimated sales value.
(c) The fair value of debt relates to two properties that emerged from bankruptcy in December 2009.
Fair Value of Financial Instruments
The fair values of our financial instruments approximate their carrying amount in our financial statements except for
debt. GAAP requires that management estimate and disclose the fair value of our debt. As a result of certain of our
subsidiaries Chapter 11 cases, the fair value for the outstanding debt at December 31, 2009 that is included in
liabilities subject to compromise in our Combined Balance Sheets could not be reasonably determined as the Plan
was not effective as of such date. Such debt was adjusted to fair value upon the applicable entity’s emergence from
bankruptcy. For the $208.8 million of mortgages, notes and loans payable outstanding that was not subject to
compromise at December 31, 2009 and all such debt as of December 31, 2010, management’s required estimates of
fair value are presented below.
F-19
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
We estimated the fair value of this debt based on quoted market prices for publicly-traded debt, recent financing
transactions (which may not be comparable), estimates of the fair value of the property that serves as collateral for
such debt, historical risk premiums for loans of comparable quality, current London Interbank Offered Rate
(“LIBOR”), a widely quoted market interest rate which is frequently the index used to determine the rate at which
we borrow funds and US treasury obligation interest rates, and on the discounted estimated future cash payments to
be made on such debt. The discount rates estimated reflect our 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 assume that the debt is outstanding through maturity. We have utilized market information as
available or present value techniques to estimate the amounts required to be disclosed or recorded due to GAAP
bankruptcy emergence guidance. Since such amounts are estimates that are based on limited available market
information for similar transactions and do not acknowledge transfer or other repayment restrictions that may exist
in specific loans, it is unlikely that the estimated fair value of any of such debt could be realized by immediate
settlement of the obligation.
Fixed-rate debt
Variable-rate debt
SID bonds (*)
Total
____________
December 31, 2010
Carrying
Amount
Estimated
Fair Value
December 31, 2009
Carrying
Amount
Estimated
Fair Value
(In thousands)
$
$
191,037 $
65,518
62,105
318,660 $
202,897 $
65,629
62,105
330,631 $
208,860 $ 205,206
—
—
208,860 $ 205,206
—
—
(*) Due to the uncertain repayment terms of special improvement district (SID) bonds the carrying
value has been used as an approximation of fair value.
Included in such amounts for 2010 and 2009 is $65.8 million and $134.1 million, respectively, of debt that
relates to the properties that emerged from bankruptcy in such years where the aggregate carrying value of the
debt was reduced by $2.7 million and $11.7 million, respectively, to then estimated fair value of such debt
(based on significant unobservable Level 3 inputs).
Municipal Utility Districts (“MUDS”)
In Houston, Texas, certain development costs are reimbursable through the creation of MUDs (and 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, waste water, 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 developer initiates the MUD process by filing the applications for the formation of
the MUD, and once the applications have been approved, a board of directors is elected for the MUD and given the
authority to issue ad valorem tax bonds and the authority to tax residents. The MUD Board authorizes and approves
all MUD development contracts and pay estimates. The Company estimates the costs it believes will be eligible for
reimbursement for MUD receivables and MUD bond sale proceeds are used to reimburse the developer for its
construction costs, including interest. MUD taxes are used to pay the debt service on the bonds and the operating
expenses of the MUD. The Company estimates the costs it believes will be eligible for reimbursement as MUD
receivables and has not incurred any debt relating to the MUDs.
Reclassifications
In 2010, certain amounts in the 2009 and 2008 combined financial statements were reclassified to conform to the
current period presentation. Specifically, to reflect changes in our segment classifications and improve our internal
and external reporting, we reclassified $41.8 million of assets in 2009 related to the Nouvelle at Natick
F-20
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
condominium project from the Master Planned Community Asset to Developments in Progress. In addition,
property management and other costs of $17.6 and $20.7 million and strategic initiatives of $5.4 and $1.5 million,
respectively, for 2009 and 2008 were combined into one line item, General and Administrative. Further, notes
receivable, uncertain tax position liability and certain elements of Master Planned Community revenues and
expenses have been presented separately to provide additional detail on our obligations, while certain income and
expense elements of our operating retail properties have been combined due to their relative lack of significance.
Total assets, total liabilities, total revenues, total equity, total expenses and net loss attributable to common
stockholders for such periods were unchanged by such reclassifications.
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 and 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. For example, significant estimates and assumptions have been
made with respect to useful lives of assets, capitalization of development and leasing costs, provision for income
taxes, recoverable amounts of receivables and deferred taxes, valuations and related amortization periods of deferred
costs and intangibles, allocations of our predecessors’ property and asset management costs and reorganization costs
to the HHC Businesses, impairment of long-lived assets, valuation of impaired assets, warrants and of debt of
emerged entities and cost ratios and completion percentages used for land sales. Actual results could differ from
these and other estimates.
NOTE 3
IMPAIRMENT
General
Impairment charges totaled $503.4 million, $680.3 million and $52.5 million for the years ended December 31,
2010, 2009 and 2008, as presented in the table below. These impairment provisions resulted from an evaluation of
impairment indicators for our properties, including considerations of revised strategies and operating philosophies
and, with properties with such indicators, the undiscounted cash flows of the projects as compared to their carrying
values. At December 31, 2010, although an additional four regions or projects within our master planned
communities segment and four additional operating properties had carrying values in excess of estimated fair values,
no additional provisions for impairment were considered necessary for such projects and properties. These
impairment charges are included in provisions for impairment in our consolidated and combined statement of loss
and comprehensive loss for the years ended December 31, 2010, 2009 and 2008. Circle T also recorded impairment
charges of $38.1 million for the year ended December 31, 2009 relating to the assets of our non-consolidated Real
Estate Affiliates, of which our share was $19.0 million, was included in our Equity in income (loss) from Real
Estate Affiliates.
In addition to the impairment changes recorded by the Circle T venture, we recorded impairment charges related to
our investment in Circle T of $10.6 million for the year ended December 31, 2009 to write these investments down
to their estimated fair value, with such provisions reflected in our Equity in income (loss) from Real Estate
Affiliates. Based on such evaluations, no provisions for impairment were recorded for the years ended December
31, 2010 and 2008 related to our investments in Real Estate Affiliates. See Note 5 for further disclosure of the
provisions for impairment related to certain properties within our Real Estate Affiliates.
F-21
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Summary of all impairment provisions:
Impaired Asset
Location
Method of Determining Fair Value
2010
2009
2008
Year Ended December 31,
(In thousands)
Master Planned Communities:
Maryland- Gateway
Maryland- Columbia
Maryland- Fairwood
Summerlin-South
Operating Assets:
Landmark
Howard County, MD
Columbia, MD
Projected sales price analysis (a) (c)
Projected sales price analysis (a) (c)
$
2,613 $
56,798
— $
—
Columbia, MD
Las Vegas, NV
Projected sales price analysis (a) (c)
Projected sales price analysis (a) (c)
Alexandria, VA
Projected sales price analysis (a) (c)
Riverwalk Marketplace
New Orleans, LA
Discounted cash flow analysis (c)
Various pre-development costs
(b)
Strategic Development:
Allen
Cottonwood Mall
Kendall
West Windsor
Bridges at Mint Hill
Elk Grove Promenade
The Shops at Summerlin Centre
Century Plaza Mall
Redlands Promenade
Village at Redlands
Nouvelle at Natick
Various pre-development costs
Total provisions for impairment
Real Estate Affiliates (REA):
The Shops at Circle T Ranch
Circle T Power Center
Allen, TX
Holladay, UT
Miami, FL
Princeton, NJ
Charlotte, NC
Elk Grove, CA
Las Vegas, NV
Birmingham, AL
Redlands, CA
Redlands, CA
Natick, MA
Projected sales price analysis (a) (c)
Comparable property market analysis (d)
Projected sales price analysis (c)
Projected sales price analysis (c)
Projected sales price analysis (b)
Projected sales price analysis (c)
Projected sales price analysis (c)
Projected sales price analysis (a) (d)
Projected sales price analysis (a) (c)
Projected sales price analysis (a) (b)
Discounted cash flow analysis (c)
(b)
Dallas, TX
Dallas, TX
Projected sales price analysis (d)
Projected sales price analysis (d)
Total provisions for impairment on property held by REA
The Shops at Circle T Ranch
Circle T Power Center
Dallas, TX
Dallas, TX
Total provisions for impairment on property held by REA at share
Impairment of Circle T investment (e)
—
52,767
345,920
405,331
24,434
55,975
514
80,923
—
—
—
—
—
—
—
12,899
—
—
4,135
68
17,102
—
52,767
27,323
—
23,641
50,964
29,063
50,768
35,089
22,260
16,636
175,280
176,141
—
6,667
5,537
55,923
3,254
576,618
—
—
—
—
—
—
—
37
37
—
—
—
—
—
—
—
7,819
—
—
40,346
4,309
52,474
$
$
$
$
$
$
503,356 $
680,349 $
52,511
— $
—
— $
— $
—
— $
17,062 $
21,020
38,082 $
8,531 $
10,510
19,041 $
— $
10,600 $
—
—
—
—
—
—
—
____________
(a) Projected sales price analysis incorporates available market information and other management assumptions.
(b) Related to the write down of various pre-development costs that were determined to be non-recoverable due to
the related projects being terminated.
(c) These impairments were primarily driven by the carrying value of the assets, including costs expected to be
incurred, not being recoverable by the projected sales price of such assets.
(d) These impairments were primarily driven by management’s changes in current plans with respect to the property
and measured based on the value of the underlying land, which is based on comparable property market analysis or a
projected sales price analysis that incorporates available market information and other management assumptions as
these properties are either no longer operational or operating with no or nominal income.
(e) Reflected in our equity in income (loss) of Real Estate Affiliates.
F-22
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE 4
INTANGIBLES
Intangible Assets and Liabilities
The following table summarizes our intangible assets and liabilities:
As of December 31, 2010
Tenant leases:
In-place value
Above-market
Below-market
Ground leases:
Above-market
Below-market
As of December 31, 2009
Tenant leases:
In-place value
Above-market
Below-market
Ground leases:
Above-market
Below-market
Gross Asset
(Liability)
Accumulated
(Amortization)
/ Accretion
(In thousands)
Net
Carrying
Amount
$
$
11,824 $
1,820
(77)
(3,545)
23,096
(10,221) $
(1,701)
77
1,603
119
—
638
(2,078)
(2,907)
21,018
13,063 $
2,323
(86)
(10,875) $
(1,883)
72
2,188
440
(14)
(16,968)
23,096
2,425
(1,739)
(14,543)
21,357
Changes in gross asset (liability) balances in 2010 are the result of the allocation of provisions for impairment (Note
2) and our policy of writing off fully amortized intangible assets.
The gross asset balances of the in-place value of tenant leases are included in Buildings and equipment in our
Consolidated and Combined Balance Sheets. Acquired in-place at-market tenant leases are amortized over periods
that approximate the related lease terms. The above-market and below-market tenant and ground leases are included
in Prepaid expenses and other assets and Accounts payable and accrued expenses as detailed in Note 12. Above and
below-market lease values are amortized over the remaining non-cancelable terms of the respective leases.
Amortization/accretion of these intangible assets and liabilities decreased our income (excluding the impact of
noncontrolling interest and the provision for income taxes) by $0.8 million in 2010, $0.3 million in 2009 and $1.4
million in 2008.
Future amortization is estimated to decrease income (excluding the impact of noncontrolling interest and the
provision for income taxes) by $0.5 million in 2011, $0.3 million in 2012, $0.2 million in 2013, $0.1 million in 2014
and zero in 2015.
NOTE 5
DISCONTINUED OPERATIONS AND LOSS ON DISPOSITION OF INTEREST IN
PROPERTY
On December 21, 2009, we sold one office building totaling approximately 38,400 square feet and 4.2 acres of land
for a total sales price of $2.0 million, resulting in a total loss of $0.9 million.
F-23
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
We evaluated the operations of this property pursuant to the requirements of the GAAP related to discontinued
operations and concluded that the operations of this office building did not materially impact the prior period results
and therefore have not reported any prior operations of this property as discontinued operations in the accompanying
combined financial statements.
NOTE 6
REAL ESTATE AFFILIATES
We own non-controlling investments in The Woodlands Partnerships and Circle T whereby, generally, we share in
the profits and losses, cash flows and other matters relating to our investments in such Real Estate Affiliates in
accordance with our respective ownership percentages. Our unaffiliated joint venture partners manage the properties
owned by these joint ventures. As we have joint interest and control of these ventures with our venture partners, we
account for these joint ventures using the equity method.
As of December 31, 2010, approximately $372.2 million of indebtedness was secured by properties owned by our
Real Estate Affiliates, our share of which was approximately $158.2 million. The debt was scheduled to mature in
2011. In March 2011, the Woodlands Partnerships refinanced their debt by entering into a $270 million facility
which expires in 2014 and a $36.1 million facility which expires in 2012. After the refinancings, our share of the
debt of our Real Estate Affiliates is approximately $141.0 million.
Circle T recorded a $38.1 million provision for impairment related to the properties and we recorded a $10.6 million
provisions for impairment with respect to our investment in the joint venture, for the year ended December 31, 2009
based on a projected sales price analysis incorporating available market information and other management
assumptions. Such impairment charges are included in equity in income (loss) from Real Estate Affiliates in our
combined financials statements.
Condensed Combined Financial Information of Certain Real Estate Affiliates
We own a 52.5% economic interest and a 42.5% equity interest in The Woodlands Partnerships. The Woodlands
Partnerships include the venture developing the master planned community known as The Woodlands (whose
operations are included in the Master Planned Community segment) and also hold the beneficial interests in other
commercial real estate within the Woodlands community, including the conference center, all located near Houston,
Texas. The remaining 47.5% economic interests in The Woodlands Partnerships are owned by Morgan Stanley Real
Estate Fund II, L.P.
We own a 50% interest in the two Circle T ventures with AIL Investment, LP., an investment partnership owned by
Hillwood Development Company of Dallas, Texas.
As The Woodlands Partnerships and Circle T are accounted for on the equity method, the following summarized
financial information as of December 31, 2010 and 2009 and for the years ended December 31, 2010, 2009 and
2008 is presented below. Previously reported summarized financial information has been restated 1) to reflect
certain operations as discontinued and 2) correct the prior presentation as a result of certain amounts having not been
eliminated. The restatement has no effect on our previously reported Equity in income (loss) of Real Estate
Affiliates.
F-24
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Condensed Combined Balance Sheet - Real Estate Affiliates
Assets:
Land
Building and equipment
Less accumulated depreciation
Developments in progress
Net property and equipment
Land held for development and sale
Net investment in real estate
Cash and cash equivalents
Accounts and notes receivable, net
Deferred expenses, net
Prepaid expenses and other assets
Total assets
Liabilities and Owners’ Equity:
Mortgages, notes and loans payable
Accounts payable, accrued expenses and other liabilities
Owners’ equity
Total liabilities and owners’ equity
Investment in Real Estate Affiliates, Net
Owners’ equity
Less joint venture partners’ equity
Capital or basis difference and loans
Investment in Real Estate Affiliates, net
December 31,
2010
December 31,
2009
(In thousands)
$
$
$
$
$
$
31,077 $
241,436
(81,218)
25,431
216,726
237,117
453,843
99,769
45,863
895
41,663
642,033 $
31,077
207,051
(73,866)
55,996
220,258
266,253
486,511
35,569
66,460
1,189
41,364
631,093
372,222 $
122,877
146,934
642,033 $
377,964
112,847
140,282
631,093
146,934 $
(70,243)
72,852
149,543 $
140,282
(67,084)
67,360
140,558
F-25
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Condensed Combined Statements of Income -Real Estate Affiliates
Revenue:
Land sales
Tenant rents
Other
Total revenues
Expenses:
Cost of sales - land
Land sales operations
Real estate taxes
Property maintenance costs
Other property operating costs
Provision for impairment
Depreciation and amortization
Total expenses
Operating income (loss)
2010
Year Ended December 31,
2009
(In thousands)
2008
$
93,763 $ 66,013 $ 120,153
19,779
21,713
10,604
7,348
15,894
8,476
148,408
95,074
120,261
49,745
19,943
2,228
1,687
20,539
—
7,628
34,560
25,601
1,314
4,778
13,699
38,082
10,004
56,301
24,729
1,180
2,985
17,791
—
8,075
111,061
37,347
101,770 128,038
18,491
(32,964)
Interest income
Interest expense
Provision for (benefit from) income taxes
Discontinued operations
Net income (loss) attributable to joint venture partners
Equity In Income of Real Estate Affiliates:
Net income (loss) attributable to joint venture partners
Joint venture partners’ share of income
Amortization of capital or basis differences
Equity in income (loss) of Real Estate Affiliates
1,896
(11,042)
(824)
(306)
8,215 $ (35,044) $
1,265
(7,942)
937
3,660
814
(10,824)
(1,166)
13,438
39,609
8,215 $ (35,044) $
(3,740)
15,281
(8,446)
4,938
9,413 $ (28,209) $
39,609
(17,937)
1,834
23,506
$
$
$
NOTE 7
MORTGAGES, NOTES AND LOANS PAYABLE
Mortgages, notes and loans payable are summarized as follows (see Note 13 for the maturities of our long term
commitments):
Fixed-rate debt:
Collateralized mortgages, notes and loans payable
Special Improvement District bonds
Variable-rate debt:
Collateralized mortgages, notes and loans payable
Total mortgages, notes and loans payable
Less: Mortgages, notes and loans payable subject to compromise in 2009
Total mortgages, notes and loans payable not subject to compromise
December 31,
2010
December 31,
2009
(In thousands)
$
$
191,037 $
62,105
277,833
65,000
65,518
318,660
—
318,660 $
—
342,833
(133,973)
208,860
F-26
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
No liabilities, including mortgages, notes and loans payable are subject to compromise at December 31, 2010.
The weighted average interest rate on our mortgages, notes and loans payable was 5.14% and 5.54% as of December
31, 2010 and 2009, respectively. The interest rate used in the calculation at December 31, 2010 for a loan that
converted to a variable rate in July, 2010 was 3.50%.
Collateralized Mortgages, Notes and Loans Payable
As of December 31, 2010, $318.7 million of land, buildings and equipment and developments in progress (before
accumulated depreciation) have been pledged as collateral for our mortgages, notes and loans payable of which $7.0
million is recourse. In addition, certain of our loans contain provisions which grant the lender a security interest in
the operating cash flow of the property that represents the collateral for the loan. Such provisions are not expected
to materially impact our operations in 2011. Certain mortgage notes may be prepaid, but may be subject to a
prepayment penalty equal to a yield-maintenance premium, defeasance or a percentage of the loan balance.
Letters of Credit and Surety Bonds
We had outstanding letters of credit and surety bonds of $38.7 million as of December 31, 2010 and $76.5 million as
of December 31, 2009. These letters of credit and bonds were issued primarily in connection with insurance
requirements, special real estate assessments and construction obligations.
Special Improvement Districts Bonds
The Summerlin master planned community uses Special Improvement District bonds to finance certain common
infrastructure. These bonds are issued by the municipalities and, although unrated, are secured by the assessments
on the land. They are tax exempt for federal income tax purposes. The majority of proceeds from each bond issued
is held in a construction escrow and dispersed to us as infrastructure projects are completed, inspected by the
municipalities and approved for reimbursement and, accordingly, the Special Improvement District bonds have been
classified as a receivable. The Summerlin master planned community pays the debt service on the bonds semi-
annually, but receives reimbursement of all principal paid from most of the purchasers of its land; therefore, the
asset and liability balances relating to the Special Improvement District bonds offset. In addition, as Summerlin
sells land, the purchasers assume a proportionate share of the bond obligation.
NOTE 8
INCOME TAXES
We will generally be taxed as a C corporation after the Effective Date. One of our consolidated entities, Victoria
Ward, Limited (“Ward”, substantially all of which is owned by us) elected to be taxed as a REIT under sections 856-
860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with the taxable year beginning
January 1, 2002. To qualify as a REIT, Ward must meet a number of organizational and operational requirements,
including requirements to distribute at least 90% of its ordinary taxable income and to distribute to stockholders or
pay tax on 100% of capital gains and to meet certain asset and income tests. Ward has satisfied such REIT
distribution requirements for 2010 and we intend to operate Ward as a REIT in all periods subsequent to the
Effective Date.
GGP received a private letter ruling from the Internal Revenue Service (the “IRS”) with respect to the tax effect of
the transfer of assets from our predecessors to HHC and to the effect that the distribution of HHC to GGP’s
shareholders in the Separation would qualify as tax-free to GGP and its subsidiaries for U.S. federal income tax
purposes. A private letter ruling from the IRS generally is binding on the IRS. The IRS did not rule that the
distribution satisfies every requirement for a tax-free spinoff, and the parties have relied, and will rely, solely on the
advice of counsel for comfort that such additional requirements are satisfied.
F-27
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The provision for (benefit from) income taxes for the years ended December 31, 2010, 2009 and 2008 was as
follows:
Current
Deferred
Total
2010
2009
2008
(In thousands)
$
2,658 $
(636,117)
$ (633,459) $
(849) $
(23,120)
(23,969) $
9,514
(6,811)
2,703
The 2010 income tax provision includes significant tax amounts recognized immediately prior to the Separation
related to assets previously held in REIT entities for which no income tax provision was recorded. Upon transfer of
the assets to a taxable entity a net tax benefit was recorded to reflect the excess of tax basis over the book basis of
transferred assets. In addition, the 2010 income tax provision also reflects deferred tax benefits recognized after the
Separation due to impairment losses.
Income tax expense is computed by applying the Federal corporate tax rate for the years ended December 31, 2010,
2009 and 2008 and is reconciled to the provision for income taxes as follows:
Tax at statutory rate on earnings from continuing
operations before income taxes
Increase in valuation allowance, net
State income taxes, net of Federal income tax benefit
Tax at statutory rate on former REIT entity earnings
(losses) not subject to Federal income taxes
Tax expense (benefit) from change in tax rates, prior
period adjustments and other permanent differences
Non-deductible warrant liability expense
Non-deductible restructuring costs
Tax benefit from tax related restructuring
Expiration of capital loss carryforwards
Uncertain tax position expense, excluding interest
Uncertain tax position interest, net of Federal income
tax benefit
Income tax expense (benefit)
2010
2009
(In thousands)
2008
$ (245,942) $ (254,653) $
61,649
(7,969)
7,267
(2,728)
(5,356)
1,470
476
2,193
220,836
18,589
(8,811)
49,315
17,352
(509,970)
—
1,667
257
—
—
—
3,726
—
(11,241)
—
—
—
—
200
7,057
$ (633,459) $
1,326
(23,969) $
(1,435)
2,703
Realization of a deferred tax benefit is dependent upon generating sufficient taxable income in future periods. Our
net operating loss carryforwards are currently scheduled to expire in subsequent years through 2031. Some of the net
operating loss carryforward amounts are subject to annual limitations under Section 382 of the Code. This annual
limitation under Section 382 is subject to modification if a taxpayer recognizes what are called ‘‘built-in gain
items.’’ It is possible that the Company could, in the future, experience a change in control pursuant to Section 382
that could put additional limits on the benefit of deferred tax assets.
The amounts and expiration dates of operating loss and tax credit carryforwards for tax purposes for are as follows:
Net operating loss carryforwards - Federal
Net operating loss carryforwards - State
Tax credit carryforwards - Federal AMT
F-28
Amount
Expiration
Date
$
(In thousands)
70,045 2023-2031
195,743 2011-2031
1,184
n/a
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
As of December 31, 2010 and 2009, the Company had gross deferred tax assets totaling $367.9 million and $200.8
million, and gross deferred tax liabilities of $376.2 million and $975.0 million, respectively. We have established a
valuation allowance in the amount of $70.4 million and $8.7 million as of December 31, 2010 and 2009,
respectively, against certain deferred tax assets for which it is more likely than not that such deferred tax assets will
not be realized. Deferred tax assets that we believe have only a remote possibility of realization have not been
recorded.
The tax effects of temporary differences and carryforwards included in the net deferred tax liabilities at December
31, 2010 and 2009 are summarized as follows:
Property Associated with Master Planned Communities, primarily
differences in the tax basis of land assets and treatment of interest
and other costs
Operating property, primarily differences in basis of assets and
liabilities
Deferred income
Interest deduction carryforwards
Operating loss and tax credit carryforwards
Valuation allowance
Net deferred tax liabilities
2010
2009
(In thousands)
$ (171,351) $
(704,541)
210,587
(204,828)
122,330
34,968
(70,386)
(78,680) $
30,524
(270,382)
142,073
28,246
(8,737)
(782,817)
$
The deferred tax liability associated with the master planned communities is largely attributable to the difference
between the basis and value determined as of the date of the acquisition by our predecessors of The Rouse Company
(“TRC”) in 2004 adjusted for sales that have occurred since that time. The cash cost related to this deferred tax
liability is dependent upon the sales price of future land sales and the method of accounting used for income tax
purposes. The deferred tax liability related to deferred income is the difference between the income tax method of
accounting and the financial statement method of accounting for prior sales of land in our Master Planned
Communities.
Although we believe our tax returns are correct, the final determination of tax examinations and any related
litigation could be different than what was reported on the returns. In the opinion of management, we have made
adequate tax provisions for years subject to examination. Generally, we are currently open to audit under the statute
of limitations by the Internal Revenue Service for the years ending December 31, 2007 through 2010 and are open to
audit by state taxing authorities for years ending December 31, 2006 through 2010.
Two of our subsidiaries were subject to IRS audit for the years ended December 31, 2008 and 2007. On February 9,
2011, the two subsidiaries received statutory notices of deficiency (“90-day letters”) seeking $144.1 million in
additional tax. It is our position that the tax law in question has been properly applied and reflected in the 2007 and
2008 returns for these two taxable REIT subsidiaries. We previously provided for the additional taxes sought by the
IRS, through uncertain tax position liability or deferred tax liabilities. Although we believe the tax returns are
correct, the final determination of tax examinations and any related litigation could be different than what was
reported on the returns. In the opinion of management, we have made adequate tax provisions for the years subject
to examination. Pursuant to the Investment Agreements, GGP has indemnified us from and against 93.75% of any
and all losses, claims, damages, liabilities and reasonable expenses to which we become subject, in each case solely
to the extent directly attributable to MPC Taxes (as defined in the Investment Agreements) in an amount up to
$303,750,000. Under certain circumstances, GGP has also agreed to be responsible for interest or penalties
attributable to such MPC Taxes in excess of the $303,750,000. As a result of this indemnity, GGP intends to cause
the two former taxable REIT subsidiaries of GGP to file petitions in the Tax Court contesting this liability.
F-29
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
On January 1, 2007, we adopted a 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.
At January 1, 2007, we had total unrecognized tax benefits of $58.0 million, excluding accrued interest, of which
none would impact our effective tax rate. These unrecognized tax benefits increased our income tax liabilities by
$0.4 million, and cumulatively reduced retained earnings by $0.4 million. As of January 1, 2007, we had accrued
interest of $4.1 million related to these unrecognized tax benefits and no penalties. Prior to adoption of the generally
accepted accounting principle related to accounting for uncertainty in income taxes, we did not treat either interest
or penalties related to tax uncertainties as part of income tax expense. With the adoption of the generally accepted
accounting principle related to accounting for uncertainty in income taxes, we have chosen to change this accounting
policy. As a result, we recognized and reported interest and penalties, if applicable, within our provision for income
tax expense from January 1, 2007 forward. We recognized potential interest expense (benefit) related to the
unrecognized tax benefits of $10.9 million, $2.0 million and $(2.2) million for the years ended December 31, 2010,
2009 and 2008, respectively. At December 31, 2010, we had total unrecognized tax benefits of $120.8 million,
excluding interest, of which none would impact our effective tax rate.
Unrecognized tax benefits, opening balance
Gross increases - tax positions in prior period
Gross increases - tax positions in current period
Gross decreases - tax positions in prior periods
Unrecognized tax benefits, ending balance
2010
2009
(In thousands)
2008
$
56,508 $
69,168
—
(4,860)
$ 120,816 $
69,665 $ 69,967
—
41
3,247
—
(13,198)
(3,549)
56,508 $ 69,665
Based on our assessment of the expected outcome of existing examinations or examinations that may commence, or
as a result of the expiration of the statute of limitations for specific jurisdictions, it is reasonably possible that the
related unrecognized tax benefits, excluding accrued interest, for tax positions taken regarding previously filed tax
returns will materially change from those recorded at December 31, 2010. A material change in unrecognized tax
benefits could have a material effect on our statements of income and comprehensive income. As of December 31,
2010, there is approximately $120.8 million of unrecognized tax benefits, excluding accrued interest, which due to
the reasons above, could significantly increase or decrease during the next twelve months.
Earnings and profits, which determine the taxability of dividends to stockholders, differ from net income reported
for financial reporting purposes due to differences for Federal income tax reporting purposes in, among other things,
estimated useful lives, depreciable basis of properties and permanent and temporary differences on the inclusion or
deductibility of elements of income and deductibility of expense for such purposes.
Pursuant to our agreements with GGP, GGP has indemnified us (the “Tax Indemnity Cap”) from and against
93.75% of any and all losses, claims, damages, liabilities and reasonable expenses to which we and our subsidiaries
become subject, in each case solely to the extent attributable to certain taxes related to sales of certain assets in our
Master Planned Communities segment prior to March 31, 2010, in an amount up to approximately $303.8 million,
plus additional interest and penalties, if any. Such amount is reflected as an asset of the Company at December 31,
2010. In addition, we are generally responsible for any liabilities, taxes or other charges that are imposed on GGP as
a result of the Separation failing to qualify for nonrecognition treatment for U.S. federal (and state and local) income
tax purposes, if we are the party responsible for such failure.
F-30
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE 9
RENTALS UNDER OPERATING LEASES
We receive rental income from the leasing of retail and other space under operating leases. The minimum future
rentals based on operating leases of our combined properties held as of December 31, 2010 are as follows:
Year
Total Minimum Rent
(In thousands)
2011 $
2012
2013
2014
2015
Subsequent
49,581
44,598
38,378
31,038
27,235
80,637
Minimum future rentals exclude amounts which are payable by certain tenants based upon a percentage of their
gross sales or as reimbursement of operating expenses and amortization of above and below-market tenant leases.
Such operating leases are with a variety of tenants, the majority of which are national and regional retail chains and
local retailers, and consequently, our credit risk is concentrated in the retail industry.
NOTE 10
TRANSACTIONS WITH GGP AND OTHER RELATED PARTY DISCLOSURES
As described in Note 2, the accompanying combined financial statements present the operations of the HHC
Businesses as carved-out from the consolidated financial statements of GGP. Transactions between the HHC
Businesses have been eliminated in the combined presentation. Also as described in Note 2, an allocation of certain
centralized GGP costs incurred for activities such as employee benefit programs, property management and asset
management functions, centralized treasury, payroll and administrative functions have been made to the property
operating costs of HHC Businesses.
Prior to the Effective Date, we entered into a transition services agreement (the “TSA”) whereby GGP will provide
to us, on a transitional basis, certain specified services on an interim basis for various terms not exceeding 24
months following the Separation, subject to our earlier termination. The services that GGP will provide to us
pursuant to the TSA include, among others, payroll, human resources and employee benefits, financial systems
management, treasury and cash management, accounts payable services, telecommunications services, information
technology services, property management services, legal and accounting services and various other corporate
services. The charges of each of the transition services will generally be based on an hourly fee arrangement
(intended to allow GGP to fully recover the costs directly associated with providing the services, plus a level of
profit consistent with an arm’s length transaction) and pass-through of out-of-pocket costs. Subject to certain
exceptions, the liabilities of GGP for providing services under the TSA are generally limited to the greater of the
aggregate charges actually paid to GGP for such services and $10 million and the TSA also provides that GGP shall
not be liable to us for an special, indirect, incidental or consequential damages related to the provision of TSA
services.
For 2010, we incurred approximately $0.3 million of expenses related to the TSA. In addition, transactions between
us and GGP or other GGP subsidiaries for rental income of approximately $6.1 million annually have not been
eliminated except that end-of-period intercompany balances as of December 31, 2009 between GGP and the HHC
Businesses have been considered elements of our equity.
As of the Effective Date, we entered into a Reverse Transition Services Agreement with GGP. Pursuant to the
agreement, we provide GGP with income tax preparation services, accounting and audit support relating to Master
Planned Communities and certain mall properties and other ancillary services related to such tax and audit support.
This agreement may be terminated prior to its expiration date of November 9, 2013. For 2010, we received a
neglible amount of reimbursements under the Reverse Transition Services Agreement.
F-31
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
On August 6, 2010, we entered into a Management Services Agreement with Brookfield Advisors LP. Pursuant to
the agreement, Brookfield Advisors LP provided us services that included strategic advice, project development
oversight, financials planning, financing consultation, internal controls expertise and community and investor
relations. This agreement provided for payments to Brookfield Advisors LP of $0.5 million per month and was
terminated on January 31, 2011.
We also entered into a Transition Agreement with TPMC Realty Services Group, Inc. (“TPMC”). David Weinreb, a
director and our CEO, is the sole equity owner of TPMC and the chief executive officer of TPMC. Grant Herlitz,
our president, is also the president of TPMC. The Transition Agreement contemplates, among other things,
transactions that will facilitate the continuity of management of our company and provide for the reimbursement of
expenses accrued by us to TPMC as contemplated by Mr. Weinreb’s employment agreement with us. The amounts
of the agreement are immaterial.
NOTE 11
STOCK BASED PLANS
Incentive Stock Plans
On November 9, 2010, HHC adopted The Howard Hughes Corporation 2010 Equity Incentive Plan (the ‘‘Equity
Plan’’). Pursuant to the Equity Plan, 3,698,050 shares of HHC common stock are reserved for issuance. The Equity
Plan provides for grants of options, stock appreciation rights, restricted stock, other stock-based awards and
performance-based compensation (collectively, ‘‘the Awards’’). Directors, employees and consultants of HHC and
its subsidiaries and affiliates are eligible for Awards.
Prior to the Chapter 11 Cases, our predecessors granted qualified and non-qualified stock options and restricted
stock to certain GGP officers and key employees whose compensation costs related specifically to our assets.
Accordingly, an allocation of stock-based compensation costs pertaining to such employees has been reflected in our
financial statements for periods prior to the Effective Date.
Stock Options
Pursuant to the Plan, each outstanding option to acquire shares of GGP stock (“Old GGP Options”) was converted
into (i) an option to acquire the same number of shares of common stock of reorganized GGP (“New GGP Options”)
and (ii) a separate option to acquire 0.0983 shares of our common stock for each existing option for one share of
GGP common stock (“HHC Options”). The replacement options are fully vested as of the Effective Date and have
the same terms and conditions as the outstanding GGP options. As of December 31, 2010, 164,138 shares of our
common stock are issuable upon exercise of the HHC options.
The exercise price under the Old GGP Options was allocated to the New GGP Options and the HHC options based
on the relative market values of the two underlying stocks. For purposes of such allocation, the volume-weighted
price of shares of GGP after its emergence of bankruptcy and HHC during the last ten-day trading period (the
“Trading Period”) ending on or before the 60th day after the Effective Date was used. As the date of emergence was
November 9, 2010, the Trading Period was December 27, 2010 through January 7, 2011. The volume-weighted
price of one GGP common share upon emergence from bankruptcy was $15.29 and one HHC common share was
$54.13 (that was subsequently adjusted by .0983 to be on a comparable basis), during the Trading Period and,
therefore, the exercise prices for the Old GGP Options replaced were allocated in a ratio of approximately 74.15% to
GGP and 25.85% to HHC. In addition, we have agreed with GGP that all exercises of GGP replacement options
would be settled by, except those of the former top two executive officers of GGP whose options were exercised at
their termination in December 2010, the employer of the pre-emergence GGP employee at the time of exercise.
F-32
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The following tables summarize stock option activity as of and for the year ended December 31, 2010:
2010
Weighted
Average
Exercise
Price
Shares
Stock options outstanding at January 1
Granted
Exercised
Forfeited
Expired
Stock options outstanding at December 31
— $
501,317
(179,808)
(106)
—
94.29
9.64
31.48
(157,265) 150.41
164,138 $ 133.28
Stock Options Outstanding
Exercise
Price
29.92
35.10
43.35
43.98
122.16
130.47
170.12
133.28
Shares
3,139
4,506
8,078
9,834
1,245
67,424
69,912
164,138
$
$
Weighted Average
Remaining
Contractual Term
(in years)
0.3
0.7
1.2
4.2
—
0.1
0.9
0.8
For 2010, 2009 and 2008, the GGP stock compensation expense for employees specifically attributed to the HHC
Businesses, of approximately $0.6 million, $0.2 million and $0.4 million, respectively, has been included in the
accompanying financial statements for periods prior to the Effective Date.
Restricted Stock
Pursuant to the Equity Plan, the Company granted 8,247 shares of restricted stock to certain non-employee directors
as part of an annual retainer for their services on the board of directors. The restrictions on these shares lapse on the
date of HHC’s annual meeting of stockholders in 2011. Dividends are paid on restricted stock and are not
returnable, even if the underlying stock does not ultimately vest.
The following table summarizes restricted stock activity for the year ended December 31, 2010.
2010
Weighted
Average
Grant Date
Fair Value
Shares
— $
8,247
—
—
8,247 $
—
41.42
—
—
41.42
Restricted stock outstanding at January 1
Granted
Vested
Cancelled
Restricted stock outstanding at December 31
F-33
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The remaining unamortized expense at December 31, 2010 is approximately $0.3 million.
NOTE 12
OTHER ASSETS AND LIABILTIES
The following table summarizes the significant components of prepaid expenses and other assets.
Special Improvement District receivable
MUD and other receivables
Prepaid expenses
Below-market ground leases (Note 3)
Security and escrow deposits
Above-market tenant leases (Note 3)
Other
Uncertain tax position asset
December 31,
2010
2009
(In thousands)
$
46,250 $ 48,713
37,355
33,455
3,757
2,859
21,357
21,018
9,487
6,814
440
119
8,791
7,127
5,145
8,945
$ 126,587 $ 135,045
The following table summarizes the significant components of accounts payable and accrued expenses.
December 31,
2010
2009
(In thousands)
$
Construction payable
Payables to GGP
Accounts payable and accrued expenses
Above-market ground leases (Note 3)
Deferred gains/income
Accrued interest
Accrued real estate taxes
Tenant and other deposits
Insurance reserve
Accrued payroll and other employee liabilities
Below-market tenant leases (Note 3)
Other
Total accounts payable and accrued expenses
Less: amounts subject to compromise (Note 2)
Accounts payable and accrued expenses not subject to compromise $
—
29,745
2,907
5,631
1,633
3,953
3,555
4,229
3,930
15,531 $ 108,437
30,359
23,087
14,545
9,045
3,816
4,548
4,322
5,640
2,754
14
3,361
209,928
(141,866)
78,836 $ 68,062
7,722
78,836
—
—
NOTE 13
COMMITMENTS AND CONTINGENCIES
In the normal course of business, from time to time, we are involved in legal proceedings relating to the ownership
and operations of our properties. In management’s opinion, the liabilities, if any, that may ultimately result from
such legal actions are not expected to have a material adverse effect on our combined financial position, results of
operations or liquidity.
We lease land or buildings at certain properties from third parties. The leases generally provide us with a right of
first refusal in the event of a proposed sale of the property by the landlord. Rental payments are expensed as
incurred and have, to the extent applicable, been straight-lined over the term of the lease. Contractual rental
expense, including participation rent, was $3.5 million in 2010, $3.5 million in 2009 and $3.7 million in 2008, while
F-34
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
the same rent expense excluding amortization of above and below-market ground leases and straight-line rents, as
presented in our combined financial statements, was $3.7 million in 2010, $3.6 million in 2009 and $3.8 million in
2008.
See Note 8 for our obligations related to uncertain tax positions for disclosure of additional contingencies.
The following table summarizes the contractual obligations relating to our long-term commitments. Both long-term
debt and ground leases include fair value adjustments:
2011
2012
2013
2014
2015
Subsequent /
Other
Total
Long-term debt-principal
Ground lease payments
Uncertainty in income taxes,
including interest
Total
$ 13,100 $
4,142
6,360 $
4,150
(In thousands)
8,085 $ 83,637 $ 5,386 $
4,134
4,134
4,166
—
—
$ 17,242 $ 10,510 $ 12,251 $ 87,771 $ 9,520 $
—
—
—
202,092 $ 318,660
198,077
177,351
140,076 140,076
519,519 $ 656,813
NOTE 14
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On June 12, 2009, the FASB issued new generally accepted accounting guidance that amends the consolidation
guidance applicable to variable interest entities. The amendments to the consolidation guidance affect all entities
and enterprises currently within the scope of the previous guidance and are effective for the Company on January 1,
2010. Although the amendments significantly affected the overall consolidation analysis under previously issued
guidance, our consolidated financial statements were not significantly impacted by this new guidance.
In December 2007, the FASB issued new accounting guidance with respect to the accounting and reporting for
certain minority interests, the effect of which is to re-characterize such minority interests as non-controlling interests
and classify such non-controlling interests as a component of equity. The adoption of this new non-controlling
interest guidance was not significant except that all of our minority interests were reclassified to a component of
equity, specifically, non-controlling interests.
NOTE 15
SEGMENTS
We have three business segments which offer different products and services. In previous periods, we reported in
two segments predominantly as the assets within our current Operating Assets segment and our current Strategic
Developments segment were managed jointly as a group. Our current three segments are managed separately
because each requires different operating strategies or management expertise. These segments are different than
those of our predecessors with respect to the HHC Businesses and are reflective of our new management’s operating
philosophies and methods. All resulting changes from our predecessors’ previous presentation of our segments have
been applied to all periods presented. In addition, our current segments or assets within such segments could change
in the future as development of certain properties commence or other operational or management changes occur. We
do not distinguish or group our combined operations on a geographic basis. Further, all operations are within the
United States and no customer or tenant comprises more than 10% of revenues. Our reportable segments are as
follows:
(cid:129) Master Planned Communities - includes the development and sale of land, in large-scale, long-term
community development projects in and around Las Vegas, Nevada; Houston, Texas and Columbia,
Maryland. This segment also includes certain office properties and other ownership interest owned by The
Woodlands Partnerships as such assets are managed jointly with The Woodlands Maser Planned Community.
(cid:129) Operating Assets — includes commercial, mixed use and retail properties currently generating revenues but
for many of which we believe there is opportunity to redevelop or reposition the asset to increase operating
performance.
F-35
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(cid:129) Strategic Developments - includes all properties held for development and redevelopment, including the
current rental property operations (primarily retail and other interests in real estate at such locations) as well
as our one residential condominium project located in Natick (Boston), Massachusetts
As our segments are managed separately, different operating measures are utilized to assess operating results and
allocate resources. The one common operating measure used to assess operating results for the business segments is
Real Estate Property Earnings Before Taxes (“EBT”) which represents the operating revenues of the properties less
property operating expenses, as further described below. Management believes that EBT provides useful
information about the operating performance of all of our assets, projects and property.
EBT is defined as net income (loss) from continuing operations plus: (1) reorganization items; (2) income tax
provision (benefit); (3) warrant liability expense; (4) strategic initiatives; (5) general and administrative costs; and
(6) the items above of unconsolidated Real Estate Affiliates. We present 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) from continuing
operations to calculate EBT is appropriate to provide additional information to investors because EBT therefore
excludes certain non-recurring and non-cash items, including reorganization items related to the bankruptcy, which
we believe are not indicative of our core operating performance.
EBT should not be considered as an alternative to GAAP net income (loss) attributable to common stockholders or
GAAP net income (loss) from continuing operations, 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.
The accounting policies of the segments are the same as those described in Note 2, except that we report the
operations of our Real Estate Affiliates using the proportionate share method rather than the equity method. Under
the proportionate share method, our share of the revenues and expenses of our Real Estate Affiliates are aggregated
with the revenues and expenses of consolidated or combined properties. Under the equity method, our share of the
net revenues and expenses of our Real Estate Affiliates are reported as a single line item, Equity in income (loss) of
Real Estate Affiliates, in our Consolidated and Combined Statements of Loss and Comprehensive Loss. This
difference affects only the reported revenues and operating expenses of the segments and has no effect on our
reported net earnings.
The total cash expenditures for additions to long-lived assets for the Master Planned Communities segment was
$57.1 million for the year ended December 31, 2010, $61.2 million for the year ended December 31, 2009 and
$147.8 million for the year ended December 31, 2008. Similarly, cash expenditures for long-lived assets for the
Operating Assets and Strategic Developments segments was $111.8 million for the year ended December 31, 2010,
$27.7 million for the year ended December 31, 2009 and $314.1 million for the year ended December 31, 2008.
Such amounts for the Master Planned Communities segment and certain amounts in the Strategic Developments
segment are included in the amounts listed in our statements of cash flow as Land/residential development and
acquisitions expenditures; likewise such amounts for the Operating Assets and other investing amounts in the
Strategic Developments segments are included in the amounts listed as Development of real estate and property
additions/improvements primarily previously accrued, respectively, in our Consolidated and Combined Statements
of Cash Flows.
Segment operating results are as follows:
F-36
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Consolidated
Properties
Year Ended December 31, 2010
Real Estate
Affiliates
(In thousands)
Segment
Basis
Master Planned Communities
Land sales
Builder price participation
Minimum rents
Other land sales revenues
Other rental and property revenues
Total revenues
Cost of sales - land
CSA participation expense
Land sales operations
Land sales real estate and business taxes
Rental property real estate taxes
Rental property maintenance costs
Other property operating costs
Provisions for impairment
Depreciation and amortization
Interest income
Interest expense*
Total expenses
MPC EBT
Operating Assets
Minimum rents
Tenant recoveries
Other rental and property revenues
Total revenues
Rental property real estate taxes
Rental property maintenance costs
Other property operating costs
Provision for doubtful accounts
Provisions for impairment
Depreciation and amortization
Interest income
Interest expense
Total expenses
Operating Assets EBT
Strategic Developments
Minimum rents
Tenant recoveries
Other rental and property revenues
Total revenues
Real estate taxes
Rental property maintenance costs
Other property operating costs
Provision for doubtful accounts
Provisions for impairment
Depreciation and amortization
Interest expense
Total expenses
Strategic Developments EBT
$
38,058
4,124
1,949
5,384
984
50,499
23,388
—
17,154
11,887
1,010
229
545
405,331
334
(1)
(14,125)
445,752
(395,253)
63,962
18,220
7,354
89,536
9,764
5,582
30,174
1,606
80,923
16,017
(368)
16,513
160,211
(70,675)
1,015
347
1,322
2,684
3,756
684
7,174
176
17,102
212
34
29,138
(26,454)
$
47,181 $
2,045
5,567
(76)
8,420
63,137
26,116
—
5,639
2,552
1,166
886
10,782
—
4,147
(995)
2,833
53,126
10,011
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3
—
1
—
—
—
—
4
(4)
85,239
6,169
7,516
5,308
9,404
113,636
49,504
—
22,793
14,439
2,176
1,115
11,327
405,331
4,481
(996)
(11,292)
498,878
(385,242)
63,962
18,220
7,354
89,536
9,764
5,582
30,174
1,606
80,923
16,017
(368)
16,513
160,211
(70,675)
1,015
347
1,322
2,684
3,759
684
7,175
176
17,102
212
34
29,142
(26,458)
Real estate property EBT
____________
* Negative interest expense amounts relate to interest capitalized on debt assigned to our Operating Asset Segment
(492,382) $
10,007
(482,375)
$
$
F-37
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Master Planned Communities
Land sales
Builder price participation
Minimum rents
Other land sales revenues
Other rental and property revenues
Total revenues
Cost of sales - land
CSA participation expense
Land sales operations
Land sales real estate and business taxes
Rental property real estate taxes
Rental property maintenance costs
Other property operating costs
Provisions for impairment
Depreciation and amortization
Interest income
Interest expense*
Total expenses
MPC EBT
Operating Assets
Minimum rents
Tenant recoveries
Other rental and property revenues
Total revenues
Rental property real estate taxes
Rental property maintenance costs
Other property operating costs
Provision for doubtful accounts
Provisions for impairment
Depreciation and amortization
Interest income
Interest expense
Total expenses
Operating Assets EBT
Strategic Developments
Minimum rents
Tenant recoveries
Other rental and property revenues
Total revenues
Real estate taxes
Rental property maintenance costs
Other property operating costs
Provision for doubtful accounts
Provisions for impairment
Depreciation and amortization
Interest expense*
Total expenses
Strategic Developments EBT
Year Ended December 31, 2009
Combined
Properties
Real Estate
Affiliates
(In thousands)
Segment
Basis
$
34,563 $
5,687
2,291
5,747
803
49,091
22,020
(5,345)
15,644
16,743
1,130
287
1,252
52,767
371
(12)
(11,933)
92,924
(43,833)
32,930 $
1,727
12,686
3,336
522
51,201
18,144
—
12,275
2,974
685
2,508
7,192
10,600
5,268
(664)
3,795
62,777
(11,576)
61,460
18,742
7,416
87,618
9,710
4,577
29,205
2,189
50,964
17,367
(1,677)
15,634
127,969
(40,351)
1,902
900
(3,163)
(361)
2,973
722
4,353
350
576,618
2,103
(2,724)
584,395
(584,756)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5
—
—
—
19,041
—
—
19,046
(19,046)
67,493
7,414
14,977
9,083
1,325
100,292
40,164
(5,345)
27,919
19,717
1,815
2,795
8,444
63,367
5,639
(676)
(8,138)
155,701
(55,409)
61,460
18,742
7,416
87,618
9,710
4,577
29,205
2,189
50,964
17,367
(1,677)
15,634
127,969
(40,351)
1,902
900
(3,163)
(361)
2,978
722
4,353
350
595,659
2,103
(2,724)
603,441
(603,802)
Real estate property EBT
____________
* Negative interest expense amounts relate to interest capitalized on debt assigned to our Operating Asset Segment
(668,940) $
(30,622) $
$
(699,562)
F-38
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Combined
Properties
Year Ended December 31, 2008
Real Estate
Affiliates
(In thousands)
Basis
Segment
Master Planned Communities
Land sales
Builder price participation
Minimum rents
Other land sales revenues
Other rental and property revenues
Total revenues
Cost of sales - land
CSA participation expense
Land sales operations
Land sales real estate and business taxes
Rental property real estate taxes
Rental property maintenance costs
Other property operating costs
Provisions for impairment
Depreciation and amortization
Interest income
Interest expense*
Total expenses
MPC EBT
Operating Assets
Minimum rents
Tenant recoveries
Other rental and property revenues
Total revenues
Rental property real estate taxes
Rental property maintenance costs
Other property operating costs
Provision for doubtful accounts
Provisions for impairment
Depreciation and amortization
Interest income
Interest expense
Total expenses
Operating Assets EBT
Strategic Developments
Minimum rents
Tenant recoveries
Other rental and property revenues
Total revenues
Real estate taxes
Rental property maintenance costs
Other property operating costs
Provision for doubtful accounts
Provisions for impairment
Depreciation and amortization
Interest expense*
Total expenses
Strategic Developments EBT
$
37,928 $
10,658
2,285
17,971
1,223
70,065
24,517
2,149
20,770
15,985
1,109
304
915
—
562
(830)
(6,801)
58,680
11,385
62,767
20,119
10,082
92,968
7,864
5,147
34,063
925
37
15,390
(1,084)
13,894
76,236
16,732
3,389
1,473
4,612
9,474
1,445
662
3,136
249
52,474
2,469
(6,284)
54,151
(44,677)
59,830 $
3,250
12,557
9,109
(4,659)
80,087
29,558
—
14,322
2,046
620
1,567
9,339
—
4,012
(427)
1,987
63,024
17,063
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
97,758
13,908
14,842
27,080
(3,436)
150,152
54,075
2,149
35,092
18,031
1,729
1,871
10,254
—
4,574
(1,257)
(4,814)
121,704
28,448
62,767
20,119
10,082
92,968
7,864
5,147
34,063
925
37
15,390
(1,084)
13,894
76,236
16,732
3,389
1,473
4,612
9,474
1,445
662
3,136
249
52,474
2,469
(6,284)
54,151
(44,677)
Real estate property EBT
____________
* Negative interest expense amounts relate to interest capitalized on debt assigned to our Operating Asset Segment
(16,560) $
17,063 $
$
503
F-39
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The following reconciles EBT to GAAP-basis income (loss) from continuing operations:
2010
Year Ended December 31,
2009
(In thousands)
2008
Reconciliation of EBT to GAAP-basis loss from continuing
operations
Real estate property EBT:
Segment basis
Real Estate Affiliates
Consolidated properties
General and administrative
Strategic Initiatives
Warrant liability expense
Benefit from (provision for) income taxes
Equity in income of unconsolidated Real Estate Affiliates
Reorganization costs
Loss from continuing operations
$
$ (482,375) $ (699,562) $
30,622
(668,940)
(17,643)
(5,380)
—
23,969
(28,209)
(6,674)
503
(17,063)
(10,007)
(16,560)
(492,382)
(20,656)
(21,538)
(1,496)
—
—
(140,900)
(2,703)
633,459
23,506
9,413
(57,282)
—
(69,230) $ (702,877) $ (17,909)
The following reconciles segment revenues to GAAP-basis combined revenues:
Year Ended December 31,
2010
2009
(In thousands)
2008
Reconciliation of Segment Basis Revenues to GAAP Revenues
Master Planned Communities - Total Segment
Operating Assets - Total Segment
Strategic Developments - Total Segment
Total Segment revenues
(less:)
The Woodlands Partnerships revenues, at our ownership share
Total revenues - GAAP basis
$ 113,636 $ 100,292 $ 150,152
92,968
9,474
187,549 252,594
89,536
2,684
205,856
87,618
(361)
(63,137)
(80,087)
$ 142,719 $ 136,348 $ 172,507
(51,201)
The assets by segment and the reconciliation of total segment assets to the total assets in the combined financial
statements at December 31, 2010 and 2009 are summarized as follows:
Master Planned Communities
Operating Assets
Strategic Developments
Total segment assets
Corporate and other
Real Estate Affiliates
Total assets
Year Ended December 31,
2010
2009
(In thousands)
1,823,399 $ 2,162,209
815,090
718,330
257,184
215,037
3,234,483
2,756,766
1,618
601,902
(335,961)
(330,874)
3,022,707 $ 2,905,227
$
$
F-40
THE HOWARD HUGHES CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE 16
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2010
$
$
Total revenues
Operating loss (a)
Loss from continuing operations (a)
Loss from discontinued operations
Net loss attributable to common
stockholders
Basic and diluted loss per share:
Continuing operations
Discontinued operations
Weighted average basic and diluted shares
outstanding
Total revenues
Operating loss (b)
Loss from continuing operations (b)
Loss from discontinued operations
Net loss
Basic and diluted loss per share:
Continuing operations
Discontinued operations
Weighted average basic and diluted shares
28,790 $
(3,285)
(20,481)
—
(In thousands, except for per share amounts)
32,460 $
(618)
(16,183)
—
30,629 $
(4,670)
(28,017)
—
50,840
(503,294)
(4,549)
—
(20,529)
(28,042)
(16,230)
(4,630)
(0.54)
—
(0.74)
—
(0.43)
—
(0.12)
—
37,716
37,716
37,716
37,753
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2009
28,968 $
(92,304)
(85,356)
—
(85,400)
(In thousands, except for per share amounts)
30,260 $
(42,427)
(24,379)
46,152 $
(55,744)
(57,925)
—
(57,946)
30,968
(502,200)
(535,217)
(939)
(535,852)
(14.19)
(0.02)
—
(24,414)
(0.65)
—
(2.26)
—
(1.54)
—
outstanding
____________
(a) Operating loss and loss from continuing operations in the fourth quarter 2010 were significantly impacted by
37,716
37,716
37,716
37,716
impairment provisions (Note 3) and warrant liability expense (Note 1).
(b) Operating loss and loss from continuing operations in the fourth quarter 2009 were primarily due to provision for
impairment (Note 3) and property level bankruptcy claims. Such losses were partially offset by gains on
liabilities subject to compromise (Note 2).
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____________
HHC
NOTES TO SCHEDULE III
(a) See description of mortgages, notes and other debt payable in Note 7 of Notes to Consolidated and
Combined Financial Statements.
(b) Initial cost for constructed malls is cost at end of first complete calendar year subsequent to
opening.
(c) For retail and other properties, costs capitalized subsequent to acquisitions is net of cost of
disposals or other property write-downs. For Master Planned Communities, costs capitalized
subsequent to acquisitions are net of land sales.
(d) The aggregate cost of land, building and improvements for federal income tax purposes is
approximately $1.8 billion.
(e) Depreciation is computed based upon the following estimated lives:
Building, improvements and carrying costs
Equipment, tenant improvements and fixtures
Years
40-45
5-10
(In thousands)
Balance at beginning of year
Change in land
Additions
Impairments
Dispositions and write-offs
Balance at end of year
(In thousands)
Balance at beginning of year
Depreciation expense
Dispositions and write-offs
Balance at end of year
Reconciliation of Real Estate
2009
2008
2010
$ 2,687,256
13,240
116,482
(503,356)
(145,589)
$ 2,168,033
$ 3,206,436 $ 2,787,779
191,857
630,868
(52,511)
(351,557)
$ 2,687,256 $ 3,206,436
179,765
238,020
(680,349)
(256,616)
Reconciliation of Accumulated Depreciation
2010
2009
2008
$
$
85,639
14,582
(16,831)
83,390
$
$
103,293 $
17,145
(34,799)
85,639 $
101,384
15,637
(13,728)
103,293
F-43
Exhibit No.
Description of Exhibit
2.1
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Separation Agreement, dated November 9, 2010, between The Howard Hughes Corporation and
General Growth Properties, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current
Report on Form 8-K, filed November 12, 2010)
Amended and Restated Certificate of Incorporation of The Howard Hughes Corporation (incorporated
by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed November 12, 2010)
Amended and Restated Bylaws of The Howard Hughes Corporation (incorporated by reference to
Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed November 12, 2010)
Transition Services Agreement, dated November 9, 2010, between The Howard Hughes Corporation,
GGP Limited Partnership and General Growth Management, Inc. (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K, filed November 12, 2010)
Reverse Transition Services Agreement, dated November 9, 2010, between The Howard Hughes
Corporation, GGP Limited Partnership and General Growth Management, Inc. (incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed November 12, 2010)
Employee Matters Agreement, dated November 9, 2010, between The Howard Hughes Corporation,
GGP Limited Partnership and General Growth Management, Inc. (incorporated by reference to Exhibit
10.3 to the Company’s Current Report on Form 8-K, filed November 12, 2010)
Employee Leasing Agreement, dated November 9, 2010, between The Howard Hughes Corporation,
GGP Limited Partnership and General Growth Management, Inc. (incorporated by reference to Exhibit
10.4 to the Company’s Current Report on Form 8-K, filed November 12, 2010)
Tax Matters Agreement, dated November 9, 2010, between The Howard Hughes Corporation and
General Growth Properties, Inc. (incorporated by reference to Exhibit 10.5 to the Company’s Current
Report on Form 8-K, filed November 12, 2010)
Surety Bond Indemnity Agreement, dated November 9, 2010, between The Howard Hughes
Corporation and General Growth Properties, Inc. (incorporated by reference to Exhibit 10.6 to the
Company’s Current Report on Form 8-K, filed November 12, 2010)
Form of indemnification agreement for directors and certain executive officers of The Howard Hughes
Corporation (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K,
filed November 12, 2010)
10.12
10.11
10.10
10.9
10.8 Warrant Agreement, dated November 9, 2010, between The Howard Hughes Corporation and Mellon
Investor Services LLC (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on
Form 8-K, filed November 12, 2010)
Letter Agreement, dated November 9, 2010, between The Howard Hughes Corporation and Brookfield
Retail Holdings LLC (incorporated by reference to Exhibit 10.9 to the Company’s Current Report on
Form 8-K, filed November 12, 2010)
Letter Agreement, dated November 9, 2010, between The Howard Hughes Corporation and The
Fairholme Fund and Fairholme Focused Income Fund (incorporated by reference to Exhibit 10.10 to
the Company’s Current Report on Form 8-K, filed November 12, 2010)
Letter Agreement, dated November 9, 2010, between The Howard Hughes Corporation and Pershing
Square Capital Management, L.P. (incorporated by reference to Exhibit 10.11 to the Company’s
Current Report on Form 8-K, filed November 12, 2010)
Registration Rights Agreement, dated November 9, 2010, between The Howard Hughes Corporation
and M.B. Capital Partners, M.B. Capital Partners III and M.B. Capital Units LLC (incorporated by
reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed November 12, 2010)
Registration Rights Agreement, dated November 9, 2010, between The Howard Hughes Corporation
and Brookfield Retail Holdings LLC, Brookfield Retail Holdings II LLC, Brookfield Retail Holdings
III LLC, Brookfield Retail Holdings IV-A LLC, Brookfield Retail
Holdings IV-D LLC, Brookfield Retail Holdings V LP and Brookfield US Retail Holdings LLC
(incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K, filed
November 12, 2010)
Registration Rights Agreement, dated November 9, 2010, between The Howard Hughes Corporation
and The Fairholme Fund and Fairholme Focused Income Fund (incorporated by reference to Exhibit
99.3 to the Company’s Current Report on Form 8-K, filed November 12, 2010)
Registration Rights Agreement, dated November 9, 2010, between The Howard Hughes Corporation
and Pershing Square Capital Management, L.P., Blackstone Real Estate Partners VI L.P., Blackstone
Real Estate Partners (AIV) VI L.P., Blackstone Real Estate Partners VI.F L.P., Blackstone Real Estate
Partners VI.TE.1 L.P., Blackstone Real Estate Partners VI.TE.2 L.P., Blackstone Real Estate Holdings
VI L.P., and Blackstone GGP Principal Transaction Partners L.P. (incorporated by reference to Exhibit
99.4 to the Company’s Current Report on Form 8-K, filed November 12, 2010)
10.13
10.14
10.15
10.16 Management Services Agreement, dated August 6, 2010, between The Howard Hughes Corporation
and Brookfield Advisors LP (incorporated by reference to Exhibit 10.4 to the Company’s Form 10,
filed October 7, 2010), which agreement is no longer in effect, but is filed as an exhibit to this Annual
Report on Form 10-K in accordance with Item 601(b)(10) of Regulation S-K
10.17* The Howard Hughes Corporation 2010 Equity Incentive Plan (incorporated by reference to Exhibit
10.18*
10.13 to the Company’s Current Report on Form 8-K, filed November 12, 2010)
Form of Restricted Stock Agreement for Nonemployee Directors under The Howard Hughes
Corporation 2010 Equity Incentive Plan
10.19* Non-Qualified Stock Option Agreement, dated November 9, 2010, between The Howard Hughes
Corporation and Adam S. Metz (incorporated by reference to Exhibit 10.14 to the Company’s Current
Report on Form 8-K, filed November 12, 2010), which agreement is no longer in effect, but is filed as
an exhibit to this Annual Report on Form 10-K in accordance with Item 601(b)(10) of Regulation S-K
10.20* Non-Qualified Stock Option Agreement, dated November 9, 2010, between The Howard Hughes
Corporation and Thomas Nolan Jr. (in his capacity as a director) (incorporated by reference to
Exhibit 10.15 to the Company’s Current Report on Form 8-K, filed November 12, 2010), which
agreement is no longer in effect, but is filed as an exhibit to this Annual Report on Form 10-K in
accordance with Item 601(b)(10) of Regulation S-K
10.21* Non-Qualified Stock Option Agreement, dated November 9, 2010, between The Howard Hughes
Corporation and Thomas Nolan Jr. (in his capacity as an employee) (incorporated by reference to
Exhibit 10.16 to the Company’s Current Report on Form 8-K, filed November 12, 2010), which
agreement is no longer in effect, but is filed as an exhibit to this Annual Report on Form 10-K in
accordance with Item 601(b)(10) of Regulation S-K
10.22* Employment Agreement, dated as of November 22, 2010, between The Howard Hughes Corporation
and David R. Weinreb (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on
Form 8-K, filed November 29, 2010)
10.23* Warrant Purchase Agreement, dated November 22, 2010, between The Howard Hughes Corporation
and David R. Weinreb (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K, filed November 29, 2010)
10.24* Employment Agreement, dated as of November 22, 2010, between The Howard Hughes Corporation
and Grant Herlitz (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form
8-K, filed November 29, 2010)
10.25* Warrant Purchase Agreement, dated November 22, 2010, between The Howard Hughes Corporation
and Grant Herlitz (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form
8-K, filed November 29, 2010)
10.26* Warrant Purchase Agreement, dated February 25, 2011, between The Howard Hughes Corporation and
Andrew C. Richardson (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K, filed March 3, 2011)
10.27* Employment Agreement, dated as of February 25, 2011, between The Howard Hughes Corporation and
Andrew C. Richardson (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K, filed March 3 2011)
List of Subsidiaries
Consent of Deloitte & Touche LLP
Consent of BKD, LLP
Power of Attorney
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
TWLDC Holdings, L.P. Consolidated Financial Statements and Independent Accountant’s Report
21.1
23.1
23.2
24.1
31.1
31.2
32.1
99.1
____________
* Management contract, compensatory plan or arrangement
TWLDC Holdings, L.P.
Accountants' Report and Consolidated Financial Statements
December 31, 2010 and 2009
TWLDC Holdings, L.P.
December 31, 2010 and 2009
Contents
Independent Accountants' Report ....................................................................................... 1
Consolidated Financial Statements
Balance Sheets ................................................................................................................................. 2
Statements of Earnings .................................................................................................................... 3
Statements of Changes in Partners' Equity ...................................................................................... 4
Statements of Cash Flows ................................................................................................................ 5
Notes to Financial Statements .......................................................................................................... 6
Independent Accountants' Report
Executive Committee
TWLDC Holdings, L.P.
The Woodlands, Texas
We have audited the accompanying consolidated balance sheets of TWLDC Holdings, L.P., as of
December 31, 2010 and 2009, and the related consolidated statements of earnings, changes in partners'
equity and cash flows for each of the years in the three-year period ended December 31, 2010. These
financial statements are the responsibility of The Woodlands Partnerships' management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of TWLDC Holdings, L.P., as of December 31, 2010 and 2009, and the
results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2010, in conformity with accounting principles generally accepted in the United States of
America.
March 29, 2011
TWLDC Holdings, L.P.
Consolidated Balance Sheets
December 31, 2010 and 2009
(dollars in thousands)
Assets
Cash and cash equivalents
Trade receivables
Inventories
Prepaid and other current assets
Notes and contracts receivable, net
Real estate, net
Property held for sale
Assets related to property held for sale
Other assets
2010
2009
$
99,769
4,956
476
3,243
59,091
380,823
58,019
5,174
5,317
$
35,766
7,202
583
3,377
78,791
474,858
-
-
4,943
Total assets
$
616,868
$
605,520
Liabilities and Partners' Equity
Liabilities
Accounts payable and accrued liabilities
Payables to affiliates
Liabilities related to property held for sale
Credit facility
Debt related to property held for sale
Other debt
Notes payable to partners
Deferred revenue
Other liabilities
$
22,359
1,796
3,127
306,539
40,000
25,683
38,193
64,958
10,310
$
25,583
2,400
-
306,539
-
71,424
34,657
61,625
7,607
Total liabilities
512,965
509,835
Partners' Equity
TWLDC Holdings, L.P., equity
Noncontrolling interests
Total partners' equity
103,274
629
103,903
90,517
5,168
95,685
Total liabilities and partners' equity
$
616,868
$
605,520
See Notes to Consolidated Financial Statements
2
TWLDC Holdings, L.P.
Consolidated Statements of Earnings
Years Ended December 31, 2010, 2009 and 2008
(dollars in thousands)
Revenues
Residential lot sales
Commercial land sales
Hotel and country club operations
Other
Costs and Expenses
Residential lot cost of sales
Commercial land cost of sales
Hotel and country club operations
Operating expenses
Depreciation and amortization
Operating Earnings
Other (Income) Expense
Interest expense
Interest capitalized
Amortization of debt costs
Other
2010
2009
2008
$
71,692 $
23,874
9,434
15,261
53,585 $
12,681
9,393
19,414
92,833
27,590
10,116
17,870
120,261
95,073
148,409
43,563
6,183
14,860
32,790
4,369
101,765
31,968
2,593
14,740
34,986
5,660
89,947
48,376
7,926
14,814
36,540
3,406
111,062
18,496
5,126
37,347
14,584
(4,147)
1,379
(2,669)
9,147
14,703
(4,988)
1,932
(4,969)
6,678
21,887
(10,050)
1,806
(3,634)
10,009
Earnings (Loss) From Continuing Operations Before
Income Taxes
9,349
(1,552)
27,338
Provision (Credit) For Income Taxes
825
(937)
1,166
Earnings (Loss) From Continuing Operations
8,524
(615)
26,172
Discontinued Operations
Gain from disposal of discontinued operations
Gain (loss) from operations of discontinued components, net of
tax expense of $197, $260 and $410 in 2010, 2009 and 2008,
respectively
-
1,819
12,225
(306)
1,841
1,213
Gain (Loss) From Discontinued Operations
(306)
3,660
13,438
Net Earnings
8,218
3,045
39,610
Less Net (Earnings) Loss Attributable to the Noncontrolling
Interests
4,539
(5,595)
Net Earnings (Loss) Attributable to TWLDC Holdings, L.P.
$
12,757 $
(2,550) $
See Notes to Consolidated Financial Statements
(2,082)
37,528
3
TWLDC Holdings, L.P.
Consolidated Statements of Changes in Partners' Equity
Years Ended December 31, 2010, 2009 and 2008
(dollars in thousands)
TWLDC
Holdings, L.P.
Noncontrolling
Interests
Total
Balances, January 1, 2008
$
55,539
$
5,886
$
61,425
Net earnings
Balances, December 31, 2008
37,528
93,067
2,082
7,968
Distribution to noncontrolling interest
Net earnings (loss)
-
(2,550)
(8,395)
5,595
Balances, December 31, 2009
90,517
5,168
Net earnings (loss)
12,757
(4,539)
39,610
101,035
(8,395)
3,045
95,685
8,218
Balances, December 31, 2010
$
103,274
$
629
$
103,903
See Notes to Consolidated Financial Statements
4
TWLDC Holdings, L.P.
Consolidated Statements of Cash Flows
Years Ended December 31, 2010, 2009 and 2008
(dollars in thousands)
Operating Activities
Net earnings
Adjustments to reconcile net earnings to cash provided by
operating activities:
Cost of land sold
Land development capital expenditures
Depreciation and amortization
Amortization of debt costs
Gain on disposal of discontinued operations
Increase (decrease) in notes and contracts receivable
Other liabilities and deferred revenue
Other
Changes in operating assets and liabilities:
Trade receivables, inventories and prepaid assets
Other assets
Accounts payable, accrued liabilities and net payables
with affiliates
Net cash provided by operating activities
Investing Activities
Distribution from equity investee
Capital expenditures
Proceeds from sales of assets
Net cash used in investing activities
Financing Activities
Distributions to noncontrolling interest
Debt borrowings
Debt repayments
Net cash used in financing activities
2010
2009
2008
$
8,218 $
3,045 $
39,610
49,746
(19,965)
7,687
1,379
(556)
19,700
4,213
6,225
448
(5,761)
2,763
74,097
-
(5,307)
954
(4,353)
-
-
(5,741)
(5,741)
34,561
(18,493)
10,005
2,050
(1,819)
1,840
(25)
2,286
8,761
(1,139)
(16,115)
24,957
-
(44,600)
34,044
(10,556)
(8,395)
8,095
(31,221)
(31,521)
56,302
(48,105)
8,528
2,025
(12,225)
(932)
6,443
(6,369)
(2,036)
(3,707)
258
39,792
4,300
(110,312)
80,498
(25,514)
-
118,629
(119,665)
(1,036)
Increase (Decrease) in Cash and Cash Equivalents
64,003
(17,120)
13,242
Cash and Cash Equivalents, Beginning of Year
35,766
52,886
Cash and Cash Equivalents, End of Year
$
99,769 $
35,766 $
Supplemental Disclosure of Cash Flow Information
Interest paid (net of amount capitalized)
Federal income tax paid
Sale of land in exchange for equity interest in Waterway Avenue
Partners, L.L.C.
$
10,460 $
13,630 $
-
-
-
-
39,644
52,886
21,472
222
10,700
See Notes to Consolidated Financial Statements
5
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
The Woodlands Partnerships' real estate activities are concentrated in The Woodlands, a
master-planned community located north of Houston, Texas. Consequently, these operations and
the associated credit risks may be affected, either positively or negatively, by changes in
economic conditions in this geographical area. Activities associated with The Woodlands
Partnerships include residential and commercial land sales and the construction, operation and
management of office and industrial buildings, apartments, golf courses and a hotel facility. The
Woodlands Partnerships has five operating segments which are disclosed in Note 15.
TWLDC Holdings, L.P. (Woodlands Development), a Texas limited partnership, is owned by
entities controlled by The Howard Hughes Corporation (HHC) and Morgan Stanley Real Estate
Fund II, L.P. (Morgan Stanley).
Principles of Consolidation
Accounting principles generally accepted in the United States of America requires the
consolidation of variable interest entities (VIEs) in which an enterprise has a controlling financial
interest. A controlling financial interest will have both of the following characteristics: (a) the
power to direct the activities of a VIE that most significantly impact the VIE's economic
performance, and (b) the obligation to receive benefits or absorb losses of the VIE that could
potentially be significant to the VIE. Woodlands Development examines specific criteria and
uses its judgment when determining if Woodlands Development is the primary beneficiary of a
VIE. Factors considered in determining whether Woodlands Development is the primary
beneficiary include risk and reward sharing, experience and financial condition of other partners,
voting rights, involvement in day-to-day capital and operating decisions, and existence of
unilateral kick-out rights or voting rights.
Woodlands Development consolidates a VIE, TWCPC Holdings, L.P. (Woodlands Commercial),
a Texas limited partnership, based on significant debt guarantees provided by Woodlands
Development to Woodlands Commercial. Woodlands Commercial consolidates a VIE, The
Woodlands Operating Company, L.P. (Woodlands Operating), a Texas limited partnership, from
which it receives management and leasing services for its properties. At December 31, 2010 and
2009, the carrying amount of the assets and debt of Woodlands Commercial totaled $115,912,000
and $180,825,000, respectively. At December 31, 2010 and 2009, the carrying amount of the
assets and debt of Woodlands Operating totaled $21,992,000 and $22,446,000, respectively.
HHC and Morgan Stanley also own Woodlands Commercial and Woodlands Operating.
Woodlands Development, Woodlands Commercial and Woodlands Operating are hereinafter
referred to as "The Woodlands Partnerships." As discussed in Note 5, Woodlands Development
and Woodlands Commercial guarantee each other's debts. In addition, The Woodlands
Partnerships has a liquidity arrangement to provide financial support to each other.
6
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Also included in the consolidation is The Woodlands Community Facilities Development
Corporation (WCFDC), an entity that has $11,454,000 in assets and $8,610,000 in debt, all of
which is owed to Woodlands Development. WCFDC's purpose is to promote the health, safety,
common good and social welfare of the residents of The Woodlands, Texas, by developing parks,
pathways and other amenities. The Woodlands Partnerships has the power to direct the activities
of WCFDC through control of WCFDC's Board of Directors. The Woodlands Partnerships also
consolidated 10101 Woodloch Forest LLC in which The Woodlands Partnerships and a third
party each had a 50 percent interest. The purpose of this entity was to construct and own an
office building that is leased by an affiliate of the third party. The noncontrolling member
contributed $6,393,000 in cash to the entity and The Woodlands Partnerships contributed a total
of $6,393,000 in cash, land and other assets. The building was sold in 2009 and after repayment
of the outstanding debt, the noncontrolling member received a distribution of $8,395,000.
The consolidated financial statements include the accounts of The Woodlands Partnerships and
their majority and wholly owned subsidiaries. The Woodlands Partnerships also consolidates
VIEs for which they are the primary beneficiary. Investments in entities in which The
Woodlands Partnerships does not control, but has the ability to exercise significant influence over
operating and financial policies, are accounted for under the equity method. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Trade Receivables
Trade receivables are stated at the amount billed to customers. The Woodlands Partnerships
provides an allowance for doubtful accounts, which is based on a review of outstanding
receivables, historical collection information and existing economic conditions. Trade
receivables are ordinarily due 30 days after the issuance of the billing. Accounts past due more
than 120 days are considered delinquent. Delinquent receivables are written off based on
individual credit evaluation and specific circumstances of the customer.
Real Estate
Real estate assets are stated at cost. Costs associated with the acquisition and development of real
estate, including holding costs consisting principally of interest and ad valorem taxes, are
capitalized as incurred to the extent the total carrying value of the property does not exceed the
estimated fair value of the completed property. Capitalization of such holding costs is limited to
properties for which active development continues. Capitalization ceases upon completion of a
property or cessation of development activities. Where practicable, capitalized costs are
specifically assigned to individual assets; otherwise, costs are allocated based on estimated values
of the affected assets. Capitalized real estate taxes and interest costs are amortized over lives that
are consistent with the related commercial properties or written off as a component of cost of
sales for land.
7
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Pre-development costs, which generally include legal and professional fees and other directly
related third-party costs, are capitalized as part of the property being developed. In the event a
development is no longer deemed to be probable, the costs previously capitalized are expensed.
In accordance with Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) 360, Property, Plant and Equipment, long-lived assets are reviewed for
impairment when events or changes in circumstances indicate the carrying amount of an asset
may not be recoverable or the useful life has changed. Assets are evaluated based on their cash
flows and profitability, including estimated future operating results, and trends or other
determinants of fair value. If the total of the expected future undiscounted cash flows is less than
the carrying amount of the asset, a loss is recognized for the difference between the fair value and
the carrying value of the asset. For the years ended December 31, 2010, 2009 and 2008, no
impairments were recognized.
Sales of Real Estate
Earnings from sales of real estate are recognized when a third-party buyer has made an adequate
cash down payment and has attained the attributes of ownership. Capitalized cost related to real
estate is determined as a specific percentage of the sales revenues recognized for each land
development project. The amount capitalized is based on actual costs incurred, total estimated
development costs and sales revenues for each project. These estimates are revised annually and
are based on the then-current development strategy and operating assumptions utilizing internally
developed projections for product type, revenue and related development cost. Capitalized costs
are depreciated over the estimated useful life of the asset.
Land Sales
Revenues from land sales are recognized using the full accrual method provided that various
criteria relating to the terms of the transactions and The Woodlands Partnerships' subsequent
involvement with the land sold are met. Revenues relating to transactions that do not meet the
established criteria are deferred and recognized when the criteria are met or using the installment
or cost recovery methods, as appropriate in the circumstances. For land sale transactions in
which The Woodlands Partnerships are required to perform additional services and incur
significant costs after title has passed, revenues and cost of sales are recognized on a percentage
of completion basis.
Cost of land sales is determined as a specified percentage of land sales revenues recognized for
each community development project. The cost ratios used are based on actual costs incurred and
estimates of development costs and sales revenues to completion of each project. The ratios are
reviewed regularly and revised for changes in sales and cost estimates or development plans.
Significant changes in these estimates or future development plans, whether due to changes in
market conditions or other factors, could result in changes to the cost ratio used for a specific
project.
8
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
The specific identification method is used to determine cost of sales for certain parcels of land,
including acquired parcels The Woodlands Partnerships do not intend to develop or for which
development is complete at the date of acquisition.
Hotel and Country Club Revenue
Revenue is recognized as services are performed. Hotel revenue primarily represents room
rentals and food and beverage sales. Country club revenues primarily represent dues, green fees,
cart rentals, and food and beverage sales. Refundable initiation fees are included in deferred
revenues on the consolidated balance sheets.
Sales of Commercial Properties
Sales of commercial properties are generally accounted for under the full accrual method. Under
that method, gain is not recognized until the collectibility of the sales price is reasonably assured
and the earnings process is complete. When a sale does not meet the requirements for income
recognition, gain is deferred until those requirements are met. Sales of real estate are accounted
for under the percentage-of-completion method when The Woodlands Partnerships has material
obligations under sales contracts to provide improvements after the property is sold. Under the
percentage-of-completion method, the gain on sale is recognized as the related obligations are
fulfilled.
Lease Revenue
Commercial properties are leased to third-party tenants generally involving multi-year terms.
These leases are accounted for as operating leases. See Note 3 for further information.
Depreciation
Depreciation of operating assets is recorded on the straight-line method over the estimated useful
lives of the assets. Useful lives range predominantly from 15 to 40 years for land improvements
and buildings, 3 to 20 years for leasehold improvements, and 3 to 10 years for furniture, fixtures
and equipment. Property and equipment are carried at cost less accumulated depreciation.
Advertising
Advertising costs are charged to operations when incurred. For the years ended December 31,
2010, 2009 and 2008, advertising costs totaled $4,733,000, $3,995,000 and $5,424,000,
respectively.
Deferred Financing Costs
Costs incurred to obtain debt financing are deferred and amortized over the estimated term of the
related debt using the interest method.
9
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Income Taxes
The Woodlands Partnerships are not income taxpaying entities and all income and expenses are
reported by the partners for tax reporting purposes. No provision for federal income taxes is
included in the accompanying consolidated financial statements for these entities, except as
follows. Effective March 1, 2002, WECCR GP, a wholly owned subsidiary of Woodlands
Operating, elected to be classified as an association taxable as a corporation for federal income
tax purposes. Accordingly, a provision for federal income tax has been provided.
Significant changes were made to the Texas franchise tax during the 79th and 80th sessions of the
Texas Legislature, whereby the Legislature extended the state franchise tax to partnerships
(general, limited and limited liability). In previous years, The Woodlands Partnerships did not
pay franchise taxes, since they were organized as partnerships and franchise taxes were not
imposed. The revised tax base is based on a taxable entity's margin. The margin tax is calculated
at a rate of 1 percent on the lesser of three calculations: a) total revenue less cost of goods sold, b)
total revenue less compensation, or c) total revenue times 70 percent. For the years ended
December 31, 2010, 2009 and 2008, The Woodlands Partnerships recorded margin tax expense of
$1,054,000, $835,000 and $1,367,000, respectively.
The tax returns, the qualification of The Woodlands Partnerships for tax purposes and the amount
of distributable partnership income or loss are subject to examination by federal taxing
authorities. If such examinations result in changes with respect to partnership qualification or in
changes to distributable partnership income or loss, the tax liability of the partners could be
changed accordingly. The 2007 and 2008 federal income tax returns are subject to examination
by the Internal Revenue Service for three years after they were filed. The 2007, 2008 and 2009
state franchise tax returns are subject to examination by the Texas Comptroller for four years
after they were filed.
The Woodlands Partnerships had no material uncertain tax positions at December 31, 2010.
Inventories
Inventory is carried at the lower of cost or market and consists primarily of golf-related clothing,
equipment sold at golf course pro shops, and food and beverages sold at the hotel facility in The
Woodlands. Cost is determined based on a first-in, first-out method.
Cash and Cash Equivalents
The Woodlands Partnerships considers all liquid investments with original maturities of three
months or less to be cash equivalents. At December 31, 2010 and 2009, cash equivalents
consisted primarily of money market accounts.
10
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
One or more of the financial institutions holding The Woodlands Partnerships' cash accounts are
participating in the Federal Deposit Insurance Corporation's (FDIC) Transaction Account
Guarantee Program. Under the program, through December 31, 2010, all noninterest-bearing
transaction accounts at these institutions are fully guaranteed by the FDIC for the entire amount
in the account. Pursuant to legislation enacted in 2010, the FDIC will fully insure all
noninterest-bearing transaction accounts beginning December 31, 2010 through December 31,
2012, at all FDIC-insured institutions.
For financial institutions opting out of the FDIC's Transaction Account Guarantee Program or
interest-bearing cash accounts, the FDIC's insurance limits increased to $250,000 effective
October 3, 2008. The increase was made permanent July 21, 2010. At December 31, 2010, The
Woodlands Partnerships had no cash accounts that exceeded federally insured limits.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
Effective January 1, 2009, The Woodlands Partnerships adopted the guidance in FASB
ASC 810-10-65, Transition Related to FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51. Upon adoption, minority interest
previously presented in other liabilities on the consolidated balance sheets has been
retrospectively reclassified as noncontrolling interests within equity. In addition, the consolidated
net earnings presented in the consolidated statements of earnings and statements of changes in
partners' equity have been retrospectively revised to include the net earnings attributable to the
noncontrolling interests. Beginning January 1, 2009, losses attributable to the noncontrolling
interests are allocated to the noncontrolling interests even if the carrying amount of the
noncontrolling interests is reduced below zero. Any changes in ownership after January 1, 2009,
that do not result in a loss of control will be prospectively accounted for as equity transactions.
In May 2009, FASB issued ASC Topic 855, Subsequent Events. Topic 855 establishes general
standards of accounting for, and disclosures of, events that occur after the balance sheet date but
before financial statements are issued or available to be issued. Financial statements are available
to be issued when they are in a format that complies with accounting principles generally
accepted in the United States and all approvals necessary for issuance have been given. Topic
855 requires the disclosure of the date through which an entity has evaluated subsequent events
and whether
11
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
that date represents the date the financial statements were issued or were available to be issued.
The adoption of Topic 855 did not have a material impact on The Woodlands Partnerships'
consolidated financial statements. Subsequent events have been evaluated through March 29,
2011, which is the date the consolidated financial statements were available to be issued.
In June 2009, FASB issued Accounting Standards Update (ASU) 2009-17, Consolidations
(Topic 810) – Improvements to Financial Reporting by Enterprises Included with Variable
Interest Entities. Topic 810 amends the consolidation guidance applicable to VIEs and the
definition of a VIE and requires enhanced disclosures to provide more information about an
enterprise's involvement in a VIE. This statement also requires ongoing assessments of whether
an enterprise is the primary beneficiary of a VIE. ASU 2009-17 was effective for The
Woodlands Partnerships' fiscal year beginning January 1, 2010. The adoption of Topic 810 did
not have a material impact on The Woodlands Partnerships' consolidated financial statements.
In June 2009, FASB issued ASC Topic 105, Generally Accepted Accounting Principals. Topic
105 establishes FASB ASC as the source of authoritative accounting principles recognized by
FASB that are applied by nongovernmental entities in the preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America. The
adoption of Topic 105 did not change accounting principles generally accepted in the United
States and did not have a material impact on The Woodlands Partnerships' consolidated financial
statements.
Reclassifications
Certain reclassifications have been made to the 2009 and 2008 consolidated financial statements
to conform to the 2010 consolidated financial statement presentation. These reclassifications had
no effect on net earnings.
Note 2: Notes and Contracts Receivable
Notes receivable are carried at cost, net of discounts. At December 31, 2010 and 2009,
Woodlands Development held notes and contracts receivable totaling $59,091,000 and
$78,791,000, respectively. Included in the notes receivable were amounts related to utility
district receivables totaling $55,902,000 and $74,491,000 at December 31, 2010 and 2009,
respectively. Utility district receivables, the collection of which is dependent on the ability of
utility districts in The Woodlands to sell bonds, had a market interest rate of approximately 4.85
percent and 5.25 percent at December 31, 2010 and 2009, respectively. Included in the utility
district receivables was a reserve of approximately $2,942,000 and $4,278,000 at December 31,
2010 and 2009, respectively. The utility district receivables are analyzed on a monthly basis for
valuation and collectibility utilizing a review of outstanding receivables, historical bond issuance
information and economic conditions of the various districts located in The Woodlands. Utility
district receivables are written off when the receivables are known to be uncollectible. During
2010, Woodlands Development sold $11,268,000 of its utility district receivables to a financial
12
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
institution under a factoring agreement and recorded a retained interest related to these
receivables of $2,672,000, which is included in the utility district receivables. The retained
interest was calculated using a discount rate of 5.25 percent and assumes the receivables are
collected in one year.
Activity in the utility district reserve was as follows:
Balance, beginning of year
Provision charged to expense
Utility district receivables charged off
2010
2009
$
$
4,278
-
(1,336)
3,768
510
-
$
2,942
$
4,278
At December 31, 2010 and 2009, the other notes receivable totaled $3,189,000 and $4,300,000,
respectively. The notes bear interest at an average rate of 3.44 percent and 3.12 percent for the
years ended December 31, 2010 and 2009, respectively. Maturities of the notes receivable are
$1,689,000 in 2011 and $1,500,000 in 2019.
For the years ended December 31, 2010, 2009 and 2008, interest income for notes and contracts
receivable totaled $2,554,000, $3,690,000 and $3,994,000, respectively, and is shown as other
income on the consolidated statements of earnings.
Note 3: Real Estate
The following is a summary of real estate at December 31, 2010 and 2009 (in thousands):
Land
Commercial properties
Equity investments
Other assets
Accumulated depreciation
2010
2009
$
$
238,318
146,275
9,494
9,549
265,183
258,424
12,841
12,275
403,636
(22,813)
548,723
(73,865)
$
380,823
$
474,858
13
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Land
The principal land development is The Woodlands, a mixed-use, master-planned community
located north of Houston, Texas. Residential land is divided into eight villages in various stages
of development. Each village has or is planned to contain a variety of housing, neighborhood
retail centers, schools, parks and other amenities. Woodlands Development controls the
development of the residential communities and produces finished lots for sale to qualified
builders. Housing is constructed in a wide range of pricing and product styles.
Commercial land is divided into distinct centers that serve or are planned to serve as locations for
office buildings, retail and entertainment facilities, industrial and warehouse facilities, research
and technology facilities, and college and training facilities. Woodlands Development produces
finished sites for third parties or for its own building development activities.
Commercial Properties
Commercial and industrial properties owned or leased by The Woodlands Partnerships are leased
to third-party tenants. Lease terms, including renewal periods, range from three to 15 years with
an average remaining term of seven years. Contingent rents include pass-throughs of incremental
operating costs. Minimum future lease revenues from noncancellable operating leases and
subleases exclude contingent rentals that may be received under certain lease agreements. Tenant
rents include rent for noncancellable operating leases, cancelable leases and month-to-month
rents and are included in other revenue. For the years ended December 31, 2010, 2009 and 2008,
tenant rents totaled $3,391,000, $6,145,000 and $7,480,000, respectively. For the years ended
December 31, 2010, 2009 and 2008, contingent rents totaled $1,451,000, $1,006,000 and
$1,554,000, respectively. Minimum future lease rentals for 2011 through 2015 and thereafter
total $5,378,000, $5,133,000, $5,207,000, $4,955,000, $4,071,000 and $15,727,000, respectively.
Properties Held for Sale and Discontinued Operations
A summary of the operations from discontinued operations for the years ended December 31,
2010, 2009 and 2008, is as follows (in thousands):
Revenues
Operating expenses
Depreciation
Interest expense
Other expense
Income tax expense
2010
2009
2008
$
$
33,558
(29,082)
(3,318)
(1,810)
543
(197)
$
42,693
(33,911)
(4,345)
(1,894)
(442)
(260)
47,679
(36,667)
(5,122)
(3,491)
(776)
(410)
Net earnings (loss)
$
(306) $
1,841
$
1,213
14
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Amounts Attributable to Woodlands
Development
2010
2009
2008
Earnings from continuing operations, net
of tax
Discontinued operations, net of tax
$
15,636
(2,879)
$
(4,136) $
1,586
37,013
515
Net earnings (loss)
$
12,757
$
(2,550) $
37,528
During 2009, Woodlands Development sold an office building for $42,000,000, recognized a
profit of $2,054,000 and repaid related debt totaling $28,513,000. A partnership in which
Woodlands Commercial has an interest sold an office building for $2,000,000. Woodlands
Commercial recognized a $235,000 loss on the transaction. During 2008, Woodlands
Development sold an office building for $85,250,000, recognized a profit of $12,230,000 and
repaid related debt totaling $45,229,000. Additionally, during 2008, Woodlands Development
abandoned the Woodlands Athletic Center operations and facility and recognized a net loss of
$652,000.
During 2010, Woodlands Commercial classified The Woodlands Resort and Conference Center, a
440-room hotel, as a discontinued operation because of management's plan to dispose of this
asset.
Operating results for the assets sold and abandoned are reported as discontinued operations on the
consolidated statements of earnings.
Note 4: Equity Method Investments
During 2010 and 2009, The Woodlands Partnerships' principal partnership and corporation
interests included the items listed below:
Woodlands Development:
Stewart Title of Montgomery County, Inc.
Waterway Avenue Partners, L.L.C.
Woodlands Commercial:
Woodlands Office Equities – '95 Limited
FV-93 Limited
Ownership
and Economic
Interest
Nature of
Operations
50%
84%
25%
50%
Title company
Apartments
Office building in
The Woodlands
(economic interest) Apartments
15
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Other partnerships own various commercial properties, all of which are located in The
Woodlands. Woodlands Operating provides various management and leasing services to these
affiliated entities. The Woodlands Partnerships' net investment in each of these entities is
included in the real estate caption on the consolidated balance sheets and their shares of these
entities' pretax earnings is included in other revenues on the consolidated statements of earnings.
A summary of The Woodlands Partnerships' net investments as of December 31, 2010 and 2009,
and their share of pretax earnings for the years then ended are as follows (in thousands):
Net investment:
Waterway Avenue Partners, L.L.C.
Stewart Title of Montgomery County, Inc.
Woodlands Office Equities – '95 Limited
FV-93 Limited
Timbermill-94 Limited
2010
2009
$
$
6,999
1,314
115
792
274
10,376
1,184
220
789
272
$
9,494
$
12,841
2010
2009
2008
Equity in pretax earnings:
Stewart Title of Montgomery County,
Inc.
$
531
$
404
$
Woodlands Office Equities - '95
Limited
Waterway Avenue Partners, L.L.C.
Woodlands Sarofim #1, Ltd.
Others that own properties in The
Woodlands
162
(1,058)
182
(97)
(324)
800
8
6
$
(175) $
789
$
498
100
-
82
6
686
Summarized financial statement information (unaudited) for partnerships and a corporation in
which The Woodlands Partnerships has an equity ownership interest at December 31, 2010 and
2009, and for the years then ended (in thousands) as follows:
Assets
Debt payable to third parties:
The Woodlands Partnerships' proportionate share:
Recourse to The Woodlands Partnerships
Nonrecourse to The Woodlands Partnerships
Other parties' proportionate share, of which $872 was
guaranteed by The Woodlands Partnerships
Accounts payable and deferred credits
Owners' equity
2010
2009
$
80,942
$
59,619
62
29,459
29,935
2,722
18,764
$
67
11,474
19,071
4,772
24,235
$
16
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
2010
2009
2008
Revenues
Operating earnings
Pretax earnings
The Woodlands Partnerships' share of pretax
$
earnings
$
13,823
2,814
1,788
(175)
$
12,684
2,268
1,729
789
13,892
3,737
2,916
686
The Woodlands Partnerships and other partners do not generally have an obligation to make
capital contributions to these partnerships. However, Woodlands Commercial has guaranteed
mortgage debt of these partnerships totaling $934,000 and $1,007,000 at December 31, 2010 and
2009, respectively. These guarantees reduce in varying amounts through 2011 and would require
payments only in the event of default on payment by the respective debtors. As of December 31,
2010 and 2009, The Woodlands Partnerships received distributions from these investments of
$3,171,000 and $1,212,000, respectively.
While these entities are VIEs, The Woodlands Partnerships has determined that the power to
direct the activities of the VIEs that most significantly affect the VIEs' economic performance is
generally shared. The Woodlands Partnerships manage the day-to-day operations of the VIEs
except for Stewart Title of Montgomery County, Inc., but major decisions require the consent and
approval of each partner.
Note 5: Debt
A summary of The Woodlands Partnerships' outstanding debt at December 31, 2010 and 2009, is
as follows (in thousands).
Senior credit facility
The Woodlands Conference Center (the Conference Center)
$
306,539
$
306,539
2010
2009
debt
Other credit facilities
Mortgages payable
40,000
17,766
7,917
40,000
17,798
13,626
$
372,222
$
377,963
17
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Senior Credit Facility
Woodlands Development and Woodlands Commercial have a bank credit agreement consisting of
a $280,000,000 term loan and a $70,000,000 revolving credit loan. During 2010, the credit
agreement was extended one year to August 2011. Woodlands Development and Woodlands
Commercial paid an $875,000 extension fee. At December 31, 2010 and 2009, approximately
$43,461,000 was unborrowed under the revolving credit agreements. The interest rate, based on
the LIBOR plus a margin, was approximately 2.40 percent at December 31, 2010 and 2009.
Interest is paid monthly. Commitment fees, based on 0.25 percent of the unused commitment,
totaled $110,000 for the years ended December 31, 2010 and 2009. Woodlands Development
and Woodlands Commercial are negotiating with a bank to replace this credit agreement with a
new credit facility.
The credit agreement contains certain restrictions that, among other things, require the
maintenance of specified financial ratios, restrict indebtedness and sale, lease or transfer of
certain assets, and limit the right of Woodlands Development and Woodlands Commercial to
merge with other companies and make distributions to their partners. Certain assets of
Woodlands Development and Woodlands Commercial, including cash, receivables and real
estate, secure the credit agreement. Mandatory debt maturities for 2011 are $306,539,000.
Payments may be made by Woodlands Development or Woodlands Commercial, or both, at their
option. Principal payments may be required based on certain covenant tests. Prepayments can
also be made at the discretion of Woodlands Development and Woodlands Commercial without
penalty.
Conference Center Debt
The debt consists of a credit facility owed by Woodlands Commercial related to and secured by
the Conference Center. Woodlands Development guarantees repayment. The credit facility has
an average interest rate of 5.0 percent and 3.2 percent at December 31, 2010 and 2009,
respectively. Interest is paid monthly. The credit facility matures in October 2011 or is required
to be repaid upon the sale of the Conference Center. Woodlands Commercial is negotiating with
a bank to replace this credit agreement with a new credit facility. The Conference Center credit
facility contains financial covenants requiring maintenance of minimum debt service coverage
and a maximum loan-to-value ratio of 60 percent. At December 31, 2010, Woodlands
Commercial exceeded the maximum loan-to-value ratio. As disclosed in Note 16, this credit
agreement was renewed subsequent to December 31, 2010.
This credit facility also requires the maintenance of a collateral account into which the
Conference Center lease payments described in Note 7 are deposited. At December 31, 2010,
Woodlands Commercial had deposits totaling $3,021,000 in the collateral account that is included
in the "Assets related to property held for sale" line on the consolidated balance sheets. The
collateral account is under the sole control of the credit facility lenders and can only be used for
repayment of the credit facility.
18
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Due to reduced business performance, the debt service coverage ratio at December 31, 2009, was
below the minimum coverage requirement. During 2010, the credit facility was amended to
waive the coverage requirement for the year ended December 31, 2009, and reduce the minimum
debt service coverage requirement through all of 2010 from 1.40x to 1.10x.
Other Credit Facilities
At December 31, 2009, Town Center Development Company, L.P. (TCDC), a wholly owned
subsidiary of Woodlands Development, had two loan commitments totaling $18,528,000 secured
by new commercial construction. Woodlands Development and Woodlands Commercial
guarantee repayment of the loans. The interest rate, based on the LIBOR plus a margin, was
approximately 2.1 percent at December 31, 2010 and 2009. At December 31, 2010 and 2009, the
outstanding balance was $17,766,000 and $17,798,000, respectively. Mandatory debt maturities
are $17,766,000 for 2011.
Derivative Financial Instruments
As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flows
due to interest rate fluctuations, Woodlands Development and Woodlands Commercial entered
into an interest rate cap agreement with a commercial bank to reduce the impact of increases in
interest rates on their bank credit agreement. The interest rate cap agreement effectively limits
the interest rate exposure on a notional amount of $100,000,000 to LIBOR rates of 6.50 percent.
The $100,000,000 interest rate cap agreement expires in 2011.
Management has designated the interest rate cap agreement as a hedging instrument. However,
management has deemed amounts associated with the derivatives and hedging transactions to be
immaterial to the consolidated financial statements and, as a result, the agreement has not been
reflected in the consolidated financial statements.
Mortgages Payable
The mortgages payable had an average interest rate of 6.3 percent and 6.4 percent at December
31, 2010 and 2009, respectively. Debt maturities for 2011 through 2015 and thereafter total
$5,306,000, $869,000, $1,641,000, $0, $0 and $101,000, respectively. Mortgages payable are all
secured by real estate.
Note 6: Notes Payable to Partners
At December 31, 2010 and 2009, Woodlands Development had notes payable to its partners
totaling $38,193,000 and $34,657,000, respectively. The notes bear interest at 15 percent.
Interest is payable quarterly. All outstanding balances are due in 2012. These notes are
subordinate to the bank credit agreement and mortgages payable described previously.
19
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Note 7: Commitments and Contingencies
Contingent Liabilities
At December 31, 2010 and 2009, The Woodlands Partnerships issued letters of credit in the
amount of $989,000 and $1,166,000, respectively. The letters of credit act as guarantees of
payment to third parties in accordance with specific terms and conditions of each letter. The term
of these letters of credit is for a period of 12 months from the date of the original agreement.
At December 31, 2010 and 2009, The Woodlands Partnerships guaranteed road bonds in the
amount of $1,838,000 and $2,132,000, respectively. These guarantees act as a warranty on the
roads for a period of 12 months from the date the roads are completed. Under these agreements,
The Woodlands Partnerships has guaranteed they will make all repairs necessary to maintain the
roads in good condition.
Leases
The Woodlands Partnerships has various noncancellable facilities and equipment lease
agreements that provide for aggregate future payments of approximately $4,926,000. Capital
lease obligations are included as other liabilities in the consolidated balance sheets. The
following are minimum rental payments for the years subsequent to December 31, 2010 (in
thousands).
Capital
Leases
Operating Leases
Woodlands
Development
Woodlands
Commercial
Woodlands
Operating
Total
2011
2012
2013
2014
2015
$
$
359
122
22
-
-
$
869
853
875
870
328
$
201
151
138
138
-
1,429
1,126
1,035
1,008
328
$
503
$
3,795
$
628
$
4,926
Rental expense for operating leases for the years ended December 31, 2010, 2009 and 2008, was
$1,591,000, $3,758,000 and $3,310,000, respectively.
20
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
General Litigation
The Woodlands Partnerships are subject to claims and legal actions arising in the ordinary course
of their business and to recurring examinations by the Internal Revenue Service and other
regulatory agencies. Management believes, after consultation with outside counsel, that the
disposition or ultimate resolution of such claims and lawsuits will not have a material adverse
effect on the consolidated financial position, results of operations and cash flows of The
Woodlands Partnerships.
Commitments
As of December 31, 2010, The Woodlands Partnerships had unrecorded development contract
commitments outstanding of approximately $81,206,000.
Note 8: Related-party Transactions
Woodlands Operating provides services to Woodlands Development and Woodlands Commercial
under management and advisory services agreements. These agreements are automatically
renewed annually. Woodlands Development and Woodlands Commercial pay Woodlands
Operating a management and advisory fee equal to cost plus 3 percent. In addition, they
reimburse Woodlands Operating for all costs and expenses incurred on their behalf. For the years
ended December 31, 2010, 2009 and 2008, Woodlands Operating recorded revenues of
$13,490,000, $13,839,000 and $13,301,000, respectively, for services provided to Woodlands
Development and $1,369,000, $1,404,000 and $1,723,000, respectively, for services provided to
Woodlands Commercial. These revenues are eliminated in the accompanying consolidated
financial statements.
Woodlands Operating, through WECCR GP, operates the Conference Center (the Facilities),
which is owned by Woodlands Commercial. The Facilities consist of a 440-room hotel and
conference center. Woodlands Commercial also owned golf course facilities that were sold in
May 2007. WECCR GP operates the Facilities and pays Woodlands Commercial rent of
$333,333 per month plus percentage rent based on revenue. For the years ended December 31,
2010, 2009 and 2008, rent totaled $4,577,000, $9,866,000 and $9,653,000, respectively. These
amounts are eliminated in the accompanying consolidated financial statements. WECCR GP has
contracted with an affiliate of Morgan Stanley to manage the Facilities for a management fee
equal to 2.5 percent of cash receipts, as defined in the agreement. During 2010, 2009 and 2008,
the management fee totaled $798,000, $824,000 and $1,092,000, respectively.
Note 9: Partners' Equity
HHC's ownership interests in The Woodlands Partnerships are through TWC Land Development,
L.P. (which owns a 42.5 percent interest in Woodlands Development), TWC Commercial
21
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Properties, L.P. (which owns a 42.5 percent interest in Woodlands Commercial) and TWC
Operating, L.P. (which owns a 42.5 percent interest in Woodlands Operating). Morgan Stanley's
ownership interests are through MS/TWC Joint Venture and MS TWC, Inc., which own the
remaining interests in Woodlands Development, Woodlands Commercial and Woodlands
Operating. The partners' percentage interests are summarized below:
Woodlands Development:
TWC Land Development, L.P.
MS/TWC Joint Venture
MS TWC, Inc.
Woodlands Commercial:
TWC Commercial Properties, L.P.
MS/TWC Joint Venture
MS TWC, Inc.
Woodlands Operating:
TWC Operating, L.P.
MS/TWC Joint Venture
MS TWC, Inc.
General
Partner
Interest
Limited
Partner
Interest
42.5%
-
1.0%
42.5%
-
1.0%
42.5%
-
1.0%
-
56.5%
-
-
56.5%
-
-
56.5%
-
The partnership agreements for each of the partnerships provide, among other things, the
following:
(i)
(ii)
(iii)
The Woodlands Partnerships are each governed by an Executive Committee composed of
equal representation from their respective general partners.
Net income and losses from operations are currently allocated based on the payout
percentages discussed below.
Distributions are made by The Woodlands Partnerships to the partners based on specified
payout percentages and include cumulative preferred returns to Morgan Stanley's
affiliates. The payout percentage to Morgan Stanley's affiliates is 57.5 percent until the
affiliates receive distributions on a consolidated basis equal to their capital contributions
and a 12.0 percent cumulative preferred return compounded quarterly. Then, the payout
percentage to Morgan Stanley's affiliates is 50.5 percent until the affiliates receive
distributions equal to their capital contributions and an 18.0 percent cumulative preferred
return compounded quarterly. Thereafter, the payout percentage to Morgan Stanley's
affiliates is 47.5 percent. During 2001, Morgan Stanley's affiliates received sufficient
cumulative distributions from The Woodlands Partnerships to exceed Morgan Stanley's
affiliates' capital contributions plus cumulative returns of 18.0 percent. Accordingly,
22
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(iv)
(v)
(vi)
Morgan Stanley's affiliates are currently receiving a payout percentage of 47.5 percent,
and HHC's affiliates are receiving 52.5 percent from The Woodlands Partnerships.
The Woodlands Partnerships will continue to exist until December 31, 2040, unless
terminated earlier due to specified events.
No additional partners may be admitted to The Woodlands Partnerships unless specific
conditions in the partnership agreements are met. Partnership interests may be
transferred to affiliates of HHC or Morgan Stanley. HHC has the right of first refusal to
buy the partnership interests of the Morgan Stanley affiliates at the same terms and
conditions offered to a third-party purchaser or sell its affiliates' interests to the same
third-party purchaser.
HHC and Morgan Stanley have the right to offer to purchase the other partner's affiliates'
partnership interests in the event of failure to make specified capital contributions or a
specified default by the other. Specified defaults include bankruptcy, breach of
partnership covenants, transfer of partnership interests except as permitted by the
partnership agreements, and fraud or gross negligence.
Note 10: Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. Topic 820 also specifies a fair value hierarchy, which requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that may be used to measure
fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for substantially the
full term of the assets or liabilities.
Level 3 Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
Following is a description of the inputs and valuation methodologies used for assets measured at
fair value on a recurring basis and recognized in the accompanying consolidated balance sheets,
as well as the general classification of such assets pursuant to the valuation hierarchy.
23
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Cash Equivalents
Where quoted market prices are available in an active market, money market funds are classified
within Level 1 of the valuation hierarchy. Money market funds are measured at fair value on a
recurring basis. There were no money market funds at December 31, 2010 and 2009.
The following methods were used to estimate the fair value of all other financial instruments
recognized in the accompanying consolidated balance sheets at amounts other than fair value:
(i)
(ii)
(iii)
(iv)
(v)
The carrying value of cash, receivables and payables approximates the estimated fair
values of those financial instruments because of the short-term nature of these
instruments.
Fair values of notes and contracts receivable approximated the carrying value of those
financial instruments. Fair values were estimated by discounting future cash flows using
interest rates at which similar loans currently could be made for similar maturities to
borrowers with comparable credit ratings.
Fixed-rate notes payable to partners for Woodlands Development had an estimated fair
value of $41,323,000 and $29,510,000 at December 31, 2010 and 2009, respectively.
Fair values of fixed-rate, long-term debt were based on current interest rates offered to
The Woodlands Partnerships for debt with similar remaining maturities.
For floating-rate debt obligations, carrying amounts and fair values were assumed to be
equal because of the nature of these obligations.
The carrying amounts of The Woodlands Partnerships' other financial instruments
approximate their fair values.
Note 11: Employee Plans
Defined Contribution Plan
Woodlands Operating has a 401(k) defined contribution plan that is available to all full-time
employees who meet specified service requirements. The plan is administered by a third party.
Contributions to the plan are based on a match of employee contributions up to a specified limit.
For the years ended December 31, 2010, 2009 and 2008, Woodlands Operating contributions
totaled approximately $462,000, $368,000 and $523,000, respectively.
Supplemental Executive Retirement Plan
During 2009, Woodlands Operating terminated a plan that deferred compensation arrangements
for a select group of management employees. Woodlands Operating's obligations under this plan
24
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
were unsecured general obligations to pay in the future, the value of the deferred compensation
adjusted to reflect the performance of its investments, whether positive or negative, of selected
measurement options, chosen by each participant, during the deferral period. During 2010,
Woodlands Operating refunded the trust account balances to the participating employees.
Incentive Plans
Woodlands Operating instituted an incentive compensation plan for certain employees in 2001.
The plan is unfunded, and while certain payments are made currently, a portion of these payments
is deferred and will be paid based on a vesting period of up to three years. For the years ended
December 31, 2010, 2009 and 2008, expenses recognized by The Woodlands Partnerships under
this plan totaled $1,733,000, $435,000 and $1,750,000, respectively.
Note 12: Income Taxes
The income tax provision for the years ended December 31, 2010, 2009 and 2008, is as follows
(in thousands):
2010
2009
2008
Deferred income tax
Current income taxes
$
(71) $
1,092
(930) $
253
25
1,551
$
1,021
$
(677) $
1,576
The income tax benefit reflected in the consolidated statements of earnings differs from the
amounts computed by applying the federal statutory rate of 35 percent to income before income
taxes as follows (in thousands):
2010
2009
2008
Income tax benefit at statutory rate
Texas margin tax
Permanent differences
NOL absorbed
Other
$
(88) $
(1,530) $
1,054
(2)
57
-
835
18
-
-
201
1,367
87
-
(79)
1,576
Deferred taxes are provided for the temporary differences between the financial reporting basis
and the tax basis of WECCR GP's assets and liabilities and for operating loss carryforwards.
Significant components of WECCR GP's net deferred tax asset at December 31, 2010 and 2009,
are as follows:
(677) $
1,021
$
$
25
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Deferred tax assets:
Net operating loss
Other
Net deferred tax asset
2010
2009
$
$
1,038
212
1,032
147
$
1,250
$
1,179
Topic 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on
the weight of the evidence, it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Accordingly, management has provided no valuation allowance at
December 31, 2010 and 2009.
The net deferred tax assets are included in other assets on the consolidated balance sheets at
December 31, 2010 and 2009.
At December 31, 2010, The Woodlands Partnerships had an unused net operating loss
carryforward of approximately $2,965,000, which will expire starting in 2029.
Note 13: Significant Estimates and Concentrations
Accounting principles generally accepted in the United States of America require disclosure of
certain significant estimates and current vulnerabilities due to certain concentrations. Those
matters include the following:
Municipal Utility District (MUD) Receivables
The State of Texas allows for the creation of MUDs, which may reimburse Woodlands
Development for construction costs associated with building water distribution and purification
systems, sewer facilities and drainage facilities. Woodlands Development constructs the facilities
and once the MUDs have enough value on the ground (tax base), the MUDs will issue bonds to
reimburse Woodlands Development for costs (including interest) according to the Texas
Commission on Environmental Quality (the Commission). Woodlands Development estimates
the costs that they believe will be eligible for reimbursement as MUD receivables. Periodically,
management evaluates these receivable balances and makes adjustments to reflect changes in
conditions related to such receivables. Actual receivables could differ from the estimates
recorded in these consolidated financial statements.
Cost of Sales Estimates
During development projects, Woodlands Development estimates sales prices on a per-lot basis
as villages are developed. These sales estimates are then utilized throughout the project to
estimate a percentage of cost of sales to be applied when portions of a development are sold.
26
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
These cost of sales estimates are updated annually based on actual land costs incurred plus
estimates to complete the villages.
Senior Credit Facility
As discussed in Note 5, Woodlands Development and Woodlands Commercial have a bank credit
agreement with approximately $306,539,000 due in August 2011. The Woodlands Partnerships
are negotiating with a bank to replace the existing credit agreement with a new credit agreement.
Inability to extend the existing agreement, or otherwise renegotiate or refinance the agreement,
could adversely affect The Woodlands Partnerships' future operations.
Impairment Considerations
In accordance with ASC Topic 360, Property, Plant and Equipment, The Woodlands Partnerships
evaluates its long-lived assets for impairment when events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable or the useful life has changed. These
assets are evaluated based on their estimated cash flows and profitability, including estimated
future operating results, and trends or other determinants of fair value. Actual cash flows,
profitability and trends could differ materially from these estimates.
Note 14: Current Economic Conditions
The current protracted economic decline continues to present real estate entities with difficult
circumstances and challenges, which, in some cases, have resulted in large and unanticipated
declines in the fair value of real estate, investments and other assets, declines in occupancy,
constraints on liquidity and difficulty obtaining financing. The consolidated financial statements
have been prepared using values and information currently available to The Woodlands
Partnerships.
Current economic and financial market conditions have led many employers to downsize,
relocate or cease operations. Such conditions may significantly affect the rate at which our
tenants fulfill or renew existing lease agreements and our ability to fill unoccupied space, which
could adversely affect our results of operations in future periods. Additionally, the current
instability in the financial markets may make it difficult for certain builders to obtain financing to
fund construction projects. Difficulty in obtaining adequate financing may significantly affect the
rate at which builders delay or cancel proposed new construction projects. Such delays or
cancellations could also have an adverse impact on The Woodlands Partnerships' future operating
results.
In addition, given the volatility of current economic conditions, the values of assets and liabilities
recorded in the consolidated financial statements could change rapidly, resulting in material
future adjustments in real estate values, investment values and allowances for MUD receivables
27
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
that could negatively affect The Woodlands Partnerships' ability to meet debt covenants or
maintain sufficient liquidity.
During 2009, General Growth Properties, Inc. (GGP), filed bankruptcy on certain of its
companies. In 2010, GGP emerged from bankruptcy and entered into a Separation Agreement
with HHC. This agreement provided, among other things, that certain assets and liabilities
related to those assets, and other liabilities related to HHC's business and operations, were
transferred to HHC.
Note 15: Segment Information
ASC Topic 280, Segment Reporting, requires The Woodlands Partnerships to report information
about their operating segments. Operating segments are the components of an enterprise for
which separate financial information is available that is regularly evaluated by senior
management in deciding how to allocate resources and assess performance. The segment results
may not represent actual results that would be expected if the segments were independent,
stand-alone businesses.
The Woodlands Partnerships has five segments: Residential, Commercial, Hotel and Country
Club, Investment Properties and Administrative. The Residential segment develops and sells
residential lots in The Woodlands and is responsible for all grounds maintenance. The
Commercial segment develops and sells commercial acreage in The Woodlands to business
owners and developers. The Hotel and Country Club segment provides hospitality services in
The Woodlands. This segment currently consists of the Club at Carlton Woods, a private golf
course. The Conference Center, a 440-room hotel, is treated as a discontinued operation. The
Investment Properties segment develops and owns office and retail properties in The Woodlands.
It also has equity investments in partnerships owning office, service, retail and apartment
properties in The Woodlands. The Administrative segment provides management, accounting,
legal and other services to the other segments. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies.
Segment information is as shown on the following page (in thousands).
28
TWLDC Holdings, L.P.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
2010
Revenues..................................
Cost of sales.............................
Costs and expenses...................
Depreciation and amortization
Operating earnings (loss).........
Capital expenditures.................
Property held for sale...............
Real estate................................
2009
Revenues..................................
Cost of sales.............................
Costs and expenses...................
Depreciation and amortization
Operating earnings (loss).........
Capital expenditures.................
Real estate................................
2008
Revenues..................................
Cost of sales.............................
Costs and expenses...................
Depreciation and amortization
Operating earnings (loss).........
Capital expenditures.................
Real estate................................
Residential
Commercial
Hotel and
Country Club
Investment
Properties
Administrative Consolidated
$
79,752
43,563
14,498
73
$
23,874
6,183
6,345
38
$
9,434
-
14,860
760
$
7,201
-
4,667
2,765
$
-
$
-
7,280
733
21,618
19,671
-
201,029
62,300
31,968
14,217
78
16,037
20,457
228,449
101,227
48,376
15,482
89
37,280
45,261
239,323
11,308
1,078
-
37,644
12,681
2,593
6,398
35
3,655
(164)
39,800
27,590
7,926
6,643
17
13,004
5,134
43,413
(6,186)
538
58,019
34,066
9,393
-
14,740
1,023
(6,370)
411
94,838
10,116
-
14,814
1,213
(5,911)
901
97,399
(231)
2,957
-
105,926
10,699
-
7,210
3,993
(504)
39,409
109,122
9,372
-
6,067
1,499
1,806
101,424
113,081
(8,013)
242
-
2,158
-
-
7,161
531
(7,692)
1,221
2,649
104
-
8,348
588
(8,832)
792
1,957
120,261
49,746
47,650
4,369
18,496
24,486
58,019
380,823
95,073
34,561
49,726
5,660
5,126
61,334
474,858
148,409
56,302
51,354
3,406
37,347
153,512
495,173
Note 16: Subsequent Events
In February 2011, The Woodlands Partnerships recognized a commercial land sale totaling
$1,583,000. The sale closed and funded in December 2010 but because of an unresolved zoning
issue, the proceeds were recorded in other liabilities in the consolidated balance sheets. Upon
resolution of the contingency, The Woodlands Partnerships recognized the sale.
Subsequent to December 31, 2010, The Woodlands Partnerships repaid the $306,539,000
outstanding balance of their Senior Credit Facility with the proceeds of a new $270,000,000
Senior Credit Facility and a $36,539,000 cash payment. The $270,000,000 credit facility has a
three-year term with a one-year extension option and bears interest at LIBOR plus 4 percent with
a 5 percent floor. In addition, Woodlands Commercial repaid its $40,000,000 Conference Center
debt with proceeds of a new $36,100,000 credit facility and a $3,900,000 cash payment. The
$36,100,000 credit facility matures in October 2012 with a one-year extension option. Interest is
based on LIBOR.
29
Performance Graph
The following performance graph compares the weekly dollar change in the cumulative total stockholder
return on The Howard Hughes Corporation’s common stock with the cumulative total returns of the NYSE
Composite Index and the group of companies included in the Morningstar Real Estate — General Index. The
graph was prepared on the following assumptions:
• $100 was invested on November 5, 2010 in The Howard Hughes Corporation’s common stock, the
NYSE Composite Index and the Morningstar Real Estate — General Index, and
• Dividends have been reinvested subsequent to the initial investment.
Comparison of Cumulative Total Return
$175
$150
$125
$100
$75
$50
Howard Hughes
Corp
NYSE Composite
Index
Morningstar Real
Estate – General
11/5/10
11/8/10
11/15/10 11/22/10
11/29/10
12/6/10
12/13/10
12/20/10
12/27/10
12/31/10
$100.00
$101.32
$107.24
$109.55
$109.00
$119.21
$143.13
$147.37
$136.66
$143.21
$100.00
$99.77
$97.75
$97.70
$96.11
$99.45
$100.89
$100.87
$101.85
$102.44
$100.00
$100.00
$96.11
$95.63
$93.00
$96.89
$96.71
$98.33
$101.32
$102.99
The graph and related information shall not be deemed “soliciting material” or to be “filed” with the
SEC. The graph and information is included for historical comparative purposed only and should not be
considered indicative of future stock performance.
Directors
William A. Ackman
Chairman of the Board
David D. Arthur
Adam R. Flatto
Jeffrey D. Furber
Gary A. Krow
Allen J. Model
R. Scot Sellers
Steven H. Shepsman
David R. Weinreb
Corporate Officers
David R. Weinreb
Chief Executive Officer
Grant D. Herlitz
President
Andrew C. Richardson
Chief Financial Officer
Peter F. Riley
General Counsel
Headquarters
One Galleria Tower, 13355 Noel Road, Suite 950
Dallas, Texas 75240
Phone: 214-741-7744
Fax: 214-741-3021
Registrar and Transfer Agent
BNY Mellon
480 Washington Boulevard
Jersey City, New Jersey 07310-1900
Phone 866-354-3668
Independent Registered Public Accounting Firm
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, Illinois 60606-4301
Phone: 312-486-1000
Fax: 312-486-1486
Annual Meeting
The Company’s Annual Meeting of Stockholders is scheduled for 9:00 a.m.,
June 22, 2011
The Westin Galleria Dallas
13340 Dallas Parkway
Dallas, Texas 75240
Properties
Four Communities with over 14,000
acres of land remaining.
• Summerlin - Las Vegas, NV
• Bridgeland - Houston, TX
• Maryland - Columbia, MD
• The Woodlands - Houston, TX
Master Planned CoMMunities
oPerating ProPerties
strategiC develoPMents
Eight Properties located in some of the
country’s most dynamic markets.
An exciting and diverse pipeline of strategic opportunities
for near, mid and long-term development.
• Ward Centers - Honolulu, HI
• South Street Seaport - New York, NY
• Landmark Mall - Alexandria, VA
• Park West - Peoria, AZ
• Rio West - Gallup, NM
• River Walk Marketplace - New Orleans, LA
• Columbia Office Buildings - Columbia, MD
• Cottonwood Square - Salt Lake City, UT
• Ala Moana Tower - Honolulu, HI
• Shops at Summerlin Centre - Las Vegas, NV
• Cottonwood - Salt Lake City, UT
• Elk Grove Promenade - Sacramento, CA
• The Bridges at Mint Hill - Charlotte, NC
• Fashion Show Air Rights - Las Vegas, NV
• Century Plaza - Birmingham, AL
• West Windsor - Princeton, NJ
• 110 N Wacker Drive - Chicago, IL
• Nouvelle at Natick - Boston, MA
• Volo Land - Chicago, IL
• Kendall Town Center - Miami, FL
• Redlands Mall & Promenade - Redlands, CA
• Circle T Ranch - Dallas–Fort Worth, TX
• Alameda Plaza - Pocatello, ID
• AllenTowne - Allen, TX